e10vk
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 29, 2006
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from
to
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Commission file number
000-06920
Applied Materials,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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94-1655526
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(State or other jurisdiction
of
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(I.R.S. Employer
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incorporation or
organization)
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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 þ No o
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 o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No
o
Indicate by check mark 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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer
Large accelerated
filer þ Accelerated
filer o Non-accelerated o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
Aggregate market value of the voting stock held by
non-affiliates of the registrant as of April 30, 2006,
based upon the closing sale price reported by the Nasdaq
National Market on that date: $27,977,029,109.
Number of shares outstanding of the registrants Common
Stock, $.01 par value, as of November 26, 2006:
1,392,743,007
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive Proxy Statement for Applied
Materials, Inc.s Annual Meeting of Stockholders to be held
on March 14, 2007 are incorporated by reference into
Part III of this
Form 10-K.
TABLE OF CONTENTS
Caution
Regarding Forward-Looking Statements
This Annual Report on
Form 10-K
of Applied Materials, Inc. and its subsidiaries (Applied or the
Company) contains forward-looking statements. All statements in
this Annual 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, projected costs,
products, competitive positions, managements plans and
objectives for future operations, acquisitions and joint
ventures, growth opportunities, and legal proceedings, as well
as semiconductor and semiconductor-related 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 below and in Item 1A, Risk Factors.
Other risks and uncertainties are disclosed in Applieds
prior Securities and Exchange Commission (SEC) filings. These
and many other factors could affect Applieds future
financial condition and operating results and could cause actual
results to differ materially from expectations based on
forward-looking statements made in this document or elsewhere by
Applied or on its behalf. Applied undertakes no obligation to
revise or update any forward-looking statements.
The following information should be read in conjunction with the
Consolidated Financial Statements and the accompanying Notes to
Consolidated Financial Statements included in this Annual
Report. All references to fiscal year apply to Applieds
fiscal year which ends on the last Sunday in October of each
year.
PART I
Organized in 1967, Applied, a Delaware corporation, develops,
manufactures, markets and services fabrication equipment for the
worldwide semiconductor and semiconductor-related industries.
Customers for these products include manufacturers of
semiconductor chips and wafers, flat panel displays, and other
electronic devices such as solar photovoltaic (PV) cells. These
customers use what they manufacture in their own products or
sell them to other companies for use in advanced electronic
components.
During fiscal 2006, Applied made certain changes to its internal
financial reporting structure and, as a result, is reporting
four segments: Silicon, Fab Solutions, Display, and Adjacent
Technologies. A summary of net sales, operating income,
depreciation/amortization, capital expenditures and assets for
reportable segments is found in Note 10 to the Consolidated
Financial Statements. A discussion of factors potentially
affecting Applieds operations is set forth under
Risk Factors in Item 1A, which is incorporated
herein by reference.
Silicon
Segment
Applieds Silicon segment comprises a wide range of
manufacturing equipment used to fabricate semiconductor chips.
Applied currently offers systems that perform most of the
primary steps in the chip fabrication process, including: atomic
layer deposition (ALD), chemical vapor deposition (CVD),
physical vapor deposition (PVD), electrochemical plating (ECP),
etch, ion implantation, rapid thermal processing (RTP), chemical
mechanical planarization (CMP), wafer wet cleaning, wafer
metrology and inspection, and systems that etch, measure and
inspect circuit patterns on masks used in the photolithography
process.
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). 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 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 power 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 portion of chips 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 wiring, these openings and patterns are
subsequently filled with conducting material using PVD
and/or ECP
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 of wiring needed to complete
the interconnection of the circuit elements to form the chip.
Advanced chip designs require about 500 steps involving these
and other processes to complete the manufacturing cycle.
Over time, the semiconductor industry has migrated to
increasingly larger wafers to build chips. The predominant wafer
size used for volume production today is 200 millimeter (mm), or
eight-inch, wafers, but a substantial number of advanced fabs
now use 300mm, or
12-inch,
wafers to gain the economic advantages of a larger surface area.
The majority of new fab capacity is 300mm. Applied offers a
comprehensive range of systems and, through its Fab Solutions
segment, products and services to support 200mm and 300mm wafer
processing.
A majority of process steps used in chipmaking are performed to
build the interconnect, a complex matrix of microscopic wires
that carry electrical signals to connect the transistor and
capacitor components of a chip. While some customers are still
using aluminum as the main conducting material for the
interconnect, many 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, and supplies systems for
depositing, etching and planarizing the 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 leads the industry in providing low k
dielectric systems to chip manufacturers and many of these
customers use the Companys
1
Applied Producer Black
Diamond®
system in volume production. Applieds second-generation
system for low k dielectric film, the Applied Producer Black
Diamond II, further reduces the dielectric constant to
enhance the speed of customers most advanced chip designs.
The transistor portion of the chip is another area in which
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 such area is strain engineering, a
technique that stretches or compresses the space between atoms,
allowing current to flow more quickly, thus greatly enhancing
chip performance. Applied leads the equipment industry in
providing solutions to enable these applications with products
such as its Applied Producer Stress Nitride, Applied Producer
HARP (high aspect ratio process) and Applied Centura Epi systems.
Most of Applieds products are single-wafer systems with
multiple process chambers attached to a base platform. Each
wafer is 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 currently support ALD, CVD, PVD, etch and RTP
technologies.
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 the four main types of deposition: ALD, CVD, PVD and
ECP. In addition, Applieds RTP systems can be used to
perform certain types of dielectric deposition.
Atomic
Layer Deposition
ALD is an emerging 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 tantalum nitride films. The Applied Endura
iCuBStm
product is the industrys first system to integrate ALD and
PVD chambers on a single platform for depositing critical
barrier and seed layers in copper interconnects. The Applied
Centura
iSprinttm
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.
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, titanium nitride, polysilicon, tungsten,
refractory metals or silicides. Applied offers the following CVD
products and technologies:
The Applied Producer CVD system This
high-throughput platform features
Twin-Chambertm
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. Key processes that help chipmakers extend their
current lithography tools are the Applied Producer
APF-etm
(advanced patterning film) and the Applied Producer
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.
2
The Applied Centura Ultima
HDP-CVD®
system High-density plasma CVD (HDP-CVD) is used
to fill very small, deep spaces (gap-fill) with dielectric film.
This product is used by a number of major integrated circuit
manufacturers for gap-fill applications, including the
deposition of silicon oxides in substrate isolation structures,
contacts and interconnects.
Low k Dielectric Films Many integrated
circuit manufacturers are now incorporating new low k dielectric
materials in their copper-based chip designs to further improve
interconnect speed. The Applied Producer Black Diamond CVD low k
system is being used by several customers in volume production
to produce some of the industrys most advanced devices.
Using conventional CVD equipment, the Black Diamond product
provides customers with a proven, cost-effective way to
transition to this new material. The Applied Producer Black
Diamond II is a second-generation dielectric that provides
a lower k-value film for building faster 65 nanometer (nm)
generation and below chip designs. A complementary low k
dielectric, called the Applied Producer
BLOktm
(Barrier low k), enables the complete, multi-layer dielectric
structure to benefit from low k technology.
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 being used for
silicon-germanium epi technology, which can reduce power usage
and increase 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 without the need to shrink the scale of the device.
Polysilicon Deposition Polysilicon is a type
of silicon used to form portions of the transistor structure
within the integrated circuit device. The Applied Centura
Polygentm
LPCVD (low pressure chemical vapor deposition) 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
transistor gate structures, 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.
Silicon Nitride Deposition The Applied
Centura
SiNgen®
Plus LPCVD system is a single-wafer, high-temperature
system that deposits silicon nitride films for transistor
applications. This system minimizes the amount of time the wafer
is exposed to high temperatures and reduces particles while
improving operating cost and productivity in critical transistor
nitride layers.
Aluminum Deposition In fiscal 2006, the
Company introduced its Applied CVD Al (aluminum) process
technology for building high-density interconnects in Flash and
DRAM memory chips. Aluminum continues to be the material used by
many memory manufacturers for interconnects. 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. The Company 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, also called sputtering, 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
3
deposition processes, including aluminum, aluminum alloys,
cobalt, titanium/titanium nitride, tantalum/tantalum nitride,
tungsten/tungsten nitride, nickel, vanadium and copper (Cu).
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 critical layers that
prevent copper material from entering other areas of the device
and primes the structure for the subsequent deposition of bulk
copper by electrochemical plating. In fiscal 2006, Applied
enhanced this system with new pre-clean chamber technology,
extending the systems capabilities to 45nm-generation and
below copper-low k interconnects.
The Applied Endura systems highly flexible, multi-chamber
architecture allows the integration of multiple PVD processes or
combinations of metal CVD and PVD technologies on the same
system. In addition to the integrated Applied Endura iCuBS
ALD/PVD system (discussed in the Atomic Layer Deposition
section), the Applied Endura
iLBtm
(integrated liner barrier) system combines a PVD chamber for
depositing titanium with a CVD chamber for titanium nitride
deposition to form critical lining layers of interconnect
structures. These structures are subsequently filled with
tungsten, aluminum or other materials. In fiscal 2006, Applied
announced significant advances to its Endura iLB system to meet
the requirements of customers leading-edge device designs.
Electrochemical
Plating
Electrochemical plating is a process by which metal atoms from a
chemical fluid (an electrolyte) are deposited on the surface of
an immersed object. Its main application in the semiconductor
industry is to deposit copper in interconnect wiring structures.
This process step follows the deposition of barrier and seed
layers that prevent the copper from contaminating other areas of
the device and improve the adhesion of the copper film.
The Applied
SlimCelltm
ECP (electrochemical plating) system offers a small-volume cell
design that enables a reduction in defect levels compared to
conventional systems while reducing chemical consumption.
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 full 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 concept 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 65nm and below chip
designs and significantly reduces operating costs.
The Applied Centura
AdvantEdgetm
Silicon Etch system offers chipmakers high precision gate
etching for 65nm and 45nm-generation devices. For etching
metals, Applied launched the Applied Centura AdvantEdge Metal
Etch system in fiscal 2006. This system enables customers to
extend aluminum interconnect technology to
sub-70nm
dimensions for Flash and DRAM memory applications.
Ion
Implantation
During ion implantation, silicon wafers are bombarded by a beam
of ions, called dopants, that penetrate (or implant) the film
surface to a desired depth. The implantation step is used during
transistor fabrication to change electrical properties of a
material and achieve a particular electrical performance.
Low-energy, high current implant technology is important to
enabling the fabrication of smaller structures, which
contributes to faster transistor performance. The Applied
Quantum®
X Plus Implant system provides chipmakers with a
production-worthy, single-wafer, high-current implanter that
enables transistor scaling beyond the 45nm node. The Quantum X
Plus systems fixed beam and precision mechanical
scanning system provide precise energy control and low defect
levels to deliver the process technology needed to achieve the
most difficult and critical implants.
4
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 RadiancePlus RTP systems feature
the same advanced RTP technology with differing platform
designs. While the multi-chamber Centura 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. For flash
memory applications, the Applied Vantage
RadOxtm
system deposits high-performance transistor gate oxides with
high productivity and low operating cost.
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 Companys 200mm Applied Mirra
Mesa®
systems and 300mm Applied
Reflexion®
systems led the industry in CMP technology with important
features such as integrated cleaning, film measurement and
process control capabilities. The Companys 300mm Applied
Reflexion LK
Ecmptm
system features proprietary electrochemical mechanical
planarization technology to provide a high-performance,
cost-effective and extendible solution for copper/low k
interconnects at the 65nm node and below. The Ecmp system
removes bulk copper at a high rate by electric charge, making it
ideal for fragile ultra-low k films.
Metrology
and Wafer Inspection
Applied offers several types of products that are used to
measure and inspect the wafer during various stages of the
fabrication process:
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, or critical dimensions
(CDs), of a patterned wafer at extremely high magnification.
Applieds SEM products or systems provide customers with
full automation, along with the high accuracy and sensitivity
needed for measuring very small CDs. The Applied
VeritySEMtm
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.
The Companys OPC
Checktm
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
SEMVisiontm
G3 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 G3 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
3Ttm
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
UVisiontm
Inspection system is the industrys first laser-based 3D
brightfield tool. Utilizing multi-beam, deep ultraviolet (DUV)
laser illumination and high efficiency detectors, the
5
UVision system uncovers critical defects on the wafer that have
not been detected before by other inspection systems, enabling
customers to rapidly resolve performance-limiting 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,
measuring and inspecting masks. The Applied Tetra II Mask
etch system is based on the Companys production-proven
decoupled plasma source (DPS) wafer etch technology and is the
semiconductor industrys most advanced etch tool for
fabricating masks. The Applied RETicle SEM system, built on
Applieds proven CD-SEM platform, measures virtually all
mask types with
sub-1nm
precision, meeting the requirements of the industrys most
advanced masks.
Fab
Solutions Segment
Through its Fab Solutions segment, Applied provides products and
services designed to improve the performance and productivity of
semiconductor manufacturers fab operations. These products
embody the in-depth expertise and best known methods of
Applieds extensive global support infrastructure.
Fab Solutions serves a critical role in Applieds ability
to continuously support customers production requirements.
Approximately 3,100 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 20,000 installed Applied systems and
non-Applied systems.
Applied offers a broad range of products to maintain, service
and optimize the operations of customers fabs. Applied
Materials Genuine
Partstm
include spare parts manufactured to Applieds strict
technical specifications and quality standards. Applied
Certified Service
Productstm
provide customers with optimized tool performance for improved
total cost of ownership and a higher return on investment.
Applied also offers remanufactured equipment, product
enhancements and technical training for customers.
As part of its eService Solutions, Applied offers
FAB300tm,
a manufacturing execution system (MES), to monitor and control
fab manufacturing activities. This system is used in
semiconductor fabs, test, assembly and packaging facilities, and
flat panel display (FPD) manufacturing facilities. Applied also
offers a suite of diagnostic software that links hardware,
process and service data from different processing systems
throughout the fab. The Applied
NeXustm
SPC product is a new diagnostic tool that performs split-second
analysis of process conditions in Applieds processing
systems.
Metron Technology, Inc. (Metron), a wholly-owned subsidiary of
Applied Materials, offers a range of products and services for
fab operations support. Metrons products include fab and
sub-fab
systems, wafer management services, chamber performance
services, gas and fluid handling components, and other services
that are critical to semiconductor manufacturing. With
Metrons acquisition of ChemTrace in fiscal 2006, Metron
now offers chipmakers a wide range of services to analyze and
identify the sources of surface or airborne contamination.
Metron also offers
EcoSys®
treatment systems to address a broad spectrum of semiconductor
abatement applications. These energy-saving solutions enable
chipmakers to meet their most stringent environmental goals.
Display
Segment
Applied also manufactures and services equipment to fabricate
flat panel displays (FPDs). These systems are used by FPD
manufacturers to build and test thin-film transistor liquid
crystal display (TFT-LCD) panels for televisions, computer
displays and other consumer-oriented electronic applications.
While similarities exist between the technologies utilized in
chipmaking and display fabrication, there are significant
differences, such as in the size and composition of the
substrate (wafer vs. panel). FPD panels can be more than
70 times larger in area than todays largest wafers (300mm
diameter), and wafers are made of silicon, while FPD panels are
made of glass.
Applied supplies a wide range of systems that process and test
many different panel sizes. To meet consumers growing
demand for larger, more cost-efficient LCD TVs, FPD
manufacturers have continually increased the size of panels that
can be processed. Leading-edge substrates, sized at 2.2 x 2.5
meters (m), now processed by Generation
6
(Gen) 8.5 systems, are designed to enable the production of up
to six
55-inch LCD
TV screens. Applied announced three new systems for
manufacturing Gen-8.5 panels in October 2006.
The AKT-55K PECVD (plasma-enhanced CVD) system, used for
fabricating the transistor layer of Gen-8.5 panels, features
Applieds multi-chamber platform architecture. For
fabricating the color filter layer of these panels, Applied
offers a fully automated vertical sputtering system, the AKT-NEW
ARISTOtm
2200. Applied acquired the NEW
ARISTOtm
technology during fiscal 2006 as part of its acquisition of
Applied Films Corporation (Applied Films).
Complementing these systems, Applied also offers electron beam
systems for testing substrates during production for defective
pixels and other imperfections. The AKT-55K EBT is a Gen-8.5
tester that features one of the industrys fastest and most
accurate pixel test technology with the lowest operating cost.
The electron beam systems non-contact test technology
enables safe testing of high-value LCD TV panels without
damaging or scratching the display.
Adjacent
Technologies Segment
The acquisition of Applied Films, a supplier of thin film
deposition equipment, accelerated Applieds entry into
growing new markets, such as solar PV cells, flexible
electronics and energy-efficient glass.
In the solar PV area, Applied offers a suite of manufacturing
systems to enable customers to increase the conversion
efficiency and yields of their PV devices, thus helping to lower
the overall cost per watt for solar electricity. These include
equipment as well as processes, material-handling technologies
and services to support the manufacture of both
crystalline-silicon and thin-film silicon solar cells.
Applieds
ATONtm
in-line sputtering system provides quality deposition, high
throughput and low cost of ownership for both thin-film and
multi-or mono-crystalline silicon.
Applied also provides high-performance,
roll-to-roll
vacuum web coating systems for depositing a wide range of films
on flexible substrates for functional, aesthetic or optical
properties. The
TOPMETtm
system is capable of handling substrates in roll widths from
1.25-4.5m with high throughput and low cost of ownership.
Applied offers large-area sputter coating equipment for the
production of low-emissivity and solar control architectural
glass. The AXL
870tm
coating system is a highly flexible and cost-effective tool that
customers can easily reconfigure to produce a variety of
products to meet the challenges of a changing market.
Backlog
Applieds backlog increased from $2.6 billion at
October 30, 2005 to $3.4 billion at October 29,
2006. Applied manufactures its systems based on order backlog
and customer commitments. Backlog includes only orders for which
written authorizations have been accepted and shipment dates
within 12 months have been assigned, or shipment has
occurred but revenue has not been recognized, and also includes
contractual service revenue and maintenance fees to be earned
within the next 12 months. Backlog increased
$285 million as a result of the acquisition of Applied
Films during fiscal 2006. Backlog adjustments for fiscal 2006
totaled $194 million, which consisted primarily of
cancellations and currency adjustments. Customers may delay
delivery of products or cancel orders prior to shipment, subject
to possible cancellation penalties. Due to possible changes in
delivery schedules and cancellations of orders, Applieds
backlog on any particular date is not necessarily indicative of
actual sales for any succeeding period. 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
assembling various commercial and proprietary components into
finished systems. Products in the Silicon segment are
manufactured in Austin, Texas; Horsham, England; and Rehovot,
Israel. Remanufactured products in the Fab Solutions 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 Adjacent
Technologies segment are primarily manufactured in Alzenau,
Germany. Manufacturing requires raw materials, including a wide
variety of mechanical and electrical components,
7
to be manufactured to Applieds specifications. Applied
uses numerous companies to supply parts, components and
subassemblies (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 will continue to seek to reduce costs and to
lower the risks of production and service interruptions, as well
as shortages of key parts, by: (1) qualifying and selecting
alternate suppliers for key parts; (2) monitoring the
financial condition of key suppliers; (3) maintaining
appropriate inventories of key parts; and (4) qualifying
new parts on a timely basis.
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 and Israel. 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, Europe and Israel.
Applied invested $992 million (12 percent of net
sales) for fiscal 2004, $941 million (13 percent of
net sales) for fiscal 2005 and $1.2 billion
(13 percent of net sales) for fiscal 2006 in RD&E for
product development and engineering programs to create new
products and to improve existing technologies and products.
Applied has spent an average of 15 percent of net sales on
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 2006, Applied focused on developing systems for
customers new chip designs with 65nm and below geometries,
including systems to enable faster and denser transistor and
interconnect structures.
Marketing
and Sales
Applied manages its business and reports financial results based
on the segments described above. Because of the highly technical
nature of the products, Applied markets and sells products
worldwide through a direct sales force. For fiscal 2006, net
sales to customers in each region as a percentage of
Applieds total net sales were: Taiwan 23 percent,
North America (primarily the United States) 19 percent,
Korea 18 percent, Japan 16 percent, Asia-Pacific
(including China) 13 percent, and Europe 11 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
and other manufacturers. These expenditures depend on many
factors, including anticipated market demand and pricing for
semiconductors, flat panel displays, solar cells, architectural
glass and other substrates; the development of new technologies;
factory utilization; and global and regional economic conditions.
During fiscal 2006, more than 80 percent of Applieds
net sales were to regions outside of the United States. Managing
Applieds global operations presents challenges and
involves uncertainties that may affect Applieds business,
financial condition and results of operations.
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. During fiscal 2004, no individual customer
accounted for more than 10 percent of Applieds net
sales. Samsung Electronics Co., Ltd. accounted for
10 percent of Applieds net sales in 2005 and
11 percent of Applieds net sales in 2006. These net
sales were for products in multiple reportable segments.
8
Competition
The global semiconductor equipment and related industries are
highly competitive and characterized by rapid technological
change. Applieds ability to compete depends primarily on
its ability to 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
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 companies with a range of products.
