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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 28, 2007
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
000-06920
Applied Materials,
Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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94-1655526
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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3050 Bowers Avenue, P.O. Box 58039
Santa Clara, California
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95052-8039
(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. o
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 27, 2007,
based upon the closing sale price reported by the NASDAQ Global
Select Market on that date: $26,577,503,014
Number of shares outstanding of the registrants Common
Stock, $.01 par value, as of November 27, 2007:
1,382,752,583
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions of the definitive Proxy Statement for Applied
Materials, Inc.s Annual Meeting of Stockholders to be held
on March 11, 2008 are incorporated by reference into
Part III of this
Form 10-K.
Caution
Regarding Forward-Looking Statements
This Annual Report on
Form 10-K
(report or
Form 10-K)
of Applied Materials, Inc. and its subsidiaries (Applied or the
Company), including Managements Discussion and
Analysis of Financial Condition and Results of Operations
in Item 7, 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, research and development,
acquisitions and joint ventures, growth opportunities,
investments and legal proceedings, as well as industry trends.
These forward-looking statements are based on managements
estimates, projections and assumptions as of the date hereof and
include the assumptions that underlie such statements.
Forward-looking statements may contain words such as
may, will, should,
could, would, expect,
plan, anticipate, believe,
estimate, predict, potential
and continue, the negative of these terms, or other
comparable terminology. Any expectations based on these
forward-looking statements are subject to risks and
uncertainties and other important factors, including those
discussed in Item 1A, Risk Factors, below and
elsewhere in this report. Other risks and uncertainties may be
disclosed in Applieds prior Securities and Exchange
Commission (SEC) filings. These and many other factors could
affect Applieds future financial condition and operating
results and could cause actual results to differ materially from
expectations based on forward-looking statements made in this
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 report.
APPLIED
MATERIALS, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 28, 2007
TABLE OF
CONTENTS
Incorporated in 1967, Applied, a Delaware corporation, provides
Nanomanufacturing
Technologytm
solutions for the global semiconductor, flat panel display,
solar and related industries, with a broad portfolio of
innovative equipment, service and software products.
Nanomanufacturing is the production of ultra-small
structures, including the engineering of thin layers of film
onto substrates. Applieds customers include manufacturers
of semiconductor chips and wafers, flat panel liquid crystal
displays (LCDs), photovoltaic (PV) cells and other electronic
devices, who use what they manufacture in their own end products
or sell the items to other companies for use in advanced
electronic components. The Companys fiscal year ends on
the last Sunday in October.
Applied is the worlds largest semiconductor fabrication
equipment supplier, based on revenue, with the capability to
provide global deployment and support services. Applied also is
a global leader in LCD fabrication equipment, and is gaining
momentum to become a leading supplier of PV manufacturing
solutions to the emerging solar industry.
Applied operates in four reportable segments: Silicon, Fab
Solutions, Display, and Adjacent Technologies. A summary of
financial information for each reportable segment is found in
Note 10 of Notes to Consolidated Financial Statements. A
discussion of factors that could affect Applieds
operations is set forth under Risk Factors in
Item 1A, which is incorporated herein by reference.
Silicon
Segment
Applieds Silicon Systems Group (SSG), reported under its
Silicon segment, develops, manufactures and sells a wide range
of manufacturing equipment used to fabricate semiconductor chips
or integrated circuits. Most chips are built on a silicon wafer
base and include a variety of circuit components, such as
transistors and other devices, that are connected by multiple
layers of wiring (interconnects). Applied offers systems that
perform most of the primary steps in the chip fabrication
process, including: atomic layer deposition (ALD), chemical
vapor deposition (CVD), physical vapor deposition (PVD), etch,
rapid thermal processing (RTP), chemical mechanical
planarization (CMP), wafer wet cleaning, and wafer metrology and
inspection, as well as systems that etch, measure and inspect
circuit patterns on masks used in the photolithography process.
Applieds semiconductor manufacturing systems are used by
both integrated device manufacturers and foundries to build
memory, logic and other types of chips.
To build a chip, the transistors, capacitors and other circuit
components are first created on the surface of the wafer by
performing a series of processes to deposit and selectively
remove 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
electroplating technologies. A CMP step then polishes the wafer
to achieve a flat surface. Additional deposition, etch and CMP
steps are then performed to build up the layers 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.
A significant portion of the 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 building memory chips are still using aluminum as the
main conducting material for the interconnect, logic customers
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 systems for
depositing low k dielectric films.
1
The transistor is another key area of the chip 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 electrical current to flow more quickly, thus greatly
enhancing chip performance. Multiple strain films are typically
used in advanced devices since they have an additive effect on
increasing transistor speed. Applied has a comprehensive
portfolio of systems to enable these applications using CVD and
epitaxial deposition technologies.
Most chips currently are fabricated using 65 nanometer (nm) and
larger linewidth dimensions. Beginning at the 45nm technology
node, major chipmakers have announced they will be integrating
new high dielectric constant (high-k) and metal materials and
processes in the transistor gate structure to reduce current
leakage and enable faster switching speed. In 2007, Applied
announced a comprehensive portfolio of fully characterized
processes for building these high-k/metal gates. These solutions
include an integrated dielectric gate stack tool that combines
four critical processes in a single system, a portfolio of
metallization technologies using ALD and PVD, and an innovative
high temperature etch system.
Most of Applieds semiconductor equipment products are
single-wafer systems with multiple process chambers attached to
a base platform. This enables each wafer to be processed
separately in its own environment, allowing precise process
control, while the systems multiple chambers enable
simultaneous, high productivity manufacturing. Applied sells
most of its single-wafer, multi-chamber systems on four basic
platforms: the
Centura®,
the
Endura®,
the
Producer®
and the
Vantage®.
These platforms currently support ALD, CVD, PVD, etch and RTP
technologies.
Over time, the semiconductor industry has migrated to
increasingly larger wafers to build chips. The predominant or
common wafer size used today for the volume production of
advanced chips is 300 millimeter (mm), or
12-inch,
wafers. Applied offers a comprehensive range of 300mm, as well
as earlier-generation 200mm systems. Applied also offers
products and services to support its systems, which are reported
under its Fab Solutions segment.
The following summarizes Applieds portfolio of products
and their associated process technology areas reported under its
Silicon segment.
Deposition
Deposition is a fundamental step in fabricating a chip. During
deposition, layers of dielectric (an insulator), barrier, or
electrically conductive (typically metal) films are deposited or
grown on a wafer. Applied currently provides equipment to
perform the three main types of deposition: ALD, CVD and PVD. In
addition, Applieds RTP systems can be used to perform
certain types of dielectric deposition.
Atomic
Layer Deposition
ALD is an advanced technology in which atoms are deposited one
layer at a time to build chip structures. This technology
enables customers to fabricate thin films of either conducting
or insulating material with uniform coverage in sub-nanometer
sized structures. Applied offers ALD chambers for depositing
tungsten, tantalum nitride and high-k 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. Applieds high-k ALD process is part of the
Centura Advanced Gate Stack system which enables a single
integrated solution for building high-k/metal gate structures.
Chemical
Vapor Deposition
CVD is used by customers to deposit dielectric and metal films
on a wafer. During the CVD process, gases that contain atoms of
the material to be deposited react on the wafer surface, forming
a thin film of solid material. Films deposited by CVD may be
silicon oxide, single-crystal epitaxial silicon, amorphous
silicon, silicon nitride,
2
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 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 interconnect.
The Applied Producer CVD platform 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.
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 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 deposition
system that provides a lower k-value film for building faster 65
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. In 2007, Applied
introduced a second generation of this technology, the Applied
Producer BLOk II, for 45nm and below applications.
Lithography-Enabling Solutions Applied offers
several technologies on the Producer system to help chipmakers
extend their current 193nm lithography tools, including the
Applied
APFtm
(advanced patterning film) and the Applied
DARC®
(dielectric anti-reflective coating) films. Together, they
provide a film stack with the precise dimensional control and
compatibility needed to cost-effectively pattern nano-scale
features without additional integration complexity. In 2007, the
Company added to its lithography-enabling solutions with the
Applied Producer ACE SACVD (sub-atmospheric CVD) system for
fabricating denser memory cells with double patterning
techniques.
Strain Engineering Solutions The Applied
Producer HARP (high aspect ratio process) system plays a key
role in overcoming transistor performance challenges by enabling
chipmakers to boost chip speed by depositing strain inducing
dielectric films in transistor structures, while also enabling
geometric device scaling with high aspect ratio gap-fill
capability. Offering the industrys first integrated stress
nitride deposition and ultraviolet (UV) cure solution, the
Applied Producer Celera CVD delivers benchmark levels of
high-stress tensile silicon nitride films. The Company also
offers the Applied Centura SiNgenPlus LPCVD (low pressure
CVD) system for low temperature silicon nitride films. Used
together, and in conjunction with silicon germanium (SiGe) films
using Applieds epitaxial deposition technologies, these
systems can provide additive strain engineering benefits.
Epitaxial Deposition Epitaxial silicon
(epitaxy or epi) is a layer of pure silicon grown in a uniform
crystalline structure on the wafer to form a high quality base
for the device circuitry. Epi technology is used in an
increasing number of integrated circuit devices in both the
wafer substrate and transistor areas of a chip to enhance speed.
The Applied Centura Epi system integrates pre- and post-epi
processes on the same system to improve film quality and reduce
production costs. This system is also used for SiGe epi
technology, which reduces power usage and increases speed in
certain types of advanced chips. For emerging transistor
designs, the Applied Centura RP Epi system offers selective epi
processes to enable faster transistor switching through strain
engineering techniques.
Polysilicon Deposition Polysilicon is a type
of silicon used to form portions of the transistor structure
within the integrated circuit device. The Applied Centura
Polygentm
LPCVD (low pressure CVD) 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
3
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.
Aluminum Deposition Aluminum (Al) continues
to be the material used by many memory manufacturers for
interconnects. The Applied Endura iFill Al CVD CVD/PVD system is
used for building high-density interconnects in Flash and DRAM
memory chips. This advanced process, for sub-90nm generations,
enables customers to replace tungsten structures with aluminum
to achieve faster chips with fewer steps and less cost.
Tungsten Deposition Tungsten is used in the
contact area of a chip that connects the transistors to the
wiring circuitry. In aluminum-based devices, tungsten is also
used in the structures that connect the multiple layers of
aluminum wiring. Applied has two products for depositing
tungsten: the Applied Centura
Sprint®
Tungsten CVD system for 90nm and below devices and the Applied
Centura iSprint ALD/CVD system for more advanced applications.
The latter product combines ALD technology and CVD chambers on
the same platform.
Physical
Vapor Deposition
PVD, 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 deposition processes, including
aluminum, aluminum alloys, cobalt, titanium/titanium nitride,
tantalum/tantalum nitride, tungsten/tungsten nitride, nickel,
vanadium and copper.
The Applied Endura CuBS (copper barrier/seed) PVD system is
widely used by customers for fabricating copper-based chips.
Using PVD technology, the system deposits critical films that
prevent copper material from entering other areas of the device
and primes the structure for the subsequent deposition of bulk
copper. Applied Siconi pre-clean technology extends the
systems capabilities to 45nm 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.
Etch
Etching is used many times throughout the integrated circuit
manufacturing process to selectively remove material from the
surface of a wafer. Before etching begins, the wafer is coated
with a light-sensitive film, called photoresist. A
photolithography process then projects the circuit pattern onto
the wafer. Etching removes material only from areas dictated by
the photoresist pattern. Applied offers a wide range of systems
for etching dielectric, metal and silicon films to meet the
requirements of sub-100nm processing.
For dielectric applications, the Applied Centura
eMax®
system etches a broad range of dielectric films in the contact
and interconnect regions of the chip. Applieds Producer
Etch system utilizes the Companys Twin-Chamber Producer
platform to target cost-sensitive dielectric etch applications
in 90nm and below design geometries. To address advanced low k
etch applications, the Applied Centura
Enabler®
Etch system performs etch, strip and clean steps in a single
chamber. The Enablers
all-in-one
capability streamlines the process flow for advanced chip
designs and significantly reduces operating costs. In 2007, the
Company introduced its Applied Centura Carina system that uses
innovative, high-temperature technology to deliver the etch
capability essential for scaling logic and memory devices with
high-k/metal gates at 45nm and below.
The Applied Centura
AdvantEdgetm
Silicon Etch system offers chipmakers high precision gate
etching for advanced-generation devices. To enable customers to
scale memory devices, in 2007 the Company launched its Applied
Centura Mariana Trench Etch, the first system with the
capability to etch 80:1 aspect ratio structures. For etching
metals, Applied also introduced in fiscal 2007 the Applied Opus
AdvantEdge Metal Etch. Using an
4
optimized 5-chamber platform configuration, this system enables
customers to extend aluminum interconnect technology and
productivity to sub-70nm dimensions for Flash and DRAM memory
applications.
Rapid
Thermal Processing
RTP is a process in which a wafer is subjected to rapid bursts
of intense heat that can take the wafer from room temperature to
more than 1,000 degrees Celsius in less than 10 seconds. A rapid
thermal process is used mainly for modifying the properties of
deposited films. The Applied Centura
Radiance®Plus
and Applied Vantage
RadOxtm
RTP systems feature 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. With
its proprietary radical-based, oxidation process, the Applied
Vantage RadOx system deposits high-performance transistor gate
oxides with high productivity and low operating cost for Flash
memory applications.
Chemical
Mechanical Planarization
The CMP process removes material from a wafer to create a flat
(planarized) surface. This process allows subsequent
photolithography patterning steps to occur with greater accuracy
and enables film layers to build with minimal height variations.
The 300mm Applied
Reflexion®
LK system leads the industry in CMP technology with important
features such as integrated cleaning, film measurement and
process control capabilities. The 300mm Applied Reflexion LK
Ecmptm
system (Ecmp system) features proprietary, electrochemical
mechanical planarization technology to provide a
high-performance, cost-effective and extendible solution for
advanced copper/low k interconnects. This 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 products for measuring and inspecting 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 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. Applieds 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.
5
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,
three dimensional brightfield tool. Utilizing multi-beam, deep
ultraviolet (DUV) laser illumination and high efficiency
detectors, the UVision system uncovers previously undetectable
defects on the wafer, enabling customers to rapidly resolve
defect issues and achieve greater chip yields.
Mask
Making
Masks are used by photolithography systems to transfer
microscopic circuit designs onto wafers. Since an imperfection
in a mask may be replicated on the wafer, the mask must be
virtually defect-free. Applied provides systems for etching,
measuring and inspecting masks. In 2007, the Company introduced
the Applied Tetra III Advanced Reticle Etch system, an
advanced etch tool for fabricating masks, based on
Applieds production-proven, decoupled plasma source (DPS)
wafer etch technology.
Fab
Solutions Segment
Through Applied Global Services group, reported under its Fab
Solutions segment, Applied provides products and services
designed to improve the performance and productivity and reduce
the environmental impact of the fab operations of semiconductor,
LCD and solar cell manufacturers. The in-depth expertise and
best known methods of Applieds extensive global support
infrastructure enable Applied to continuously support
customers production requirements. Approximately 2,450
trained customer engineers and process support engineers are
deployed in more than a dozen countries. These engineers are
usually located at or near customers fab sites and service
over 22,000 installed Applied systems, as well as non-Applied
systems. Applied offers three general types of services:
Fab Services Applied offers a portfolio of
fab-wide operations services to maintain and optimize
customers fabrication facilities. Applied Genuine Parts
are spare parts manufactured to Applieds strict technical
specifications and quality standards. Applied Services provides
customers with optimized tool performance for improved total
cost of ownership and a higher return on investment. Through its
Metron Chamber Performance Services unit, Applied is the
industrys leading provider of critical parts cleaning,
coating refurbishment and analytical testing capabilities. In
2007, Applied announced the opening of its Advanced Wafer
Reclaim Center in Taiwan. Using state-of-the-art manufacturing
systems and software at this center, Applied can extend the
lifecycle of silicon test wafers by over 45% and reduce
customers costs.
Equipment Services Applied provides
remanufactured and refurbished systems, system enhancements and
technical training, which are intended to optimize
customers cost of ownership by increasing the efficiency
and extending the life of their equipment. Applied also offers
energy-saving solutions through its Metron
EcoSystm
products, the semiconductor industrys most comprehensive
line of point-of-use abatement systems. Applieds EcoSys
systems help enable chipmakers worldwide to meet environmental
goals.
Automation Services Applied offers automated
factory-level and tool-level control software systems for
semiconductor, LCD and solar cell manufacturing facilities. In
2007, Applied expanded its portfolio of software solutions with
the acquisition of Brooks Software, a division of Brooks
Automation, Inc. The Brooks Software products complement
Applieds existing software applications, allowing the
Company to offer customers a comprehensive computer integrated
manufacturing (CIM) solution. CIM solutions improve fab
operation performance and provide real-time visibility to
critical production processes for fast and informed
decision-making. These enterprise solutions include
manufacturing execution systems (MES) to automate the production
of wafers and LCD and solar substrates, advanced process control
systems, and scheduling and materials handling control systems.
Applied also offers computerized maintenance management systems
and performance tracking, and modeling and simulation tools for
improving asset utilization.
Display
Segment
Applieds subsidiary AKT, reported under the Display
segment, designs, manufactures and sells and services equipment
to fabricate thin film transistor LCDs for televisions, computer
displays and other consumer-oriented electronic applications.
While similarities exist between the technologies utilized in
chipmaking and LCD
6
fabrication, the most significant differences are in the size
and composition of the substrate. Substrates used to manufacture
LCD panels can be more than 70 times larger in area than 300mm
wafers and are made of glass, while wafers are made of silicon.
AKT also develops, manufactures and supports differentiated
stand-alone equipment for the Applied
SunFabtm
Thin Film Line, discussed further under the Adjacent
Technologies segment.
Applied supplies a wide range of systems that process and test
different glass substrate sizes. To meet growing consumer demand
for larger, more cost-efficient LCD TVs, LCD manufacturers have
moved to larger-sized substrates. Applieds latest
Generation (Gen) 8.5 systems can process substrates sized at 2.2
x 2.5 meters, which in turn enable the production of up to six
55-inch LCD
TV screens.
For fabricating the transistor layer of Gen-8.5 panels, Applied
offers the AKT-55K PECVD (plasma-enhanced CVD) system that
uses multi-chamber platform architecture to deposit dielectric
and semiconducting films. In 2007, the Company launched the
AKT-PiVottm
55KV system, which employs high-productivity, cost-efficient PVD
technology to deposit metal and transparent conductive oxide
films on the substrate. For manufacturing the color filter layer
of LCD panels, Applied offers a fully automated, vertical
sputtering system, the AKT-NEW
ARISTOtm
2200.
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 Energy and Environmental Solutions (EES) group, reported
under the Adjacent Technologies segment, provides manufacturing
solutions for the generation and conservation of energy. Applied
entered the solar PV market in 2006 and announced its objective
to lower the overall cost per watt of solar electricity to
parity with that of electricity generated by other sources, such
as the burning of fossil fuels. Applied offers manufacturing
solutions for both wafer-based crystalline silicon (c-Si), and
glass-based thin film applications to enable customers to
increase the conversion efficiency and yields of PV devices.
Applieds products include large-area platforms such as the
ATONtm
in-line sputtering system for high-quality deposition and
high-throughput in both c-Si and thin film PV cell
manufacturing, as well as processes, materials-handling
technologies and fabrication services.
During the fourth quarter of fiscal 2007, Applied launched the
Applied
SunFabtm
Thin Film Line, the worlds only integrated production line
for manufacturing thin film silicon solar modules using
5.7 square meter
(m2)
glass substrates. These ultra-large panels, which are
approximately four times the size of thin film solar panels
offered by others in the industry, are intended for large-scale
applications such as solar farms and building-integrated PV
system installations. Applied has entered into multiple
contracts for its SunFab line with customers in Europe and Asia,
which have not yet met Applieds order recognition policy
and accordingly have not been reported as new orders.
Also in fiscal 2007, Applied expanded its capabilities and
opportunities in the c-Si technology sector through its
acquisition of HCT Shaping Systems SA, the worlds leading
supplier of precision wafering systems used to make c-Si
substrates. These systems reduce silicon consumption and cost by
sectioning silicon ingots into ultra-thin wafers used to
fabricate c-Si solar cells.
Other products reported in this segment include roll-to-roll
vacuum web coating systems for high-performance deposition of a
range of films on flexible substrates for functional, aesthetic
or optical properties. Applied also offers large-area sputtering
equipment for the production of low-emissivity (Low-E) and solar
control architectural glass.
Backlog
Applieds backlog increased from $3.4 billion at
October 29, 2006 to $3.7 billion at October 28,
2007. Applied manufactures systems to meet demand represented by
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
7
revenue and maintenance fees to be earned within the next
12 months. Backlog adjustments were positive for fiscal
2007 and totaled $300 million, consisting primarily of
backlog obtained from acquired companies, partially offset by
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
procurement, assembly, test and integration of various
proprietary and commercial parts, components and subassemblies
(parts) that are used to manufacture systems. Products in the
Silicon segment are manufactured in Austin, Texas 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, Cheseaux, Switzerland, and Santa Clara,
California. Manufacturing requires raw materials, including a
wide variety of mechanical and electrical components, to be
manufactured to Applieds specifications. Applied uses
numerous companies to supply parts for the manufacture and
support of its products. Although Applied makes reasonable
efforts to assure that parts are available from multiple,
qualified suppliers, this is not always possible. Accordingly,
some key parts may be obtained from only a single supplier or a
limited group of suppliers. Applied seeks to reduce costs and to
lower the risks of production and service interruptions, as well
as shortages of key parts, by: (1) 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, China, Europe and Israel.
Applied invested $1.1 billion (12 percent of net
sales) in fiscal 2007, $1.2 billion (13 percent of net
sales) in fiscal 2006 and $941 million (13 percent of
net sales) in fiscal 2005 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 13 percent of net sales in RD&E over the last five
years. In addition to RD&E for specific product
technologies, Applied maintains ongoing programs for automation
control systems, materials research and environmental control
that have applications to its products. In fiscal 2007, Applied
focused on developing systems for customers new chip
designs with 45nm and below geometries, including systems to
enable faster transistors using strain engineering and high-k
metal gates, and patterning processes that will enable customers
to extend their existing 193nm lithography tools through
additional technology generations.
Marketing
and Sales
Because of the highly technical nature of its products, Applied
markets and sells products worldwide through a direct sales
force. More than 84 percent of Applieds fiscal
2007 net sales were to regions outside of the
United States. Net sales to customers by region as a
percentage of total net sales were: Taiwan 28 percent,
Korea 19 percent, North America (primarily the United
States) 16 percent, Japan 15 percent, Asia-Pacific
(including China) 12 percent, and Europe 10 percent.
8
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, LCDs, solar cells, architectural glass and other
substrates; the development of new technologies; factory
utilization; and global and regional economic conditions.
Applied manages its business and reports financial results based
on the segments described above, but does not allocate certain
sales and marketing costs to the segments.
Information on net sales to unaffiliated customers and
long-lived assets attributable to Applieds geographic
regions is included in Note 10 of Notes to Consolidated
Financial Statements. Samsung Electronics Co., Ltd. accounted
for 12 percent of Applieds net sales in fiscal 2007,
11 percent of Applieds net sales in fiscal 2006, and
10 percent of Applieds net sales in fiscal 2005.
These net sales were for products in multiple reportable
segments.
Competition
The industries in which Applied operates are highly competitive
and characterized by rapid technological change. Applieds
ability to compete generally depends on its ability to timely
commercialize its technology, continually improve its products
and develop new products that meet constantly evolving customer
requirements. Significant competitive factors include technical
capability and differentiation, productivity and
cost-effectiveness. The importance of these factors varies
according to customers needs, including product mix and
respective product requirements, applications, and the timing
and circumstances of purchasing decisions. Substantial
competition exists in all areas of Applieds business.
Competitors range from small companies that compete with a
single product
and/or in a
single region, to global, diversified companies with a range of
products. Applieds ability to compete requires a high
level of investment in RD&E and in marketing, sales and
customer support activities. Management believes that many of
Applieds products have strong competitive positions.
The competitive environment for each segment is described below:
The semiconductor industry has been increasingly driven by
consumer demand for lower-cost electronic products with
increased capability and, to a lesser extent, by demand for
commercial applications. As a result, products within the
Silicon segment are subject to rapid changes in customer
requirements, including transitions to smaller dimensions,
larger wafer sizes, new materials and an increasing number of
applications. While certain existing technologies may be adapted
to new requirements, some applications create the need for an
entirely different technical approach. The rapid pace of
technological change can quickly diminish the value of current
technologies and create opportunities for many existing and new
competitors. Applied offers a broad portfolio of technically
differentiated products that must continuously evolve to satisfy
customers requirements in order to compete effectively.
Applied allocates resources among its many product offerings and
therefore may decide not to invest in an individual product to
the same degree as competitors who specialize in fewer products.
There are many competitors serving the semiconductor
manufacturing equipment industry, with some offering a single
product line and others offering multiple product lines. These
competitors range from suppliers serving a single region to
global, diversified companies.
Products and services within the Fab Solutions segment are
characterized by demanding worldwide service requirements and a
diverse group of numerous competitors. To compete effectively,
Applied offers products and services to reduce costs, improve
productivity, and lessen the environmental impact of
customers fab operations. Significant competitive factors
include productivity, cost-effectiveness, and the level of
technical service and support. The importance of these factors
varies according to customers needs and the type of
products or services offered.
Products in the Display segment are subject to strong
competition from a number of major competitors. Applied holds
established market positions with its technically differentiated
LCD manufacturing solutions for the PECVD, color filter (CF)
sputtering and array testing, although its market position can
change rapidly if it does not meet customers requirements.
Applied introduced a new array sputtering tool in fiscal 2007.
As a recent entrant, Applied faces significant competition from
existing array sputtering suppliers.
9
Applieds products within the Adjacent Technologies segment
compete in diverse market areas, including equipment to make
solar cells, flexible electronics and energy-efficient glass. In
solar, Applied offers products for two distinct technologies,
c-Si wafer-based and thin film (glass) modules. As a recent
entrant to the solar equipment business, Applied competes with
many other companies that have more experience with solar
applications. Applied also is a recent entrant to the flexible
electronics equipment business, which operates in an emerging
market sector characterized by diverse types of applications,
customer requirements and competitors. Applieds glass
coating equipment faces significant competition from at least
one established supplier and another recent market entrant.
Patents
and Licenses
Management believes that Applieds competitive position
significantly depends upon the Companys research,
development, engineering, manufacturing and marketing
capabilities, and not just on its patent position. However,
protection of Applieds technological assets by obtaining
and enforcing intellectual property rights, including patents,
is important. Therefore, Applieds practice is to file
patent applications in the United States and other countries for
inventions that Applied considers significant. Applied has a
substantial number of patents in the United States and other
countries, and additional applications are pending for new
inventions. Although Applied does not consider its business
materially dependent upon any one patent, the rights of Applied
and the products made and sold under its patents, taken as a
whole, are a significant element of Applieds business. In
addition to patents, Applied also possesses other intellectual
property, including trademarks, know-how, trade secrets and
copyrights.
Applied enters into patent and technology licensing agreements
with other companies when management determines that it is in
its best interest to do so. Applied pays royalties under
existing patent license agreements for the use, in several of
its products, of certain patented technologies that are licensed
to Applied for the life of the patents. Applied also receives
royalties from licenses granted to third parties. Royalties
received from or paid to third parties have not been, and are
not expected to be, material to Applieds consolidated
results of operations.
In the normal course of business, Applied periodically receives
and makes inquiries regarding possible patent infringement. In
dealing with such inquiries, it may become necessary or useful
for Applied to obtain or grant licenses or other rights.
However, there can be no assurance that such licenses or rights
will be available to Applied on commercially reasonable terms,
or at all. If Applied is not able to resolve or settle claims,
obtain necessary licenses on commercially reasonable terms,
and/or
successfully prosecute or defend its position, Applieds
business, financial condition and results of operations could be
materially and adversely affected.
Environmental
Matters
Two of Applieds locations have been designated as
environmental cleanup sites. In 1987, the United States
Environmental Protection Agency designated one of the locations,
in Santa Clara, California, as a Superfund site and named
Applied as a Responsible Party. Cleanup activities
at this site began in 1984 and were substantially completed in
February 2002. The California Regional Water Quality Control
Board designated Applied as a Discharger with
respect to another site in Sunnyvale, California. Applied was
named a Discharger upon its acquisition of the property in 1997
solely due to its status as property owner. The prior owners of
the site
and/or
operators who caused the contamination are responsible for
performing cleanup and monitoring activities.
Applied maintains a number of environmental, health and safety
programs that are primarily preventive in nature. As part of
these programs, Applied regularly monitors ongoing compliance
and periodically conducts investigations of possible
contamination.
Compliance with federal, state and local provisions regulating
the discharge of materials into the environment, remedial
agreements and other actions relating to the environment have
not had, and are not expected to have, a material effect on
Applieds capital expenditures, competitive position,
financial condition or results of operations.
The most recent report on Applieds environmental, health
and safety activities can be found on the Companys website
at
http://www.appliedmaterials.com/about/environment.html.
This report is updated periodically. This website address is
intended to be an inactive textual reference only. None of the
information contained on Applieds website is part of this
report or is incorporated by reference herein.
10
Employees
At October 28, 2007, Applied employed 14,550 regular
employees and 778 temporary employees. In the high-technology
industry, competition for highly-skilled employees is intense.
Applied believes that its future success is highly dependent
upon its continued ability to attract, retain and motivate
qualified employees. There can be no assurance that Applied will
be able to attract, hire, assimilate and retain a sufficient
number of qualified employees.
Executive
Officers of the Registrant
The following table and notes set forth information about
Applieds executive officers:
|
|
|
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
|
Mark R. Pinto(6)
|
|
Senior Vice President, Chief Technology Officer and General
Manager Energy and Environmental Solutions
|
Thomas St. Dennis(7)
|
|
Senior Vice President, General Manager Silicon Systems Group
|
Joseph J. Sweeney(8)
|
|
Senior Vice President, General Counsel and Corporate Secretary
|
Gilad Almogy(9)
|
|
Group Vice President, General Manager Display Products and
Process Diagnostics and Control Business Group
|
Ron Kifer(10)
|
|
Group Vice President, Chief Information Officer, Global
Information Services
|
Jeannette L. Liebman(11)
|
|
Group Vice President, Global Human Resources
|
Menachem Erad(12)
|
|
Group Vice President, Chief of Staff
|
Yvonne Weatherford(13)
|
|
Corporate Vice President, Corporate Controller
|
|
|
|
(1) |
|
Mr. Morgan, age 69, 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 57, has been President, Chief
Executive Officer and a member of the Board of Directors of
Applied since joining Applied in April 2003. Prior to joining
Applied, 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 58, 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 50, 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 53, 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 |
11
|
|
|
|
|
October 2002 to May 2003. From May 2003 to July 2004, he was
Group Vice President, Foundation 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. Pinto, age 47, has served as Senior Vice
President, Chief Technology Officer and General Manager, Energy
and Environmental Solutions (formerly known as New Business and
New Products) 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. |
|
(7) |
|
Mr. St. Dennis, age 54, was appointed Senior Vice
President, General Manager, Silicon Systems Group in June 2007.
Mr. St. Dennis returned to Applied in September 2005 as
Senior Vice President, General Manager Etch, Cleans, Front End
and Implant Product Business Groups. He previously was with
Applied from 1992 to 1999, most recently as Group Vice
President, Planarization and Dielectric Deposition Product
Business Group, and before that as Corporate Vice President,
Physical Vapor Deposition Product Business Group. From 2003 to
2005, Mr. St. Dennis was an Executive Vice President and
member of the Office of the CEO of Novellus Systems, Inc. He
served as President and Chief Executive Officer of Wind River
Systems, Inc. from 1999 to 2003. |
|
(8) |
|
Mr. Sweeney, age 59, 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. |
|
(9) |
|
Dr. Almogy, age 42, was appointed Group Vice
President, General Manager, Display Products and Process
Diagnostics and Control Business Group in August 2007. From July
2005 to August 2007, Dr. Almogy served as Group Vice
President, General Manager, Process Diagnostics and Control
Product Business Group. 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 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. |
|
(10) |
|
Mr. Kifer, age 56, joined Applied in May 2006 as Group
Vice President and Chief Information Officer, Global Information
Services. Prior to his appointment, Mr. Kifer spent five
years with DHL in various executive management roles, most
recently as the Senior Vice President and Chief Information
Officer for North America, Asia Pacific and Emerging Markets. |
|
(11) |
|
Ms. Liebman, age 60, has served as Group Vice
President, Global Human Resources since July 2005.
Ms. Liebman served as Corporate Vice President, Global
Human Resources from August 2003 to July 2005. Prior to joining
Applied in 2003, Ms. Liebman held various human resources
positions at Intel. |
|
(12) |
|
Mr. Erad, age 59, was appointed Group Vice President,
Chief of Staff in February 2005. From January 2004 to February
2005, Mr. Erad served as Group Vice President, Strategic
Planning and New Technology. He served as Group Vice President,
New Business and New Products Group from May 2003 to January
2004. Mr. Erad joined Applied in 2002 as Group Vice
President, Strategic Planning and New Business Development. |
|
(13) |
|
Ms. Weatherford, age 56, has served as Corporate Vice
President, Corporate Controller since December 2004.
Ms. Weatherford was Appointed Vice President, Business
Operations Controller from December 2001 to December 2004, and
Appointed Vice President, Financial Operations Controller from
October 2000 to December 2001. She has held various other
finance roles since joining Applied in 1990. |
Available
Information
Applieds website is
http://www.appliedmaterials.com.
Applied makes available free of charge, on or through its
website, its annual, quarterly and current reports, and any
amendments to those reports, as soon as reasonably practicable
after electronically filing such reports with, or furnishing
them to, the SEC. This website address is intended to be an
inactive textual reference only and none of the information
contained on Applieds website is part of this report or is
incorporated by reference herein.
12
The following factors could materially affect Applieds
business, financial condition or results of operations and
should be carefully considered in evaluating the Company and its
business, in addition to other information presented elsewhere
in this report.
The
industries that Applied serves are volatile and
unpredictable.
As a supplier to the global semiconductor, flat panel display,
solar and related industries, Applied is subject to business
cycles, the timing, length and volatility of which can be
difficult to predict and which may vary by reportable segment.
The industries have historically been cyclical due to sudden
changes in customers manufacturing capacity requirements
and spending, which depend in part on capacity utilization,
demand for customers products, and inventory levels
relative to demand. The effects on Applied of these changes in
demand, including end-customer demand, are occurring more
rapidly. 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 rapidly changing demand. During periods of
decreasing demand Applieds products, Applied must be able
to appropriately align its cost structure with prevailing market
conditions, motivate and retain key employees, and effectively
manage its supply chain. During periods of increasing demand,
Applied must have sufficient manufacturing capacity and
inventory to meet customer demand; attract, retain and motivate
a sufficient number of qualified individuals; and effectively
manage its supply chain. If Applied is not able to timely and
appropriately adapt to changes in industry cycles,
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) higher
capital requirements for building and operating new
semiconductor and LCD fabrication plants and the resulting
effect on customers ability to raise the necessary
capital; (2) differing rates of market growth for, and
capital investments by, various semiconductor device makers,
such as memory (including NAND Flash and DRAM), logic and
foundry, as well as LCD and solar manufacturers;
(3) industry growth rates; (4) the increasing cost and
decreasing affordability of research and development due to many
factors, including decreasing linewidths, the increasing number
of materials, applications and process steps, and the greater
complexity of process development and chip design; (5) the
increasing difficulty for customers to move from product design
to volume manufacturing; (6) 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 LCD demand and the related focus on lower
prices; (7) varying levels of business information
technology spending; (8) 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; (9) the growing
types and varieties of semiconductors and expanding number of
applications across multiple substrate sizes, resulting in
customers divergent technical demands; (10) demand
for shorter cycle times for the development, manufacture and
installation of manufacturing equipment; (11) 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 and
the rate of investment in capital equipment; (12) price
trends for certain semiconductor devices and LCDs;
(13) difficulties associated with transitioning to larger
substrate sizes; and (14) the increasing importance of the
availability of spare parts to assure maximum system uptime. 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.