Applieds ability to compete requires a high level of
investment in RD&E and in marketing, sales and customer
support activities. Management believes that Applieds
products have strong competitive positions. Applied is a global
leader in the semiconductor equipment and related markets. In
addition, Applied is expanding into adjacent markets where
customers may benefit from the Companys expertise in
nanomanufacturing technologies.
The competitive environment for each segment is described below:
Products within the Silicon segment are subject to rapid change,
with customers frequently moving to smaller dimensions, larger
wafer sizes and new materials for fabricating chips. 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 creates opportunities for many existing and new
competitors, and can quickly diminish the value of current
technologies. To compete effectively, Applied must offer a broad
portfolio of technically differentiated products. Applied must
allocate resources across these products and may not fund or
invest in individual products to the same degree as competitors
who specialize in fewer products.
Products and services within the Fab Solutions segment are
subject to a highly competitive environment characterized by
demanding worldwide service requirements and a diverse group of
competitors. To compete effectively, Applied must offer products
and services to help reduce costs and improve the productivity
of customers fab operations. Significant competitive
factors include productivity, cost-effectiveness, and the level
of technical service and support. The importance of these
factors varies according to customers needs and the type
of products or services offered.
Products and services within the Display segment are highly
specialized, with a limited number of major competitors located
primarily in Asia. Applied is the leader in PECVD and color
filter (CF) sputtering equipment markets and is a leader in the
array test equipment market. Applied has recently entered the
PVD market.
Products and services within the Adjacent Technologies segment
compete in diverse markets, including solar, flexible
electronics and energy-efficient glass. Applied has recently
entered these markets, which have established competitors. In
solar, Applied offers products utilizing two distinct
technologies, wafer-based and thin film, and is focused on the
emerging thin film area. Flexible electronics equipment competes
in a relatively fragmented market. Applieds glass coating
equipment has one major competitor.
Patents
and Licenses
Management believes that Applieds competitive position is
significantly dependent upon its skills in research,
development, engineering, manufacturing and marketing, 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
developments. 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, knowhow, 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
9
patents. Applied also receives royalties from licenses granted
to third parties. Royalties received from and paid to third
parties have not been and are not expected to be material in
relation 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.
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 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. In addition,
Applied has become aware of soil and groundwater contamination
at levels exceeding regulatory requirements at its facility in
Narita, Japan, which it believes was caused by a former owner or
operator of the property. Applied is continuing its
investigation of the contamination and is working with local
authorities to determine what further action may be required.
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
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 contained on Applieds website is part of this
report or is incorporated by reference herein.
Employees
At October 29, 2006, Applied employed 14,072 regular
employees and 1,033 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.
10
Executive
Officers of the Registrant
The following table and notes set forth information about
Applieds executive officers:
|
|
|
Name of Individual
|
|
Position
|
|
James C. Morgan(1)
|
|
Chairman of the Board of Directors
|
Michael R. Splinter(2)
|
|
President, Chief Executive Officer
and Director
|
Franz Janker(3)
|
|
Executive Vice President, Sales
and Marketing
|
George S. Davis(4)
|
|
Senior Vice President, Chief
Financial Officer
|
Manfred Kerschbaum(5)
|
|
Senior Vice President, General
Manager Applied Global Services
|
Farhad Moghadam(6)
|
|
Senior Vice President, General
Manager Thin Films Product Business Group and Foundation
Engineering
|
Mark R. Pinto(7)
|
|
Senior Vice President, Chief
Technology Officer and General Manager New Business and New
Products Group
|
Thomas St. Dennis(8)
|
|
Senior Vice President, General
Manager Etch, Cleans, Front End and Implant Product Business
Groups
|
Joseph J. Sweeney(9)
|
|
Senior Vice President, General
Counsel and Corporate Secretary
|
Nancy H. Handel(10)
|
|
Senior Vice President, Finance
|
Gilad Almogy(11)
|
|
Group Vice President, General
Manager Process Diagnostics and Control Product Business Group
|
Ron Kifer(12)
|
|
Group Vice President, Chief
Information Officer, Global Information Services
|
Yvonne Weatherford(13)
|
|
Corporate Vice President,
Corporate Controller
|
|
|
|
(1) |
|
Mr. Morgan, age 68, has been Chairman of the Board of
Directors of Applied 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 56, serves as President, Chief
Executive Officer and a member of the Board of Directors of
Applied. Prior to joining Applied in April 2003,
Mr. Splinter worked for nearly 20 years at Intel
Corporation (Intel). Most recently he was Executive Vice
President and Director of the Sales and Marketing Group at
Intel, 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 57, has been the head of Sales and
Marketing 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) |
|
Mr. Davis, age 49, 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. |
|
(5) |
|
Mr. Kerschbaum, age 52, has been Senior Vice
President, General Manager Applied Global Services since January
2005. He was Group 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 |
11
|
|
|
|
|
Engineering and Operations. From March 1997 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. |
|
(6) |
|
Dr. Moghadam, age 52, has been Senior Vice President,
General Manager Thin Films Product Business Group and Foundation
Engineering since September 2004. He became Group Vice
President, General Manager Dielectric Systems and Modules
Product Business Group and Foundation Engineering and Operations
in April 2004, after serving as Group Vice President, General
Manager Dielectric Systems and Modules Product Business Group
since December 2002. He was named Corporate Vice President of
the Chemical Vapor Deposition Product Business Group in December
1999. Dr. Moghadam earned his Ph.D in Materials Science and
Engineering from Stanford University. |
|
(7) |
|
Dr. Pinto, age 47, has served as Senior Vice
President, Chief Technology Officer and General Manager New
Business and New Products Group since joining Applied in January
2004. Prior to his appointment, 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 53, 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 58, 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) |
|
Ms. Handel, age 55, Senior Vice President, Finance,
was Chief Financial Officer from October 2004 to November 2006.
She was Group Vice President, Deputy Chief Financial Officer and
Corporate Controller from 2000 to 2004. From 1994 to 2000,
Ms. Handel had responsibility for Global Finance Operations
in addition to serving as Treasurer. From 1986 to 1994,
Ms. Handel served as Treasurer. Ms. Handel joined
Applied in 1985. Ms. Handel has announced her intention to
retire. |
|
(11) |
|
Dr. Almogy, age 41, was appointed Group Vice
President, General Manager Process Diagnostics and Control
Product Business Group in July 2005. He 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
in the group 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. |
|
(12) |
|
Mr. Kifer, age 55, joined Applied in May 2006 as Group
Vice President and Chief Information Officer, Global Information
Services. Prior to his appointment, Mr. Kifer spent
5 years with DHL Express in various executive management
roles, most recently as the Senior Vice President and Chief
Information Officer for North America, Asia Pacific and Emerging
Markets. |
|
(13) |
|
Ms. Weatherford, age 55, 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
12
intended to be an inactive textual reference only and none of
the information contained on Applieds website is part of
this report or is incorporated by reference herein.
The
industries that Applied serves is volatile and
unpredictable.
As a supplier to the global semiconductor and
semiconductor-related industries, Applied is subject to business
cycles, the timing, length and volatility of which can be
difficult to predict. The industries have historically been
cyclical due to sudden changes in demand and manufacturing
capacity, including capacity using the latest technology. The
effect on Applied of these changes in demand, including
end-customer demand, is occurring more rapidly, exacerbating the
volatility of these cycles. These changes have affected the
timing and amounts of customers purchases and investments
in technology, and continue to affect Applieds orders, net
sales, gross margin, contributed profit and results of
operations.
Applied must effectively manage its resources and production
capacity to meet changing demand. During periods of increasing
demand for semiconductor and semiconductor-related manufacturing
equipment, Applied must have sufficient manufacturing capacity
and inventory to meet customer demand and must be able to
attract, retain and motivate a sufficient number of qualified
individuals and effectively manage its supply chain. During
periods of decreasing demand, Applied must be able to
appropriately align its cost structure with prevailing market
conditions, effectively motivate and retain key employees, and
effectively manage its supply chain. If Applied is not able to
timely and appropriately align its cost structure with business
conditions
and/or
effectively manage its resources and production capacity,
including its supply chain, during changes in demand,
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
semiconductor and
semiconductor-related
industries.
The global industries in which Applied operates are
characterized by ongoing changes, including: (1) changes in
customers capacity requirements, capacity utilization and
capital spending, which depend in part on the demand for
customers products and their inventory levels relative to
demand; (2) the importance of reducing the cost of system
ownership, due in part to the increasing significance of
consumer electronics as a driver for semiconductor and display
demand and the related focus on lower prices; (3) varying
levels of business information technology spending;
(4) increasingly complex technology requirements, including
a significant rise in the number and importance of new materials
and importance of expertise in chemical processes and device
structure; (5) the growing types and varieties of
semiconductors and expanding number of applications across
multiple substrate sizes, resulting in customers divergent
technical demands and different rates of spending on capital
equipment; (6) customers varying adoption rates of
new technology; (7) a rising percentage of business from
customers in Asia and the emergence of customers, competitors
and suppliers in new geographical regions; (8) demand for
shorter cycle times for the development, manufacture and
installation of manufacturing equipment; (9) 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;
(10) differing rates of market growth for, and capital
investments by, various semiconductor device makers, such as
memory (including NAND flash and DRAM), logic, foundry, display
and solar; (11) customers increasing use of
partnerships, alliances, joint ventures and industry consortia,
which has increased the influence of key integrated circuit
manufacturers in technology decisions made by their global
partners; (12) higher capital requirements for building and
operating new semiconductor fabrication plants; (13) the
increasing difficulty for customers to move from product design
to volume manufacturing; (14) the challenge to
semiconductor manufacturers of moving volume manufacturing from
one technology node to the next smaller technology node and the
resulting impact on the technology transition rate;
(15) the increasing cost and reduced affordability of
research and development due to many factors, including
decreasing linewidths and the increasing number of materials,
applications and process steps; (16) the industry growth
rate; (17) the increasing importance of the availability of
spare parts to assure maximum system uptime; (18) concern
among United States governmental agencies regarding possible
national commercial
and/or
security issues posed by the growing manufacturing business in
Asia; and (19) the increasing importance of operating
flexibility to enable different responses to different markets,
customers and applications. The solar market, which Applied
recently entered, is
13
also characterized by ongoing changes in demand for PV products
arising from, among other things, fluctuations in the cost of
fossil fuels and electric power, availability of government
subsidies, the performance and reliability of PV technology, and
the success of other renewable energy sources. If Applied does
not successfully manage the risks resulting from the ongoing
changes occurring in the semiconductor and semiconductor-related
industries, 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
development, 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, and cultivating new
markets and new business models, 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. Applieds success is subject to many
risks, including but not limited to its ability to timely,
cost-effectively and successfully: (1) improve and develop
new applications for existing products and increase market share
in its existing markets; (2) develop, appropriately price,
and achieve market acceptance of new products; (3) expand
into or develop related and new markets for its
nanomanufacturing technology; (4) anticipate and capitalize
on opportunities in new markets, such as solar, and with new
technologies; (5) supply a range of Applied and non-Applied
products as part of its solar offerings; (6) appropriately
allocate resources, including RD&E funding, among
Applieds products and between the development of new
products and the improvement of existing products;
(7) accurately forecast demand and meet production
schedules for its products; (8) achieve cost efficiencies
across product offerings; (9) adapt to technology changes
in related markets, such as lithography; (10) develop,
market and price similar products for use by customers in
different applications
and/or
markets that may have varying technical requirements;
(11) adapt to changes in value offered by companies in
different parts of the supply chain; (12) qualify products
for volume manufacturing with its customers; (13) implement
changes in its design engineering methodology, including those
that enable significant decreases in material costs and cycle
time, greater commonality of platforms and types of parts used
in different systems, and effective product life cycle
management; (14) improve its manufacturing processes; and
(15) deploy initiatives to transform Applieds
information technology systems and enhance business processes,
including transitioning to a single-vendor enterprise resource
planning (ERP) software system. Furthermore, new or improved
products may involve higher costs and reduced efficiencies
compared to Applieds more established products and could
adversely affect Applieds gross margins. Also, entry into
new markets entails additional challenges, including those
arising from changes in Applieds customer
and/or
supplier base. In addition, Applied must regularly reassess the
size, capability and location of its global infrastructure and
timely make appropriate changes in its real estate and
facilities portfolio. If Applied does not successfully manage
these challenges, 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 2006, more than 80 percent of Applieds net
sales were to customers in regions outside the United States.
Certain of Applieds RD&E and manufacturing facilities,
as well as suppliers to Applied, are also located outside the
United States. Managing Applieds global operations
presents challenges, including but not limited to, those arising
from: (1) varying regional and geopolitical business
conditions and demands; (2) global trade issues;
(3) variations in protection of intellectual property and
other legal rights in different countries; (4) fluctuating
raw material and energy costs; (5) variations in the
ability to develop relationships with suppliers and other local
businesses; (6) changes in laws and regulations of the
United States (including export restrictions) and other
countries, as well as their interpretation and application;
(7) fluctuations in interest rates and currency exchange
rates; (8) the need to provide sufficient levels of
technical support in different locations; (9) political
instability, natural disasters (such as earthquakes, floods or
storms), pandemics, terrorism or acts of war where Applied has
operations, suppliers or sales; (10) cultural differences;
(11) special customer- or government-supported efforts to
promote the development and growth of local competitors; and
(12) shipping costs
and/or
delays. Many of these challenges are present in China, which is
experiencing significant growth of both suppliers and
prospective
14
competitors to Applied, and which Applied believes presents a
large potential market for its products and opportunity for
growth over the long term. These challenges, as well as global
uncertainties with respect to: (1) economic growth rates in
various countries; (2) consumer confidence; (3) the
sustainability, timing, rate and amount of demand for
electronics products and integrated circuits; (4) capital
and operational spending by semiconductor and display
manufacturers; and (5) price trends for certain integrated
circuit devices, 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 customer base is and has historically been highly
concentrated. Orders from a relatively limited number of
manufacturers have accounted for, and are expected to continue
to account for, a substantial portion of Applieds net
sales. 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. Moreover, certain customers,
particularly in emerging areas such as solar, may have capital
resource constraints
and/or a
limited operating history. 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 changes
and/or
formed strategic alliances or collaborative efforts, 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.
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 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 in developing regions, including China. 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 has also begun a multi-year, company-wide
program to transform certain business processes that includes
transitioning to a single-vendor enterprise resource planning
(ERP) software system to perform various functions, such as
order management and manufacturing control. Significant
interruptions of manufacturing operations or the delivery of
services as a result of (1) the failure or inability of
suppliers to timely deliver quality parts; (2) volatility
in the availability and cost of materials; (3) difficulties
or delays in obtaining required export approvals;
(4) information technology or infrastructure failures;
(5) difficulties and costs related to planning or effecting
business process changes and implementing a new ERP system;
(6) natural disasters (such as earthquakes, floods or
storms); or (7) 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.
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. Any or all of these factors could
materially and adversely affect Applieds business,
financial condition and results of operations.
The
failure to successfully implement and conduct offshoring and
outsourcing activities could adversely affect results of
operations.
To better align costs with market conditions, increase its
presence in growing markets, and enhance productivity and
operational efficiency, 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 engineering, manufacturing, customer support, software
development and administrative activities. The expanding role of
third party providers has required changes to Applieds
existing operations and the adoption of new
15
procedures and processes for retaining and managing these
providers in order to protect its intellectual property. If
Applied does not effectively develop and implement its
offshoring and outsourcing strategies, if required export and
other governmental approvals are not timely obtained, or if
Applieds third party providers do not perform as
anticipated, Applied may not realize productivity improvements
or cost efficiencies and may experience operational
difficulties, increased costs, manufacturing interruptions or
delays, 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.
Applied
is exposed to risks associated with acquisitions and strategic
investments.
Applied has made, and in the future intends to make,
acquisitions of, or investments in, companies, technologies or
products in existing, related or new markets for Applied.
Acquisitions involve numerous risks, including but not limited
to: (1) diversion of managements attention from other
operational matters; (2) inability to complete acquisitions
as anticipated or at all; (3) inability to realize
anticipated benefits; (4) failure to commercialize
purchased technologies; (5) inability to capitalize on
characteristics of new markets that may be significantly
different from Applieds existing markets;
(6) inability to obtain and protect intellectual property
rights in key technologies; (7) ineffectiveness of an
acquired companys internal controls; (8) impairment
of acquired intangible assets as a result of technological
advancements or
worse-than-expected
performance of the acquired company or its product offerings;
(9) unknown, underestimated
and/or
undisclosed commitments or liabilities; (10) excess or
underutilized facilities; and (11) ineffective integration
of operations, 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.
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, and the effectiveness of
Applieds compensation programs, including its equity-based
programs. Applied regularly evaluates its overall compensation
program and makes adjustments, as appropriate, to enhance its
competitiveness, such as instituting broad-based grants of
restricted stock units in fiscal 2006. If Applied does not
successfully attract, retain and motivate key employees,
Applieds ability 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.
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 earnings
in countries with differing tax rates; or (3) valuation of
Applieds deferred tax assets and liabilities. In addition,
Applied is subject to regular examination of its income tax
returns 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 results of operations.
16
Applied
is exposed to various risks related to legal proceedings or
claims and protection of intellectual property
rights.
Applied from time to time is, and in the future may be, involved
in legal proceedings or claims regarding patent infringement,
intellectual property rights, antitrust, environmental
regulations, securities, contracts, product performance, product
liability, unfair competition, employment and other matters. In
addition, Applied on occasion receives notification from
customers who believe that Applied owes them indemnification or
other obligations related to claims made against customers by
third parties. These legal proceedings and claims, whether with
or without merit, may be time-consuming and expensive to
prosecute or defend and also divert managements attention
and resources. 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 assert
these rights. Furthermore, the laws and practices of other
countries, including China, 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 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; the operation of its facilities;
and the use of its real property. Failure or inability to comply
with existing or future environmental and safety regulations
could result in significant remediation liabilities, the
imposition of fines
and/or the
suspension or termination of development, manufacture, sale or
use of certain of its products,
and/or may
affect the operation of its facilities, use or 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 and an attestation by
Applieds independent registered public accounting firm to
the adequacy of managements assessment of Applieds
internal control. Ongoing compliance with these requirements is
complex, costly and time-consuming. If (1) Applied fails to
maintain effective internal control over financial reporting;
(2) Applieds management does not timely assess the
adequacy of such internal control; or (3) Applieds
independent registered
17
public accounting firm does not timely attest to the evaluation,
Applied could be subject to regulatory sanctions and the
publics perception of Applied may decline.
|
|
Item 1B:
|
Unresolved
Staff Comments
|
None.
As indicated above, Applied has four reportable segments:
Silicon, Fab Solutions, Display and Adjacent Technologies.
Because of the interrelation of Applieds operations,
properties within a country may be shared by all segments
operating within that country. Products in the Silicon segment
are manufactured in Austin, Texas; Horsham, England; and
Rehovot, Israel. Remanufactured products in the Fab Solutions
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 Adjacent Technologies segment are manufactured primarily in
Alzenau, Germany.
Information concerning Applieds principal properties at
October 29, 2006 is set forth below:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Square
|
|
|
|
|
Location
|
|
Type
|
|
Principal Use
|
|
Footage(1)(2)
|
|
|
Ownership
|
|
|
Santa Clara, CA
|
|
Office, Plant & Warehouse
|
|
Headquarters, Marketing,
|
|
|
1,465,000
|
|
|
|
Owned
|
|
|
|
|
|
Manufacturing, Distribution,
|
|
|
705,000
|
|
|
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Leased
|
|
|
|
|
|
Research, Development
|
|
|
|
|
|
|
|
|
|
|
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and Engineering
|
|
|
|
|
|
|
|
|
Austin, TX
|
|
Office, Plant & Warehouse
|
|
Manufacturing
|
|
|
1,719,000
|
|
|
|
Owned
|
|
|
|
|
|
|
|
|
394,000
|
|
|
|
Leased
|
|
Rehovot, Israel
|
|
Office, Plant & Warehouse
|
|
Manufacturing, Research,
|
|
|
442,000
|
|
|
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Owned
|
|
|
|
|
|
Development and Engineering
|
|
|
|
|
|
|
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|
Alzenau, Germany
|
|
Office, Plant & Warehouse
|
|
Manufacturing, Research,
|
|
|
381,000
|
|
|
|
Leased
|
|
|
|
|
|
Development and Engineering
|
|
|
|
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|
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|
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Hsinchu, Taiwan
|
|
Office & Warehouse
|
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Customer Support
|
|
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90,000
|
|
|
|
Owned
|
|
|
|
|
|
|
|
|
104,000
|
|
|
|
Leased
|
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Singapore
|
|
Office
|
|
Customer Support
|
|
|
200,000
|
|
|
|
Owned
|
|
Tainan, Taiwan
|
|
Office & Warehouse
|
|
Customer Support
|
|
|
148,000
|
|
|
|
Owned
|
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Horsham, England
|
|
Office, Plant & Warehouse
|
|
Manufacturing, Research,
|
|
|
138,000
|
|
|
|
Leased
|
|
|
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|
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Development and Engineering
|
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|
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|
|
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|
Pudong, China
|
|
Office & Warehouse
|
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Customer Support
|
|
|
102,000
|
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Leased
|
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|
|
(1) |
|
Approximately 120,000 square feet were available for lease
or sublease. |
|
(2) |
|
Includes approximately 260,000 square feet that were
subleased. |
In addition to the above properties, Applied leases office space
for marketing, sales, engineering and customer support offices
in 92 locations throughout the world: 25 in North America
(principally the United States), 23 in Europe, 23 in Japan, 11
in Asia-Pacific (including China and India), 7 in Korea and 3 in
Taiwan.
In addition, Applied owns 94 acres of buildable land in
Texas that could accommodate approximately 1,433,000 square
feet of additional building space and 43 acres in
California that could accommodate approximately
1,247,000 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; 10 acres in Israel that could accommodate
approximately 110,000 square feet of additional building
space; and 25 acres in China, where Applied is building a
118,000 square foot facility.
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 Plan).
Properties were reported as assets
held-for-sale
and reclassified from property, plant and equipment on the
Consolidated Balance Sheet. Applied recorded an asset
18
impairment charge to write down the following properties to
estimated fair value: (1) facilities in Narita, Japan;
Hillsboro, Oregon; Chunan, Korea; and Danvers, Massachusetts;
and (2) 26 acres of unimproved land in Hillsboro,
Oregon. As part of the Plan, Applied also recorded a charge for
future obligations under a lease in Hayward, California, which
was subsequently terminated. At October 29, 2006, Applied
had properties held for sale in Hillsboro, Oregon; Narita,
Japan; and Chunan, Korea. For additional discussion of the Plan,
refer to Note 6 to the Consolidated Financial Statements.
Applied considers these properties 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
|
David
Scharf
On July 31, 2001, David Scharf, an individual, filed a
lawsuit against Applied in the United States District Court for
the Central District of California, captioned David
Scharf v. Applied Materials, Inc. (case
no. 01-06580
AHM). The lawsuit alleges that Applied has infringed, has
induced others to infringe, and has contributed to others
infringement of, a patent concerning color synthesizing scanning
electron microscope technology. Mr. Scharf seeks a
preliminary and permanent injunction, a finding of willful
infringement, damages (including treble damages), and costs.
Applied has answered the complaint and counterclaimed for
declaratory judgment of non-infringement and invalidity. On
May 10, 2002, Mr. Scharf filed a request for
re-examination of his patent with the Patent and Trademark
Office (PTO). On June 26, 2002, the case was removed from
the Courts active docket after the parties stipulated to
stay the case pending the results of that re-examination. On
July 11, 2002, Applied filed its own request for
re-examination of Mr. Scharfs patent with the PTO.
Applieds request for re-examination was granted on
September 19, 2002. On April 23, 2004, the PTO
notified Applied that it intended to issue a re-examination
certificate. On June 14, 2004, Applied filed a second
request for re-examination of Mr. Scharfs patent with
the PTO. The second request was denied on September 1,
2004. On October 1, 2004, Applied filed a petition for
reconsideration of that denial, which subsequently was denied.
The lawsuit was returned to the active docket of the District
Court for the Central District of California in January 2006,
and is scheduled to commence trial on April 3, 2007. The
parties are engaged in discovery and on November 6, 2006,
the Court heard opposing motions for summary judgment on the
issues of infringement and claim construction. The Court has not
yet ruled on these motions. Applied believes it has meritorious
defenses and counterclaims and intends to pursue them vigorously.
Linear
Technology
On March 12, 2002, Linear Technology Corp. (LTC) filed a
complaint against Applied in the Superior Court for the County
of Santa Clara, captioned Linear Technology Corp. v.
Applied Materials, Inc., Novellus Systems, Inc. and Tokyo
Electron Ltd. (case no. CV806004), alleging claims for
breach of contract, fraud and deceit, negligent
misrepresentation, suppression of fact, unfair competition,
breach of warranty, express contractual indemnity, implied
equitable indemnity and declaratory relief. The complaint
alleged, among other things, that Applied is obligated to
indemnify and defend LTC for certain claims in an underlying
patent infringement lawsuit brought by Texas Instruments, Inc.
(TI) against LTC. On November 12, 2002, LTC filed an
amended complaint asserting essentially the same claims as in
the original complaint, but adding an additional assertion that
LTC and TI have settled their litigation. Applieds motion
to dismiss the amended complaint was granted in part. LTC filed
Second and Third Amended Complaints, each of which was dismissed
upon Applieds motion. On February 13, 2004, LTC filed
a Fourth Amended Complaint, which Applied moved to dismiss. LTC
then filed a motion to amend its Fourth Amended Complaint, which
the Court granted. On July 7, 2004, LTC filed a Fifth
Amended Complaint. On October 5, 2004, Applieds
motion to dismiss LTCs Fifth Amended Complaint was granted
with prejudice. On January 11, 2005, LTC filed a notice of
appeal of the dismissal of its complaint. Applied believes it
has meritorious defenses and intends to pursue them vigorously.
19
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. (case no. 92 Tsai-chuan Tzi
No. 6388). The lawsuit alleges that Jusung is infringing a
patent related to chemical vapor deposition owned by Applied. In
the lawsuit, Applied seeks a provisional injunction prohibiting
Jusung from importing, using, manufacturing, servicing or
selling in Taiwan certain flat panel display manufacturing
equipment. On December 25, 2003, the Tao-Yuan District
Court ruled in favor of Applieds request for a provisional
injunction and, on January 14, 2004, the Court issued a
provisional injunction order against Jusung Pacific. Jusung
Pacific appealed those decisions, and the decisions were
affirmed on appeal. On January 30, 2004, Jusung Pacific
requested permission to post a counterbond to have the Jusung
Pacific injunction lifted. Jusung Pacifics counterbond
request 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 Engineering
appealed that order, and the order was affirmed on appeal.
Jusung Engineering also requested permission to post a
counterbond to have the Jusung Engineering injunction lifted.
Jusung Engineerings counterbond request was granted and on
April 25, 2005, the provisional injunction order against
Jusung Engineering was lifted. Applied has appealed both
counterbond decisions. 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.
(case no. 93 Zhong Zhi No. 3). In the lawsuit, Applied
seeks damages and a permanent injunction for infringement of the
same patent. The decisions regarding the provisional injunction
and counterbond have no effect on the separate patent
infringement lawsuit filed by Applied against Jusung in the
Hsinchu Court. In August 2006, the Court set the litigation fee
and the litigation security payment, and the main action is now
proceeding on its merits. The Court held a second hearing in the
main action on October 30, 2006. This same patent is the
subject of an invalidity proceeding filed in the Taiwanese
Patent and Trademark Office by Jusung Pacific in June 2004.
Applied believes it has meritorious claims and intends to pursue
them vigorously.
On June 13, 2006, Applied filed an action in the Taiwanese
Patent and Trademark Office challenging the validity of a patent
owned by Jusung Engineering (Taiwanese Patent
No. 249186) related to the severability of the
transfer chamber. On June 20, 2006, Jusung Engineering
filed a lawsuit against Applied and Applieds subsidiary,
AKT, 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, but does not seek injunctive relief. The
Court has scheduled the first hearing in this matter for
December 28, 2006. Applied believes that it has meritorious
defenses that it intends to pursue vigorously.
Taiwan
Fair Trade Commission
On April 10, 2004, the Taiwan Fair Trade Commission (TFTC)
notified Applieds subsidiary, AKT, in Taiwan that,
pursuant to a complaint filed by Jusung, the TFTC had begun an
investigation into whether AKT had violated the Taiwan Fair
Trade Act. The investigation focused on whether AKT 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
AKTs 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. By letter
dated April 15, 2005, the TFTC notified Applied and AKT
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 in favor of
Applied on February 7, 2006. Jusung has appealed the
appeals courts affirmation of the decision of the TFTC.
Silicon
Services Consortium
On January 19, 2006, five companies that sell 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.
(case no. A06CA051 LY). The plaintiffs claim that a policy
that Applied announced in January 2005 limiting the sale of
certain parts to them
20
constituted an unlawful attempt to monopolize the refurbishment
business, an interference with existing contracts, and an
interference with prospective business relationships. The suit
seeks injunctive relief, damages, costs and attorneys
fees. After Applied filed a motion to dismiss the original
complaint, the plaintiffs filed an amended complaint alleging
similar conduct. Applied filed a motion to dismiss the amended
complaint on April 7, 2006, and a hearing before the Court
was conducted on August 22, 2006. The Court has not yet
ruled on these motions. Applied believes it has meritorious
defenses and counterclaims and intends to pursue them vigorously.
Applied does not believe that the outcome of any of the above
matters will have a material adverse effect on its financial
position or results of operations.
Other
Legal Matters
From time to time, Applied receives notification from third
parties, including customers and suppliers, seeking
indemnification, litigation support, payment of money or other
actions by Applied in connection with claims made against them
by third parties. 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
these claims and proceedings cannot be predicted with certainty,
Applied does not believe that any of these other existing
proceedings or claims will have a material adverse effect on its
consolidated financial condition or results of operations.
|
|
Item 4:
|
Submission
of Matters to a Vote of Security Holders
|
None.
21
PART II
|
|
Item 5:
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
The following table sets forth the high and low closing sale
prices as reported on the Nasdaq Global Select Market (formerly
the Nasdaq National Market).
|
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|
|
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|
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2005
|
|
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2006
|
|
Fiscal Year
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First quarter
|
|
$
|
17.89
|
|
|
$
|
15.17
|
|
|
$
|
20.82
|
|
|
$
|
16.03
|
|
Second quarter
|
|
$
|
17.92
|
|
|
$
|
14.50
|
|
|
$
|
20.46
|
|
|
$
|
17.41
|
|
Third quarter
|
|
$
|
18.48
|
|
|
$
|
15.08
|
|
|
$
|
19.05
|
|
|
$
|
14.76
|
|
Fourth quarter
|
|
$
|
18.58
|
|
|
$
|
16.36
|
|
|
$
|
19.02
|
|
|
$
|
15.12
|
|
Applieds common stock is traded on the Nasdaq Global
Select Market under the symbol AMAT. As of November 26,
2006, there were 5,786 directly registered holders of stock.
Applieds Board of Directors declared three quarterly cash
dividends in the amount of $0.03 per share each in fiscal
2005. 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. The fourth quarterly cash
dividend declared in fiscal 2006 was paid on December 7,
2006, to stockholders of record as of November 16, 2006.
Dividends paid during fiscal 2005 and fiscal 2006 totaled
$98 million and $251 million, respectively. Applied
currently anticipates that cash dividends will continue to be
paid 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
stockholders.
The following table provides information as of October 29,
2006 with respect to the shares of common stock repurchased by
Applied during the fourth quarter of fiscal 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
Month #1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(July 31, 2006 to
August 27, 2006)
|
|
|
3,975
|
|
|
$
|
15.87
|
|
|
|
3,975
|
|
|
$
|
4,437
|
|
Month #2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(August 28, 2006 to
September 24, 2006)
|
|
|
149,700
|
|
|
$
|
17.18
|
|
|
|
149,700
|
|
|
$
|
5,000
|
|
Month #3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(September 25, 2006 to
October 29, 2006)
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
153,675
|
|
|
$
|
17.15
|
|
|
|
153,675
|
|
|
|
|
|
|
|
|
* |
|
On September 15, 2006, the Board of Directors approved the
repurchase of 145 million shares of Applied common stock
for an initial purchase price of $2.5 billion in cash under
an accelerated stock buyback program. The repurchase was
executed by Goldman, Sachs & Co. pursuant to agreements
that include a two-way market purchase price adjustment based on
the volume weighted average market trading price of Applied
common stock over the subsequent four-month period. On that
date, the Board of Directors also approved a new stock
repurchase program for up to $5.0 billion in repurchases
over the next three years, ending September 2009. |
22
|
|
Item 6:
|
Selected
Financial Data
|
The following selected financial information has been derived
from Applieds historical 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)
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands, except percentages, ratios, per share amounts
and number of employees)
|
|
|
Net sales
|
|
$
|
5,062,312
|
|
|
$
|
4,477,291
|
|
|
$
|
8,013,053
|
|
|
$
|
6,991,823
|
|
|
$
|
9,167,014
|
|
Gross margin
|
|
$
|
2,056,661
|
|
|
$
|
1,604,455
|
|
|
$
|
3,701,245
|
|
|
$
|
3,085,874
|
|
|
$
|
4,291,802
|
|
(% of net sales)
|
|
|
40.6
|
|
|
|
35.8
|
|
|
|
46.2
|
|
|
|
44.1
|
|
|
|
46.8
|
|
Research, development and
engineering
|
|
$
|
1,052,269
|
|
|
$
|
920,618
|
|
|
$
|
991,873
|
|
|
$
|
940,507
|
|
|
$
|
1,152,326
|
|
(% of net sales)
|
|
|
20.8
|
|
|
|
20.6
|
|
|
|
12.4
|
|
|
|
13.5
|
|
|
|
12.6
|
|
Marketing, selling, general and
administrative
|
|
$
|
708,955
|
|
|
$
|
625,865
|
|
|
$
|
751,621
|
|
|
$
|
697,402
|
|
|
$
|
906,742
|
|
(% of net sales)
|
|
|
14.0
|
|
|
|
14.0
|
|
|
|
9.4
|
|
|
|
10.0
|
|
|
|
9.9
|
|
Income/(loss) before income taxes
|
|
$
|
340,511
|
|
|
$
|
(211,556
|
)
|
|
$
|
1,829,250
|
|
|
$
|
1,581,569
|
|
|
$
|
2,166,971
|
|
Effective tax rate (%)
|
|
|
21.0
|
|
|
|
29.5
|
|
|
|
26.1
|
|
|
|
23.5
|
|
|
|
30.0
|
|
Net income/(loss)
|
|
$
|
269,004
|
|
|
$
|
(149,147
|
)
|
|
$
|
1,351,303
|
|
|
$
|
1,209,900
|
|
|
$
|
1,516,663
|
|
(% of net sales)
|
|
|
5.3
|
|
|
|
(3.3
|
)
|
|
|
16.9
|
|
|
|
17.3
|
|
|
|
16.5
|
|
Earnings/(loss) per share
|
|
$
|
0.16
|
|
|
$
|
(0.09
|
)
|
|
$
|
0.78
|
|
|
$
|
0.73
|
|
|
$
|
0.97
|
|
Weighted average common shares and
equivalents
|
|
|
1,701,557
|
|
|
|
1,659,557
|
|
|
|
1,721,645
|
|
|
|
1,657,493
|
|
|
|
1,565,072
|
|
Order backlog
|
|
$
|
3,190,459
|
|
|
$
|
2,495,115
|
|
|
$
|
3,368,382
|
|
|
$
|
2,570,808
|
|
|
$
|
3,398,280
|
|
Working capital(2)
|
|
$
|
4,493,447
|
|
|
$
|
4,789,480
|
|
|
$
|
6,020,747
|
|
|
$
|
5,069,663
|
|
|
$
|
3,644,974
|
|
Current ratio(2)
|
|
|
4.0
|
|
|
|
3.9
|
|
|
|
3.6
|
|
|
|
3.9
|
|
|
|
2.5
|
|
Long-term debt
|
|
$
|
573,853
|
|
|
$
|
456,422
|
|
|
$
|
410,436
|
|
|
$
|
407,380
|
|
|
$
|
204,708
|
|
Cash dividends declared per common
share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.09
|
|
|
$
|
0.18
|
|
Stockholders equity
|
|
$
|
8,019,649
|
|
|
$
|
8,068,034
|
|
|
$
|
9,262,027
|
|
|
$
|
8,928,549
|
|
|
$
|
6,651,400
|
|
Book value per share
|
|
$
|
4.87
|
|
|
$
|
4.81
|
|
|
$
|
5.51
|
|
|
$
|
5.56
|
|
|
$
|
4.78
|
|
Total assets
|
|
$
|
10,224,765
|
|
|
$
|
10,311,622
|
|
|
$
|
12,093,445
|
|
|
$
|
11,269,157
|
|
|
$
|
9,480,837
|
|
Capital expenditures, net of loss
on fixed asset retirements
|
|
$
|
417,080
|
|
|
$
|
211,959
|
|
|
$
|
171,538
|
|
|
$
|
177,097
|
|
|
$
|
151,117
|
|
Regular employees
|
|
|
16,077
|
|
|
|
12,050
|
|
|
|
12,191
|
|
|
|
12,576
|
|
|
|
14,072
|
|
|
|
|
(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 restated to conform to the
current period presentation. |
23
|
|
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 report. 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 Annual Report on
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 develops, manufactures, markets and services
semiconductor and semiconductor-related fabrication equipment,
providing nanomanufacturing
technologytm
solutions to the global semiconductor, flat panel display, solar
and other industries. Product development and manufacturing
activities occur in North America, Europe and Israel.
Applieds broad range of equipment and service products are
highly technical and are sold through a direct sales force.
Customer demand for spare parts and services is fulfilled
through a global spare parts distribution system and trained
service engineers located around the world in close proximity to
customer sites.
As a supplier to these industries, Applieds results are
primarily driven by worldwide demand for chips and flat panel
displays, which in turn depends on end-user demand for
electronic products. The industries in which Applied operates
are volatile and its results in fiscal 2004 through 2006 reflect
this volatility.
The following table presents certain significant measurements of
the past three fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In millions, except per share amounts and percentages)
|
|
|
New orders
|
|
$
|
8,982
|
|
|
$
|
6,389
|
|
|
$
|
9,888
|
|
Net sales
|
|
$
|
8,013
|
|
|
$
|
6,992
|
|
|
$
|
9,167
|
|
Gross margin
|
|
$
|
3,701
|
|
|
$
|
3,086
|
|
|
$
|
4,292
|
|
Gross margin percent
|
|
|
46.2
|
%
|
|
|
44.1
|
%
|
|
|
46.8
|
%
|
Net income
|
|
$
|
1,351
|
|
|
$
|
1,210
|
|
|
$
|
1,517
|
|
Earnings per share
|
|
$
|
0.78
|
|
|
$
|
0.73
|
|
|
$
|
0.97
|
|
Operating results for fiscal 2004 reflected a recovery from a
downturn in the semiconductor industry and the global economy,
as well as realized savings from Applieds fiscal 2003
realignment activities. In addition, Applied gained market share
in critical areas, including 300mm equipment and copper
interconnect, and improved its operational efficiencies.
Fiscal 2005 results reflected a challenging environment as
Applieds customers decreased fab utilization globally and
reduced or delayed capital expenditures as a result of excess
inventories and slowing demand for chips. In this period,
Applied focused on lowering costs, improving efficiencies,
reducing cycle time and bringing new products to market. During
the fourth quarter of fiscal 2005, customer demand for Applied
products began to increase.
24
Customer demand further improved in fiscal 2006, resulting in
higher orders and revenue. Fiscal 2006 results reflected a
recovery in the semiconductor and semiconductor-related
industries and the global economy as end-user demand for
electronic products and flat panel displays drove increased
customer requirements for advanced silicon and display products.
During this period, Applieds semiconductor customers
increased both high-volume production and leading-edge 65nm
and 45nm chip development. Results for this period also
reflected Applieds continued focus on cost controls.
Improvements in operating performance were offset in part by
restructuring and asset impairment charges associated with real
estate and facilities disinvestment that commenced during the
first fiscal quarter, equity-based compensation expenses and an
in-process research and development expense associated with the
acquisition of Applied Films Corporation (Applied Films).
During the second half of fiscal 2006, Applied completed certain
transactions in support of its long-term growth strategy.
Management believes that these transactions will enhance
Applieds ability to extend its nanomanufacturing
capabilities into adjacent and new markets, including color
filters for flat panel displays, solar cells, flexible
electronics, energy-efficient glass and track solutions for
semiconductor manufacturing. These transactions included the
acquisition of Applied Films, the formation of a joint venture
with Dainippon Screen Mfg. Co., Ltd. (Screen), and the purchase
of certain parts cleaning and recycling assets in Singapore from
UMS Solutions Pte. Ltd. (UMS Solutions), a wholly-owned
subsidiary of Norelco UMS Holdings Limited.
Applieds long-term opportunities depend in part on
successful execution of its growth strategy, including
increasing market share in existing markets, expanding into
related markets, and cultivating new markets and new business
models. These opportunities are also subject to many factors,
including: (1) global economic conditions;
(2) advanced technology
and/or
capacity requirements of semiconductor manufacturers and their
capital investment trends; (3) the profitability of chip
and display manufacturers; (4) supply and demand for chips,
flat panel displays, solar panels, and related products and
services; (5) realization of the anticipated benefits of
business combinations; (6) continued investment in
research, development and engineering (RD&E); and
(7) the relative competitiveness of Applieds
equipment and service products. For these and other reasons set
forth in Part 1, Item 1A, Risk Factors,
Applieds prior results of operations are not necessarily
indicative of future operating results.
Results
of Operations
Net
Sales
Applieds business was subject to cyclical industry
conditions in fiscal 2004, 2005 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 flat panel supply and demand and other factors,
including rapid technological advances in fabrication processes.