13
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, 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/or
develop new applications for existing products, adapt similar
products for use by customers in different applications
and/or
markets with varying technical requirements, and develop new
products; (2) appropriately price and achieve market
acceptance of products; (3) maintain operating flexibility
to enable different responses to different markets, customers
and applications; (4) appropriately allocate resources,
including RD&E funding, among Applieds products and
between the development of new products and the improvement of
existing products; (5) accurately forecast demand and meet
production schedules for its products; (6) achieve cost
efficiencies across product offerings; (7) increase market
share in existing markets, expand its markets and exceed the
industry growth rate; (8) adapt to technology changes in
related markets, such as lithography; (9) adapt to changes
in value offered by companies in different parts of the supply
chain; (10) qualify products for volume manufacturing with
its customers; (11) 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
greater effectiveness of product life cycle management; and
(12) improve its manufacturing processes. Furthermore, new
or improved products may involve higher costs and reduced
margins. If Applied does not successfully manage these
challenges, its business, financial condition and results of
operations could be materially and adversely affected.
The
entry into new markets and industries entails additional
challenges.
As part of its growth strategy, Applied must successfully expand
into related or new markets and industries, either with its
existing nanomanufacturing technology products or with new
products developed internally or obtained through acquisitions.
These include the emerging solar market, which Applied entered
in 2006 and which is subject to ongoing changes in demand for
photovoltaic (PV) products arising from, among other things,
fluctuations in the cost of electric power, availability of
government incentives, changes in government energy policies,
the performance and reliability of PV technology, and the
success of other renewable energy sources. The entry into
different markets involves additional challenges, including
those arising from: (1) Applieds ability to
anticipate demand and capitalize on opportunities, and avoid or
minimize risks; (2) new customers and suppliers, including
some with limited operating histories, uncertain
and/or
limited funding,
and/or
locations in regions where Applied does not have existing
operations; (3) the adoption of new business models, such
as the supply of a suite of Applied and non-Applied equipment
sufficient to manufacture solar cells; (4) difficulties in
production planning and execution; (5) new materials,
processes and technologies; (6) Applieds ability to
drive efficiencies and cost reductions; (7) the need to
attract, motivate and retain employees with skills and expertise
in these new areas; (8) different service requirements; and
(9) intellectual property rights of others. If Applied does
not successfully manage the risks resulting from entry into new
markets and industries, its business, financial condition and
results of operations could be materially and adversely affected.
Applied
is exposed to the risks of operating a global
business.
In fiscal 2007, approximately 84 percent of Applieds
net sales were to customers in regions outside the
United States. A rising percentage of Applieds
business is from customers in Asia. Certain of Applieds
RD&E
and/or
manufacturing facilities, as well as suppliers to Applied, are
also located outside the United States, including in China.
Managing Applieds global operations presents challenges,
including but not limited to, those arising from:
(1) global uncertainties with respect to economic growth
rates in various countries; (2) varying regional and
geopolitical business conditions and demands; (3) global
trade issues; (4) variations in protection of intellectual
property and other legal rights in different countries;
(5) concerns of U.S. governmental agencies regarding
possible
14
national commercial
and/or
security issues posed by the growing manufacturing business in
Asia; (6) fluctuating raw material and energy costs;
(7) variations in the ability to develop relationships with
suppliers and other local businesses; (8) changes in laws
and regulations of the United States (including export
restrictions) and other countries, as well as their
interpretation and application; (9) fluctuations in
interest rates and currency exchange rates, including the
weakening relative position of the U.S. dollar;
(10) the need to provide sufficient levels of technical
support in different locations; (11) political instability,
natural disasters (such as earthquakes, floods or storms),
pandemics, terrorism or acts of war in locations where Applied
has operations, suppliers or sales; (12) cultural
differences; (13) special customer- or government-supported
efforts to promote the development and growth of local
competitors; (14) shipping costs
and/or
delays; and (15) adverse conditions in credit markets. Many
of these challenges are present in China, which is experiencing
significant growth of both suppliers and competitors to Applied,
and which Applied believes presents a large potential market for
its products and opportunity for growth over the long term. In
addition, Applied must regularly reassess the size, capability
and location of its global infrastructure and make appropriate
changes. These challenges may materially and adversely affect
Applieds business, financial condition and results of
operations.
Applied
is exposed to risks associated with a highly concentrated
customer base in the semiconductor and flat panel display
industries.
Applieds semiconductor and flat panel display customer
base historically has been, and is becoming even more, 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. 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, have
outsourced manufacturing activities,
and/or have
entered into strategic alliances or industry consortia that have
increased the influence of key semiconductor manufacturers in
technology decisions made by their partners, which may result in
additional complexities in managing customer relationships and
transactions. These factors could have a material, adverse
effect on Applieds business, financial condition and
results of operations.
Applied
is exposed to risks associated with acquisitions and strategic
investments.
Applied has made, and in the future intends to make,
acquisitions of, and investments in, companies, technologies or
products in existing, related or new markets for Applied.
Acquisitions involve numerous risks, including but not limited
to: (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) exposure to operational risks, rules and regulations to
the extent such activities are located in countries where
Applied has not historically done business; (7) inability
to obtain and protect intellectual property rights in key
technologies; (8) ineffectiveness of an acquired
companys internal controls; (9) impairment of
acquired intangible assets as a result of technological
advancements or worse-than-expected performance of the acquired
company or its product offerings; (10) unknown,
underestimated
and/or
undisclosed commitments or liabilities; (11) excess or
underutilized facilities; and (12) 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.
15
Manufacturing
interruptions or delays could affect Applieds ability to
meet customer demand, while the failure to estimate customer
demand accurately could result in excess or obsolete
inventory.
Applieds business depends on its ability to supply
equipment, services and related products that meet the rapidly
changing technical and volume requirements of its customers,
which depends in part on the timely delivery of parts,
components and subassemblies (collectively, parts) from
suppliers. Some key parts may be subject to long lead-times
and/or
obtainable only from a single supplier or limited group of
suppliers, and some sourcing or subassembly is provided by
suppliers in developing regions, including China. 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) natural disasters (such as earthquakes, floods or
storms); or (6) 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 and other operational initiatives could
adversely affect results of operations.
To better align its costs with market conditions, increase its
presence in growing markets, improve its tax structure, 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 certain engineering,
manufacturing, customer support, software development,
information technology support and administrative activities.
The expanding role of third party providers has required changes
to Applieds existing operations and the adoption of new
procedures and processes for retaining and managing these
providers in order to realize the potential productivity and
operational efficiencies, assure quality and protect
Applieds intellectual property. In addition, Applied has
implemented several key, operational initiatives intended to
improve manufacturing efficiency, including integrate-to-order,
module-final-test and
merge-in-transit
programs. Applied also is implementing a multi-year,
company-wide program to transform certain business processes,
which includes transitioning to a single-vendor, enterprise
resource planning (ERP) software system to perform various
functions. If Applied does not effectively develop and implement
its offshoring and outsourcing strategies, if required export
and other governmental approvals are not timely obtained, if
Applieds third party providers do not perform as
anticipated, or if there are delays or difficulties in
implementing a new ERP system or enhancing business processes,
Applied may not realize anticipated productivity improvements or
cost efficiencies, and may experience operational difficulties,
increased costs, 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.
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. 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.
16
Changes
in tax rates or tax liabilities could affect results of
operations.
As a global company, Applied is subject to taxation in the
United States and various other countries. Significant judgment
is required to determine and estimate worldwide tax liabilities.
Applieds future annual and quarterly tax rates could be
affected by numerous factors, including changes in the:
(1) applicable tax laws; (2) composition of 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.
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. The failure or inability to
comply with existing or future environmental and safety
regulations could result in: (1) significant remediation
liabilities; (2) the imposition of fines; (3) the
suspension or termination of the development, manufacture, sale
or use of certain of its products; (4) limitations on the
operation of its facilities or ability to use its real property;
and/or
(5) a decrease in the value of its real property, each of
which could have a material adverse effect on Applieds
business, financial condition and results of operations.
Applied
is exposed to various risks related to the regulatory
environment.
Applied is subject to various risks related to: (1) new,
different, inconsistent or even conflicting laws, rules and
regulations that may be enacted by legislative bodies
and/or
regulatory agencies in the countries in which Applied operates;
(2) disagreements or disputes between national or regional
regulatory agencies related to international trade; and
(3) the interpretation and application of laws, rules and
regulations. If Applied is found by a court or
17
regulatory agency not to be in compliance with applicable laws,
rules or regulations, Applieds business, financial
condition and results of operations could be materially and
adversely affected.
Applied
is subject to internal control evaluations and attestation
requirements of Section 404 of the Sarbanes-Oxley
Act.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002,
Applied must include in its Annual Report on
Form 10-K
a report of management on the effectiveness of Applieds
internal control over financial reporting. Ongoing compliance
with this requirement is complex, costly and time-consuming. If:
(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 public accounting
firm does not timely deliver an unqualified opinion as to the
effectiveness of Applieds internal controls, Applied could
be subject to regulatory sanctions and the publics
perception of Applied may decline.
|
|
Item 1B:
|
Unresolved
Staff Comments
|
None.
Information concerning Applieds principal properties at
October 28, 2007 is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Square
|
|
|
Location
|
|
Type
|
|
Principal Use
|
|
Footage
|
|
Ownership
|
|
Santa Clara, CA
|
|
Office, Plant & Warehouse
|
|
Headquarters, Marketing,
|
|
|
1,454,000
|
|
|
Owned
|
|
|
|
|
Manufacturing, Distribution, Research, Development and
Engineering
|
|
|
573,000
|
|
|
Leased
|
Austin, TX
|
|
Office, Plant & Warehouse
|
|
Manufacturing
|
|
|
1,719,000
|
|
|
Owned
|
|
|
|
|
|
|
|
327,000
|
|
|
Leased
|
Rehovot, Israel
|
|
Office, Plant & Warehouse
|
|
Manufacturing, Research, Development and Engineering
|
|
|
442,000
|
|
|
Owned
|
Alzenau, Germany
|
|
Office, Plant & Warehouse
|
|
Manufacturing, Research, Development and Engineering
|
|
|
381,000
|
|
|
Leased
|
Cheseaux, Switzerland
|
|
Office, Plant & Warehouse
|
|
Manufacturing, Research, Development and Engineering
|
|
|
93,000
|
|
|
Leased
|
Xian, China
|
|
Office, Plant & Warehouse
|
|
Research, Development and Engineering
|
|
|
120,000
|
|
|
Owned
|
Hsinchu, Taiwan
|
|
Office & Warehouse
|
|
Customer Support
|
|
|
90,000
|
|
|
Owned
|
|
|
|
|
|
|
|
86,000
|
|
|
Leased
|
Singapore
|
|
Office
|
|
Customer Support
|
|
|
200,000
|
|
|
Owned
|
Tainan, Taiwan
|
|
Office & Warehouse
|
|
Customer Support
|
|
|
148,000
|
|
|
Owned
|
Pudong, China
|
|
Office & Warehouse
|
|
Customer Support
|
|
|
112,000
|
|
|
Leased
|
Because of the interrelation of Applieds operations,
properties within a country may be shared by the segments
operating within that country. Products in the Silicon segment
are manufactured in Austin, Texas and Rehovot, Israel.
Remanufactured products in the 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, Cheseaux, Switzerland, and Santa Clara, California.
18
In addition to the above properties, Applied leases office space
for marketing, sales, engineering and customer support offices
in 86 locations throughout the world: 23 in North America
(principally the United States), 21 in Japan, 20 in Europe, 12
in Asia-Pacific (including China and India), 7 in Korea and 3 in
Taiwan.
In addition, Applied owns 112 acres of buildable land in
Texas that could accommodate approximately 1,708,000 square
feet of additional building space, 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 111,000 square feet of additional building
space; and 25 acres in China that could accommodate
approximately 768,000 square feet of additional building
space.
Applied considers the properties that it owns or leases as
adequate to meet its current and future requirements. Applied
regularly assesses the size, capability and location of its
global infrastructure and periodically makes adjustments based
on these assessments.
|
|
Item 3:
|
Legal
Proceedings
|
The information set forth under Legal Matters in
Note 11 of Notes to Consolidated Financial Statements is
incorporated herein by reference.
|
|
Item 4:
|
Submission
of Matters to a Vote of Security Holders
|
None.
19
|
|
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 for the periods presented as reported on the NASDAQ
Global Select Market (formerly the NASDAQ National Market).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
Fiscal Year
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First quarter
|
|
$
|
20.82
|
|
|
$
|
16.03
|
|
|
$
|
19.54
|
|
|
$
|
17.08
|
|
Second quarter
|
|
$
|
20.46
|
|
|
$
|
17.41
|
|
|
$
|
19.68
|
|
|
$
|
17.61
|
|
Third quarter
|
|
$
|
19.05
|
|
|
$
|
14.76
|
|
|
$
|
21.80
|
|
|
$
|
18.40
|
|
Fourth quarter
|
|
$
|
19.02
|
|
|
$
|
15.12
|
|
|
$
|
22.96
|
|
|
$
|
18.86
|
|
Applieds common stock is traded on the NASDAQ Global
Select Market under the symbol AMAT. As of November 27,
2007, there were 5,369 directly registered holders of stock.
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. During fiscal 2007, Applieds Board of Directors
declared one quarterly cash dividend in the amount of $0.05 per
share and three quarterly cash dividends in the amount of $0.06
per share each. The fourth quarterly cash dividend declared in
fiscal 2007 was paid on December 6, 2007, to stockholders
of record as of November 15, 2007. Dividends paid during
fiscal 2006 and fiscal 2007 totaled $251 million and
$306 million, respectively. Applied currently anticipates
that it will continue to pay cash dividends on a quarterly basis
in the future, although the declaration of any future cash
dividend is at the discretion of the Board of Directors and will
depend on Applieds financial condition, results of
operations, capital requirements, business conditions and other
factors, as well as a determination that cash dividends are in
the best interest of Applieds stockholders.
The following table provides information as of October 28,
2007 with respect to the shares of common stock repurchased by
Applied during the fourth quarter of fiscal 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Dollar
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Value of Shares
|
|
|
|
|
|
|
Average
|
|
|
Shares Purchased as
|
|
|
that May Yet be
|
|
|
|
Total Number of
|
|
|
Price Paid
|
|
|
Part of Publicly
|
|
|
Purchased under
|
|
Period
|
|
Shares Purchased
|
|
|
per Share
|
|
|
Announced Program*
|
|
|
the Program*
|
|
|
|
(Shares in
|
|
|
|
|
|
(Shares in
|
|
|
(Dollars in
|
|
|
|
thousands)
|
|
|
|
|
|
thousands)
|
|
|
millions)
|
|
|
Period #1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(July 30, 2007 to August 26, 2007)
|
|
|
3,241
|
|
|
$
|
21.20
|
|
|
|
3,241
|
|
|
$
|
4,131
|
|
Period #2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(August 27, 2007 to September 23, 2007)
|
|
|
7,350
|
|
|
$
|
20.89
|
|
|
|
7,350
|
|
|
$
|
3,978
|
|
Period #3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(September 24, 2007 to October 28, 2007)
|
|
|
8,506
|
|
|
$
|
20.90
|
|
|
|
8,506
|
|
|
$
|
3,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
19,097
|
|
|
$
|
20.95
|
|
|
|
19,097
|
|
|
|
|
|
|
|
|
* |
|
On September 15, 2006, the Board of Directors approved a
stock repurchase program for up to $5.0 billion in
repurchases over the next three years, ending September 2009. |
20
|
|
Item 6:
|
Selected
Financial Data
|
The following selected financial information has been derived
from Applieds historical audited consolidated financial
statements and should be read in conjunction with the
consolidated financial statements and the accompanying notes for
the corresponding fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended(1)
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands, except percentages, ratios, per share amounts
and number of employees)
|
|
|
Net sales
|
|
$
|
4,477,291
|
|
|
$
|
8,013,053
|
|
|
$
|
6,991,823
|
|
|
$
|
9,167,014
|
|
|
$
|
9,734,856
|
|
Gross margin
|
|
$
|
1,604,455
|
|
|
$
|
3,701,245
|
|
|
$
|
3,085,874
|
|
|
$
|
4,291,802
|
|
|
$
|
4,492,443
|
|
(% of net sales)
|
|
|
35.8
|
|
|
|
46.2
|
|
|
|
44.1
|
|
|
|
46.8
|
|
|
|
46.1
|
|
Research, development and engineering
|
|
$
|
920,618
|
|
|
$
|
991,873
|
|
|
$
|
940,507
|
|
|
$
|
1,152,326
|
|
|
$
|
1,142,073
|
|
(% of net sales)
|
|
|
20.6
|
|
|
|
12.4
|
|
|
|
13.5
|
|
|
|
12.6
|
|
|
|
11.7
|
|
Marketing, selling, general and administrative
|
|
$
|
625,865
|
|
|
$
|
751,621
|
|
|
$
|
697,402
|
|
|
$
|
906,742
|
|
|
$
|
952,443
|
|
(% of net sales)
|
|
|
14.0
|
|
|
|
9.4
|
|
|
|
10.0
|
|
|
|
9.9
|
|
|
|
9.8
|
|
Income/(loss) before income taxes
|
|
$
|
(211,556
|
)
|
|
$
|
1,829,250
|
|
|
$
|
1,581,569
|
|
|
$
|
2,166,971
|
|
|
$
|
2,439,653
|
|
Effective tax rate(%)
|
|
|
29.5
|
|
|
|
26.1
|
|
|
|
23.5
|
|
|
|
30.0
|
|
|
|
29.9
|
|
Net income/(loss)
|
|
$
|
(149,147
|
)
|
|
$
|
1,351,303
|
|
|
$
|
1,209,900
|
|
|
$
|
1,516,663
|
|
|
$
|
1,710,196
|
|
(% of net sales)
|
|
|
(3.3
|
)
|
|
|
16.9
|
|
|
|
17.3
|
|
|
|
16.5
|
|
|
|
17.6
|
|
Earnings/(loss) per share
|
|
$
|
(0.09
|
)
|
|
$
|
0.78
|
|
|
$
|
0.73
|
|
|
$
|
0.97
|
|
|
$
|
1.20
|
|
Weighted average common shares
|
|
|
1,659,557
|
|
|
|
1,721,645
|
|
|
|
1,657,493
|
|
|
|
1,565,072
|
|
|
|
1,427,002
|
|
Order backlog
|
|
$
|
2,495,115
|
|
|
$
|
3,368,382
|
|
|
$
|
2,570,808
|
|
|
$
|
3,398,280
|
|
|
$
|
3,654,704
|
|
Working capital(2)
|
|
$
|
4,789,480
|
|
|
$
|
6,020,747
|
|
|
$
|
5,069,663
|
|
|
$
|
3,644,974
|
|
|
$
|
4,232,201
|
|
Current ratio(2)
|
|
|
3.9
|
|
|
|
3.6
|
|
|
|
3.9
|
|
|
|
2.5
|
|
|
|
2.8
|
|
Long-term debt
|
|
$
|
456,422
|
|
|
$
|
410,436
|
|
|
$
|
407,380
|
|
|
$
|
204,708
|
|
|
$
|
202,281
|
|
Cash dividends declared per common share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.09
|
|
|
$
|
0.18
|
|
|
$
|
0.23
|
|
Stockholders equity
|
|
$
|
8,068,034
|
|
|
$
|
9,262,027
|
|
|
$
|
8,928,549
|
|
|
$
|
6,651,400
|
|
|
$
|
7,821,409
|
|
Book value per share
|
|
$
|
4.81
|
|
|
$
|
5.51
|
|
|
$
|
5.56
|
|
|
$
|
4.78
|
|
|
$
|
5.64
|
|
Total assets
|
|
$
|
10,311,622
|
|
|
$
|
12,093,445
|
|
|
$
|
11,269,157
|
|
|
$
|
9,480,837
|
|
|
$
|
10,654,075
|
|
Capital expenditures, net of loss on fixed asset retirements
|
|
$
|
211,959
|
|
|
$
|
171,538
|
|
|
$
|
177,097
|
|
|
$
|
151,117
|
|
|
$
|
243,383
|
|
Regular employees
|
|
|
12,050
|
|
|
|
12,191
|
|
|
|
12,576
|
|
|
|
14,072
|
|
|
|
14,550
|
|
|
|
|
(1) |
|
Each fiscal year ended on the last Sunday in October. |
|
(2) |
|
In fiscal 2006, Applied reclassified certain fixed-income
securities from short-term investments to long-term investments;
prior period balances have been reclassified to conform to the
current period presentation. |
21
|
|
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 provides Nanomanufacturing Technology solutions for the
global semiconductor, flat panel display, solar and related
industries, with a broad portfolio of innovative equipment,
service and software products. Applieds customers include
manufacturers of semiconductor chips and wafers, liquid crystal
displays (LCDs), solar photovoltaic (PV) cells, flexible
electronics and energy-efficient glass. Applied reports four
segments: Silicon, Fab Solutions, Display, and Adjacent
Technologies. Product development and manufacturing activities
occur in North America, Europe, Israel and Asia. Applieds
broad range of equipment and service products are highly
technical and are sold through a direct sales force.