25
Quarterly and full fiscal year financial information was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter
|
|
|
Fiscal
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Year
|
|
|
|
(In millions, except per share amounts)
|
|
|
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New orders
|
|
$
|
1,683
|
|
|
$
|
2,214
|
|
|
$
|
2,462
|
|
|
$
|
2,623
|
|
|
$
|
8,982
|
|
Net sales
|
|
$
|
1,556
|
|
|
$
|
2,018
|
|
|
$
|
2,236
|
|
|
$
|
2,203
|
|
|
$
|
8,013
|
|
Gross margin
|
|
$
|
676
|
|
|
$
|
939
|
|
|
$
|
1,059
|
|
|
$
|
1,027
|
|
|
$
|
3,701
|
|
Net income
|
|
$
|
82
|
|
|
$
|
373
|
|
|
$
|
441
|
|
|
$
|
455
|
|
|
$
|
1,351
|
|
Earnings per share
|
|
$
|
0.05
|
|
|
$
|
0.22
|
|
|
$
|
0.26
|
|
|
$
|
0.27
|
|
|
$
|
0.78
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New orders
|
|
$
|
1,675
|
|
|
$
|
1,553
|
|
|
$
|
1,468
|
|
|
$
|
1,693
|
|
|
$
|
6,389
|
|
Net sales
|
|
$
|
1,781
|
|
|
$
|
1,861
|
|
|
$
|
1,632
|
|
|
$
|
1,718
|
|
|
$
|
6,992
|
|
Gross margin
|
|
$
|
790
|
|
|
$
|
818
|
|
|
$
|
717
|
|
|
$
|
761
|
|
|
$
|
3,086
|
|
Net income
|
|
$
|
289
|
|
|
$
|
305
|
|
|
$
|
370
|
|
|
$
|
246
|
|
|
$
|
1,210
|
|
Earnings per share
|
|
$
|
0.17
|
|
|
$
|
0.18
|
|
|
$
|
0.23
|
|
|
$
|
0.15
|
|
|
$
|
0.73
|
|
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 share
|
|
$
|
0.09
|
|
|
$
|
0.26
|
|
|
$
|
0.33
|
|
|
$
|
0.30
|
|
|
$
|
0.97
|
|
Net sales by geographic region, which were attributed to the
location of customers facilities, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Taiwan
|
|
$
|
2,006
|
|
|
$
|
1,608
|
|
|
$
|
2,079
|
|
North America(1)
|
|
|
1,337
|
|
|
|
1,472
|
|
|
|
1,708
|
|
Korea
|
|
|
879
|
|
|
|
1,021
|
|
|
|
1,699
|
|
Japan
|
|
|
1,417
|
|
|
|
1,396
|
|
|
|
1,518
|
|
Asia-Pacific(2)
|
|
|
1,580
|
|
|
|
612
|
|
|
|
1,157
|
|
Europe
|
|
|
794
|
|
|
|
883
|
|
|
|
1,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,013
|
|
|
$
|
6,992
|
|
|
$
|
9,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Primarily the United States. |
|
(2) |
|
Includes China. |
New orders increased to $9.0 billion for fiscal 2004,
reflecting a broad-based increase in capital investment in 300mm
technology to meet rising demand for chips and flat panel
displays. Following the new order trends, net sales increased to
$8.0 billion in fiscal 2004, reflecting the fulfillment of
higher levels of orders for capital equipment received in prior
quarters to support customers manufacturing capacity
expansion and new technology requirements.
New orders for fiscal 2005 decreased 29 percent, from
$9.0 billion in the prior year to $6.4 billion, as
semiconductor manufacturers reduced their capital investments to
align inventories with demand. Following the trend of decreasing
orders during fiscal 2005, net sales decreased by
13 percent from $8.0 billion for fiscal 2004 to
$7.0 billion for fiscal 2005, reflecting lower demand for
semiconductor products.
26
New orders for fiscal 2006 increased 55 percent, from
$6.4 billion in the prior year to $9.9 billion, as
customer demand increased. Following the trend of increasing
orders during fiscal 2006, net sales increased by
31 percent, from $7.0 billion for fiscal 2005 to
$9.2 billion for fiscal 2006.
Gross
Margin
Gross margin as a percentage of net sales decreased from
46.2 percent for fiscal 2004 to 44.1 percent for
fiscal 2005, and increased to 46.8 percent for fiscal 2006.
The higher gross margin percentage for fiscal 2004 was
principally attributable to improved revenue levels, changes in
product mix, decreased product costs, and increased
manufacturing volume, resulting in higher absorption of
manufacturing and field service costs and the completion of
refocused product efforts. The higher gross margin in fiscal
2004 was partially offset by increased variable compensation
costs as a result of improved operating performance. The
decrease in gross margin from fiscal 2004 to fiscal 2005 was due
to lower revenue levels, lower manufacturing absorption and
changes in product mix, which were partially offset by
initiatives for cost reduction and efficiency improvement, such
as common platform architecture and parts, lower cost sourcing
and cycle time reduction. The increase in the gross margin
percentage from fiscal 2005 to fiscal 2006 was principally
attributable to the combination of higher revenue levels,
decreased product costs and increased manufacturing volume and
absorption, partially offset by increased variable and
equity-based compensation costs. Applied began recognizing
expenses associated with stock options and the ESPP in fiscal
2006. Gross margin during fiscal 2006 included $37 million
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
products and services 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 has historically maintained its
commitment to investing in RD&E in order to continue to
offer new products and technologies. As a result, RD&E
expenses were $992 million (12 percent of net sales)
for fiscal 2004, $941 million (13 percent of net
sales) for fiscal 2005, and $1.2 billion (13 percent
of net sales) for fiscal 2006. Equity-based compensation
expenses during fiscal 2006 associated with research,
development and engineering functions totaled $76 million.
Development cycles range from 12 to 36 months depending on
whether the product is an enhancement of an existing product or
a new product. 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 2004, Applied continued its investment in developing
technologies for future generation manufacturing. Advances were
made in several key areas, including technology for enhancing
transistor and interconnect performance.
In fiscal 2005, Applied focused on developing systems for
customers advanced chip designs, including systems to
enable smaller and faster interconnect and transistor structures
with 65nm, 45nm and below geometries and flat panel display
systems to process larger glass substrates.
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 flat panel display
systems to process even larger glass substrates.
During fiscal 2006, Applied recorded an in-process research and
development (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. No
IPR&D charges were recorded in fiscal 2005. During fiscal
2004, Applied recorded an IPR&D expense in the amount of
$6 million related to the acquisition of Torrex Equipment
Corporation.
27
Marketing,
Selling, General and Administrative
Marketing, selling, general and administrative expenses were
$752 million (9 percent of net sales) for fiscal 2004,
decreased to $697 million (10 percent of net sales)
for fiscal 2005, and increased to $907 million
(10 percent of net sales) for fiscal 2006. The decrease in
operating expenses from fiscal 2004 to 2005 was due to lower
business volume. Operating expenses were affected by reductions
in variable compensation due to lower operating performance and
focus on cost controls. The increase from fiscal 2005 to 2006
correlated to the increase in business volume, as well as
increases in variable compensation as a result of improved
operating performance, equity-based compensation expense, and
spending on the Companys business transformation
initiative, partially offset by savings resulting from
Applieds continued focus on controlling its overall cost
structure. Equity-based compensation expenses during fiscal 2006
associated with marketing, sales and general and administrative
functions totaled $104 million. During fiscal 2006, Applied
launched the planning stage of its multi-year business
transformation initiative, which is expected to include the
design of certain new company-wide business processes and the
transition to a single-vendor software system to perform various
functions, such as order management and manufacturing control.
Restructuring
and Asset Impairments
Restructuring actions taken in fiscal 2004 were intended to
better align Applieds cost structure with prevailing
market conditions due to the industry downturn at the time.
These actions, which were necessary as a result of reduced
business volume, reduced Applieds global workforce and
consolidated global facilities. Restructuring, asset impairments
and other charges for fiscal 2004 totaled $167 million,
consisting of $65 million for facility consolidations,
$6 million for severance and benefits, and $96 million
for other costs, primarily fixed asset writeoffs due to facility
consolidations.
As of October 29, 2006, the fiscal 2004 restructuring
actions were completed, and restructuring reserve balances
consisted principally of remaining lease commitments associated
with facilities.
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 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. Applied recorded an asset impairment
charge of $124 million during the first quarter of fiscal
2006 to write down the following properties to estimated fair
value: (1) facilities in Narita, Japan; Chunan, Korea;
Hillsboro, Oregon; Danvers, Massachusetts; and
(2) 26 acres of unimproved land in Hillsboro, Oregon.
As part of the Plan, Applied also recorded a charge in the
amount of $91 million for future lease obligations that
were scheduled to continue through fiscal 2014 related to the
closure of its leased Hayward, California facility. During the
third quarter of fiscal 2006, Applied sold the Danvers,
Massachusetts facility for net proceeds of $16 million and
recognized a gain of $4 million. During the fourth quarter
of fiscal 2006, Applied recorded additional impairment charges
on the Narita and Chunan facilities of $6 million and
recorded a restructuring charge of $4 million related to
environmental contamination of the Narita site. During the
second, third and fourth quarters of fiscal 2006, Applied
consumed $9 million in restructuring reserves related to
the Hayward campus in rental and operating costs. In the fourth
quarter of fiscal 2006, the Hayward lease obligation was
terminated for $81 million. Applied continues to actively
market the remaining properties.
For further details, see Note 6 of Notes to Consolidated
Financial Statements.
Litigation
Settlements, Net
Litigation settlements, net were $27 million for fiscal
2004 and consisted of costs of $28 million related to two
separate patent litigation settlements, net of a gain of
$1 million related to a legal settlement in favor of
Applied. During fiscal 2005 and 2006, there were no material
litigation settlements.
Net
Interest Income
Net interest income was $66 million for fiscal 2004,
$134 million for fiscal 2005 and $149 million for
fiscal 2006. The increases in net interest income from fiscal
2004 to 2005 and from 2005 to 2006 were due primarily to a
28
substantial increase in interest rates combined with a decrease
in interest expense associated with scheduled debt maturities in
September 2004 and September 2005.
During the fourth quarter of fiscal 2006, Applied repurchased
145 million shares of outstanding common stock for an
aggregate purchase price of $2.5 billion under an
accelerated buyback program. The repurchase was funded with
Applieds existing cash and investments. A portion of the
investment portfolio was sold to fund the accelerated stock
buyback, resulting in lower interest income due to the
realization of losses associated with certain investments and a
reduced investment portfolio.
Income
Taxes
Applieds effective income tax provision rate was
26.1 percent for fiscal 2004, 23.5 percent for fiscal
2005 and 30.0 percent for fiscal 2006. Applieds
effective rate of 23.5 percent for fiscal 2005 reflected
the favorable resolution of audits of prior years income
tax filings of $118 million and a change in estimate with
respect to export tax benefits of $14 million, partially
offset by a charge of $32 million relating to the
distribution of foreign earnings under the American Jobs
Creation Act of 2004 (the Jobs Creation Act). 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.
The Jobs Creation Act, enacted in fiscal 2004, provides for a
three year phase-out of current extraterritorial income tax
(ETI) benefits and replaces ETI with a phased-in nine percent
domestic production activity deduction that will not be fully
effective until 2010. The Jobs Creation Act will not fully
replace Applieds current ETI tax benefits.
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
After the acquisition of Applied Films, Applied made certain
changes to its internal financial reporting structure during the
fourth quarter of fiscal 2006 and, as a result, is reporting
four segments: Silicon, Fab Solutions, Display, and Adjacent
Technologies. 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.
Future changes to Applieds internal financial reporting
structure may result in changes to the reportable segments
disclosed. Applied does not allocate to its reportable segments
certain operating expenses which are reported separately at the
corporate level. These unallocated costs include equity-based
compensation, regional marketing and sales, corporate functions
(certain management, finance, legal, human resources and
RD&E costs) and unabsorbed information technology and
occupancy costs. Prior to the fourth quarter of fiscal 2006,
Applied operated in one reportable segment. Fiscal 2004 and 2005
amounts are presented on a basis comparable to fiscal 2006
amounts. Discussions below include the results of each
reportable segment.
Silicon
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
New orders
|
|
$
|
6,363
|
|
|
$
|
3,918
|
|
|
$
|
6,555
|
|
Net sales
|
|
$
|
5,767
|
|
|
$
|
4,468
|
|
|
$
|
5,971
|
|
Operating income
|
|
$
|
1,832
|
|
|
$
|
1,105
|
|
|
$
|
2,000
|
|
Fiscal 2004 Silicon orders of $6.4 billion reflected
investment in advanced 300mm manufacturing capacity by chip
manufacturers due to robust consumer spending, increased
corporate information technology spending and growth in the
personal computer and cell phone markets. During fiscal 2004,
net sales of $5.8 billion reflected increased demand for
Applieds low k CVD Black products, and PECVD, CMP and PVD
products continued to be industry benchmarks for performance and
capability in advanced technologies. During fiscal 2004,
operating income of $1.8 billion reflected higher net sales
and cost savings related to completion of the realignment plan,
29
offset in part by higher variable compensation expenses. In
fiscal 2004, RD&E advances were made in several key areas,
including technology for enhancing transistor and interconnect
performance. Ten major products were introduced, including the
Applied Endura2, Applied Reflexion LK Ecmp, Applied Producer
HARP, Applied Quantum X and Applied SEMVision G2 FIB systems,
all targeted for 65nm and below chip manufacturing.
Silicon orders of $3.9 billion decreased 38 percent in
fiscal 2005 compared to fiscal 2004. Net sales of
$4.5 billion decreased 23 percent in fiscal 2005
compared to fiscal 2004. Fiscal 2005 was a year of lower
semiconductor capital equipment investment, as customers aligned
inventories with demand. During fiscal 2005, customers decreased
manufacturing utilization to address rising chip inventory and
softening end-user demand. Operating income of $1.1 billion
decreased 40 percent in fiscal 2005 compared to fiscal
2004. During fiscal 2005, Applied reduced variable expenses and
the cost of products sold in order to align its cost structure
with market conditions. In fiscal 2005, RD&E focused on
developing systems for customers advanced chip designs,
including systems to enable smaller and faster interconnect and
transistor structures with 65nm, 45nm and below geometries. For
copper interconnect applications, the Company introduced the
Applied Endura CuB/S II system with advanced copper
barrier/seed technology and the Applied Producer Black
Diamond II system for next-generation low k dielectric film
layers. For leading-edge transistor gate applications, the
Company launched the Applied Centura AdvantEdge Etch system,
Applied
Siconitm
preclean technology and the Applied Vantage RadOx RTP. New
applications in strain engineering, which involves creating
localized areas of stress in the transistor structure, were also
developed for existing systems to meet customers
requirements for faster transistors. In the area of inspection
and metrology, the Company launched the Applied
UVisiontm
system, the industrys first laser 3D brightfield
inspection tool, and Applied OPC Check software, designed to
automate critical OPC mask verification.
Silicon orders of $6.6 billion increased 67 percent in
2006 compared to 2005. 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 new 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.
Net sales of $6.0 billion increased 34 percent in 2006
compared to 2005. During fiscal 2006, demand increased in many
areas, including etch, inspection and thin films products.
Operating income of $2.0 billion increased 81 percent
in 2006 compared to 2005. Improved operating results in fiscal
2006 reflected an increase in business volume, offset in part by
increases in variable compensation expenses. In fiscal 2006,
Applied continued its development of systems to increase chip
performance, especially for Flash and DRAM devices. To extend
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 system with Aktiv Preclean, extending the
systems capability to the 45nm node and below, especially
for use with ultra-low k dielectric 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.
Fab
Solutions Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
New orders
|
|
$
|
1,779
|
|
|
$
|
1,713
|
|
|
$
|
2,259
|
|
Net sales
|
|
$
|
1,675
|
|
|
$
|
1,768
|
|
|
$
|
2,210
|
|
Operating income
|
|
$
|
394
|
|
|
$
|
400
|
|
|
$
|
623
|
|
Fiscal 2004 orders and net sales reflected increased demand for
spare parts due to higher wafer starts, a growing installed
base, and increased demand for remanufactured equipment. During
fiscal 2004, operating income of $394 million reflected
higher net sales and savings related to cost control initiatives.
30
Fiscal 2005 orders of $1.7 billion decreased 4 percent
compared to fiscal 2004, reflecting customers cost
reduction initiatives and lower remanufactured systems orders,
offset in part by a modest increase in wafer starts. Fiscal
2005 net sales and operating income included Metron, which
Applied acquired in December 2004, expanding the product and
service portfolio with a wide range of outsourcing solutions.
Net sales of $1.8 billion increased 6 percent in
fiscal 2005 compared to fiscal 2004. Operating income of
$400 million increased 1 percent in fiscal 2005
compared to fiscal 2004, and included Metron integration costs.
Applied also expanded its product portfolio with the addition of
abatement systems, FAB300 manufacturing execution systems,
products for assembly and test, kitting and cleaning, and other
technology-focused fab offerings.
Orders of $2.3 billion increased 32 percent in 2006
compared to 2005. Net sales of $2.2 billion increased
25 percent in 2006 compared to 2005. Net sales reflected
increases in spare parts shipments and service contracts as a
result of higher wafer starts and an increase in 200mm
remanufactured equipment investment. Operating income of
$623 million increased 56 percent in 2006 compared to
2005. 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
perfluorocompound (PFC) emissions and additional chamber
performance services capabilities.
Display
Segment
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
New orders
|
|
$
|
840
|
|
|
$
|
758
|
|
|
$
|
1,037
|
|
Net sales
|
|
$
|
571
|
|
|
$
|
756
|
|
|
$
|
966
|
|
Operating income
|
|
$
|
177
|
|
|
$
|
254
|
|
|
$
|
319
|
|
Fiscal 2004 orders, net sales and operating income reflected
increased end-user demand for LCD TVs and laptop displays.
Demand also increased for small panels, driven by mobile phones
with enhanced capabilities, such as color displays, cameras,
larger screen sizes and higher resolutions. Operating income
included RD&E expenses related to the development of the
Gen-7 system. Seventh generation TFT-LCD substrates measure 1.8m
x 2.2m and produce up to six
46-inch
large screen displays.
Orders of $758 million decreased 10 percent in fiscal
2005 compared to fiscal 2004. Fiscal 2005 orders reflected a
lower demand for smaller panel equipment, offset in part by
orders for Gen-7.5 systems as manufacturers migrated to
larger-sized TFT-LCD display production. Net sales of
$756 million increased 32 percent in fiscal 2005
compared to fiscal 2004. Operating income of $254 million
increased 43 percent in fiscal 2005 compared to fiscal
2004. Fiscal 2005 results included higher RD&E expenses.
Applied introduced the Gen-8 AKT-50K PECVD system for
manufacturing flat panel displays. This system processes 2.2m x
2.4m glass substrates for producing up to six
52-inch LCD
screens.
Orders of $1.0 billion increased 37 percent in fiscal
2006 compared to fiscal 2005. During fiscal 2006, price
reductions in consumer electronics accelerated the growth of the
TFT-LCD display market. As a result, display manufacturers
aggressively invested 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. Net sales of $1.0 billion
increased 28 percent in 2006 compared to 2005. During the
last quarter of fiscal 2006, flat panel equipment demand began
to slow as customers aligned their capacity plans and inventory
levels. Operating income of $319 million increased
25 percent in 2006 compared to 2005. 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
screens.
31
Adjacent
Technologies
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
New orders
|
|
$
|
|
|
|
$
|
|
|
|
$
|
37
|
|
Net sales
|
|
$
|
|
|
|
$
|
|
|
|
$
|
20
|
|
Operating loss
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8
|
|
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 August 14, 2006, Applieds wholly-owned subsidiary,
Metron Technology, Inc., purchased certain parts cleaning and
recycling assets in Singapore from UMS Solutions for
$10 million. The acquisition enhances Metrons
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 will provide 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 flat panel displays (FPDs),
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 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, 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. (collectively, ChemTrace) for
approximately $22 million in cash, net of cash acquired, of
which $18 million was paid upon closing. ChemTrace provides
customers with precision parts cleaning and materials testing
solutions.
On June 28, 2005, Applied purchased certain assets of SCP
Global Technology, Inc. (SCP), consisting of single-wafer
HF-last immersion technology and Marangoni clean/dry
intellectual property, for approximately $24 million in
cash.
On December 16, 2004, Applied acquired the assets of ATMI,
Inc.s Treatment Systems business (EcoSys), which supports
the gas abatement requirements of process equipment for
semiconductor manufacturing and other industrial applications,
for approximately $16 million in cash.
On December 14, 2004, Applied acquired substantially all of
the operating subsidiaries and businesses of Metron Technology
N.V., a provider of a range of products and services for
fab-wide operations, for approximately $85 million in cash.
32
On June 14, 2004, Applied acquired Torrex Equipment
Corporation, a developer of a multi-wafer system that utilizes
chemical vapor deposition and atomic layer deposition processes
to address front-end semiconductor manufacturing applications,
for $7 million in cash.
For further details, see Note 13 of Notes to Consolidated
Financial Statements.