As a supplier to these industries, Applieds results are
driven primarily by worldwide demand for integrated circuits,
which in turn depends on end-user demand for electronic
products. Applieds business is subject to cyclical
industry conditions, as demand for manufacturing equipment and
services can change depending on supply and demand for chips,
LCDs and other electronic devices, as well as other factors,
such as global economic conditions and technological advances in
fabrication processes.
The following table presents certain significant measurements
for the past three fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In millions, except per share amounts and percentages)
|
|
|
New orders
|
|
$
|
6,389
|
|
|
$
|
9,888
|
|
|
$
|
9,677
|
|
Net sales
|
|
$
|
6,992
|
|
|
$
|
9,167
|
|
|
$
|
9,735
|
|
Gross margin
|
|
$
|
3,086
|
|
|
$
|
4,292
|
|
|
$
|
4,492
|
|
Gross margin percent
|
|
|
44.1
|
%
|
|
|
46.8
|
%
|
|
|
46.1
|
%
|
Net income
|
|
$
|
1,210
|
|
|
$
|
1,517
|
|
|
$
|
1,710
|
|
Earnings per share
|
|
$
|
0.73
|
|
|
$
|
0.97
|
|
|
$
|
1.20
|
|
Fiscal 2007 financial results reflected improved conditions in
the semiconductor industry that began with the industrys
recovery in 2006, while conditions in the display industry were
mixed as manufacturers postponed capacity additions despite
strong consumer demand for LCD TVs. Total orders decreased
slightly from fiscal 2006, primarily due to the significant
decline in demand for display manufacturing products, partially
offset by increased demand for products and services in all
other segments. Net sales increased during fiscal 2007 over
fiscal 2006, primarily due to strong demand from DRAM and Flash
memory chip manufacturers, partially offset by a significant
decline in LCD equipment sales as manufacturers absorbed
capacity following substantial growth in 2006. Net income
improved in fiscal 2007 compared to fiscal 2006 due to higher
sales and lower operating expenses, offset in
22
part by lower interest income. Fiscal 2007 financial results
included equity-based compensation expenses, restructuring and
asset impairment and other charges associated with ceasing
development of beamline implant products, and an in-process
research and development (IPR&D) expense associated with
the acquisition of certain net assets of Brooks Automation, Inc.
(Brooks Software).
In fiscal 2006, customer demand improved over fiscal 2005,
resulting in higher orders and revenue. Fiscal 2006 results
reflected a recovery in the semiconductor and flat panel display
industries and the global economy, as end-user demand for
electronic products and LCDs drove increased customer
investments in advanced silicon (particularly memory) and
display products. During this period, Applieds
semiconductor customers increased both high-volume production
and leading-edge 65nm and 45nm chip development. Improvements in
operating performance were offset in part by restructuring and
asset impairment charges associated with real estate and
facilities disinvestment, equity-based compensation expenses,
and an IPR&D expense associated with the acquisition of
Applied Films Corporation (Applied Films).
Fiscal 2005 financial 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.
Applied expects a challenging environment for the first part of
fiscal 2008. Uncertain economic conditions, including higher
energy prices, credit concerns and changes in consumer
confidence, have led to reduced demand in the semiconductor
equipment industry. As a result, semiconductor equipment
customers are expected to invest at levels lower than in 2007,
offset in part by the anticipated onset of a recovery in the
flat panel display industry and growth in other markets.
Results
of Operations
Quarterly and full fiscal year financial information is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter
|
|
|
Fiscal
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Year
|
|
|
|
(In millions, except per share amounts)
|
|
|
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
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New orders
|
|
$
|
2,538
|
|
|
$
|
2,648
|
|
|
$
|
2,284
|
|
|
$
|
2,206
|
|
|
$
|
9,677
|
|
Net sales
|
|
$
|
2,277
|
|
|
$
|
2,530
|
|
|
$
|
2,561
|
|
|
$
|
2,367
|
|
|
$
|
9,735
|
|
Gross margin
|
|
$
|
1,063
|
|
|
$
|
1,137
|
|
|
$
|
1,216
|
|
|
$
|
1,077
|
|
|
$
|
4,492
|
|
Net income
|
|
$
|
403
|
|
|
$
|
411
|
|
|
$
|
474
|
|
|
$
|
422
|
|
|
$
|
1,710
|
|
Earnings per share
|
|
$
|
0.29
|
|
|
$
|
0.29
|
|
|
$
|
0.34
|
|
|
$
|
0.30
|
|
|
$
|
1.20
|
|
Applieds business was subject to cyclical industry
conditions in fiscal 2005, 2006 and 2007. As a result of these
conditions, there were significant fluctuations in
Applieds quarterly new orders and net sales, both within
and
23
across the fiscal years. Demand for manufacturing equipment has
historically been volatile as a result of sudden changes in chip
and LCD supply and demand and other factors, including rapid
technological advances in fabrication processes.
New
Orders
New orders by geographic region, which were attributed to the
location of customers facilities, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
Taiwan
|
|
$
|
1,549
|
|
|
$
|
2,098
|
|
|
$
|
2,703
|
|
Korea
|
|
|
856
|
|
|
|
1,758
|
|
|
|
1,639
|
|
Japan
|
|
|
1,295
|
|
|
|
1,823
|
|
|
|
1,520
|
|
North America(1)
|
|
|
1,279
|
|
|
|
1,901
|
|
|
|
1,518
|
|
Asia-Pacific(2)
|
|
|
566
|
|
|
|
1,272
|
|
|
|
1,262
|
|
Europe
|
|
|
844
|
|
|
|
1,036
|
|
|
|
1,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,389
|
|
|
$
|
9,888
|
|
|
$
|
9,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Primarily the United States. |
|
(2) |
|
Includes China. |
New orders for fiscal 2007 decreased 2 percent to
$9.7 billion from $9.9 billion in the prior year,
reflecting delays in investment by LCD customers, partially
offset by increased demand for solar equipment, semiconductor
manufacturing equipment, and service products. Demand for
semiconductor equipment slowed in the second half of fiscal 2007
as customers absorbed added capacity. LCD customers increased
spending levels in the fourth quarter of fiscal 2007.
New orders for fiscal 2006 increased 55 percent to
$9.9 billion from $6.4 billion in the prior year, as
customer demand increased. Fiscal 2006 orders reflected
increased semiconductor manufacturing equipment orders from
memory manufacturers, increased service orders as a result of
higher customer factory utilization and new product
introductions, and increased display orders as customers
invested in next generation equipment. New orders for fiscal
2005 decreased to $6.4 billion reflecting a challenging
environment, as semiconductor manufacturers reduced their
capital investments to align inventories with demand.
Applieds backlog for the last three fiscal years was as
follows: $3.7 billion at October 28, 2007,
$3.4 billion at October 29, 2006, and
$2.6 billion at October 30, 2005. Backlog consists
only of orders for which written authorizations have been
accepted, shipment dates within 12 months have been
assigned and revenue has not been recognized. Due to the
potential for customer changes in delivery schedules or
cancellation of orders, Applieds backlog at any particular
time is not necessarily indicative of actual sales for any
future periods.
24
Net
Sales
Net sales by geographic region, which were attributed to the
location of customers facilities, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
Taiwan
|
|
$
|
1,608
|
|
|
$
|
2,079
|
|
|
$
|
2,679
|
|
Korea
|
|
|
1,021
|
|
|
|
1,699
|
|
|
|
1,847
|
|
North America(1)
|
|
|
1,472
|
|
|
|
1,708
|
|
|
|
1,554
|
|
Japan
|
|
|
1,396
|
|
|
|
1,518
|
|
|
|
1,493
|
|
Asia-Pacific(2)
|
|
|
612
|
|
|
|
1,157
|
|
|
|
1,206
|
|
Europe
|
|
|
883
|
|
|
|
1,006
|
|
|
|
956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,992
|
|
|
$
|
9,167
|
|
|
$
|
9,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Primarily the United States. |
|
(2) |
|
Includes China. |
During fiscal 2007, net sales increased by 6 percent, from
$9.2 billion in fiscal 2006 to $9.7 billion in fiscal
2007, led by strength in memory capacity expansion throughout
the year. In fiscal 2006, following the trend of increasing
orders that year, net sales increased by 31 percent, from
$7.0 billion in fiscal 2005 to $9.2 billion in fiscal
2006. In fiscal 2005, net sales of $7.0 billion reflected
lower demand for semiconductor products.
Gross
Margin
Gross margin as a percentage of net sales decreased to
46.1 percent in fiscal 2007 from 46.8 percent in
fiscal 2006, which was an increase from 44.1 percent in
fiscal 2005. The decrease in the gross margin percentage from
fiscal 2006 to fiscal 2007 was principally attributable to
inventory-related charges of $56 million associated with
ceasing development of beamline implant products, incremental
charges attributable to acquisitions consisting of inventory
fair value adjustments on products sold, amortization, and
product mix, partially offset by higher revenue levels and lower
material costs. Gross margin during fiscal 2006 and 2007
included $37 million and $27 million, respectively, of
equity-based compensation expense. 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.
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. RD&E
expenses were $1.1 billion (12 percent of net sales)
in fiscal 2007, $1.2 billion (13 percent of net sales)
in fiscal 2006, and $941 million (13 percent of net
sales) in fiscal 2005. RD&E expense during fiscal 2006 and
2007 included $76 million and $56 million,
respectively, of equity-based compensation expense. Development
cycles range from 12 to 36 months depending on whether the
product is an enhancement of an existing product, which
typically has a shorter development cycle, or a new product,
which typically has a longer development cycle. Most of
Applieds existing products resulted from internal
development activities and innovations involving new
technologies, materials and processes. In certain instances,
Applied acquires technologies, either in existing or new product
areas, to complement its existing technology capabilities and to
reduce time to market.
In fiscal 2007, Applied focused on developing systems for
customers new chip designs with 45nm and below geometries,
including systems to enable faster transistors using strain
engineering and high-k metal gates, and
25
patterning processes that will enable customers to extend their
existing 193 nm lithography tools through additional technology
generations. Applied also continued to invest in solar research
and development.
In fiscal 2006, Applied continued its development of systems to
increase chip performance, especially for Flash and DRAM
devices. Applied also focused on developing systems for 32nm and
22nm copper/low k interconnect processing technologies to
address critical manufacturing challenges that chipmakers face
as they transition to future device generations, helping them to
bring new products to market more rapidly while minimizing risk.
Applied also continued to focus on developing LCD systems to
process larger glass substrates.
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 LCD systems to process
larger glass substrates.
During fiscal 2007, Applied recorded an IPR&D expense of
$5 million associated with the acquisition of certain net
assets of Brooks Software. During fiscal 2006, Applied recorded
an IPR&D expense in the amount of $14 million related
to the acquisition of Applied Films. Applieds methodology
for allocating the purchase price relating to purchased
acquisitions to IPR&D was determined through established
valuation techniques. The IPR&D was expensed upon
acquisition because technological feasibility had not been
established and no future alternative uses existed. No
IPR&D charges were recorded in fiscal 2005.
Marketing,
Selling, General and Administrative
Marketing, selling, general and administrative expenses were
$952 million (10 percent of net sales) in fiscal 2007,
$907 million (10 percent of net sales) in fiscal 2006,
and $697 million (10 percent of net sales) in fiscal
2005. The increase in marketing, selling, general and
administrative expenses from fiscal 2006 to 2007 was principally
attributable to increased operating costs from acquired
businesses, investments in the solar business expansion, and
increased variable compensation expenses. These expenses were
partially offset by lower equity compensation expenses and
savings from cost control initiatives, including ceasing
development of beamline implant products and transitioning to
managed service providers to perform certain information
technology and business infrastructure support. Marketing, sales
and general and administrative expenses during fiscal 2006 and
2007 included $104 million and $77 million,
respectively, of equity-based compensation expense. 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 early spending on Applieds
implementation of an enterprise resource planning software
system, partially offset by savings resulting from
Applieds continued focus on controlling its overall cost
structure.
Restructuring
and Asset Impairments
During the first quarter of fiscal 2006, Applieds Board of
Directors approved a plan to disinvest a portion of
Applieds real estate and facilities portfolio (the
Disinvestment Plan). Properties with an estimated fair value of
$56 million were reported as assets held-for-sale and
reclassified from property, plant and equipment on the
Consolidated Balance Sheet. During fiscal 2006, Applied recorded
an asset impairment charge of $124 million to write down
the following properties to estimated fair value:
(1) facilities in Narita, Japan, Chunan, Korea, Hillsboro,
Oregon, and Danvers, Massachusetts; and (2) 26 acres
of unimproved land in Hillsboro, Oregon. During fiscal 2006,
Applied sold the Danvers facility for net proceeds of
$16 million and recognized a gain of $4 million.
During fiscal 2007, Applied sold the Hillsboro, Chunan, and
Narita facilities and the Hillsboro land for total net proceeds
of $38 million and recognized a gain of $3 million.
Also in fiscal 2006, as part of the Disinvestment Plan, Applied
recorded lease termination charges in the amount of
$89 million related to the closure of its leased Hayward,
California facility.
During the second quarter of fiscal 2007, Applieds Board
of Directors approved a plan (the Plan) to cease development of
beamline implant products for semiconductor manufacturing and
curtail the operations of its Implant group based in Horsham,
England. Pursuant to the Plan, Applied closed its research,
development and manufacturing operations in Horsham in October
2007. The total cost of implementing the Plan is expected to be
in the range of $95 million to $110 million, and is
reported in the Consolidated Statements of Operations under cost
of
26
products sold and operating expenses (including restructuring
and asset impairment charges). The majority of the cash outlays
in connection with the Plan occurred in fiscal 2007.
Costs under the Plan in fiscal 2007 consisted primarily of
inventory-related charges reported as cost of products sold of
$56 million, other operating expenses of $10 million,
and restructuring and asset impairment charges of
$30 million. Also as part of the Plan, Applied recorded
restructuring charges of $22 million, consisting primarily
of employee termination costs to reduce its workforce by
approximately 215 positions. The majority of the affected
employees were based in Horsham, England, and represented
multiple functions. Asset impairment charges included
$8 million of fixed asset write-offs. The Implant group
operated in the Silicon segment, and the results of its
operations were not material to Applieds financial
position or results of operations.
For further details, see Note 6 of Notes to Consolidated
Financial Statements.
Net
Interest Income
Net interest income was $98 million for fiscal 2007,
$149 million for fiscal 2006, and $134 million for
fiscal 2005.
The decrease in net interest income from fiscal 2006 to 2007 was
primarily due to a reduction in cash and investments during the
fourth quarter of fiscal 2006, when Applied repurchased
145 million shares of outstanding common stock for an
aggregate purchase price of $2.5 billion under an
accelerated stock buyback program. On January 24, 2007,
Applied settled the price adjustment of $132 million
relating to the accelerated stock buyback program by payment in
cash to Goldman Sachs & Co. (Goldman Sachs), resulting
in an adjusted price per share of $18.08. 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 in
2007.
The increase in net interest income from fiscal 2005 to 2006 was
due primarily to increased interest rates combined with a
decrease in interest expense associated with scheduled debt
maturities in September 2004 and September 2005.
Income
Taxes
Applieds effective income tax provision rate was
29.9 percent for fiscal 2007, 30.0 percent for fiscal
2006, and 23.5 percent for fiscal 2005. Applieds
effective tax rate of 29.9 percent for fiscal 2007
reflected benefits of $36 million principally related to
the favorable resolution of audits of prior years income
tax filings, partially offset by a $13 million charge from
the expensing of equity-based compensation. Applieds
effective tax rate of 30.0 percent for fiscal 2006
reflected benefits of $61 million principally related to
the favorable resolution of audits of prior years income
tax filings, partially offset by a $17 million charge from
the expensing of equity-based compensation. Applieds
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 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, operates in four
reportable 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 it manages separately
at the corporate level. These unallocated costs include
equity-based compensation and certain components of variable
compensation, corporate marketing and sales, corporate functions
(certain management, finance, legal, human resources and
RD&E), and unabsorbed information technology and occupancy
costs. Prior to the fourth quarter of
27
fiscal 2006, Applied operated in one reportable segment.
Discussions below include the results of each reportable segment.
Silicon
Segment
The Silicon segment includes semiconductor capital equipment for
etch, rapid thermal processing (RTP), deposition, chemical
mechanical planarization (CMP), and metrology and inspection.
Development efforts are focused on solving customers key
technical challenges, including transistor performance and
nanoscale patterning, and on reducing chip manufacturing costs.
A significant portion of fiscal 2007 demand was attributable to
a growing market for consumer products with greater memory
content.
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
New orders
|
|
$
|
3,918
|
|
|
$
|
6,555
|
|
|
$
|
6,651
|
|
Net sales
|
|
$
|
4,468
|
|
|
$
|
5,971
|
|
|
$
|
6,512
|
|
Operating income
|
|
$
|
1,105
|
|
|
$
|
2,000
|
|
|
$
|
2,379
|
|
Silicon orders of $6.7 billion increased 1 percent in
fiscal 2007, compared to $6.6 billion in fiscal 2006,
reflecting the semiconductor industrys strength during
this period, driven by demand for cell phones, digital TVs, game
consoles, MP3 players and other electronic products. The
majority of new orders were for memory applications as customers
invested in leading-edge Flash and DRAM memory devices, while
orders from foundries remained at low levels. Net sales
increased 9 percent to $6.5 billion in fiscal 2007,
compared to $6.0 billion in fiscal 2006. The increase in
net sales was due to increased investment by memory and logic
semiconductor customers in multiple areas, including etch,
inspection, and RTP products. Operating income increased
19 percent to $2.4 billion in fiscal 2007, compared to
$2.0 billion in fiscal 2006. The increase in operating
income was due to higher revenue levels and continued focus on
cost controls. Operating income for fiscal 2007 included charges
of $66 million related to ceasing development of beamline
implant products. In fiscal 2006, the Company launched the
Applied Producer GT, a significant redesign of its successful
Producer platform that offers faster, more cost-effective CVD
processing for 45 nm and beyond applications. To meet the
challenges of fabricating next-generation transistors, Applied
announced its portfolio of high-k/metal gate solutions,
including the Applied Advanced Gate Stack and Applied Centura
Carina Etch systems. Other new etch systems introduced were the
Applied Mariana Trench, for etching high aspect ratio
structures, the Applied Opus AdvantEdge Metal Etch with a new
5-chamber platform, and the Applied Centura Tetra III
Advanced Reticle Etch. The Company also added to its line of
lithography-enabling systems with the new Applied Producer ACE
SACVD and added to its line of strain engineering solutions with
the Applied Producer Celera CVD.
In fiscal 2006, Silicon orders of $6.6 billion increased
67 percent compared to fiscal 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
additional capacity. In addition to expanding consumer
electronics demand, corporate information technology investment
increased, with an emphasis on security, server consolidation
and more robust internet infrastructures. Net sales of
$6.0 billion increased 34 percent in fiscal 2006
compared to fiscal 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 fiscal 2006 compared to fiscal 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 the usefulness of aluminum (the material used
by many memory manufacturers for interconnects) to the sub-70nm
node, the Company introduced two products, the Applied Endura
CVD Al technology and Applied Centura AdvantEdge Metal Etch
system. For faster copper interconnects, Applied launched its
enhanced Endura CuBS/S II system with Aktiv Preclean, extending
the systems capability to the 45nm node and below,
especially for use with ultra-low dielectric constant (low
k) films. The Company introduced the Applied Endura iLB II
(integrated liner-barrier) system, offering advances in PVD
titanium and preclean technologies, to provide significantly
reduced resistance for contact structures. The Company also
focused on providing solutions to extend customers
lithography technology, introducing the Applied Producer APF-e
(advanced patterning film enhancement) system. The new
28
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.
In fiscal 2005, Silicon orders of $3.9 billion and net
sales of $4.5 billion reflected lower semiconductor capital
equipment investment. During the year, customers decreased
manufacturing utilization to address rising chip inventory and
softening end-user demand. Operating income of $1.1 billion
reflected Applieds reduction in variable expenses and 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.
Fab
Solutions Segment
The Fab Solutions segment includes products to improve the
productivity and operating efficiency and lessen the
environmental impact of customers factories, and includes
spares and remanufactured equipment sales. Customer demand for
spare parts and services is fulfilled through a global
distribution system with trained service engineers located in
close proximity to customer sites. This business is focused on
expanding with technically-differentiated new products that
improve fab productivity, reduce fab operation costs, and enable
customers to decrease the environmental impact of manufacturing.
|
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|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
New orders
|
|
$
|
1,713
|
|
|
$
|
2,259
|
|
|
$
|
2,374
|
|
Net sales
|
|
$
|
1,768
|
|
|
$
|
2,210
|
|
|
$
|
2,196
|
|
Operating income
|
|
$
|
400
|
|
|
$
|
623
|
|
|
$
|
572
|
|
Orders of $2.4 billion increased 5 percent in fiscal
2007, compared to $2.3 billion in fiscal 2006. The increase
in orders reflected increased demand for spare parts and
services, as well as demand for factory automation products
obtained as part of the Brooks Software acquisition. Net sales
of $2.2 billion in fiscal 2007 were slightly down compared
to fiscal 2006 and reflected declines in spares parts sales,
offset by increased factory automation sales. Fiscal 2007
remanufactured equipment orders and net sales remained
consistent with fiscal 2006 levels. Operating income decreased
8 percent to $572 million in fiscal 2007, compared to
$623 million in fiscal 2006, reflecting product mix and
increased operating expenses and charges related to the Brooks
Software acquisition.
In fiscal 2006, orders of $2.3 billion increased
32 percent compared to fiscal 2005. Net sales of
$2.2 billion increased 25 percent compared to fiscal
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.
Fiscal 2005 orders of $1.7 billion reflected
customers cost reduction initiatives and lower
remanufactured systems orders, offset in part by a modest
increase in wafer starts. Fiscal 2005 net sales were
$1.8 billion and operating income was $400 million.
Applied 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.
29
Display
Segment
The Display segment encompasses products and services for
manufacturing LCDs for TVs, personal computers and other
video-enabled devices. Applied is focused on expanding market
share by differentiation with larger-scale substrates, entry
into new markets, and development of products to enable cost
reductions through enhanced productivity and uniformity. The
Display segment also developments, manufactures and supports
differentiated stand-alone equipment for the Applied SunFab Thin
Film Line.
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
New orders
|
|
$
|
758
|
|
|
$
|
1,037
|
|
|
$
|
407
|
|
Net sales
|
|
$
|
756
|
|
|
$
|
966
|
|
|
$
|
862
|
|
Operating income
|
|
$
|
254
|
|
|
$
|
319
|
|
|
$
|
217
|
|
Orders decreased 61 percent to $407 million in fiscal
2007, compared to $1.0 billion in fiscal 2006, reflecting
continued delays in capacity expansion plans by LCD panel makers
in light of excess inventories and sales price declines. LCD
customers increased spending levels in the fourth quarter of
fiscal 2007 as panel makers began to experience more favorable
market conditions. Net sales decreased 11 percent to
$862 million in fiscal 2007 from $1.0 billion in
fiscal 2006. The decrease in net sales was attributable to lower
investment by LCD manufacturers as they absorbed capacity.
Operating income decreased 32 percent to $217 million
in fiscal 2007, compared to $319 million in fiscal 2006,
due to lower revenues and factory absorption, product mix and
higher operating expenses in support of the expanded product
portfolio resulting from the acquisition of Applied Films in
July 2006. In 2007, Applied launched the
AKT-PiVottm
55KV system which employs high-productivity, cost-efficient PVD
technology to deposit metal and transparent conductive oxide
films on the substrate.
In fiscal 2006, orders of $1.0 billion increased
37 percent compared to fiscal 2005. During fiscal 2006,
price reductions in consumer electronics accelerated the growth
of the flat panel display market. As a result, display
manufacturers increased investments in Gen-7, Gen-7.5, and Gen-8
systems. In addition, laptop demand continued to be strong,
resulting in additional Gen-5 and Gen-5.5 fab investment. With
the acquisition of Applied Films in fiscal 2006, Applied entered
the PVD color filter market. 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
TV screens.
Fiscal 2005 orders of $758 million reflected lower demand
for smaller panel equipment, offset in part by orders for
Gen-7.5 systems as manufacturers migrated to larger-sized flat
panel display production. Net sales and operating income
increased to $756 million and $254 million,
respectively. Fiscal 2005 results included higher RD&E
expenses. Applied introduced the Gen-8 AKT-50K PECVD system for
manufacturing LCDs. This system processes 2.2m x 2.4m glass
substrates for producing up to six
52-inch LCD
TV screens.
Adjacent
Technologies
The Adjacent Technologies segment includes products and services
for manufacturing solar cells, high throughput roll-to-roll
coating systems for flexible electronics, and energy-efficient
glass. Applied began offering these products after the
acquisition of Applied Films in the third quarter of fiscal
2006. In the fourth quarter of fiscal 2007, Applied acquired HCT
Shaping Systems SA (HCT), expanding its solar product offerings.
Activities in this segment are focused on delivering solutions
to generate and conserve energy, with the objective to lower the
cost to produce solar electricity by providing equipment and
services to enhance manufacturing scale and efficiency.
30
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
New orders
|
|
$
|
|
|
|
$
|
37
|
|
|
$
|
245
|
|
Net sales
|
|
$
|
|
|
|
$
|
20
|
|
|
$
|
165
|
|
Operating loss
|
|
$
|
|
|
|
$
|
8
|
|
|
$
|
89
|
|
New orders of $245 million in fiscal 2007 increased from
$37 million in fiscal 2006, due primarily to increased
orders of c-Si solar, glass and flexible electronics products.
Net sales of $165 million in fiscal 2007 increased from
$20 million in fiscal 2006 due primarily to higher glass,
flexible electronics and solar net sales. Operating loss of
$89 million in fiscal 2007 increased from $8 million
in fiscal 2006 reflecting increased RD&E spending to
develop products and services that enable lower-cost production
of solar energy and costs related to expansion of solar
marketing efforts, offset by higher revenues. In fiscal 2007,
Applied introduced the Applied SunFab Thin Film Line, the first
integrated production line designed for manufacturing thin film
silicon solar modules using 5.7 square meter glass panels.
Orders and net sales in fiscal 2006 reflected the results of
Applied Films solar, flexible electronics and
energy-efficient glass products that Applied acquired in the
third quarter. Fiscal 2006 results included a $9 million
IPR&D expense related to the acquisition of Applied Films.
Business
Combinations and Equity-Method Investment
On August 23, 2007, Applied acquired all of the outstanding
shares of Switzerland-based HCT for $463 million in cash,
net of cash acquired. HCT is the worlds leading supplier
of precision wafering systems used principally in manufacturing
c-Si substrates for the solar industry.
On March 30, 2007, Applied purchased Brooks Software for
$137 million in cash. Brooks Software is a leading provider
of factory management and control software to the semiconductor
and flat panel display industries. Its products complement
Applieds existing software applications and enable Applied
to offer customers a comprehensive computer integrated
manufacturing solution for optimizing fab operations.
On August 14, 2006, Applieds wholly-owned subsidiary,
Metron Technology, Inc. (Metron), purchased certain parts
cleaning and recycling assets in Singapore from UMS Solutions
PTE Ltd. for $10 million. The acquisition enhanced the
Companys capabilities in Southeast Asia to provide
advanced, high-quality parts cleaning services to support its
customers semiconductor manufacturing requirements.
On July 20, 2006, Applied and Dainippon Screen Mfg. Co.,
Ltd. (Screen) completed the formation of Sokudo Co., Ltd.
(Sokudo), a Japanese joint venture company, to deliver advanced
track solutions for customers critical semiconductor
manufacturing requirements. Track systems are a key part of
semiconductor manufacturing and are used before and after
photolithography to deposit, bake and develop the photoresist
layer that defines circuit patterns. Screen owns 52 percent
and holds the controlling interest in Sokudo, and Applied owns
48 percent of Sokudo. Screen transferred into Sokudo its
existing track business and related intellectual property,
including employees, products and its installed base of systems.
Applied paid $147 million for its investment in Sokudo.
Additionally, Applied contributed to Sokudo certain technology
and related intellectual property and has provided key
development employees. Screen performs manufacturing for Sokudo
under an outsourcing agreement.
On July 7, 2006, Applied completed its acquisition of
Applied Films, a leading supplier of thin film deposition
equipment used in manufacturing LCDs, solar cells, flexible
electronics and energy-efficient glass. Applied paid $28.50 per
share in cash for each outstanding share of Applied Films for a
total purchase price of approximately $484 million, or
$328 million net of Applied Films existing cash and
marketable securities. As part of the acquisition, Applied
assumed Applied Films outstanding stock options and
restricted stock unit awards that, at the acquisition date, had
a total fair value of $26 million, of which
$18 million was allocated to the purchase price and the
remainder to unearned compensation. Upon the acquisition and
subject to vesting, Applied Films stock options became
exercisable for shares of Applied common stock and Applied Films
restricted stock unit awards became payable in shares of Applied
common stock totaling, in the aggregate, three million shares of
Applied common stock.
31
On December 23, 2005, Applied acquired all of the
outstanding shares of ChemTrace Corporation and ChemTrace
Precision Cleaning, Inc. for $22 million in cash, net of
cash acquired, of which $18 million was paid upon closing.
This business provides customers with precision parts cleaning
and materials testing solutions.
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 supported
the gas abatement requirements of process equipment for
integrated circuit 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.
For further details, see Note 12 of Notes to Consolidated
Financial Statements.
Recent
Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board
(FASB) issued SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities Including
an Amendment of FASB Statement No. 115
(SFAS No. 159), which permits entities to elect to
measure many financial instruments and certain other items at
fair value that are not currently required to be measured at
fair value. This election is irrevocable. SFAS No. 159
will be effective for Applied in fiscal 2009. Applied is
evaluating the potential impact of the implementation of
SFAS No. 159 on its financial position and 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 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 will
continue to evaluate the application of FIN 48. Management
does not believe the effect of implementing FIN 48 will
have a material impact on its financial position or results of
operations.
Financial
Condition, Liquidity and Capital Resources
Applieds cash, cash equivalents and investments increased
from $3.2 billion at October 29, 2006 to
$3.7 billion at October 28, 2007, due primarily to
cash generated from operating activities and proceeds from
common stock issuances, offset by share repurchases, cash paid
for acquisitions and cash dividend distributions. Applied has
not undertaken any significant external financing activities for
several years.
32
Cash, cash-equivalents and investments consist of the following:
|
|
|
|
|
|
|
|
|
|
|
October 29,
|
|
|
October 28,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In millions)
|
|
|
Cash and cash equivalents
|
|
$
|
861
|
|
|
$
|
1,203
|
|
Short-term investments
|
|
|
1,036
|
|
|
|
1,167
|
|
Long-term investments
|
|
|
1,315
|
|
|
|
1,362
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash-equivalents and investments
|
|
$
|
3,212
|
|
|
$
|
3,732
|
|
|
|
|
|
|
|
|
|
|
Applied generated cash from operating activities of
$2.2 billion in fiscal 2007, $2.0 billion in fiscal
2006, and $1.3 billion in fiscal 2005. The primary sources
of cash from operating activities were net income, as adjusted
to exclude the effect of non-cash charges including
depreciation, amortization, equity-based compensation, asset
impairments and restructuring and IPR&D expenses, and
changes in working capital levels, including accounts receivable
and inventories. Applied utilized programs to discount letters
of credit issued by customers of $431 million in fiscal
2007, $237 million in fiscal 2006, and $145 million in
fiscal 2005. Discounting of letters of credit depends on many
factors, including the willingness of financial institutions to
discount the letters of credit and the cost of such
arrangements. Days sales outstanding were 79 days at the
end of fiscal 2007, compared to 80 days at the end of
fiscal 2006 and 85 days at the end of fiscal 2005. The
decrease in days sales outstanding in fiscal 2007 was primarily
related to the change in the regional sales mix. Inventories
decreased by $94 million in fiscal 2007, reflecting
improved working capital management during a period of increased
business volume and sales activity.
Applied used $977 million of cash for investing activities
in fiscal 2007, generated $1.9 billion of cash for
investing activities in fiscal 2006 and used $219 million
of cash in investing activities in fiscal 2005. Purchases of
investments, net of proceeds from sales and maturities of
investments, totaled $150 million for fiscal 2007. Proceeds
from sales and maturities of investments, net of purchases of
investments, totaled $2.6 billion in fiscal 2006 and
$83 million in fiscal 2005. Proceeds from the sale of
investments in fiscal 2006 were used principally to
fund Applieds accelerated stock buyback.
Capital expenditures were $265 million in fiscal 2007,
$179 million in fiscal 2006 and $200 million in fiscal
2005. Fiscal 2007 capital expenditures included investment in
the implementation of an enterprise resource planning software
system, and in Applieds new global development capability
center in Xian, China. Fiscal 2006 capital expenditures
included purchases of lab equipment, network infrastructure and
three buildings in Santa Clara, California that Applied had
previously leased. Fiscal 2005 capital expenditures included
investments in laboratory equipment and upgrades to
Applieds enterprise resource planning software and network
architecture.
Investing activities also included investments in technology and
acquisitions of companies to allow Applied to access new market
opportunities or emerging technologies. During fiscal 2007,
Applied acquired all of the outstanding shares of HCT for
$463 million in cash, net of cash acquired, and certain net
assets of Brooks Software for $137 million in cash. During
fiscal 2006, Applied paid cash for acquisitions and the
investment in a joint venture totaling $486 million. During
fiscal 2006, Applied acquired the outstanding stock of Applied
Films for $310 million in cash, net of cash and marketable
securities acquired, and assumed equity awards with a fair value
of $26 million, of which $18 million was included in
the purchase price; formed a joint venture, Sokudo, with
Dainippon Screen Mfg. Ltd., for which Applied paid
$147 million in cash and contributed other assets; acquired
certain assets of UMS Solutions for $10 million; and
acquired ChemTrace for approximately $22 million in cash,
net of cash acquired, of which $18 million was paid upon
closing. During fiscal 2005, Applied paid $102 million, net
of cash acquired, for the Metron and EcoSys acquisitions. See
Note 12 of Notes to Consolidated Financial Statements for
additional details.