Recent
Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88, 106, and
132R (SFAS 158). SFAS 158 requires an entity to
recognize in its statement of financial condition the funded
status of its defined benefit post-retirement plans, measured as
the difference between the fair value of the plan assets and the
benefit obligation. SFAS 158 also requires an entity to
recognize changes in the funded status of a defined benefit
post-retirement plan directly to accumulated other comprehensive
income, net of tax, to the extent such changes are not
recognized in earnings as components of periodic net benefit
cost. SFAS 158 is effective for Applied in fiscal 2007.
Applied does not expect the implementation of this standard to
have a material effect on Applieds financial position or
results of operations.
In September 2006, the FASB issued Statement No. 157,
Fair Value (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. SFAS 157
becomes effective for Applied in fiscal 2009. Applied is
evaluating the potential impact of the implementation of
SFAS 157 on its financial position and results of
operations.
In September 2006, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108, Considering
the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements
(SAB 108), which provides interpretive guidance on how the
effects of the carryover or reversal of prior year misstatements
should be considered in quantifying a current year misstatement.
SAB 108 is effective for Applied in fiscal 2007. Applied
does not expect the implementation of this staff accounting
bulletin to have a material effect on Applieds financial
position or results of operations.
In July 2006, the FASB issued FASB Interpretation 48,
Accounting for Income Tax Uncertainties
(FIN 48). FIN 48 defines the threshold for recognizing
the benefits of tax return positions in the financial statements
as more-likely-than-not to be sustained by the
taxing authority. The recently issued literature also provides
guidance on the derecognition, measurement and classification of
income tax uncertainties, along with any related interest and
penalties. FIN 48 also includes guidance concerning
accounting for income tax uncertainties in interim periods and
increases the level of disclosures associated with any recorded
income tax uncertainties. FIN 48 will become effective for
Applied beginning in fiscal 2008. Any differences between the
amounts recognized in the statements of financial position prior
to the adoption of FIN 48 and the amounts reported after
adoption will be accounted for as a cumulative-effect adjustment
recorded to the beginning balance of retained earnings. Applied
is evaluating the potential impact of the implementation of
FIN 48 on its financial position and results of operations.
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial
Instruments an amendment of FASB Statements
No. 133 and 140 (SFAS 155). SFAS 155 amends
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. SFAS 155 also
resolves issues addressed in SFAS 133 Implementation Issue
No. D1, Application of Statement 133 to
Beneficial Interests in Securitized Financial Assets.
SFAS 155 (a) permits fair value remeasurement for any
hybrid financial instrument that contains an embedded derivative
that otherwise would require bifurcation, (b) clarifies
which interest-only strips and principal-only strips are not
subject to the requirements of SFAS 133,
(c) establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring
bifurcation, (d) clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives,
and (e) amends SFAS No. 140 to eliminate the
prohibition on a qualifying special-purpose entity from holding
a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument.
SFAS 155 is effective for all financial instruments
acquired or issued after the beginning of Applieds 2007
fiscal year. Applied is currently assessing the
33
impact of SFAS 155, however, it does not anticipate that
SFAS 155 will have a material impact on its financial
position and results of operations.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections a
Replacement of APB Opinion No. 20 and FASB Statement
No. 3 (SFAS 154), which requires retrospective
application to prior periods financial statements of
voluntary changes in accounting principle unless it is
impracticable to do so. SFAS 154 is effective for
accounting changes and corrections of errors beginning in fiscal
2007. Applied does not expect the implementation of this
standard to have a material effect on Applieds financial
position or results of operations.
Financial
Condition, Liquidity and Capital Resources
Applieds cash, cash equivalents and investments decreased
from $6.0 billion at October 30, 2005 to
$3.2 billion at October 29, 2006 due primarily to
share repurchases and cash dividend distributions. Applied has
not undertaken any significant external financing activities for
several years.
Cash, cash-equivalents and investments consist of the following:
|
|
|
|
|
|
|
|
|
|
|
October 30,
|
|
|
October 29,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Cash and cash equivalents
|
|
$
|
990
|
|
|
$
|
861
|
|
Short-term investments
|
|
|
2,343
|
|
|
|
1,036
|
|
Long-term investments
|
|
|
2,652
|
|
|
|
1,315
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash-equivalents and
investments
|
|
$
|
5,985
|
|
|
$
|
3,212
|
|
|
|
|
|
|
|
|
|
|
During fiscal 2006, Applied changed its accounting method for
certain fixed-income investments, which resulted in the
reclassification of these investments from short-term
investments to long-term investments. As a result, prior period
balances have been reclassified to conform to the current
periods presentation. This accounting method is based on
the contractual maturity dates of fixed-income securities as
current or long-term, while the prior classification was based
on the nature of the securities and the availability for use in
current operations. Applied believes this presentation method is
preferable as it is more reflective of Applieds assessment
of the timing of when such securities will be converted to cash.
Accordingly, certain fixed-income investments of
$2.6 billion have been reclassified from short-term
investments to long-term investments in the October 30,
2005 Consolidated Balance Sheet to conform to the fiscal 2006
financial statement presentation. In connection with this
reclassification, short-term deferred taxes have been
reclassified to long-term deferred taxes. There have been no
changes in Applieds investment policies or practices
associated with this change in accounting method. In addition,
$50 million of long-term equity securities previously
reported in other long-term assets have been reclassified to
long-term investments in the October 30, 2005 Consolidated
Balance Sheet to conform to the fiscal 2006 financial statement
presentation. Applied continues to classify auction rate
securities and variable rate demand notes as current assets,
notwithstanding the underlying contractual term of such
investments, since the highly liquid nature of these investments
enables them to be readily convertible to cash.
Applied generated cash from operating activities of
$1.6 billion for fiscal 2004, $1.2 billion for fiscal
2005 and $1.9 billion for fiscal 2006. The primary sources
of cash from operating activities have been 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 sell accounts
receivable of $859 million for fiscal 2004,
$158 million for fiscal 2005 and $245 million for
fiscal 2006. The sales of these accounts receivable increased
cash and reduced accounts receivable and days sales outstanding.
Days sales outstanding were 69 days at the end of fiscal
2004, compared to 85 days at the end of fiscal 2005 and
80 days at the end of fiscal 2006. A portion of these sold
accounts receivable is subject to certain limited recourse
provisions. However, Applied has not experienced any losses
under these programs. Availability and usage of these accounts
receivable sale agreements depend on many factors, including the
willingness of financial institutions to purchase receivables
and the cost of such arrangements. The decrease in days sales
outstanding in fiscal 2006 is primarily related to the change in
the regional sales mix and
34
the resulting relative increase in the amount of sold accounts
receivable. For further details regarding accounts receivable
sales, see Note 11 of Notes to Consolidated Financial
Statements. Inventories increased by $373 million in fiscal
2006, which related to the increase in business volume and sales
activity from fiscal 2005 to fiscal 2006.
Applied used $534 million of cash for investing activities
for fiscal 2004, $179 million for fiscal 2005, and
generated $2.0 billion during fiscal 2006. Applieds
investing activities included purchases of investments, net of
sales and maturities, of $336 million for fiscal 2004.
Proceeds from sales and maturities of investments, net of
purchases of investments, totaled $122 million for fiscal
2005 and $2.6 billion for fiscal 2006. Proceeds from the
sale of investments in fiscal 2006 were used principally to
fund Applieds accelerated stock buyback.
Capital expenditures were $191 million for fiscal 2004,
$200 million for fiscal 2005, and $179 million for
fiscal 2006, totaling $570 million for the past three
years. The majority of capital spending was for application
laboratories, equipment and related facilities. Fiscal 2004
capital expenditures consisted principally of laboratory and
demonstration equipment. Fiscal 2005 capital expenditures
included investment in laboratory equipment and upgrades to
Applieds enterprise resource planning software and network
architecture. Fiscal 2006 capital expenditures included
purchases of lab equipment, network infrastructure and
$18 million to purchase 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 2005,
Applied paid $102 million, net of cash acquired, for the
Metron and EcoSys acquisitions. 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 for approximately
$22 million in cash, net of cash acquired, of which
$18 million was paid upon closing. See Note 13 of
Notes to Consolidated Financial Statements for additional
details.
Applied used cash of $359 million for financing activities
for fiscal 2004, $1.6 billion for fiscal 2005 and
$4.1 billion for 2006. Financing activities included
issuances and repurchases of common stock and payment of
dividends. Since March 1996, Applied has systematically
repurchased shares of its common stock in the open market to
partially fund its equity-based employee benefit and incentive
plans. Cash used to repurchase shares totaled $650 million
for fiscal 2004, $1.7 billion for fiscal 2005 and
$4.2 billion for fiscal 2006. Beginning in the second
fiscal quarter of 2005, Applieds Board of Directors
declared four consecutive quarterly cash dividends, in the
amount of $0.03 per share each. The first two declared cash
dividends totaling $98 million were paid during fiscal
2005. Beginning in the second fiscal quarter of 2006,
Applieds Board declared three consecutive quarterly cash
dividends, in the amount of $0.05 per share each. Cash
dividends declared, totaling $251 million, were paid during
fiscal 2006. The declaration of any future cash dividend is at
the discretion of the Board of Directors and will depend on the
Companys financial condition, results of operations,
capital requirements, business conditions and other factors.
Financing activities also included borrowings and repayments of
debt. Applied did not borrow any cash in fiscal years 2004, 2005
or 2006. During fiscal 2006, Applied entered into a
$100 million
364-day
unsecured credit agreement, which replaced a $250 million
credit facility that expired during the year. Cash used for debt
repayments totaled $105 million for fiscal 2004,
$62 million for fiscal 2005 and $8 million for fiscal
2006. Cash generated from issuances of common stock pursuant to
Applieds equity compensation programs totaled
$397 million for fiscal 2004, $266 million for fiscal
2005 and $361 million for fiscal 2006.
On September 18, 2006, Applied entered into accelerated
stock buyback agreements with Goldman, Sachs & Co.
(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 from Goldman Sachs
145 million shares of Applieds 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 is entitled or subject to a price
adjustment with Goldman Sachs based upon the volume weighted
average price of Applied common stock during the purchase
period. The price adjustment, if any, may be settled, at
Applieds option, in cash or shares of its common stock.
The
35
repurchase was funded with Applieds existing cash and
investments. The repurchased shares were reported as treasury
stock.
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. For further details regarding Applieds
operating, investing and financing activities for each of the
three years in the period ended October 29, 2006, 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 29, 2006, the
maximum potential amount of future payments that Applied could
be required to make under these guarantee agreements was
approximately $114 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 also has operating leases for various facilities. Total
rental expense for operating leases was $88 million for
fiscal 2004, $87 million for fiscal 2005 and
$70 million for fiscal 2006.
Contractual
Obligations
The following table summarizes Applieds contractual
obligations as of October 29, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
407
|
|
|
$
|
203
|
|
|
$
|
3
|
|
|
$
|
1
|
|
|
$
|
200
|
|
Interest expense associated with
long-term debt obligations
|
|
|
172
|
|
|
|
28
|
|
|
|
29
|
|
|
|
29
|
|
|
|
86
|
|
Operating lease obligations
|
|
|
173
|
|
|
|
60
|
|
|
|
72
|
|
|
|
25
|
|
|
|
16
|
|
Purchase obligations*
|
|
|
1,237
|
|
|
|
1,186
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
189
|
|
|
|
118
|
|
|
|
16
|
|
|
|
10
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,178
|
|
|
$
|
1,595
|
|
|
$
|
171
|
|
|
$
|
65
|
|
|
$
|
347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Represents Applieds agreements to purchase goods and
services consisting of Applieds (a) outstanding
purchase orders for goods and services; (b) contractual
requirements to make specified minimum payments even if Applied
does not take delivery of the contracted goods; and
(c) contractual requirements to pay a penalty if a contract
is cancelled. While the amount above represents Applieds
purchase agreements as of October 29, 2006, the actual
amounts to be paid by Applied may be less in the event that any
agreements are renegotiated, cancelled or terminated. |
Other
Commitments
On July 20, 2006, Applied and Screen completed the
formation of 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 will provide 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
36
operations is limited to $144 million as of
October 29, 2006, 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.
Critical
Accounting Policies
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.
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.
37
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
Beginning on October 31, 2005, Applied began accounting for
stock options and Employee Stock Purchase Plan (ESPP) shares
under the provisions of SFAS 123(R), which requires
recognition of the fair value of equity-based compensation. The
fair value of stock options and ESPP shares was estimated using
a Black-Scholes option valuation model. This methodology
requires the use of subjective assumptions in implementing
SFAS 123(R), 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. Applied makes quarterly
assessments of the adequacy of the tax credit pool to determine
if there are any deficiencies that require recognition in the
consolidated condensed statements of operations. Prior to the
implementation of SFAS 123(R), Applied accounted for stock
options and ESPP shares under the provisions of APB 25 and
made pro forma footnote disclosures as required by
SFAS No. 148, Accounting For Stock-Based
Compensation Transition and Disclosure
an Amendment of FASB Statement No. 123, which amended
SFAS No. 123, Accounting For Stock-Based
Compensation. Pro forma net income and pro forma net
income per share disclosed in the footnotes to the Consolidated
Financial Statements were estimated using a Black-Scholes option
valuation model. The fair value of restricted stock units was
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).
Legal
Matters
Applied is subject to various legal proceedings and claims,
either asserted or unasserted, that arise in the ordinary course
of business. Applied evaluates, among other factors, the degree
of probability of an unfavorable outcome and reasonably
estimates the amount of the loss. Significant judgment is
required in both the probability
38
determination and as to whether an exposure can be reasonably
estimated. When Applied determines that it is probable that a
loss has been incurred and the amount is reasonably estimable,
the effect is recorded in the consolidated financial statements.
Although the outcome of these claims cannot be predicted with
certainty, Applied does not believe that any of the existing
legal matters will have a material adverse effect on its
financial condition or results of operations. However,
significant changes in legal proceedings and claims, or the
factors considered in the evaluation of those matters, could
have a material adverse effect on Applieds business,
financial condition and results of operations.
|
|
Item 7A:
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Interest
Rate Risk
At October 29, 2006, Applieds investment portfolio
included fixed-income securities with a fair value of
approximately $2.4 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 29, 2006 and
October 30, 2005, an immediate 100 basis point
increase in interest rates would result in a decrease in the
fair value of the portfolio of approximately $28 million
and $65 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.
Applieds long-term debt bears interest at fixed rates. As
such, Applieds interest expense would increase only to the
extent that Applied significantly increased the amount of
variable rate obligations outstanding. Due to the short-term
nature and relatively low amount of Applieds variable rate
obligations, 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, British pound, euro and
Israeli shekel. 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 within 12 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 2004, 2005 or
2006.
Forward exchange contracts are denominated in the same currency
as the underlying transactions (primarily Japanese yen, British
pound, euro and Israeli shekel), 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 29, 2006 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).
39
|
|
Item 9:
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
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 29, 2006.
KPMG LLP, an independent registered public accounting firm, has
audited the consolidated financial statements included in this
Annual Report on
Form 10-K
and, as part of the audit, has issued a report, included herein,
on (1) Applieds managements assessment of the
effectiveness of Applieds internal control over financial
reporting and (2) the effectiveness of Applieds
internal control over financial reporting as of October 29,
2006.
Changes in Internal Control over Financial
Reporting. During the fourth quarter of
fiscal 2006, 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.
40
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Stockholders and Board of Directors
Applied Materials, Inc.:
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting in Item 9A: Controls and Procedures,
that Applied Materials, Inc. maintained effective internal
control over financial reporting as of October 29, 2006,
based on the criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Applied Materials, Inc.s management is responsible
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is
to express an opinion on managements assessment and an
opinion on the effectiveness of 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, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and 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, managements assessment that Applied
Materials, Inc. maintained effective internal control over
financial reporting as of October 29, 2006, is fairly
stated, in all material respects, based on the criteria
established in Internal Control Integrated
Framework issued by COSO. Also, in our opinion, Applied
Materials, Inc. maintained, in all material respects, effective
internal control over financial reporting as of October 29,
2006, based on the criteria established in Internal
Control Integrated Framework issued by COSO.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Applied Materials, Inc. as of
October 29, 2006 and October 30, 2005, and the related
consolidated statements of operations, stockholders
equity, and cash flows for each of the years in the three-year
period ended October 29, 2006. 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 29, 2006.
Our report dated December 14, 2006 expressed an unqualified
opinion on those consolidated financial statements and financial
statement schedule.
KPMG LLP
Mountain View, California
December 14, 2006
41
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 2007
Annual Meeting of Stockholders (the Proxy Statement).
|
|
Item 10:
|
Directors
and Executive Officers of the Registrant
|
(1) Information concerning directors, including
Applieds 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 adopted 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.
|
|
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.
|
|
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.
The following table summarizes information with respect to
options and other equity awards under Applieds equity
compensation plans as of October 29, 2006:
Equity
Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
|
|
|
(a)
|
|
|
|
|
|
Number of Securities
|
|
|
|
Number of
|
|
|
|
|
|
Available for Future
|
|
|
|
Securities to be
|
|
|
(b)
|
|
|
Issuance Under Equity
|
|
|
|
Issued Upon Exercise
|
|
|
Weighted Average
|
|
|
Compensation Plans
|
|
|
|
of Outstanding Options,
|
|
|
Exercise Price of
|
|
|
(Excluding Securities
|
|
|
|
Warrants and
|
|
|
Outstanding Options,
|
|
|
Reflected in
|
|
Plan Category
|
|
Rights(1)
|
|
|
Warrants and Rights(2)
|
|
|
Column(a))
|
|
|
|
(In thousands, except prices)
|
|
|
Equity compensation plans approved
by security holders
|
|
|
57,687
|
|
|
$
|
14.88
|
|
|
|
132,278
|
(3)
|
Equity compensation plans not
approved by security holders
|
|
|
119,644
|
(4)
|
|
$
|
18.51
|
|
|
|
22,973
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
177,331
|
|
|
$
|
17.33
|
|
|
|
155,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
(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 29, 2006. |
|
(2) |
|
The weighted average exercise price of outstanding options,
warrants and rights does not take restricted stock units into
account as restricted stock units have a de minimis purchase
price. |
|
(3) |
|
Includes 6,894 shares of Applied common stock reserved for
future issuance under the Applied Materials, Inc.
Employees Stock Purchase Plan. |
|
(4) |
|
Includes options to purchase 3,310 shares of Applied common
stock assumed through various mergers and acquisitions, after
giving effect to the applicable exchange ratios. These assumed
options had a weighted average exercise price of $13.16 per
share. No further shares are available for issuance under these
plans under which these options were granted. |
|
(5) |
|
Includes 3,775 shares of Applied common stock reserved for
future issuance under the Applied Materials, Inc. Stock Purchase
Plan for Offshore Employees. |
Applied has the following equity compensation plans that have
not been approved by stockholders (share numbers shown in
thousands):
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
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 (extended to up to
13 years in the event of death). A total of
147,000 shares has been authorized for issuance under the
2000 Plan, and 19,198 shares remain available for issuance
as of October 29, 2006.
Stock Purchase Plan for Offshore Employees The Stock
Purchase Plan for Offshore Employees (the Offshore ESPP) was
adopted effective as of October 16, 1995. The Offshore ESPP
provides for the grant of stock options to employees (other than
United States citizens or residents) through one or more
offerings. The administrator of the Offshore ESPP (the Board or
a committee appointed by the Board) determines the terms and
conditions of all options prior to the start of an offering,
including the option exercise price, number of shares covered
and when an option may be exercised. All options granted as part
of an offering must be granted on the same date. A total of
12,800 shares has been authorized for issuance under the
Offshore Plan, and 3,775 shares remain available for
issuance as of October 29, 2006.
|
|
Item 13:
|
Certain
Relationships and Related Transactions
|
The information appearing in the Proxy Statement under the
heading Certain Relationships and Related
Transactions 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 heading
Fees Paid to KPMG LLP and is incorporated herein by
reference.
43
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:
|
|
|
|
|
|
|
Page
|
|
|
Number
|
|
(1) Financial
Statements:
|
|
|
|
|
Consolidated Statements of
Operations for each of the three years in the period ended
October 29, 2006
|
|
|
45
|
|
Consolidated Balance Sheets at
October 30, 2005 and October 29, 2006
|
|
|
46
|
|
Consolidated Statements of
Stockholders Equity for each of the three years in the
period ended October 29, 2006
|
|
|
47
|
|
Consolidated Statements of Cash
Flows for each of the three years in the period ended
October 29, 2006
|
|
|
48
|
|
Notes to Consolidated Financial
Statements
|
|
|
49
|
|
Report of KPMG LLP, Independent
Registered Public Accounting Firm
|
|
|
80
|
|
(2) Financial Statement
Schedule:
|
|
|
|
|
Schedule II
Valuation and Qualifying Accounts for each of the three years in
the period ended October 29, 2006
|
|
|
86
|
|
(3) Exhibits:
|
|
|
|
|
The exhibits listed in the
accompanying Index to Exhibits are filed or incorporated by
reference as part of this Annual Report on
Form 10-K
|
|
|
|
|
All other schedules are omitted because they are not applicable
or the required information is shown in the Consolidated
Financial Statements or Notes thereto.