On November 9, 2007, Applied purchased from Edwards Vacuum,
Inc. certain assets of its Kachina semiconductor equipment parts
cleaning and refurbishment business for $19 million. On
November 19, 2007, Applied entered into an agreement to
acquire all of the outstanding shares of Baccini S.p.A.
(Baccini), a
privately-held
company based in Italy, for 225 million (or
approximately $330 million at the exchange rate at the time
of announcement) in cash, which is expected to close in early
2008.
Applied used cash of $892 million for financing activities
in fiscal 2007, $4.1 billion in fiscal 2006, and
$1.6 billion in fiscal 2005. Financing activities included
issuances and repurchases of common stock and payment
33
of dividends. Since March 1996, Applied has systematically
repurchased shares of its common stock in the open market. Cash
used to repurchase shares totaled $1.3 billion in fiscal
2007, $4.2 billion in fiscal 2006, and $1.7 billion in
fiscal 2005. Beginning in the second quarter of fiscal 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 quarter of
fiscal 2006, Applieds Board declared three consecutive
quarterly cash dividends, in the amount of $0.05 per share each.
Cash dividends totaling $251 million were paid during
fiscal 2006. Beginning in the second quarter of fiscal 2007,
Applieds Board declared three consecutive quarterly cash
dividends, in the amount of $0.06 per share each. Cash dividends
totaling $306 million were paid during fiscal 2007. 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 interests of
Appliedstockholders. Financing activities also included
borrowings and repayments of debt. Applied did not have any
borrowings in fiscal years 2005, 2006 or 2007. As of
October 28, 2007, Applied had credit facilities for
unsecured borrowings in various currencies of up to
approximately $1.2 billion, of which $1.0 billion is
comprised of a
5-year
revolving credit agreement with a group of banks that is
scheduled to expire in January 2012. This agreement provides for
borrowings at interest rates keyed to one of the two rates
selected by Applied for each advance, and includes financial and
other covenants with which Applied was in compliance at
October 28, 2007. No amounts were outstanding under this
agreement at October 28, 2007. Cash used for debt
repayments totaled $202 million for fiscal 2007,
$8 million for fiscal 2006, and $62 million for fiscal
2005. Cash generated from issuances of common stock pursuant to
Applieds equity compensation programs totaled
$948 million for fiscal 2007, $361 million for fiscal
2006, and $266 million for fiscal 2005.
On September 18, 2006, Applied entered into accelerated
stock buyback agreements with Goldman Sachs under which Applied
agreed to repurchase from Goldman Sachs shares of Applieds
outstanding common stock for an initial purchase price of
$2.5 billion. Under the agreements, Applied purchased
145 million shares of its common stock on
September 18, 2006 at a price per share of $17.20, and
Goldman Sachs agreed to purchase an equivalent number of shares
in the open market over the following four months. At the end of
the four month period, Applied was entitled or subject to a
price adjustment based upon the volume weighted average price of
Applied common stock during the purchase period. On
January 24, 2007, Applied settled the price adjustment of
$132 million by payment in cash to Goldman Sachs, resulting
in an adjusted price per share of $18.08. The repurchase was
funded with Applieds existing cash and investments. The
repurchased shares were reported as treasury stock.
At October 28, 2007, cash and cash equivalents included an
aggregate investment of $147 million in an enhanced cash
fund (the Fund). During the period between
October 29, 2007 and December 6, 2007, Applied
redeemed net $61 million of its investment in the Fund at
par value (net of interim transactions). On December 6,
2007, the Funds manager notified Applied that:
(1) cash redemptions were temporarily suspended, although
redemptions could be fulfilled through a pro rata distribution
of the underlying securities, consisting principally of high
quality corporate debt, mortgage-backed securities and
asset-backed securities; (2) the Funds valuation will
be based on the market value of the underlying securities,
whereas historically the Funds valuation was based on
amortized cost; and (3) interest would continue to accrue.
The estimated carrying value of Applieds investment in the
Fund at December 6, 2007 was $86 million and is not
considered a cash equivalent due to the suspension of Fund
redemptions. Applied expects to receive a pro rata distribution
of the underlying securities in the Fund. Applied anticipates
that this redemption will not result in a significant loss. The
securities received on redemption will be subject to changes in
value depending on market conditions.
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 28, 2007, see the
Consolidated Statements of Cash Flows in this report.
34
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 28, 2007, the
maximum potential amount of future payments that Applied could
be required to make under these guarantee agreements was
approximately $194 million. Applied has not recorded any
liability in connection with these guarantee arrangements below
that required Applied to appropriately account for the
underlying transaction being guaranteed. Applied does not
believe, based on historical experience and information
currently available, that it is probable that any amounts will
be required to be paid under these guarantee arrangements.
Applied also has operating leases for various facilities. Total
rental expense for operating leases was $62 million for
fiscal 2007, $70 million for fiscal 2006, and
$87 million for fiscal 2005.
Contractual
Obligations
The following table summarizes Applieds contractual
obligations as of October 28, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
205
|
|
|
$
|
3
|
|
|
$
|
2
|
|
|
$
|
|
|
|
$
|
200
|
|
Interest expense associated with long-term debt obligations
|
|
|
143
|
|
|
|
14
|
|
|
|
29
|
|
|
|
29
|
|
|
|
71
|
|
Operating lease obligations
|
|
|
144
|
|
|
|
59
|
|
|
|
61
|
|
|
|
12
|
|
|
|
12
|
|
Purchase obligations*
|
|
|
1,264
|
|
|
|
1,263
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities
|
|
|
204
|
|
|
|
8
|
|
|
|
81
|
|
|
|
18
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,960
|
|
|
$
|
1,347
|
|
|
$
|
174
|
|
|
$
|
59
|
|
|
$
|
380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Represents Applieds agreements to purchase goods and
services consisting of Applieds (a) outstanding
purchase orders for goods and services; and (b) contractual
requirements to make specified minimum payments even if Applied
does not take delivery of the contracted goods. |
Critical
Accounting Policies and Estimates
The preparation of consolidated financial statements and related
disclosures in conformity with accounting principles generally
accepted in the United States of America requires management to
make judgments, assumptions and estimates that affect the
amounts reported. Note 1 of Notes to Consolidated Financial
Statements describes the significant accounting policies used in
the preparation of the consolidated financial statements.
Certain of these significant accounting policies are considered
to be critical accounting policies.
A critical accounting policy is defined as one that is both
material to the presentation of Applieds consolidated
financial statements and requires management to make difficult,
subjective or complex judgments that could have a material
effect on Applieds financial condition or results of
operations. Specifically, these policies have the following
attributes: (1) Applied is required to make assumptions
about matters that are highly uncertain at the time of the
estimate; and (2) different estimates Applied could
reasonably have used, or changes in the estimate that are
reasonably likely to occur, would have a material effect on
Applieds financial condition or results of operations.
Estimates and assumptions about future events and their effects
cannot be determined with certainty. Applied bases its estimates
on historical experience and on various other assumptions
believed to be applicable and reasonable under the
circumstances. These estimates may change as new events occur,
as additional information is obtained and as Applieds
operating environment changes. These changes have historically
been minor and have been included in the consolidated financial
statements as soon as they became known. In addition, management
is periodically faced with uncertainties, the outcomes of which
are not within its control and will not be known for prolonged
periods of time. These uncertainties are discussed in the
section above entitled Risk Factors. Based on a
critical assessment of its accounting policies and the
underlying judgments and uncertainties affecting the
35
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.
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.
36
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.
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 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.
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 Statement of Financial Accounting
Standards No. 123(R),
Share-Based
Payment (SFAS 123(R)), which requires recognition
of the fair value of equity-based compensation. The fair value
of stock options and ESPP shares 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. Prior to the implementation of
SFAS 123(R), Applied accounted for stock options and ESPP
shares under the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees, (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).
|
|
Item 7A:
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Interest
Rate Risk
At October 28, 2007, Applieds investment portfolio
included fixed-income securities with a fair value of
approximately $2.6 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 28, 2007 and
October 29, 2006, an immediate 100 basis point
increase in interest rates would result in a decrease in the
fair value of the portfolio of approximately $31 million
and $28 million, respectively. While an increase in
interest rates reduces the fair value of the investment
portfolio, Applied will not realize the losses in the
Consolidated Statement of Operations unless the individual
fixed-income securities are sold prior to recovery or the loss
is determined to be other-than-temporarily impaired.
All of Applieds debt bears interest at fixed rates.
Therefore, an immediate 100 basis point increase in
interest rates would not be expected to have a material effect
on Applieds near-term financial condition or results of
operations.
Foreign
Currency Exchange Rate Risk
Certain operations of Applied are conducted in foreign
currencies, such as Japanese yen, euro, Israeli shekel and Swiss
francs. Applied enters into forward exchange and currency option
contracts to hedge a portion of, but not all, existing and
anticipated foreign currency denominated transactions expected
to occur typically within
37
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 2005, 2006 or 2007.
Forward exchange contracts are denominated in the same currency
as the underlying transactions (primarily Japanese yen, euro,
Israeli shekel and Swiss francs), and the terms of the forward
exchange contracts generally match the terms of the underlying
transactions. Applieds outstanding forward exchange
contracts are marked-to-market (see Note 2 of Notes to
Consolidated Financial Statements), as are the majority of the
related underlying transactions being hedged; therefore, the
effect of exchange rate changes on forward exchange contracts is
expected to be substantially offset by the effect of these
changes on the underlying transactions. The effect of an
immediate 10 percent change in exchange rates on forward
exchange contracts and the underlying hedged transactions is not
expected to be material to Applieds near-term financial
condition or results of operations. Applieds risk with
respect to currency option contracts is limited to the premium
paid for the right to exercise the option. Premiums paid for
options outstanding at October 28, 2007 were not material.
|
|
Item 8:
|
Financial
Statements and Supplementary Data
|
The consolidated financial statements required by this Item are
set forth on the pages indicated at Item 15(a).
|
|
Item 9:
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
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 28, 2007.
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 the effectiveness of Applieds internal control over
financial reporting as of October 28, 2007.
38
Changes in Internal Control over Financial
Reporting. During the fourth quarter of
fiscal 2007, 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.
39
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Stockholders and Board of Directors
Applied Materials, Inc.:
We have audited Applied Materials, Inc. and subsidiaries
(the Company) internal control over financial reporting as of
October 28, 2007, based on criteria established in
Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Companys management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the
accompanying Managements Report on Internal Control over
Financial Reporting included in Item 9A. Our responsibility
is to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Applied Materials Inc. and subsidiaries
maintained, in all material respects, effective internal control
over financial reporting as of October 28, 2007, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Applied Materials, Inc. and
subsidiaries as of October 28, 2007 and October 29,
2006, and the related consolidated statements of operations,
stockholders equity and comprehensive income, and cash
flows for each of the years in the three-year period ended
October 28, 2007. 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 28, 2007. Our report
dated December 14, 2007 expressed an unqualified opinion on
those consolidated financial statements and financial statement
schedule.
KPMG LLP
Mountain View, California
December 14, 2007
40
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 2008
Annual Meeting of Stockholders (the Proxy Statement).
|
|
Item 10:
|
Directors,
Executive Officers and Corporate Governance
|
(1) Information concerning directors, including director
nominations, and Applieds audit committee and audit
committee financial expert, appears in the Proxy Statement under
Election of Directors, and is incorporated herein by
reference.
(2) For information with respect to Executive Officers, see
Part I, Item 1 of this Annual Report on
Form 10-K,
under Executive Officers of the Registrant.
(3) Information concerning Section 16(a) beneficial
ownership reporting compliance appears in the Proxy Statement
under Section 16(a) Beneficial Ownership Reporting
Compliance, and is incorporated herein by reference.
Applied has implemented the Standards of Business Conduct, a
code of ethics with which every person who works for Applied and
every member of the Board of Directors is expected to comply. If
any substantive amendments are made to the Standards of Business
Conduct or any waiver is granted, including any implicit waiver,
from a provision of the code to Applieds Chief Executive
Officer, Chief Financial Officer or Chief Accounting Officer,
Applied will disclose the nature of such amendment or waiver on
its website or in a report on
Form 8-K.
The above information, including the Standards of Business
Conduct, is available on Applieds website under the
Investors section at
http://www.appliedmaterials.com/investors/index.html.
This website address is intended to be an inactive, textual
reference only. None of the material on this website is part of
this report.
|
|
Item 11:
|
Executive
Compensation
|
Information concerning executive compensation appears in the
Proxy Statement under Executive Compensation and Related
Information and is incorporated herein by reference.
Information concerning compensation committee interlocks and
insider participation appears in the Proxy Statement under
Compensation Committee Interlocks and Insider
Participation and is incorporated herein by reference.
Information concerning the compensation committee report appears
in the Proxy Statement under Human Resources and
Compensation Committee Report and is incorporated herein
by reference.
|
|
Item 12:
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Information concerning the security ownership of certain
beneficial owners and management appears in the Proxy Statement,
under Principal Stockholders, and is incorporated
herein by reference.
41
The following table summarizes information with respect to
options and other equity awards under Applieds equity
compensation plans as of October 28, 2007:
Equity
Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
|
|
|
(a)
|
|
|
|
|
|
Number of Securities
|
|
|
|
Number of
|
|
|
(b)
|
|
|
Available for Future
|
|
|
|
Securities to be
|
|
|
Weighted Average
|
|
|
Issuance Under Equity
|
|
|
|
Issued Upon Exercise
|
|
|
Exercise Price of
|
|
|
Compensation Plans
|
|
|
|
of Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
|
|
Warrants and
|
|
|
Warrants and
|
|
|
Reflected in
|
|
Plan Category
|
|
Rights(1)
|
|
|
Rights(2)
|
|
|
Column(a))
|
|
|
|
(In thousands, except prices)
|
|
|
Equity compensation plans approved by security holders
|
|
|
43,478
|
|
|
$
|
17.79
|
|
|
|
197,690
|
(3)
|
Equity compensation plans not approved by security holders
|
|
|
70,020
|
(4)
|
|
$
|
17.82
|
|
|
|
34,992
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
113,498
|
|
|
$
|
17.81
|
|
|
|
232,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 28, 2007. |
|
(2) |
|
The weighted average exercise price calculation does not take
into account any restricted stock units as they have a de
minimis purchase price. |
|
(3) |
|
Includes 73,781 shares of Applied common stock available
for future issuance under the Applied Materials, Inc.
Employees Stock Purchase Plan. Of these
73,781 shares, 1,788 are subject to purchase during the
purchase period in effect as of October 28, 2007. |
|
(4) |
|
Includes options to purchase 2,363 shares of Applied common
stock and 21,987 shares of Applied common stock underlying
restricted stock units assumed through various mergers and
acquisitions, after giving effect to the applicable exchange
ratios. The assumed options had a weighted average exercise
price of $13.32 per share. No further shares are available for
issuance under the plans under which these assumed awards were
granted. |
|
(5) |
|
Includes 2,578 shares of Applied common stock available for
future issuance under the Applied Materials, Inc. Stock Purchase
Plan for Offshore Employees. Of these 2,578 shares, 693 are
subject to purchase during the purchase period in effect as of
October 28, 2007. |
Applied has the following equity compensation plans that have
not been approved by stockholders:
2000 Global Equity Incentive Plan The 2000 Global Equity
Incentive Plan (the 2000 Plan) was adopted effective as of
June 21, 2000. The 2000 Plan provides for the grant of
non-qualified stock options to employees other than officers and
directors. The administrator of the 2000 Plan (either the Board
of Directors of Applied or a committee appointed by the Board)
determines the terms and conditions of all stock options
granted; provided, however, that (1) the exercise price
generally may not be less than 100 percent of the fair
market value (on the date of grant) of the stock covered by the
option, and (2) the term of options can be no longer than
10 years (or 13 years in the event of death). A total
of 147,000,000 shares have been authorized for issuance
under the 2000 Plan, and 32,414,000 shares remain available
for issuance as of October 28, 2007.
Stock Purchase Plan for Offshore Employees The Stock
Purchase Plan for Offshore Employees (the Offshore ESPP) was
adopted effective as of October 16, 1995 for the benefit of
employees of Applieds participating affiliates (other than
United States citizens or residents). The Offshore ESPP provides
for the grant of options to purchase shares of Applied common
stock through payroll deductions pursuant to one or more
offerings. The administrator of the Offshore ESPP (the Board of
Directors of Applied or a committee appointed by the Board)
determines the terms and conditions of all options prior to the
start of an offering, including the purchase price of shares,
the number of shares covered by the option and when the option
may be exercised. All options granted as part of an offering
must be granted on the same date. A total of
42
12,800,000 shares have been authorized for issuance under
the Offshore ESPP, and 2,578,000 shares remain available
for issuance as of October 28, 2007.
|
|
Item 13:
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information appearing in the Proxy Statement under the
heading Certain Relationships and Related
Transactions is incorporated herein by reference.
The information appearing in the Proxy Statement under the
heading Director Independence is incorporated herein
by reference.
|
|
Item 14:
|
Principal
Accounting Fees and Services
|
Information concerning principal accounting fees and services
and the audit committees preapproval policies and
procedures appears in the Proxy Statement under the headings
Fees Paid to KPMG LLP and Policy and Audit
Committees Pre-Approval of Audit and Permisssible
Non-audit Services of Independent Registered Public Accounting
Firm, is incorporated herein by reference.
43
|
|
Item 15:
|
Exhibits
and Financial Statement Schedules
|
(a) The following documents are filed as part of this
Annual Report on
Form 10-K:
All other schedules are omitted because they are not applicable
or the required information is shown in the Consolidated
Financial Statements or Notes thereto.
44
APPLIED
MATERIALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 30,
|
|
|
October 29,
|
|
|
October 28,
|
|
Fiscal Year
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net sales
|
|
$
|
6,991,823
|
|
|
$
|
9,167,014
|
|
|
$
|
9,734,856
|
|
Cost of products sold
|
|
|
3,905,949
|
|
|
|
4,875,212
|
|
|
|
5,242,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
3,085,874
|
|
|
|
4,291,802
|
|
|
|
4,492,443
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research, development and engineering
|
|
|
940,507
|
|
|
|
1,152,326
|
|
|
|
1,142,073
|
|
Marketing and selling
|
|
|
358,524
|
|
|
|
438,654
|
|
|
|
451,258
|
|
General and administrative
|
|
|
338,878
|
|
|
|
468,088
|
|
|
|
501,185
|
|
Restructuring and asset impairments
|
|
|
|
|
|
|
212,113
|
|
|
|
26,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,447,965
|
|
|
|
2,020,621
|
|
|
|
2,371,506
|
|
Pretax loss of equity-method investment
|
|
|
|
|
|
|
2,849
|
|
|
|
29,371
|
|
Interest expense
|
|
|
37,819
|
|
|
|
36,096
|
|
|
|
38,631
|
|
Interest income
|
|
|
171,423
|
|
|
|
185,295
|
|
|
|
136,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,581,569
|
|
|
|
2,166,971
|
|
|
|
2,439,653
|
|
Provision for income taxes
|
|
|
371,669
|
|
|
|
650,308
|
|
|
|
729,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,209,900
|
|
|
$
|
1,516,663
|
|
|
$
|
1,710,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.74
|
|
|
$
|
0.98
|
|
|
$
|
1.22
|
|
Diluted
|
|
$
|
0.73
|
|
|
$
|
0.97
|
|
|
$
|
1.20
|
|
Weighted average number of shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
1,645,531
|
|
|
|
1,551,339
|
|
|
|
1,406,685
|
|
Diluted
|
|
|
1,657,493
|
|
|
|
1,565,072
|
|
|
|
1,427,002
|
|
See accompanying Notes to Consolidated Financial Statements.
45
APPLIED
MATERIALS, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
October 29,
|
|
|
October 28,
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands, except per share amounts)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
861,463
|
|
|
$
|
1,202,722
|
|
Short-term investments
|
|
|
1,035,875
|
|
|
|
1,166,857
|
|
Accounts receivable, less allowance for doubtful accounts of
$3,342 and $4,136 at 2006 and 2007, respectively
|
|
|
2,026,199
|
|
|
|
2,049,427
|
|
Inventories
|
|
|
1,406,777
|
|
|
|
1,313,237
|
|
Deferred income taxes
|
|
|
455,473
|
|
|
|
424,502
|
|
Assets held for sale
|
|
|
37,211
|
|
|
|
|
|
Other current assets
|
|
|
258,021
|
|
|
|
448,879
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
6,081,019
|
|
|
|
6,605,624
|
|
Long-term investments
|
|
|
1,314,861
|
|
|
|
1,362,425
|
|
Property, plant and equipment
|
|
|
2,753,883
|
|
|
|
2,782,204
|
|
Less: accumulated depreciation and amortization
|
|
|
(1,729,589
|
)
|
|
|
(1,730,962
|
)
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment
|
|
|
1,024,294
|
|
|
|
1,051,242
|
|
Goodwill, net
|
|
|
572,558
|
|
|
|
1,000,176
|
|
Purchased technology and other intangible assets, net
|
|
|
201,066
|
|
|
|
373,178
|
|
Equity-method investment
|
|
|
144,431
|
|
|
|
115,060
|
|
Deferred income taxes and other assets
|
|
|
142,608
|
|
|
|
146,370
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,480,837
|
|
|
$
|
10,654,075
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
202,535
|
|
|
$
|
2,561
|
|
Accounts payable and accrued expenses
|
|
|
2,023,651
|
|
|
|
2,213,313
|
|
Income taxes payable
|
|
|
209,859
|
|
|
|
157,549
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,436,045
|
|
|
|
2,373,423
|
|
Long-term debt
|
|
|
204,708
|
|
|
|
202,281
|
|
Other liabilities
|
|
|
188,684
|
|
|
|
256,962
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,829,437
|
|
|
|
2,832,666
|
|
|
|
|
|
|
|
|
|
|
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; 1,391,730 and
1,385,711 shares outstanding at 2006 and 2007, respectively
|
|
|
13,917
|
|
|
|
13,857
|
|
Additional paid-in capital
|
|
|
3,678,202
|
|
|
|
4,658,832
|
|
Retained earnings
|
|
|
9,472,303
|
|
|
|
10,863,291
|
|
Treasury stock: 378,435 and 434,686 shares at 2006 and
2007, respectively, net
|
|
|
(6,494,012
|
)
|
|
|
(7,725,924
|
)
|
Accumulated other comprehensive income (loss)
|
|
|
(19,010
|
)
|
|
|
11,353
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
6,651,400
|
|
|
|
7,821,409
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
9,480,837
|
|
|
$
|
10,654,075
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
46
APPLIED
MATERIALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
AND
COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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
|
|
Issuance under stock plans, including tax benefits of $84,294
|
|
|
27,638
|
|
|
|
276
|
|
|
|
278,223
|
|
|
|
|
|
|
|
|
|
|
|
71,910
|
|
|
|
|
|
|
|
350,409
|
|
Amortization of deferred stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
|
|
Treasury stock repurchases
|
|
|
(101,208
|
)
|
|
|
(1,012
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,698,984
|
)
|
|
|
|
|
|
|
(1,699,996
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 30, 2005
|
|
|
1,606,694
|
|
|
$
|
16,067
|
|
|
$
|
3,161,053
|
|
|
$
|
|
|
|
$
|
8,227,793
|
|
|
$
|
(2,439,116
|
)
|
|
$
|
(37,248
|
)
|
|
$
|
8,928,549
|
|
Components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,516,663
|
|
|
|
|
|
|
|
|
|
|
|
1,516,663
|
|
Change in unrealized net gain on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,486
|
|
|
|
16,486
|
|
Change in unrealized net gain on derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,888
|
)
|
|
|
(4,888
|
)
|
Change in minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(117
|
)
|
|
|
(117
|
)
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,757
|
|
|
|
6,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,534,901
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(272,153
|
)
|
|
|
|
|
|
|
|
|
|
|
(272,153
|
)
|
Equity-based compensation
|
|
|
|
|
|
|
|
|
|
|
216,269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216,269
|
|
Issuance under stock plans, including tax benefits of $23,664
and other
|
|
|
23,433
|
|
|
|
234
|
|
|
|
282,587
|
|
|
|
|
|
|
|
|
|
|
|
77,958
|
|
|
|
|
|
|
|
360,779
|
|
Assumption of Applied Films equity plans
|
|
|
|
|
|
|
|
|
|
|
18,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,293
|
|
Treasury stock repurchases
|
|
|
(238,397
|
)
|
|
|
(2,384
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,132,854
|
)
|
|
|
|
|
|
|
(4,135,238
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 29, 2006
|
|
|
1,391,730
|
|
|
$
|
13,917
|
|
|
$
|
3,678,202
|
|
|
$
|
|
|
|
$
|
9,472,303
|
|
|
$
|
(6,494,012
|
)
|
|
$
|
(19,010
|
)
|
|
$
|
6,651,400
|
|
Components of comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,710,196
|
|
|
|
|
|
|
|
|
|
|
|
1,710,196
|
|
Change in unrealized net loss on investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,887
|
|
|
|
21,887
|
|
Change in unrealized net gain on derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,728
|
)
|
|
|
(5,728
|
)
|
Change in minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,462
|
|
|
|
3,462
|
|
Change in retiree medical benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,132
|
)
|
|
|
(1,132
|
)
|
Translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,583
|
|
|
|
9,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,738,268
|
|
Adjustment to initially apply SFAS 158, net of tax of $959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,291
|
|
|
|
2,291
|
|
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(319,208
|
)
|
|
|
|
|
|
|
|
|
|
|
(319,208
|
)
|
Equity-based compensation
|
|
|
|
|
|
|
|
|
|
|
161,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161,196
|
|
Issuance under stock plans, including tax benefits of $48,870
and other
|
|
|
54,391
|
|
|
|
544
|
|
|
|
819,434
|
|
|
|
|
|
|
|
|
|
|
|
99,481
|
|
|
|
|
|
|
|
919,459
|
|
Treasury stock repurchases
|
|
|
(60,410
|
)
|
|
|
(604
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,331,393
|
)
|
|
|
|
|
|
|
(1,331,997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 28, 2007
|
|
|
1,385,711
|
|
|
$
|
13,857
|
|
|
$
|
4,658,832
|
|
|
$
|
|
|
|
$
|
10,863,291
|
|
|
$
|
(7,725,924
|
)
|
|
$
|
11,353
|
|
|
$
|
7,821,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
47
APPLIED
MATERIALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 30,
|
|
|
October 29,
|
|
|
October 28,
|
|
Fiscal Year
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,209,900
|
|
|
$
|
1,516,663
|
|
|
$
|
1,710,196
|
|
Adjustments required to reconcile net income to cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
300,433
|
|
|
|
270,413
|
|
|
|
268,334
|
|
Loss on fixed asset retirements
|
|
|
22,553
|
|
|
|
28,365
|
|
|
|
21,401
|
|
Restructuring and asset impairments
|
|
|
|
|
|
|
212,113
|
|
|
|
26,421
|
|
Acquired in-process research and development expense
|
|
|
|
|
|
|
14,000
|
|
|
|
4,900
|
|
Pretax loss of equity-method investment
|
|
|
|
|
|
|
2,849
|
|
|
|
29,371
|
|
Net recognized loss on investments
|
|
|
39,581
|
|
|
|
41,391
|
|
|
|
5,460
|
|
Deferred income taxes
|
|
|
20,310
|
|
|
|
25,323
|
|
|
|
31,642
|
|
Excess tax benefits from equity-based compensation plans
|
|
|
|
|
|
|
(23,664
|
)
|
|
|
(49,794
|
)
|
Tax benefit from equity-based compensation plans
|
|
|
84,294
|
|
|
|
|
|
|
|
|
|
Amortization of deferred compensation
|
|
|
96
|
|
|
|
|
|
|
|
|
|
Equity-based compensation
|
|
|
55
|
|
|
|
216,269
|
|
|
|
161,197
|
|
Changes in operating assets and liabilities, net of amounts
acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
86,959
|
|
|
|
(393,022
|
)
|
|
|
34,259
|
|
Inventories
|
|
|
130,924
|
|
|
|
(222,335
|
)
|
|
|
140,933
|
|
Other current assets
|
|
|
48,315
|
|
|
|
25,224
|
|
|
|
(164,289
|
)
|
Other assets
|
|
|
(10,415
|
)
|
|
|
17,088
|
|
|
|
3,359
|
|
Accounts payable and accrued expenses
|
|
|
(444,858
|
)
|
|
|
237,952
|
|
|
|
(12,473
|
)
|
Income taxes payable
|
|
|
(217,851
|
)
|
|
|
100,020
|
|
|
|
(23,968
|
)
|
Other liabilities
|
|
|
16,425
|
|
|
|
(91,531
|
)
|
|
|
22,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
1,286,721
|
|
|
|
1,977,118
|
|
|
|
2,209,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(199,650
|
)
|
|
|
(179,482
|
)
|
|
|
(264,784
|
)
|
Cash paid for acquisitions, net of cash acquired
|
|
|
(101,793
|
)
|
|
|
(339,093
|
)
|
|
|
(599,653
|
)
|
Investment in equity-method investment
|
|
|
|
|
|
|
(147,280
|
)
|
|
|
|
|
Proceeds from disposition of assets
|
|
|
|
|
|
|
1,863
|
|
|
|
|
|
Proceeds from disposition of assets held for sale
|
|
|
|
|
|
|
16,206
|
|
|
|
37,611
|
|
Proceeds from sales and maturities of investments
|
|
|
6,090,477
|
|
|
|
6,071,156
|
|
|
|
3,053,640
|
|
Purchases of investments
|
|
|
(6,007,738
|
)
|
|
|
(3,474,384
|
)
|
|
|
(3,203,427
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used for)/provided by investing activities
|
|
|
(218,704
|
)
|
|
|
1,948,986
|
|
|
|
(976,613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used for financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term debt repayments
|
|
|
(13,290
|
)
|
|
|
(7,710
|
)
|
|
|
(99
|
)
|
Long-term debt repayments
|
|
|
(48,425
|
)
|
|
|
|
|
|
|
(202,040
|
)
|
Proceeds from common stock issuances
|
|
|
266,115
|
|
|
|
337,106
|
|
|
|
898,025
|
|
Common stock repurchases
|
|
|
(1,677,511
|
)
|
|
|
(4,157,725
|
)
|
|
|
(1,331,997
|
)
|
Excess tax benefit from equity-based compensation plans
|
|
|
|
|
|
|
23,664
|
|
|
|
49,794
|
|
Payments of dividends to stockholders
|
|
|
(98,040
|
)
|
|
|
(250,782
|
)
|
|
|
(305,672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used for financing activities
|
|
|
(1,571,151
|
)
|
|
|
(4,055,447
|
)
|
|
|
(891,989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
184
|
|
|
|
464
|
|
|
|
565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(decrease) in cash and cash equivalents
|
|
|
(502,950
|
)
|
|
|
(128,879
|
)
|
|
|
341,259
|
|
Cash and cash equivalents beginning of year
|
|
|
1,493,292
|
|
|
|
990,342
|
|
|
|
861,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of year
|
|
$
|
990,342
|
|
|
$
|
861,463
|
|
|
$
|
1,202,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for income taxes, net
|
|
$
|
374,302
|
|
|
$
|
549,531
|
|
|
$
|
845,756
|
|
Cash payments for interest
|
|
$
|
32,171
|
|
|
$
|
28,195
|
|
|
$
|
29,104
|
|
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, 2006 and 2007 contained 52 weeks
each. Each fiscal quarter of 2005, 2006 and 2007 contained
13 weeks.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ
materially from those estimates.
Reclassifications The accompanying consolidated financial
statements for fiscal 2005 and fiscal 2006 contain certain
reclassifications to conform to the fiscal 2007 presentation.
In fiscal 2007, Applied changed its presentation of accretion of
discounts and amortization of premiums on its investment
portfolio and gains and losses on sales of investments in the
Consolidated Statements of Cash Flows. This revision did not
result in material changes to operating cash flows in the
accompanying Consolidated Statements of Cash Flows. The
accompanying consolidated financial statements for prior year
amounts have been conformed to the fiscal 2007 presentation.
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 1 to 15 years using the
straight-line method.
Long-Lived Assets Applied reviews long-lived assets for
impairment whenever events or changes in circumstances indicate
that the carrying amount of these assets may not be recoverable.
Applied assesses these assets for impairment based on estimated
future cash flows from these assets.
Research, Development and Engineering Costs Research,
development and engineering costs are expensed as incurred.
Advertising Costs Advertising costs are expensed as
incurred. Advertising costs were not material for all periods
presented.
49
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Sales and Value Added Taxes Taxes collected from
customers and remitted to governmental authorities are presented
on a net basis in the accompanying Consolidated Statements of
Operations.
Income Taxes Income tax expense is based on pretax
earnings. Deferred tax assets and liabilities are recognized for
the expected tax consequences of temporary differences between
the book and tax bases of recorded assets and liabilities, net
operating losses and tax credit carryforwards.
Revenue Recognition Applied recognizes revenue when all
four revenue recognition criteria have been met: persuasive
evidence of an arrangement exists; delivery has occurred or
services have been rendered; sellers price to buyer is
fixed or determinable; and collectability is reasonably assured.
Applieds shipping terms are customarily FOB Applied
shipping point or equivalent terms. Applieds revenue
recognition policy generally results in revenue recognition at
the following points: (1) for all transactions where legal
title passes to the customer upon shipment, Applied recognizes
revenue upon shipment for all products that have been
demonstrated to meet product specifications prior to shipment;
the portion of revenue associated with certain
installation-related tasks is deferred based on the estimated
fair value, and that revenue is recognized upon completion of
the installation-related tasks; (2) for products that have
not been demonstrated to meet product specifications prior to
shipment, revenue is recognized at customer technical
acceptance; (3) for transactions where legal title does not
pass at shipment, revenue is recognized when legal title passes
to the customer, which is typically at customer technical
acceptance; and (4) for arrangements containing multiple
elements, the revenue relating to the undelivered elements is
deferred at 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 typically
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 As of October 28, 2007,
primarily all of Applieds subsidiaries use the United
States dollar as their functional currency. Accordingly, assets
and liabilities of these subsidiaries are translated using
exchange rates in effect at the end of the period, except for
non-monetary assets, such as inventories and property, plant and
equipment, which are translated using historical exchange rates.
Revenues and costs are translated using average exchange rates
for the period, except for costs related to those balance sheet
items that are translated using historical exchange rates. The
resulting translation gains and losses are included in the
Consolidated Statements of Operations as incurred.
Equity-Based
Compensation
Applied has adopted stock plans that provide for grants to
employees of equity-based awards, including stock options,
restricted stock and restricted stock units (also referred to as
performance shares under the Applied
50
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Materials, Inc. Employee Stock Incentive Plan). In addition, the
Employee Stock Incentive Plan provides for the automatic grant
of restricted stock units to non-employee directors and permits
the grant of equity-based awards to Applied consultants. Applied
also has two Employee Stock Purchase Plans (ESPP) for United
States and international employees, respectively, which enable
eligible employees to purchase Applied common stock.
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
periods 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 implemented 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).
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, insignificant
equity-based compensation cost for stock options was recognized
in the Consolidated Statements of Operations under the intrinsic
value method.
During fiscal 2006 and fiscal 2007, Applied recognized total
equity-based compensation expense related to stock options, ESPP
shares, restricted stock units and restricted stock of
$216 million (or $0.11 per diluted share) and
$161 million (of $0.08 per diluted share), respectively.
During fiscal 2006 and 2007, Applied recognized income tax
benefits related to equity-based compensation of
$46 million and $45 million, respectively. The
equity-based
compensation expense related to restricted stock units and
restricted stock for fiscal 2006 and fiscal 2007 was
$30 million and $104 million, respectively.