44
APPLIED
MATERIALS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
October 30,
|
|
|
October 29,
|
|
Fiscal Year
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net sales
|
|
$
|
8,013,053
|
|
|
$
|
6,991,823
|
|
|
$
|
9,167,014
|
|
Cost of products sold
|
|
|
4,311,808
|
|
|
|
3,905,949
|
|
|
|
4,875,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
3,701,245
|
|
|
|
3,085,874
|
|
|
|
4,291,802
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research, development and
engineering
|
|
|
991,873
|
|
|
|
940,507
|
|
|
|
1,152,326
|
|
Marketing and selling
|
|
|
394,376
|
|
|
|
358,524
|
|
|
|
438,654
|
|
General and administrative
|
|
|
357,245
|
|
|
|
338,878
|
|
|
|
468,088
|
|
Restructuring and asset impairments
|
|
|
167,459
|
|
|
|
|
|
|
|
212,113
|
|
Litigation settlements, net
|
|
|
26,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,763,665
|
|
|
|
1,447,965
|
|
|
|
2,020,621
|
|
Pretax loss of equity-method
investment
|
|
|
|
|
|
|
|
|
|
|
2,849
|
|
Interest expense
|
|
|
52,877
|
|
|
|
37,819
|
|
|
|
36,096
|
|
Interest income
|
|
|
118,462
|
|
|
|
171,423
|
|
|
|
185,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,829,250
|
|
|
|
1,581,569
|
|
|
|
2,166,971
|
|
Provision for income taxes
|
|
|
477,947
|
|
|
|
371,669
|
|
|
|
650,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,351,303
|
|
|
$
|
1,209,900
|
|
|
$
|
1,516,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.80
|
|
|
$
|
0.74
|
|
|
$
|
0.98
|
|
Diluted
|
|
$
|
0.78
|
|
|
$
|
0.73
|
|
|
$
|
0.97
|
|
Weighted average number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,688,121
|
|
|
|
1,645,531
|
|
|
|
1,551,339
|
|
Diluted
|
|
|
1,721,645
|
|
|
|
1,657,493
|
|
|
|
1,565,072
|
|
See accompanying Notes to Consolidated Financial Statements.
45
APPLIED
MATERIALS, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
October 30,
|
|
|
October 29,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
990,342
|
|
|
$
|
861,463
|
|
Short-term investments
|
|
|
2,342,952
|
|
|
|
1,035,875
|
|
Accounts receivable, less
allowance for doubtful accounts of $3,649 and $3,342 at 2005 and
2006, respectively
|
|
|
1,615,504
|
|
|
|
2,026,199
|
|
Inventories
|
|
|
1,034,093
|
|
|
|
1,406,777
|
|
Deferred income taxes
|
|
|
581,183
|
|
|
|
455,473
|
|
Assets held for sale
|
|
|
|
|
|
|
37,211
|
|
Other current assets
|
|
|
271,003
|
|
|
|
258,021
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
6,835,077
|
|
|
|
6,081,019
|
|
Long-term investments
|
|
|
2,651,927
|
|
|
|
1,314,861
|
|
Property, plant and equipment
|
|
|
3,011,110
|
|
|
|
2,753,883
|
|
Less: accumulated depreciation and
amortization
|
|
|
(1,736,086
|
)
|
|
|
(1,729,589
|
)
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
1,275,024
|
|
|
|
1,024,294
|
|
Goodwill, net
|
|
|
338,982
|
|
|
|
572,558
|
|
Purchased technology and other
intangible assets, net
|
|
|
81,093
|
|
|
|
201,066
|
|
Equity-method investment
|
|
|
|
|
|
|
144,431
|
|
Deferred income taxes and other
assets
|
|
|
87,054
|
|
|
|
142,608
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
11,269,157
|
|
|
$
|
9,480,837
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
7,574
|
|
|
$
|
202,535
|
|
Accounts payable and accrued
expenses
|
|
|
1,618,042
|
|
|
|
2,023,651
|
|
Income taxes payable
|
|
|
139,798
|
|
|
|
209,859
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,765,414
|
|
|
|
2,436,045
|
|
Long-term debt
|
|
|
407,380
|
|
|
|
204,708
|
|
Other liabilities
|
|
|
167,814
|
|
|
|
188,684
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,340,608
|
|
|
|
2,829,437
|
|
|
|
|
|
|
|
|
|
|
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; 1,606,694 and
1,391,730 shares outstanding at 2005 and 2006, respectively
|
|
|
16,067
|
|
|
|
13,917
|
|
Additional paid-in capital
|
|
|
3,161,053
|
|
|
|
3,678,202
|
|
Retained earnings
|
|
|
8,227,793
|
|
|
|
9,472,303
|
|
Treasury stock: 144,104 and
378,435 shares at 2005 and 2006, respectively, net
|
|
|
(2,439,116
|
)
|
|
|
(6,494,012
|
)
|
Accumulated other comprehensive
loss
|
|
|
(37,248
|
)
|
|
|
(19,010
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
8,928,549
|
|
|
|
6,651,400
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
11,269,157
|
|
|
$
|
9,480,837
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
46
APPLIED
MATERIALS, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Stock
|
|
|
Retained
|
|
|
Treasury
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Earnings
|
|
|
Stock
|
|
|
Income/(Loss)
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance at October 26, 2003
|
|
|
1,677,440
|
|
|
$
|
16,774
|
|
|
$
|
2,462,129
|
|
|
$
|
(1,543
|
)
|
|
$
|
5,812,867
|
|
|
$
|
(238,576
|
)
|
|
$
|
16,383
|
|
|
$
|
8,068,034
|
|
Components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,351,303
|
|
|
|
|
|
|
|
|
|
|
|
1,351,303
|
|
Change in unrealized net gain on
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,657
|
)
|
|
|
(12,657
|
)
|
Change in unrealized net gain on
derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,283
|
)
|
|
|
(1,283
|
)
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,974
|
|
|
|
7,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,345,337
|
|
Net issuance under stock plans,
including tax benefits of $100,599
|
|
|
40,608
|
|
|
|
407
|
|
|
|
420,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
421,053
|
|
Amortization of deferred stock
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,447
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,447
|
|
Treasury Stock repurchases, net
|
|
|
(37,784
|
)
|
|
|
(378
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(573,466
|
)
|
|
|
|
|
|
|
(573,844
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 31, 2004
|
|
|
1,680,264
|
|
|
$
|
16,803
|
|
|
$
|
2,882,775
|
|
|
$
|
(96
|
)
|
|
$
|
7,164,170
|
|
|
$
|
(812,042
|
)
|
|
$
|
10,417
|
|
|
$
|
9,262,027
|
|
Components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,209,900
|
|
|
|
|
|
|
|
|
|
|
|
1,209,900
|
|
Change in unrealized net loss on
investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,053
|
)
|
|
|
(33,053
|
)
|
Change in unrealized net gain on
derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,561
|
|
|
|
8,561
|
|
Change in minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,868
|
)
|
|
|
(17,868
|
)
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,305
|
)
|
|
|
(5,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,162,235
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(146,277
|
)
|
|
|
|
|
|
|
|
|
|
|
(146,277
|
)
|
Equity-based compensation
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
|
|
Net issuance under stock plans,
including tax benefits of $84,294
|
|
|
27,638
|
|
|
|
276
|
|
|
|
278,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
278,499
|
|
Amortization of deferred stock
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
|
|
Treasury Stock repurchases, net
|
|
|
(101,208
|
)
|
|
|
(1,012
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,627,074
|
)
|
|
|
|
|
|
|
(1,628,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 loss 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
|
|
Net issuance under stock plans,
including tax benefits of $23,664
|
|
|
23,433
|
|
|
|
234
|
|
|
|
282,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
282,821
|
|
Assumption of Applied Films equity
plans
|
|
|
|
|
|
|
|
|
|
|
18,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,293
|
|
Treasury Stock repurchases, net
|
|
|
(238,397
|
)
|
|
|
(2,384
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,054,896
|
)
|
|
|
|
|
|
|
(4,057,280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 29, 2006
|
|
|
1,391,730
|
|
|
$
|
13,917
|
|
|
$
|
3,678,202
|
|
|
$
|
|
|
|
$
|
9,472,303
|
|
|
$
|
(6,494,012
|
)
|
|
$
|
(19,010
|
)
|
|
$
|
6,651,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
47
APPLIED
MATERIALS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31,
|
|
|
October 30,
|
|
|
October 29,
|
|
Fiscal Year
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,351,303
|
|
|
$
|
1,209,900
|
|
|
$
|
1,516,663
|
|
Adjustments required to reconcile
net income to cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
355,538
|
|
|
|
300,433
|
|
|
|
270,413
|
|
Loss on fixed asset retirements
|
|
|
19,039
|
|
|
|
22,553
|
|
|
|
28,365
|
|
Non-cash portion of restructuring
and asset impairments
|
|
|
81,300
|
|
|
|
|
|
|
|
212,113
|
|
Acquired in-process research and
development expense
|
|
|
5,800
|
|
|
|
|
|
|
|
14,000
|
|
Pretax loss of equity-method
investment
|
|
|
|
|
|
|
|
|
|
|
2,849
|
|
Deferred income taxes
|
|
|
78,927
|
|
|
|
20,310
|
|
|
|
25,323
|
|
Excess tax benefit from
equity-based compensation plans
|
|
|
|
|
|
|
|
|
|
|
(23,664
|
)
|
Tax benefit from equity-based
compensation plans
|
|
|
100,599
|
|
|
|
84,294
|
|
|
|
|
|
Amortization of deferred
compensation
|
|
|
1,447
|
|
|
|
96
|
|
|
|
|
|
Equity-based compensation
|
|
|
|
|
|
|
55
|
|
|
|
216,269
|
|
Changes in operating assets and
liabilities, net of amounts acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(756,193
|
)
|
|
|
86,959
|
|
|
|
(393,022
|
)
|
Inventories
|
|
|
(187,925
|
)
|
|
|
130,924
|
|
|
|
(222,335
|
)
|
Other current assets
|
|
|
(53,315
|
)
|
|
|
48,315
|
|
|
|
25,224
|
|
Other assets
|
|
|
(82,228
|
)
|
|
|
(10,415
|
)
|
|
|
17,088
|
|
Accounts payable and accrued
expenses
|
|
|
580,443
|
|
|
|
(444,858
|
)
|
|
|
237,952
|
|
Income taxes payable
|
|
|
130,554
|
|
|
|
(217,851
|
)
|
|
|
100,020
|
|
Other liabilities
|
|
|
1,982
|
|
|
|
16,425
|
|
|
|
(91,531
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating
activities
|
|
|
1,627,271
|
|
|
|
1,247,140
|
|
|
|
1,935,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(190,577
|
)
|
|
|
(199,650
|
)
|
|
|
(179,482
|
)
|
Cash paid for acquisitions, net of
cash acquired
|
|
|
(7,400
|
)
|
|
|
(101,793
|
)
|
|
|
(339,093
|
)
|
Investment in equity-method
investment
|
|
|
|
|
|
|
|
|
|
|
(147,280
|
)
|
Proceeds from disposition of assets
|
|
|
|
|
|
|
|
|
|
|
1,863
|
|
Proceeds from disposition of assets
held for sale
|
|
|
|
|
|
|
|
|
|
|
16,206
|
|
Proceeds from sales and maturities
of investments
|
|
|
2,852,439
|
|
|
|
3,245,686
|
|
|
|
3,312,388
|
|
Purchases of investments
|
|
|
(3,188,319
|
)
|
|
|
(3,123,366
|
)
|
|
|
(674,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used for)/provided by
investing activities
|
|
|
(533,857
|
)
|
|
|
(179,123
|
)
|
|
|
1,990,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used for financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt repayments
|
|
|
(861
|
)
|
|
|
(13,290
|
)
|
|
|
(7,710
|
)
|
Long-term debt repayments
|
|
|
(104,553
|
)
|
|
|
(48,425
|
)
|
|
|
|
|
Proceeds from common stock issuances
|
|
|
396,610
|
|
|
|
266,115
|
|
|
|
337,106
|
|
Common stock repurchases
|
|
|
(650,000
|
)
|
|
|
(1,677,511
|
)
|
|
|
(4,157,725
|
)
|
Excess tax benefit from
equity-based compensation plans
|
|
|
|
|
|
|
|
|
|
|
23,664
|
|
Payments of dividends to
stockholders
|
|
|
|
|
|
|
(98,040
|
)
|
|
|
(250,782
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used for financing activities
|
|
|
(358,804
|
)
|
|
|
(1,571,151
|
)
|
|
|
(4,055,447
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
1,282
|
|
|
|
184
|
|
|
|
464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(decrease) in cash and
cash equivalents
|
|
|
735,892
|
|
|
|
(502,950
|
)
|
|
|
(128,879
|
)
|
Cash and cash
equivalents beginning of year
|
|
|
757,400
|
|
|
|
1,493,292
|
|
|
|
990,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents end of year
|
|
$
|
1,493,292
|
|
|
$
|
990,342
|
|
|
$
|
861,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments/(refunds) for income
taxes, net
|
|
$
|
179,489
|
|
|
$
|
374,302
|
|
|
$
|
549,531
|
|
Cash payments for interest
|
|
$
|
40,255
|
|
|
$
|
32,171
|
|
|
$
|
28,195
|
|
See accompanying Notes to Consolidated Financial Statements.
48
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
Note 1
|
Summary
of Significant Accounting Policies
|
Principles of Consolidation and Basis of
Presentation The consolidated financial
statements include the accounts of Applied Materials, Inc. and
its subsidiaries (Applied or the Company) after elimination of
intercompany balances and transactions. All references to a
fiscal year apply to Applieds fiscal year which ends on
the last Sunday in October. Fiscal 2005 and 2006 contained
52 weeks, whereas fiscal 2004 contained 53 weeks. The
first fiscal quarter of 2005 and 2006 each contained
13 weeks, whereas the first fiscal quarter of 2004
contained 14 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.
Reclassifications The accompanying
consolidated financial statements for fiscal 2004 and fiscal
2005 contain certain reclassifications to conform to the fiscal
2006 presentation. These consist of reclassification to
long-term investments of $2.6 billion for fiscal 2005 of
certain fixed-income securities, excluding auction rate
securities and variable rate demand notes, previously reported
in short-term investments in fiscal 2005 and related deferred
taxes. The reclassifications resulted from a change in
accounting for fixed-income investments based on contractual
maturity dates. In connection with this reclassification,
short-term deferred taxes were reclassified to long-term
deferred taxes. In addition, certain long-term equity
securities, previously reported in other long-term assets, are
also now included in long-term investments. There were no
changes in Applieds investment policies or practices
associated with this change in accounting method.
During fiscal 2006, Applied began disclosing treasury stock on
the Consolidated Balance Sheets and in the Consolidated
Statements of Changes in Stockholders Equity. Prior amounts have
been restated to conform to the fiscal 2006 presentation.
Repurchases of common stock are accounted for under the par
value method. The cost of reissued shares was determined on a
first-in,
first-out (FIFO) basis.
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 generally stated
at the lower of cost or market, with cost determined on a 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
2 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.
49
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Research, Development and Engineering
Costs Research, development and engineering costs
are expensed as incurred.
Advertising Costs Advertising costs are
expensed as incurred. Advertising costs were not material for
all periods presented.
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 collectibility 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 estimated fair value
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. 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
expected to occur within 12 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.
Foreign Currency Translation Applieds
subsidiaries, with the exception primarily of the subsidiary
located in the United Kingdom, 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, that 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. Applieds subsidiary
located in the United Kingdom operates primarily using the
British pound, and therefore, the British pound has been
determined to be the functional currency for the United Kingdom
subsidiary. Accordingly, all assets and liabilities of this
50
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
subsidiary are translated using exchange rates in effect at the
end of the period, and revenues and costs are translated using
average exchange rates for the period. The resulting translation
adjustments are presented as a separate component of accumulated
other comprehensive income/(loss) in stockholders equity.
Equity-Based
Compensation
Applied has adopted equity-based compensation plans that provide
for the grant to employees of equity-based awards, including
stock options and, beginning in fiscal 2005, restricted stock
units (referred to as performance shares under the Applied
Materials, Inc. Employee Stock Incentive Plan). In addition,
certain of these plans provide for the automatic grant of stock
options to non-employee directors and permit the grant of
equity-based awards to consultants. Applied also has two
Employee Stock Purchase Plans (ESPP) for United States and
international employees, respectively, which enable
substantially all employees to purchase Applied common stock.
On October 31, 2005, Applied implemented the provisions of
Statement of Financial Accounting Standards
No. 123(R),
Share-Based Payment (SFAS 123(R)),
using the modified prospective transition method.
SFAS 123(R) requires companies to recognize the cost of
employee services received in exchange for awards of equity
instruments based upon the grant-date fair value of those
awards. Using the modified prospective transition method of
adopting
SFAS 123(R),
Applied began recognizing compensation expense for stock
options and ESPP shares granted after October 30, 2005,
plus equity-based awards granted prior to, and unvested as of
October 31, 2005. As provided under this method of
implementation, prior periods have not been restated. The
estimated fair value of Applieds equity-based awards, less
expected forfeitures, is amortized over the awards service
period on a straight-line basis.
On November 10, 2005, the Financial Accounting Standards
Board (FASB) issued FASB Staff position
No. FAS 123(R)-3 Transition Election Related to
Accounting for Tax Effects of Share-Based Payment Awards.
Applied has elected to adopt the alternative transition method
provided in the FASB Staff Position for calculating the tax
effects of equity-based compensation pursuant to
SFAS 123(R). The alternative transition method includes
simplified methods to establish the beginning balance of the
additional paid-in capital pool (APIC pool) related to the tax
effects of employee equity-based compensation, and to determine
the subsequent impact on the APIC pool and Consolidated
Statement of Cash Flows of the tax effects of employee
equity-based compensation awards that are outstanding upon the
implementation of SFAS 123(R).
The equity-based compensation expense for fiscal 2006 included
$30 million related to restricted stock units. The expense
related to restricted stock units would have been included in
Applieds Consolidated Statements of Operations under the
provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees
(APB 25) and is therefore excluded from the impact of
the implementation of SFAS 123(R) for fiscal 2006. As a
result of adopting SFAS 123(R), Applieds income
before taxes and net income for fiscal 2006 was reduced by
$186 million and $146 million, respectively. The
implementation of SFAS 123(R), which resulted in the
expensing of stock options and the ESPP over the vesting or
purchase period, as applicable, reduced basic and fully diluted
earnings per share by $0.09 for fiscal 2006.
Total equity-based compensation expense recognized in the
Consolidated Statements of Operations consists of charges
associated with stock options, restricted stock units and the
ESPP. Equity-based compensation expense and the related income
tax benefit for fiscal 2006 were $216 million (or
$0.11 per diluted share) which resulted in a
$46 million income tax benefit.
Prior to October 31, 2005, Applied measured compensation
expense for its employee equity-based compensation plans using
the intrinsic value method under APB 25 and related
interpretations. As the exercise price of all options granted
under these plans was not below the fair market price of the
underlying common stock on the grant date, no equity-based
compensation cost for stock options was recognized in the
Consolidated Statements of Operations under the intrinsic value
method.
51
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Stock
Options
The exercise price of each stock option equals the market price
of Applieds stock on the date of grant. Most options are
scheduled to vest over four years and expire no later than seven
years after 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 2006
|
|
|
Stock Options:
|
|
|
|
|
Dividend yield
|
|
|
0.73
|
%
|
Expected volatility
|
|
|
36.7
|
%
|
Risk-free interest rate
|
|
|
4.48
|
%
|
Expected life (in years)
|
|
|
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 annually
reviews historical employee exercise behavior of option grants
with similar vesting periods.
Options outstanding had an aggregate intrinsic value of
$317 million and $165 million at October 30, 2005
and October 29, 2006, respectively. The weighted average
grant date fair value of options granted during fiscal 2006 was
$54 million. The total intrinsic value of options exercised
during fiscal 2006 was $57 million. The total fair value of
options that vested during fiscal 2006 was $256 million. At
October 29, 2006, Applied had $121 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 1.1 years. Cash received from
stock option exercises was $284 million during fiscal 2006.
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 13).
The total 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 at the
beginning of the offering period or at the end of each
applicable purchase period. The number of shares issued under
the ESPP during the year ended October 29, 2006 was
4,065,000. Based on the Black-Scholes option pricing model, the
weighted average estimated fair value of purchase rights under
the ESPP was $5.21 for the year ended October 29, 2006.
Compensation expense is calculated using the fair value of the
employees purchase rights per the Black-Scholes model.
Underlying assumptions used in the model are outlined in the
following table:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
October 29,
|
|
|
|
2006
|
|
|
ESPP:
|
|
|
|
|
Dividend yield
|
|
|
0.32
|
%
|
Expected volatility
|
|
|
31.1
|
%
|
Risk-free interest rate
|
|
|
2.81
|
%
|
Expected life (in years)
|
|
|
1.25
|
|
52
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Restricted
Stock Units
Restricted stock units (also referred to as performance shares)
are converted into shares of Applied common stock upon vesting
on a
one-for-one
basis. Typically, vesting of restricted stock units is subject
to the employees continuing service to Applied. The
compensation expense related to these awards was determined
using the fair value of Applieds common stock on the date
of the grant, and compensation is recognized over the service
period. Restricted stock units generally vest over four years.