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 Year
|
|
2006
|
|
|
2007
|
|
|
Stock Options:
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0.73
|
%
|
|
|
1.12
|
%
|
Expected volatility
|
|
|
36.7
|
%
|
|
|
31.5
|
%
|
Risk-free interest rate
|
|
|
4.48
|
%
|
|
|
4.66
|
%
|
Expected life (in years)
|
|
|
3.8
|
|
|
|
3.9
|
|
51
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
$165 million and $190 million at October 29, 2006
and October 28, 2007, respectively. The weighted average
grant date fair value of options granted during fiscal 2006 and
fiscal 2007 was $54 million and $2 million,
respectively. The total intrinsic value of options exercised
during fiscal 2006 and fiscal 2007 was $57 million and
$141 million, respectively. The total fair value of options
that vested during fiscal 2006 and fiscal 2007 was
$256 million and $124 million, respectively. 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. At October 28,
2007, Applied had $48 million of total unrecognized
compensation expense, net of estimated forfeitures, related to
stock option plans that will be recognized over the weighted
average period of 0.8 years. Cash received from stock
option exercises was $284 million and $837 million,
respectively, during fiscal 2006 and fiscal 2007. The actual tax
benefit realized for the tax deductions from options exercised
for fiscal 2006 and fiscal 2007 totaled $24 million and
$50 million, respectively. During fiscal 2006, as part of
the acquisition of Applied Films, Applied assumed outstanding
options to purchase Applied Films common stock that, at the
acquisition date, had a fair value of $26 million,
including $6 million of total unrecognized compensation
expense, net of $2 million of estimated forfeitures (see
Note 12). The Applied Films stock options assumed by
Applied were converted into options to purchase 3 million
shares of Applied common stock.
Employee
Stock Purchase Plans
Under the ESPP, substantially all employees may purchase Applied
common stock through payroll deductions at a price equal to
85 percent of the lower of the fair market value at the
beginning of the applicable offering period or at the end of
each purchase period. The number of shares issued under the ESPP
during fiscal 2006 and fiscal 2007 was 4,065,000 shares and
4,310,000 shares, respectively. Based on the Black-Scholes
option pricing model, the weighted average estimated fair value
of purchase rights under the ESPP was $5.21 per share for the
year ended October 29, 2006 and $4.83 per share for the
year ended October 28, 2007. 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:
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2006
|
|
|
2007
|
|
|
ESPP:
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0.32
|
%
|
|
|
1.18
|
%
|
Expected volatility
|
|
|
31.1
|
%
|
|
|
28.5
|
%
|
Risk-free interest rate
|
|
|
2.81
|
%
|
|
|
4.93
|
%
|
Expected life (in years)
|
|
|
1.25
|
|
|
|
1.25
|
|
Restricted
Stock Units and Restricted Stock
Restricted stock units are converted into shares of Applied
common stock upon vesting on a one-for-one basis. 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 vesting period.
Restricted stock units vest over a minimum of three years and
typically vest over three to 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). At October 28, 2007, Applied had
$271 million total unrecognized compensation expense, net
of estimated forfeitures, related to restricted stock unit
grants, which will be recognized over the weighted
52
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
average period of 1.5 years (see Note 8). During
fiscal 2006, as part of the acquisition of Applied Films,
Applied assumed Applied Films outstanding restricted stock
units that, at the acquisition date, had a fair value of
$298,000, including $130,000 of total unrecognized equity-based
compensation expense, net of estimated forfeitures. The Applied
Films restricted stock units assumed are expected to convert
into 19,000 shares of Applied common stock upon vesting.
On January 25, 2007, the Human Resources and Compensation
Committee (the Committee) of the Board of Directors approved new
awards of 1,950,000 performance-based restricted stock units for
Applieds named executive officers and other key employees.
The Committee also approved the issuance of 150,000 shares
of restricted stock to Applieds President and Chief
Executive Officer at $0.01 per share. These awards will vest
only if specific performance goals set by the Committee are
achieved. The goals require the achievement of specified levels
of Applieds annual operating profit and also that the
officer remain an employee of Applied through the vesting date.
The fair value of the performance-based restricted stock units
and restricted stock was estimated using the fair value of
Applied common stock on the date of the grant and assumes that
performance goals will be achieved. If such goals are not met,
no compensation cost will be recognized and any recognized
compensation cost will be reversed. The expected cost of the
grant is being reflected over the vesting period, and is reduced
for estimated forfeitures. Fiscal 2007 equity-based compensation
expense included $13 million attributable to the
performance-based awards granted on January 25, 2007.
Pro Forma
Information under SFAS 123 for Fiscal 2005
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 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 2005
|
|
|
|
|
Reported net income
|
|
$
|
1,209,900
|
|
Equity-based compensation expense, net of tax
|
|
|
(312,116
|
)
|
|
|
|
|
|
Pro forma net income
|
|
$
|
897,784
|
|
|
|
|
|
|
Earnings per share as reported:
|
|
|
|
|
Basic
|
|
$
|
0.74
|
|
Diluted
|
|
$
|
0.73
|
|
Pro forma earnings per share:
|
|
|
|
|
Basic
|
|
$
|
0.55
|
|
Diluted
|
|
$
|
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:
|
|
|
|
|
|
|
|
|
Fiscal 2005
|
|
Stock Options
|
|
|
ESPP
|
|
|
Dividend yield
|
|
|
0.11
|
%
|
|
|
0.01
|
%
|
Expected volatility
|
|
|
44
|
%
|
|
|
48
|
%
|
Risk-free interest rate
|
|
|
3.45
|
%
|
|
|
2.51
|
%
|
Expected life (in years)
|
|
|
4.0
|
|
|
|
1.25
|
|
53
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Based on the Black-Scholes option pricing model, the weighted
average estimated fair value of employee stock option grants was
$6.46. The weighted average estimated fair value of purchase
rights granted under the ESPP was $5.65. The computation of the
expected volatility assumption used in the Black-Scholes
calculations for new grants was based on a combination of
historical and implied volatilities.
Defined
Benefit Pension Plans of Foreign Subsidiaries
On October 28, 2007, Applied implemented the recognition
and disclosure provisions of SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of FASB
Statements 87, 88, 106 and 132(R) (SFAS 158).
SFAS 158 required Applied to recognize the funded status
(the difference between the fair value of plan assets and the
projected benefit obligations) of the defined benefit plan in
the Consolidated Balance Sheet, with a corresponding adjustment
to accumulated other comprehensive income, net of tax, to
measure the fair value of plan benefit obligations as of its
fiscal year ending October 28, 2007 and to provide
additional disclosures. The implementation of SFAS 158 did
not have a material impact on Applieds financial
statements. For additional information on Applieds
employee benefit plans, see Note 8.
Concentrations of Credit Risk Financial instruments that
potentially subject Applied to significant concentrations of
credit risk consist principally of cash equivalents,
investments, trade accounts receivable and derivative financial
instruments used in hedging activities. Applied invests in a
variety of financial instruments, such as, but not limited to,
certificates of deposit, corporate and municipal bonds, United
States Treasury and agency securities, and mortgage-backed
securities, and, by policy, limits the amount of credit exposure
with any one financial institution or commercial issuer.
Applieds customers consist principally of semiconductor
and LCD manufacturers located throughout the world. Applied
performs ongoing credit evaluations of its customers
financial condition and generally requires no collateral to
secure accounts receivable. Applied maintains an allowance
reserve for potentially uncollectible accounts receivable based
on its assessment of the collectibility of accounts receivable.
Applied regularly reviews the allowance by considering factors
such as historical experience, credit quality, age of the
accounts receivable balances, and current economic conditions
that may affect a customers ability to pay. In addition,
Applied utilizes letters of credit to mitigate credit risk when
considered appropriate. Applied is exposed to credit-related
losses in the event of nonperformance by counterparties to
derivative financial instruments, but does not expect any
counterparties to fail to meet their obligations.
Earnings Per Share Basic earnings per share is determined
using the weighted average number of common shares outstanding
during the period. Diluted earnings per share is determined
using the weighted average number of common shares and potential
common shares (representing the dilutive effect of stock
options, restricted stock units, ESPP shares and amounts due
under the agreements associated with the accelerated stock
buyback program) outstanding during the period. Applieds
net income has not been adjusted for any period presented for
purposes of computing basic or diluted earnings per share.
For purposes of computing diluted earnings per share, weighted
average potential common shares do not include stock options
with an exercise price that exceeded the average fair market
value of Applieds common stock for the period, as the
effect would be anti-dilutive. Accordingly, options to purchase
124,306,000, 123,317,000 and 51,094,000 shares of common
stock for the fiscal years ended October 30, 2005,
October 29, 2006 and October 28, 2007, respectively,
were excluded from the computation.
Recent
Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board
(FASB) issued SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities Including
an Amendment of FASB Statement No. 115
(SFAS No. 159), which permits entities to elect to
measure many financial instruments and certain other items at
fair value that are not currently required to be measured at
fair value. This election is irrevocable. SFAS No. 159
will be effective for Applied in fiscal 2009. Applied is
evaluating the potential impact of the implementation of
SFAS No. 159 on its financial position and results of
operations.
54
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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
will continue to evaluate the application of FIN 48.
Management does not believe the effect of implementing
FIN 48 will have a material impact on its 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Investments by security type at October 28, 2007 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Obligations of states and political subdivisions
|
|
$
|
1,083,637
|
|
|
$
|
1,817
|
|
|
$
|
333
|
|
|
$
|
1,085,121
|
|
U.S. Treasury and agency securities
|
|
|
517,805
|
|
|
|
3,616
|
|
|
|
308
|
|
|
|
521,113
|
|
U.S. commercial paper, corporate bonds and medium-term notes
|
|
|
490,066
|
|
|
|
1,219
|
|
|
|
1,680
|
|
|
|
489,605
|
|
Other debt securities
|
|
|
341,650
|
|
|
|
1,683
|
|
|
|
1,898
|
|
|
|
341,435
|
|
Bank certificate of deposit
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed income securities
|
|
|
2,435,158
|
|
|
|
8,335
|
|
|
|
4,219
|
|
|
|
2,439,274
|
|
Publicly traded equity securities
|
|
|
27,651
|
|
|
|
25,846
|
|
|
|
3,730
|
|
|
|
49,767
|
|
Equity securities carried at cost
|
|
|
40,241
|
|
|
|
|
|
|
|
|
|
|
|
40,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,503,050
|
|
|
$
|
34,181
|
|
|
$
|
7,949
|
|
|
$
|
2,529,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents included investments in debt and other
securities of $75 million at October 29, 2006 and
$159 million at October 28, 2007.
Contractual maturities of investments at October 28, 2007
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Due in one year or less
|
|
$
|
524,700
|
|
|
$
|
524,867
|
|
Due after one through three years
|
|
|
621,939
|
|
|
|
623,345
|
|
Due after three years
|
|
|
930,627
|
|
|
|
933,425
|
|
No single maturity date*
|
|
|
425,784
|
|
|
|
447,645
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,503,050
|
|
|
$
|
2,529,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
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 28, 2007 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 28, 2007, as it has the ability and
intent to hold the investments for a period of time that may be
sufficient for an anticipated recovery in fair market value.
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
56
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 28,
2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
31,962
|
|
|
$
|
9
|
|
|
$
|
161,419
|
|
|
$
|
325
|
|
|
$
|
193,381
|
|
|
$
|
334
|
|
U.S. commercial paper, corporate bonds and medium-term notes
|
|
|
119,805
|
|
|
|
725
|
|
|
|
113,132
|
|
|
|
954
|
|
|
|
232,937
|
|
|
|
1,679
|
|
U.S. Treasury and agency securities
|
|
|
|
|
|
|
|
|
|
|
81,063
|
|
|
|
308
|
|
|
|
81,063
|
|
|
|
308
|
|
Other debt securities
|
|
|
37,190
|
|
|
|
273
|
|
|
|
98,583
|
|
|
|
1,626
|
|
|
|
135,773
|
|
|
|
1,899
|
|
Publicly traded equity securities
|
|
|
10,346
|
|
|
|
3,730
|
|
|
|
|
|
|
|
|
|
|
|
10,346
|
|
|
|
3,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
199,303
|
|
|
$
|
4,737
|
|
|
$
|
454,197
|
|
|
$
|
3,213
|
|
|
$
|
653,500
|
|
|
$
|
7,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. For fiscal 2007, gross realized gains
on sales of investments were $2 million, and gross realized
losses were $2 million.
Derivative Financial Instruments Derivative instruments
and hedging activities, including foreign currency exchange
contracts, are recognized on the balance sheet at fair value.
Changes in the fair value of derivatives that do not qualify for
hedge treatment, as well as the ineffective portion of any
hedges, are recognized currently in earnings. All of
Applieds derivative financial instruments are recorded at
their fair value in other current assets or accounts payable and
accrued expenses.
Applied conducts business in a number of foreign countries, with
certain transactions denominated in local currencies, such as
Japanese yen, euro, Israeli shekel and Swiss francs. The purpose
of Applieds foreign currency management is to mitigate the
effect of exchange rate fluctuations on certain foreign currency
denominated revenues, costs and eventual cash flows. The terms
of currency instruments used for hedging purposes are generally
consistent with the timing of the transactions being hedged.
Applied uses derivative financial instruments, such as forward
exchange contracts and currency option contracts, to hedge
certain forecasted foreign currency denominated transactions
expected to occur typically within the next 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 28, 2007 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 and general and
administrative expenses. The change in option and forward time
value was not material for fiscal 2005, 2006 or 2007. 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.
57
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Forward exchange contracts are generally used to hedge certain
foreign currency denominated assets or liabilities. These
derivatives are not designated for hedge accounting treatment.
Accordingly, changes in the fair value of these hedges are
recorded promptly in earnings to offset the changes in the fair
value of the assets or liabilities being hedged.
Derivative-related activity in accumulated other comprehensive
income/(loss), net of taxes, was as follows:
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Unrealized gain on derivative instruments at beginning of period
|
|
$
|
9,207
|
|
|
$
|
4,318
|
|
Decrease in fair value of derivative instruments
|
|
|
(5,095
|
)
|
|
|
(6,012
|
)
|
Losses reclassified into earnings, net
|
|
|
206
|
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain/(loss), net, on derivative instruments at end of
period
|
|
$
|
4,318
|
|
|
$
|
(1,409
|
)
|
|
|
|
|
|
|
|
|
|
Fair Value of Financial Instruments The carrying amounts
of Applieds financial instruments, including cash and cash
equivalents, accounts receivable, notes payable, and accounts
payable and accrued expenses, approximate fair value due to the
short maturities of these financial instruments. At
October 29, 2006, the carrying amount of long-term debt was
$407 million and the estimated fair value was
$428 million. At October 28, 2007, the carrying amount
of long-term debt was $205 million and the estimated fair
value was $226 million. The estimated fair value of
long-term debt is based primarily on quoted market prices for
the same or similar issues.
58
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 3
|
Balance
Sheet Detail
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Inventories
|
|
|
|
|
|
|
|
|
Customer service spares
|
|
$
|
466,414
|
|
|
$
|
500,173
|
|
Raw materials
|
|
|
236,913
|
|
|
|
201,055
|
|
Work-in-process
|
|
|
272,654
|
|
|
|
230,244
|
|
Finished goods*
|
|
|
430,796
|
|
|
|
381,765
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,406,777
|
|
|
$
|
1,313,237
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment, Net
|
|
|
|
|
|
|
|
|
Land and improvements
|
|
$
|
222,381
|
|
|
$
|
218,181
|
|
Buildings and improvements
|
|
|
1,241,195
|
|
|
|
1,253,322
|
|
Demonstration and manufacturing equipment
|
|
|
659,551
|
|
|
|
639,640
|
|
Furniture, fixtures and other equipment
|
|
|
553,185
|
|
|
|
563,373
|
|
Construction in progress
|
|
|
77,571
|
|
|
|
107,688
|
|
|
|
|
|
|
|
|
|
|
Gross property, plant and equipment
|
|
|
2,753,883
|
|
|
|
2,782,204
|
|
Accumulated depreciation
|
|
|
(1,729,589
|
)
|
|
|
(1,730,962
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,024,294
|
|
|
$
|
1,051,242
|
|
|
|
|
|
|
|
|
|
|
Accounts Payable and Accrued Expenses
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
475,479
|
|
|
$
|
455,894
|
|
Compensation and employee benefits
|
|
|
439,333
|
|
|
|
491,411
|
|
Deferred revenue
|
|
|
369,875
|
|
|
|
445,475
|
|
Installation and warranty
|
|
|
215,578
|
|
|
|
187,149
|
|
Customer deposits
|
|
|
97,495
|
|
|
|
154,737
|
|
Other accrued taxes
|
|
|
84,957
|
|
|
|
67,962
|
|
Dividends payable
|
|
|
69,600
|
|
|
|
83,142
|
|
Restructuring reserve
|
|
|
24,731
|
|
|
|
23,193
|
|
Other
|
|
|
246,603
|
|
|
|
304,350
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,023,651
|
|
|
$
|
2,213,313
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Included in finished goods inventory is $174 million at
October 29, 2006 and $168 million at October 28,
2007 of newly introduced systems at customer locations where the
sales transaction did not meet Applieds revenue
recognition criteria, as set forth in Note 1. |
59
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Goodwill,
Purchased Technology and Other Intangible Assets
Details of unamortized intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Intangible
|
|
|
|
|
|
|
|
|
Intangible
|
|
|
|
|
|
|
Goodwill
|
|
|
Assets
|
|
|
Total
|
|
|
Goodwill
|
|
|
Assets
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Gross carrying amount
|
|
$
|
618,428
|
|
|
$
|
17,860
|
|
|
$
|
636,288
|
|
|
$
|
1,046,046
|
|
|
$
|
17,860
|
|
|
$
|
1,063,906
|
|
Accumulated amortization
|
|
|
(45,870
|
)
|
|
|
|
|
|
|
(45,870
|
)
|
|
|
(45,870
|
)
|
|
|
|
|
|
|
(45,870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
572,558
|
|
|
$
|
17,860
|
|
|
$
|
590,418
|
|
|
$
|
1,000,176
|
|
|
$
|
17,860
|
|
|
$
|
1,018,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and unamortized intangible assets are not amortized but
are subject to annual reviews for impairment, which Applied
performs during the fourth quarter of each fiscal year. Applied
conducted these impairment tests in fiscal 2006 and fiscal 2007,
and the results of these tests indicated that Applieds
goodwill and unamortized intangible assets were not impaired.
Goodwill and unamortized intangible assets are also subject to
review for impairment when circumstances or events occur during
the year that indicate that the assets may be impaired. From
October 29, 2006 to October 28, 2007, the change in
goodwill was $428 million, primarily due to the
acquisitions of HCT Shaping Systems SA (HCT) and Brooks Software
(see Note 12). 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 28, 2007 goodwill and
unamortized intangible assets by reportable segment was:
Adjacent Technologies, $