At October 29, 2006, Applied had $204 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 1.7 years
(see Note 8). During fiscal 2006, as part of the
acquisition of Applied Films, Applied assumed Applied
Films outstanding restricted stock awards 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 awards assumed are expected to convert into
19,000 shares of Applied common stock upon vesting.
Pro Forma
Information under SFAS 123 for Periods Prior to Fiscal
2006
Prior to fiscal 2006, Applied followed the disclosure-only
provisions of Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based
Compensation (SFAS 123), as amended. The following
table illustrates the effect on net income and earnings per
share for fiscal 2004 and fiscal 2005 if the fair value
recognition provisions of SFAS 123, as amended, had been
applied to options granted under Applieds equity-based
compensation plans. For purposes of this pro forma disclosure,
the estimated value of the options is recognized over the
options vesting periods. If Applied had recognized the
expense of equity-based compensation programs in the
Consolidated Statements of Operations, additional paid-in
capital would have increased by a corresponding amount, net of
applicable taxes.
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2004
|
|
|
2005
|
|
|
Reported net income
|
|
$
|
1,351,303
|
|
|
$
|
1,209,900
|
|
Equity-based compensation expense,
net of tax
|
|
|
(345,897
|
)
|
|
|
(312,116
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
1,005,406
|
|
|
$
|
897,784
|
|
|
|
|
|
|
|
|
|
|
Earnings per share as reported:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.80
|
|
|
$
|
0.74
|
|
Diluted
|
|
$
|
0.78
|
|
|
$
|
0.73
|
|
Pro forma earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.60
|
|
|
$
|
0.55
|
|
Diluted
|
|
$
|
0.58
|
|
|
$
|
0.54
|
|
For purposes of the weighted average estimated fair value
calculations, the fair value of each stock option grant is
estimated on the date of grant using the Black-Scholes option
pricing model and the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
ESPP
|
|
Fiscal Year
|
|
2004
|
|
|
2005
|
|
|
2004
|
|
|
2005
|
|
|
Dividend yield
|
|
|
None
|
|
|
|
0.11
|
%
|
|
|
None
|
|
|
|
0.01
|
%
|
Expected volatility
|
|
|
63
|
%
|
|
|
44
|
%
|
|
|
67
|
%
|
|
|
48
|
%
|
Risk-free interest rate
|
|
|
2.49
|
%
|
|
|
3.45
|
%
|
|
|
1.82
|
%
|
|
|
2.51
|
%
|
Expected life (in years)
|
|
|
3.6
|
|
|
|
4.0
|
|
|
|
1.25
|
|
|
|
1.25
|
|
Based on the Black-Scholes option pricing model, the weighted
average estimated fair value of employee stock option grants was
$10.06 for fiscal 2004 and $6.46 for fiscal 2005. The weighted
average estimated fair value of
53
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
purchase rights granted under the ESPP was $5.91 for fiscal 2004
and $5.65 for fiscal 2005. Beginning in the first quarter of
fiscal 2005, the computation of the expected volatility
assumption used in the Black-Scholes calculations for new grants
changed from being based solely on historical volatility to
being based on a combination of historical and implied
volatilities.
On August 4, 2005, the Human Resources and Compensation
Committee of the Board of Directors of Applied approved the
vesting acceleration of certain unvested,
out-of-the-money
stock options outstanding under Applieds employee stock
option plans, effective August 5, 2005. Stock options held
by Applieds five most senior executive officers,
non-employee directors and consultants were not included in the
vesting acceleration. Vesting was accelerated for stock options
that had exercise prices greater than $17.85 per share,
which was the closing price of Applied common stock on
August 5, 2005. In connection with the modification of the
terms of these options to accelerate their vesting,
approximately $138 million was recorded as a non-cash
compensation expense on a pro forma basis in accordance with
SFAS 123, and this amount is included in the pro forma
table above for the year ended October 30, 2005. This
action was taken to reduce the impact of future compensation
expense that Applied would otherwise be required to recognize in
future consolidated statements of operations pursuant to
SFAS 123(R), which was adopted by Applied beginning in the
first quarter of fiscal 2006.
For additional information on Applieds employee benefit
plans, see Note 8 of Notes to Consolidated Financial
Statements.
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, and United States Treasury and agency
securities, 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 display 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 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 that exceeded the average fair market
value of Applieds common stock for the period, as the
effect would be anti-dilutive. Options to purchase shares of
common stock that were excluded from the computation were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands, except prices)
|
|
|
Number of shares excluded
|
|
|
80,889
|
|
|
|
124,306
|
|
|
|
123,317
|
|
Average exercise price
|
|
$
|
23.15
|
|
|
$
|
21.04
|
|
|
$
|
19.10
|
|
54
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Dividends Applieds Board of Directors
declared three quarterly cash dividends in the amount of
$0.03 per share each in fiscal 2005. 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. The fourth quarterly cash dividend declared in fiscal 2006
was payable on December 7, 2006, to stockholders of record
as of November 16, 2006. Dividends paid during fiscal 2005
and fiscal 2006 totaled $98 million and $251 million,
respectively. 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.
Recent
Accounting Pronouncements
In September 2006, the FASB issued Statement No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132R (SFAS 158).
SFAS 158 requires an entity to recognize in its statement
of financial condition the funded status of its defined benefit
postretirement plans, measured as the difference between the
fair value of the plan assets and the benefit obligation.
SFAS 158 also requires an entity to recognize changes in
the funded status of a defined benefit postretirement plan
within accumulated other comprehensive income, net of tax, to
the extent such changes are not recognized in earnings as
components of periodic net benefit cost. SFAS 158 is
effective for Applied in fiscal 2007. Applied does not expect
the implementation of this standard to have a material effect on
Applieds financial position or results of operations.
In September 2006, the FASB issued Statement No. 157,
Fair Value (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. SFAS 157
is effective for Applied in fiscal 2009. Applied is evaluating
the potential impact of the implementation of SFAS 157 on
its financial position and results of operations.
In September 2006, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 108, Considering
the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements
(SAB 108), which provides interpretive guidance on how the
effects of the carryover or reversal of prior year misstatements
should be considered in quantifying a current year misstatement.
SAB 108 is effective for Applied in fiscal 2007. Applied
does not expect the implementation of this staff accounting
bulletin to have a material effect on Applieds financial
position or results of operations.
In July 2006, the FASB issued FASB Interpretation 48,
Accounting for Income Tax Uncertainties
(FIN 48). FIN 48 defines the threshold for recognizing
the benefits of tax return positions in the financial statements
as more-likely-than-not to be sustained by the
taxing authority. The recently issued literature also provides
guidance on the derecognition, measurement and classification of
income tax uncertainties, along with any related interest and
penalties. FIN 48 also includes guidance concerning
accounting for income tax uncertainties in interim periods and
increases the level of disclosures associated with any recorded
income tax uncertainties. FIN 48 will become effective for
Applied beginning in fiscal 2008. Any differences between the
amounts recognized in the statements of financial position prior
to the adoption of FIN 48 and the amounts reported after
adoption will be accounted for as a cumulative-effect adjustment
recorded to the beginning balance of retained earnings. Applied
is evaluating the potential impact of the implementation of
FIN 48 on its financial position and results of operations.
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial
Instruments an amendment of FASB Statements
No. 133 and 140 (SFAS 155). SFAS 155 amends
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. SFAS 155 also
resolves issues addressed in SFAS 133 Implementation Issue
No. D1, Application of Statement 133 to
Beneficial Interests in Securitized Financial Assets.
SFAS 155 (a) permits fair value remeasurement for any
hybrid financial instrument that contains an embedded derivative
that otherwise would require bifurcation, (b) clarifies
which interest-only strips and principal-
55
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
only strips are not subject to the requirements of
SFAS 133, (c) establishes a requirement to evaluate
interests in securitized financial assets to identify interests
that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring
bifurcation, (d) clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives,
and (e) amends SFAS No. 140 to eliminate the
prohibition on a qualifying special-purpose entity from holding
a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument.
SFAS 155 is effective for all financial instruments
acquired or issued after the beginning of Applieds 2007
fiscal year. Applied is currently assessing the impact of
SFAS 155, however, it does not anticipate that
SFAS 155 will have a material impact on its financial
position and results of operations.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections a
Replacement of APB Opinion No. 20 and FASB Statement
No. 3 (SFAS 154), which requires retrospective
application to prior periods financial statements of
voluntary changes in accounting principle unless it is
impracticable to do so. SFAS 154 is effective for
accounting changes and corrections of errors beginning in fiscal
2007. Applied does not expect the implementation of this
standard to have a material effect on Applieds financial
position or results of operations.
|
|
Note 2
|
Financial
Instruments
|
Investments
Investments by security type at October 29, 2006 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Obligations of states and
political subdivisions
|
|
$
|
1,153,750
|
|
|
$
|
367
|
|
|
$
|
2,913
|
|
|
$
|
1,151,204
|
|
U.S. commercial paper,
corporate bonds and medium-term notes
|
|
|
447,151
|
|
|
|
320
|
|
|
|
3,176
|
|
|
|
444,295
|
|
U.S. Treasury and agency
securities
|
|
|
406,525
|
|
|
|
475
|
|
|
|
3,839
|
|
|
|
403,161
|
|
Other debt securities
|
|
|
299,003
|
|
|
|
557
|
|
|
|
4,139
|
|
|
|
295,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
2,306,429
|
|
|
|
1,719
|
|
|
|
14,067
|
|
|
|
2,294,081
|
|
Publicly traded equity securities
|
|
|
15,710
|
|
|
|
3,259
|
|
|
|
951
|
|
|
|
18,018
|
|
Equity securities carried at cost
|
|
|
38,637
|
|
|
|
|
|
|
|
|
|
|
|
38,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,360,776
|
|
|
$
|
4,978
|
|
|
$
|
15,018
|
|
|
$
|
2,350,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Investments by security type at October 30, 2005 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Obligations of states and
political subdivisions
|
|
$
|
1,362,456
|
|
|
$
|
194
|
|
|
$
|
4,720
|
|
|
$
|
1,357,930
|
|
U.S. commercial paper,
corporate bonds and medium-term notes
|
|
|
1,069,556
|
|
|
|
1,429
|
|
|
|
7,806
|
|
|
|
1,063,179
|
|
Bank certificates of deposit
|
|
|
63,847
|
|
|
|
|
|
|
|
|
|
|
|
63,847
|
|
U.S. Treasury and agency
securities
|
|
|
1,671,396
|
|
|
|
134
|
|
|
|
16,339
|
|
|
|
1,655,191
|
|
Other debt securities
|
|
|
816,424
|
|
|
|
763
|
|
|
|
12,335
|
|
|
|
804,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
4,983,679
|
|
|
|
2,520
|
|
|
|
41,200
|
|
|
|
4,944,999
|
|
Publicly traded equity securities
|
|
|
23,991
|
|
|
|
|
|
|
|
5,818
|
|
|
|
18,173
|
|
Equity securities carried at cost
|
|
|
31,707
|
|
|
|
|
|
|
|
|
|
|
|
31,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,039,377
|
|
|
$
|
2,520
|
|
|
$
|
47,018
|
|
|
$
|
4,994,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents included investments in debt and other
securities of $608 million at October 30, 2005 and
$75 million at October 29, 2006.
Contractual maturities of investments at October 29, 2006
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Due in one year or less
|
|
$
|
421,713
|
|
|
$
|
420,069
|
|
Due after one through three years
|
|
|
687,025
|
|
|
|
682,182
|
|
Due after three years
|
|
|
898,688
|
|
|
|
896,408
|
|
No single maturity date*
|
|
|
353,350
|
|
|
|
352,077
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,360,776
|
|
|
$
|
2,350,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Securities with no single maturity date include publicly traded
equity securities, mortgage- and asset-backed securities. |
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 and near-term prospects of the investee, credit
quality, 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 29, 2006 are temporary in nature. The gross
unrealized losses related to investments are primarily due to a
decrease in the fair market value of fixed-rate debt securities
as a result of increases in interest rates. Accordingly, Applied
does not consider the investments to be
other-than-temporarily
impaired at October 29, 2006, as it has the ability and
intent to hold the investments for a period of time that may be
sufficient for anticipated recovery in fair market value.
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
57
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
category and length of time that individual securities have been
in a continuous unrealized loss position as of October 29,
2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
378,372
|
|
|
$
|
2,910
|
|
|
$
|
10,006
|
|
|
$
|
3
|
|
|
$
|
388,378
|
|
|
$
|
2,913
|
|
U.S. commercial paper,
corporate bonds and medium-term notes
|
|
|
63,319
|
|
|
|
244
|
|
|
|
177,906
|
|
|
|
2,932
|
|
|
|
241,225
|
|
|
|
3,176
|
|
U.S. Treasury and agency
securities
|
|
|
103,191
|
|
|
|
748
|
|
|
|
166,047
|
|
|
|
3,091
|
|
|
|
269,238
|
|
|
|
3,839
|
|
Other debt securities
|
|
|
22,887
|
|
|
|
101
|
|
|
|
215,815
|
|
|
|
4,038
|
|
|
|
238,702
|
|
|
|
4,139
|
|
Publicly traded equity securities
|
|
|
|
|
|
|
|
|
|
|
1,008
|
|
|
|
951
|
|
|
|
1,008
|
|
|
|
951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
567,769
|
|
|
$
|
4,003
|
|
|
$
|
570,782
|
|
|
$
|
11,015
|
|
|
$
|
1,138,551
|
|
|
$
|
15,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2005, gross realized gains on sales of investments were
$3 million, and gross realized losses were $8 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.
During fiscal 2006, Applied changed its accounting method for
certain fixed-income investments, which resulted in the
reclassification of these investments from short-term
investments to long-term investments. As a result, prior period
balances have been reclassified to conform to the current
periods presentation. This accounting method is based on
the contractual maturity dates of fixed-income securities as
current or long-term, while the prior classification was based
on the nature of the securities and the availability for use in
current operations. Applied believes this presentation method is
preferable as it is more reflective of Applieds assessment
of the timing of when such securities are expected to be
converted to cash. Accordingly, certain fixed-income investments
of $2.6 billion have been reclassified from short-term
investments to long-term investments in the October 30,
2005 Consolidated Balance Sheet to conform to the fiscal 2006
financial statement presentation. In connection with this
reclassification, short-term deferred taxes have been
reclassified to long-term deferred taxes. There have been no
changes in Applieds investment policies or practices
associated with this change in accounting method.
In addition, $50 million of long-term equity securities
previously reported in other long-term assets have been
reclassified to long-term investments in the October 30,
2005 Consolidated Balance Sheet to conform to the fiscal 2006
financial statement presentation. Applied continues to classify
auction rate securities and variable rate demand notes as
current assets, notwithstanding the underlying contractual term
of such investments, since the highly liquid nature of these
investments enables them to be readily convertible to cash.
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, British pound, euro and Israeli shekel. The
purpose of Applieds foreign currency
58
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 within the next 12 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 other
comprehensive income/(loss) at October 29, 2006 will
generally 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 and are recognized in cost of
products sold. The change in option and forward time value was
not material for fiscal 2004, 2005 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) was as follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Unrealized gain, net, on
derivative instruments at beginning of period
|
|
$
|
646
|
|
|
$
|
9,207
|
|
Increase/(decrease) in fair value
of derivative instruments
|
|
|
10,105
|
|
|
|
(5,095
|
)
|
(Gains)/losses reclassified into
earnings, net
|
|
|
(1,544
|
)
|
|
|
206
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain, net, on
derivative instruments at end of period
|
|
$
|
9,207
|
|
|
$
|
4,318
|
|
|
|
|
|
|
|
|
|
|
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 30, 2005, the carrying amount of
long-term debt was $415 million and the estimated fair
value was $432 million. At October 29, 2006, the
carrying amount of long-term debt was $407 million and the
estimated fair value was $428 million. The estimated fair
value of long-term debt is based primarily on quoted market
prices for the same or similar issues.
59
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note 3
|
Balance
Sheet Detail
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Inventories
|
|
|
|
|
|
|
|
|
Customer service spares
|
|
$
|
383,003
|
|
|
$
|
466,414
|
|
Raw materials
|
|
|
136,371
|
|
|
|
236,913
|
|
Work-in-process
|
|
|
129,778
|
|
|
|
272,654
|
|
Finished goods*
|
|
|
384,941
|
|
|
|
430,796
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,034,093
|
|
|
$
|
1,406,777
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment,
Net
|
|
|
|
|
|
|
|
|
Land and improvements
|
|
$
|
280,391
|
|
|
$
|
222,381
|
|
Buildings and improvements
|
|
|
1,424,922
|
|
|
|
1,241,195
|
|
Demonstration and manufacturing
equipment
|
|
|
684,268
|
|
|
|
659,551
|
|
Furniture, fixtures and other
equipment
|
|
|
535,609
|
|
|
|
553,185
|
|
Construction in progress
|
|
|
85,920
|
|
|
|
77,571
|
|
|
|
|
|
|
|
|
|
|
Gross property, plant and equipment
|
|
|
3,011,110
|
|
|
|
2,753,883
|
|
Accumulated depreciation
|
|
|
(1,736,086
|
)
|
|
|
(1,729,589
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,275,024
|
|
|
$
|
1,024,294
|
|
|
|
|
|
|
|
|
|
|
Accounts Payable and Accrued
Expenses
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
347,559
|
|
|
$
|
475,479
|
|
Compensation and employee benefits
|
|
|
291,721
|
|
|
|
439,333
|
|
Deferred revenue
|
|
|
318,106
|
|
|
|
369,875
|
|
Installation and warranty
|
|
|
171,419
|
|
|
|
215,578
|
|
Customer deposits
|
|
|
50,291
|
|
|
|
97,495
|
|
Other accrued taxes
|
|
|
159,368
|
|
|
|
84,957
|
|
Dividends payable
|
|
|
48,237
|
|
|
|
69,600
|
|
Restructuring reserve
|
|
|
69,482
|
|
|
|
24,731
|
|
Other
|
|
|
161,859
|
|
|
|
246,603
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,618,042
|
|
|
$
|
2,023,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Included in finished goods inventory is $117 million at
October 30, 2005 and $174 million at October 29,
2006 of newly introduced systems at customer locations where the
sales transaction did not meet Applieds revenue
recognition criteria, as set forth in Note 1. |
60
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Goodwill,
Purchased Technology and Other Intangible Assets
Details of unamortized intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Intangible
|
|
|
|
|
|
|
|
|
Intangible
|
|
|
|
|
|
|
Goodwill
|
|
|
Assets
|
|
|
Total
|
|
|
Goodwill
|
|
|
Assets
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Gross carrying amount
|
|
$
|
384,852
|
|
|
$
|
17,860
|
|
|
$
|
402,712
|
|
|
$
|
618,428
|
|
|
$
|
17,860
|
|
|
$
|
636,288
|
|
Accumulated amortization
|
|
|
(45,870
|
)
|
|
|
|
|
|
|
(45,870
|
)
|
|
|
(45,870
|
)
|
|
|
|
|
|
|
(45,870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
338,982
|
|
|
$
|
17,860
|
|
|
$
|
356,842
|
|
|
$
|
572,558
|
|
|
$
|
17,860
|
|
|
$
|
590,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill is not amortized but reviewed for impairment annually
during the fourth quarter of each fiscal year. Applied conducted
goodwill impairment tests in fiscal 2005 and fiscal 2006, and
the results of these tests indicated that Applieds
goodwill assets were not impaired. From October 30, 2005 to
October 29, 2006, the change in goodwill was
$234 million, due primarily to the acquisitions of Applied
Films Corporation, a Colorado corporation (Applied Films),
certain assets of UMS Solutions Pte. Ltd. (UMS Solutions), a
wholly-owned subsidiary of Norelco UMS Holdings Limited, and
ChemTrace Corporation and ChemTrace Precision Cleaning, Inc.
(collectively, ChemTrace) and offset in part by other
adjustments associated with previous acquisitions. Other assets
that are not subject to amortization consist primarily of a
trade name associated with the Metron Technology N.V.
acquisition and is reported in the Fab Solutions segment. As of
October 29, 2006 goodwill by reportable segment was:
Silicon, $230 million; Display, $116 million; Fab
Solutions, $89 million and Adjacent Technologies,
$138 million. For additional details, see Note 13.
Details of amortized intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Purchased
|
|
|
Intangible
|
|
|
|
|
|
Purchased
|
|
|
Intangible
|
|
|
|
|
|
|
Technology
|
|
|
Assets
|
|
|
Total
|
|
|
Technology
|
|
|
Assets
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Gross carrying amount
|
|
$
|
356,933
|
|
|
$
|
37,270
|
|
|
$
|
394,203
|
|
|
$
|
469,226
|
|
|
$
|
75,617
|
|
|
$
|
544,843
|
|
Accumulated amortization
|
|
|
(308,816
|
)
|
|
|
(22,154
|
)
|
|
|
(330,970
|
)
|
|
|
(327,335
|
)
|
|
|
(34,302
|
)
|
|
|
(361,637
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,117
|
|
|
$
|
15,116
|
|
|
$
|
63,233
|
|
|
$
|
141,891
|
|
|
$
|
41,315
|
|
|
$
|
183,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased technology and other intangible assets are amortized
over their estimated useful lives of 2 to 15 years using
the straight-line method. From October 30, 2005 to
October 29, 2006, the change in amortized intangible assets
was approximately $120 million, primarily due to the
acquisitions of Applied Films, certain assets of
UMS Solutions, and ChemTrace. Aggregate amortization
expense was $26 million and $31 million for fiscal
2005 and 2006, respectively. As of October 29, 2006, future
estimated amortization expense is expected to be
$32 million for fiscal 2007, $27 million for fiscal
2008, $26 million for fiscal 2009, $22 million for
fiscal 2010, $19 million for fiscal 2011, and
$57 million thereafter. As of October 29, 2006
amortized intangible assets by reportable segment were: Silicon,
$25 million; Display, $57 million; Fab Solutions,
$19 million and Adjacent Technologies, $82 million.
|
|
Note 4
|
Borrowing
Facilities
|
At October 29, 2006, Applied had credit facilities for
unsecured borrowings in various currencies of up to
approximately $260 million. On September 14, 2006,
Applied entered into a $100 million
364-Day
Credit Agreement (Credit Agreement) with a bank. The Credit
Agreement became effective on September 17, 2006 and
61
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
replaced a $250 million credit facility which expired on
September 17, 2006. The Credit Agreement provides for
borrowings (advances) not to exceed $100 million at
interest rates keyed to one of various rates selected by Applied
for each advance, plus, in certain cases, an applicable margin
and/or a
utilization fee. The Credit Agreement also requires payment of
certain customary fees and expenses. Any advances under the
Credit Agreement will be unsecured. The Credit Agreement
includes financial and other covenants with which Applied was in
compliance at October 29, 2006. No amount was outstanding
under the Credit Agreement at October 29, 2006. The
remaining credit facilities of approximately $160 million
are with Japanese banks at rates indexed to their prime
reference rate and are denominated in Japanese yen. No amounts
were outstanding under these Japanese credit facilities at
October 29, 2006.
Long-term debt outstanding at the end of the fiscal year was as
follows:
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
1.61% installment note payable to
Tokyo Electron Ltd., face amount $3,600, maturing 2008, interest
payable March 17, June 17, September 17 and
December 17
|
|
$
|
4,971
|
|
|
$
|
3,310
|
|
Japanese debt, 3.00%, maturing
2007 - 2011
|
|
|
9,983
|
|
|
|
3,933
|
|
6.75% unsecured senior notes due
2007, interest payable April 15 and October 15
|
|
|
200,000
|
|
|
|
200,000
|
|
7.125% unsecured senior notes due
2017, interest payable April 15 and October 15
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
414,954
|
|
|
|
407,243
|
|
Current portion
|
|
|
(7,574
|
)
|
|
|
(202,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
407,380
|
|
|
$
|
204,708
|
|
|
|
|
|
|
|
|
|
|
Applied has debt agreements that contain financial and other
covenants. These covenants require Applied to maintain certain
minimum financial ratios. At October 29, 2006, Applied was
in compliance with all covenants.
Aggregate debt maturities at October 29, 2006 were:
$203 million in fiscal 2007, $3 million in fiscal
2008, $1 million in fiscal 2009, and $200 million
thereafter.
|
|
Note 6
|
Restructuring
and Asset Impairments
|
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.
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 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. Applied recorded an asset impairment
charge of $124 million during the first quarter of fiscal
2006 to write down the following properties to estimated fair
value: facilities in Narita, Japan; Chunan, Korea; Hillsboro,
Oregon; and Danvers, Massachusetts; and 26 acres of
unimproved land in Hillsboro, Oregon. During the third quarter
of fiscal 2006, Applied sold the Danvers, Massachusetts facility
for net proceeds of $16 million and recognized a gain of
$4 million. During the fourth quarter of fiscal 2006,
Applied recorded additional impairment charges on the Narita and
Chunan facilities of $6 million and recorded a
restructuring charge of $4 million related to environmental
contamination of the Narita site. As part of the Plan, Applied
also recorded a charge in the amount of $91 million for
62
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
future lease obligations that continue through fiscal 2014
related to the closure of its leased Hayward, California
facility. During the second, third and fourth quarter of fiscal
2006, Applied consumed $9 million in restructuring reserves
related to the Hayward campus in rental and operating costs. In
the fourth quarter of fiscal 2006, the Hayward lease obligation
was terminated for $81 million. Applied continues to
actively market the remaining properties.
Applied took restructuring actions in fiscal 2004 to align its
cost structure with prevailing market conditions due to an
industry downturn. These actions, which were necessary as a
result of reduced business volume, decreased Applieds
global workforce and consolidated Applieds global
facilities. Restructuring, asset impairments and other charges
for fiscal 2004 totaled $167 million, consisting of
$65 million for facility consolidations, $6 million
for severance and benefits, and $96 million for other
costs, primarily related to fixed asset writeoffs due to
facility consolidations. As of October 29, 2006, the
majority of the fiscal 2004 restructuring actions have been
completed, and restructuring reserve balances consisted
principally of remaining lease commitments associated with
facilities.
There were no restructuring, asset impairments or other charges
for fiscal 2005.
Changes in restructuring reserves for fiscal 2004, 2005 and 2006
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
|
|
|
|
|
|
|
|
|
|
and Benefits
|
|
|
Facilities
|
|
|
Other
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance, October 26, 2003
|
|
$
|
11,937
|
|
|
$
|
89,895
|
|
|
$
|
4,988
|
|
|
$
|
106,820
|
|
Provision for fiscal 2004
|
|
|
6,200
|
|
|
|
65,400
|
|
|
|
95,859
|
|
|
|
167,459
|
|
Consumption of reserves
|
|
|
(18,137
|
)
|
|
|
(57,290
|
)
|
|
|
(98,741
|
)
|
|
|
(174,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 31, 2004
|
|
|
|
|
|
|
98,005
|
|
|
|
2,106
|
|
|
|
100,111
|
|
Consumption of reserves
|
|
|
|
|
|
|
(28,523
|
)
|
|
|
(2,106
|
)
|
|
|
(30,629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 30, 2005
|
|
|
|
|
|
|
69,482
|
|
|
|
|
|
|
|
69,482
|
|
Provision for fiscal 2006
|
|
|
|
|
|
|
95,829
|
|
|
|
|
|
|
|
95,829
|
|
Consumption of reserves
|
|
|
|
|
|
|
(128,490
|
)
|
|
|
|
|
|
|
(128,490
|
)
|
Adjustment of restructuring
reserves
|
|
|
|
|
|
|
(12,090
|
)
|
|
|
|
|
|
|
(12,090
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 29, 2006
|
|
$
|
|
|
|
$
|
24,731
|
|
|
$
|
|
|
|
$
|
24,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7
|
Stockholders
Equity
|
Accumulated Other Comprehensive
Income/(Loss) See the Consolidated Statements of
Stockholders Equity for the components of comprehensive
income. Accumulated other comprehensive income/(loss) consisted
of the following components:
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Unrealized loss on investments
|
|
$
|
(21,618
|
)
|
|
$
|
(5,132
|
)
|
Unrealized gain on derivative
instruments qualifying as cash flow hedges
|
|
|
9,207
|
|
|
|
4,319
|
|
Minimum pension liability
|
|
|
(17,868
|
)
|
|
|
(17,985
|
)
|
Cumulative translation adjustments
|
|
|
(6,969
|
)
|
|
|
(212
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(37,248
|
)
|
|
$
|
(19,010
|
)
|
|
|
|
|
|
|
|
|
|
Stock Repurchase Program Since March 1996,
Applied has systematically repurchased shares of its common
stock in the open market to partially fund its equity-based
employee benefit and incentive plans. On September 15,
2006, the Board of Directors approved a new stock repurchase
program of up to $5.0 billion in repurchases over the next
three years, ending in September 2009. In fiscal 2005, there
were 101,208,000 shares
63
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
repurchased at an average price of $16.80 per share. In
fiscal 2006, there were 238,397,000 shares repurchased at
an average price of $17.35 per share.
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 shares of Applied outstanding common stock for an
initial purchase price of $2.5 billion. Under the
agreements, Applied purchased from Goldman Sachs
145 million shares of Applieds 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 is entitled or subject to a price
adjustment with Goldman Sachs based upon the volume weighted
average price of Applied common stock during the purchase
period. The price adjustment, if any, may be settled, at
Applieds option, in cash or shares of its common stock.
The repurchase was funded with Applieds existing cash and
investments. The repurchased shares were reported as treasury
stock.
Dividends Applieds Board of Directors
declared three quarterly cash dividends in the amount of
$0.03 per share each in fiscal 2005. 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. The fourth quarterly cash dividend declared in fiscal 2006
was paid on December 7, 2006 to stockholders of record as
of November 16, 2006. Dividends paid during fiscal 2005 and
fiscal 2006 amounted to $98 million and $251 million,
respectively. 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 stockholders.
|
|
Note 8
|
Employee
Benefit Plans
|
Stock Options Applied grants options to
employees and non-employee directors 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 133,878,000 shares available for grant at
October 31, 2004; 138,377,000 shares available for
grant at October 30, 2005, and 144,582,000 shares
available for grant at October 29, 2006. Stock option
activity was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
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
|
|
|
252,035
|
|
|
$
|
16.56
|
|
|
|
227,588
|
|
|
$
|
17.93
|
|
|
|
200,007
|
|
|
$
|
18.67
|
|
Granted and assumed
|
|
|
37,089
|
|
|
$
|
21.21
|
|
|
|
24,186
|
|
|
$
|
16.97
|
|
|
|
12,174
|
|
|
$
|
16.92
|
|
Exercised
|
|
|
(35,298
|
)
|
|
$
|
9.85
|
|
|
|
(22,759
|
)
|
|
$
|
8.49
|
|
|
|
(18,498
|
)
|
|
$
|
15.34
|
|
Canceled
|
|
|
(26,238
|
)
|
|
$
|
20.30
|
|
|
|
(29,008
|
)
|
|
$
|
19.48
|
|
|
|
(30,469
|
)
|
|
$
|
19.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year
|
|
|
227,588
|
|
|
$
|
17.93
|
|
|
|
200,007
|
|
|
$
|
18.67
|
|
|
|
163,214
|
|
|
$
|
18.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of year
|
|
|
105,252
|
|
|
$
|
18.45
|
|
|
|
135,714
|
|
|
$
|
20.21
|
|
|
|
130,065
|
|
|
$
|
19.59
|
|
64
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table summarizes information with respect to
options outstanding and exercisable at October 29, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
96
|
|
|
$
|
2.77
|
|
|
|
1.78
|
|
|
$
|
1,395
|
|
|
|
96
|
|
|
$
|
2.77
|
|
|
$
|
1,395
|
|
$ 5.00 - $ 9.99
|
|
|
205
|
|
|
$
|
6.26
|
|
|
|
3.30
|
|
|
|
2,254
|
|
|
|
205
|
|
|
$
|
6.26
|
|
|
|
2,254
|
|
$10.00 - $19.99
|
|
|
100,572
|
|
|
$
|
16.14
|
|
|
|
3.58
|
|
|
|
162,476
|
|
|
|
69,110
|
|
|
$
|
16.45
|
|
|
|
97,133
|
|
$20.00 - $29.99
|
|
|
56,289
|
|
|
$
|
21.72
|
|
|
|
2.26
|
|
|
|
|
|
|
|
54,602
|
|
|
$
|
21.69
|
|
|
|
|
|
$30.00 - $59.99
|
|
|
6,052
|
|
|
$
|
37.25
|
|
|
|
0.60
|
|
|
|
|
|
|
|
6,052
|
|
|
$
|
37.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163,214
|
|
|
$
|
18.83
|
|
|
|
3.01
|
|
|
$
|
166,125
|
|
|
|
130,065
|
|
|
$
|
19.59
|
|
|
$
|
100,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable and expected
to become exercisable
|
|
|
161,248
|
|
|
$
|
19.00
|
|
|
|
3.00
|
|
|
$
|
165,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 generally vest over one to four years,
subject to continued service to Applied on each vesting date.
A summary of the changes in restricted stock units outstanding
under Applieds equity compensation plans during fiscal
2006 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Weighted 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 30, 2005
|
|
|
75
|
|
|
$
|
17.47
|
|
|
|
3.9
|
Years
|
|
$
|
1,384
|
|
Granted
|
|
|
15,671
|
|
|
|
17.70
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(1,225
|
)
|
|
|
17.97
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(404
|
)
|
|
|
17.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock units
at October 29, 2006
|
|
|
14,117
|
|
|
$
|
17.67
|
|
|
|
3.7
|
|
|
$
|
243,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock units
expected to vest
|
|
|
11,913
|
|
|
$
|
17.67
|
|
|
|
3.7
|
|
|
$
|
205,625
|
|
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 at the beginning of the
offering period or at the end of each applicable purchase
period. Beginning in December 2002, Applied amended the ESPP to
extend the offering period from 6 months to 24 months,
composed of four 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 5,308,000 for
fiscal 2004, 4,879,000 for fiscal 2005, and 4,065,000 for fiscal
2006. At October 29, 2006, there were
10,669,000 shares reserved for future issuance under the
ESPP.
65
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Equity-Based
Compensation See
Note 1.
Employee Bonus Plans Applied has various
employee bonus plans. A profit-sharing plan provides for the
distribution of a percentage of pre-tax profits to substantially
all Applied employees not eligible for other performance-based
incentive plans, up to a maximum percentage of compensation.
Other plans award annual bonuses to Applieds executives
and key contributors based on the achievement of profitability
and other specific 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 $309 million for
fiscal 2004, $138 million for fiscal 2005 and
$262 million for fiscal 2006.
Employee Savings and Retirement
Plan Applieds Employee Savings and
Retirement Plan is qualified under Sections 401(a) and
(k) of the Internal Revenue Code. Applied contributes a
percentage of each participating employees salary deferral
contributions. These matching contributions generally 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 and become fully vested at the end of six
years of service. Each participant may elect to have the Company
matching contributions invested in any of the diversified
investment funds available under the plan or in Applied common
stock. Applieds matching contributions under this plan
were approximately $17 million, net of $8 million in
forfeitures, for fiscal 2004 $25 million, net of
$1 million in forfeitures, for fiscal 2005 and
$27 million, net of $2 million in forfeitures, for
fiscal 2006.
Defined Benefit Pension Plans of Foreign
Subsidiaries 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. Where
appropriate, the pension plans retain professional investment
managers that invest plan assets in equity securities, fixed
income securities, cash and other institutional investments.
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 accumulated 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.
66
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A summary of the changes in benefit obligations and plan assets
for fiscal 2005 and 2006 is presented below.
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands, except percentages)
|
|
|
Change in projected benefit
obligation
|
|
|
|
|
|
|
|
|
Beginning projected benefit
obligation
|
|
$
|
149,868
|
|
|
$
|
186,435
|
|
Service cost
|
|
|
11,935
|
|
|
|
15,429
|
|
Interest cost
|
|
|
6,841
|
|
|
|
8,938
|
|
Plan participants
contributions
|
|
|
939
|
|
|
|
1,176
|
|
Actuarial (gain)/loss
|
|
|
27,454
|
|
|
|
(12,113
|
)
|
Curtailments, settlements and
special termination benefits
|
|
|
|
|
|
|
(5,446
|
)
|
Foreign currency exchange rate
changes
|
|
|
(3,291
|
)
|
|
|
9,332
|
|
Benefits paid
|
|
|
(7,311
|
)
|
|
|
(7,763
|
)
|
Plan amendments and business
combinations
|
|
|
|
|
|
|
28,844
|
|
Transfers out
|
|
|
|
|
|
|
(511
|
)
|
|
|
|
|
|
|
|
|
|
Ending projected benefit obligation
|
|
$
|
186,435
|
|
|
$
|
224,321
|
|
|
|
|
|
|
|
|
|
|
Ending accumulated benefit
obligation
|
|
$
|
152,564
|
|
|
$
|
185,449
|
|
|
|
|
|
|
|
|
|
|
Weighted average assumptions to
determine benefit obligations
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
2.0% - 6.3
|
%
|
|
|
2.3% - 5.8
|
%
|
Rate of compensation increase
|
|
|
2.0% - 5.0
|
%
|
|
|
2.0% - 6.0
|
%
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Beginning fair value of plan assets
|
|
$
|
42,620
|
|
|
$
|
64,151
|
|
Return on plan assets
|
|
|
8,232
|
|
|
|
6,790
|
|
Employer contributions
|
|
|
21,243
|
|
|
|
23,354
|
|
Plan participants
contributions
|
|
|
939
|
|
|
|
1,176
|
|
Foreign currency exchange rate
changes
|
|
|
(1,572
|
)
|
|
|
4,714
|
|
Divestitures, settlements and
business combinations
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
(7,311
|
)
|
|
|
(7,763
|
)
|
|
|
|
|
|
|
|
|
|
Ending fair value of plan assets
|
|
$
|
64,151
|
|
|
$
|
92,422
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(122,283
|
)
|
|
$
|
(131,899
|
)
|
Unrecognized transition obligations
|
|
|
424
|
|
|
|
372
|
|
Unrecognized prior service costs
|
|
|
1,034
|
|
|
|
(1,827
|
)
|
Unrecognized net actuarial loss
|
|
|
57,884
|
|
|
|
48,197
|
|
Employer contributions after the
measurement date
|
|
|
1,360
|
|
|
|
1,330
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(61,581
|
)
|
|
$
|
(83,827
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the
consolidated balance sheets
|
|
|
|
|
|
|
|
|
Prepaid benefit cost
|
|
$
|
226
|
|
|
$
|
|
|
Accrued benefit cost
|
|
|
(89,595
|
)
|
|
|
(112,807
|
)
|
Intangible asset
|
|
|
1,212
|
|
|
|
1,403
|
|
Accumulated other comprehensive loss
|
|
|
26,576
|
|
|
|
27,577
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(61,581
|
)
|
|
$
|
(83,827
|
)
|
|
|
|
|
|
|
|
|
|
Plans with projected benefit
obligations in excess of plan assets
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
186,435
|
|
|
$
|
224,321
|
|
Fair value of plan assets
|
|
$
|
64,151
|
|
|
$
|
92,422
|
|
Plans with accumulated benefit
obligations in excess of plan assets
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
149,460
|
|
|
$
|
181,787
|
|
Fair value of plan assets
|
|
$
|
59,362
|
|
|
$
|
86,010
|
|
Plan assets
allocation
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
57
|
%
|
|
|
58
|
%
|
Debt securities
|
|
|
36
|
%
|
|
|
37
|
%
|
Cash
|
|
|
7
|
%
|
|
|
5
|
%
|
67
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 pension costs and
the weighted average assumptions used for net periodic pension
cost and benefit obligation calculations for fiscal 2004, 2005
and 2006 is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(In thousands, except percentages)
|
|
|
Components of net periodic
pension cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
12,744
|
|
|
$
|
13,835
|
|
|
$
|
15,429
|
|
Interest cost
|
|
|
5,842
|
|
|
|
7,440
|
|
|
|
8,938
|
|
Expected return on plan assets
|
|
|
(2,261
|
)
|
|
|
(2,727
|
)
|
|
|
(4,362
|
)
|
Amortization of transition
obligation
|
|
|
163
|
|
|
|
67
|
|
|
|
63
|
|
Amortization of prior service costs
|
|
|
135
|
|
|
|
140
|
|
|
|
174
|
|
Settlement gain to be recognized
|
|
|
|
|
|
|
|
|
|
|
(5,569
|
)
|
Amortization of net (gain)/loss
|
|
|
1,635
|
|
|
|
1,641
|
|
|
|
2,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
18,258
|
|
|
$
|
20,396
|
|
|
$
|
17,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
2.0% - 5.6
|
%
|
|
|
2.0% - 6.3
|
%
|
|
|
2.0% - 6.3
|
%
|
Expected long-term return on assets
|
|
|
3.5% - 7.5
|
%
|
|
|
3.5% - 7.5
|
%
|
|
|
3.5% - 7.5
|
%
|
Rate of compensation increase
|
|
|
2.0% - 5.0
|
%
|
|
|
2.0% - 5.0
|
%
|
|
|
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 high quality corporate bonds,
allowing for the approximate duration of both plan obligations
and the relevant benchmark index.
Future expected benefit payments over the next ten fiscal years
are: $5 million in fiscal 2007, $5 million in fiscal
2008, $6 million in fiscal 2009, $7 million in fiscal
2010, $7 million in fiscal 2011, and $42 million
collectively for fiscal years 2012 through 2016. Company
contributions to these plans for fiscal 2007 are expected to be
approximately $8 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
adopted by Applied effective as of January 1, 2005 and is
intended to
68
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
comply with the requirements of Code Section 409A. Amounts
payable, including accrued deemed interest, totaled
$83 million at October 30, 2005 and $79 million
at October 29, 2006, which were included in other long-term
liabilities in the Consolidated Balance Sheets.
Post-Retirement Benefits On January 1,
1999, Applied adopted a 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. This plan has not had, and is not
expected to have, a material effect on Applieds
consolidated financial condition or results of operations.
The components of income from operations before income taxes
were as follows: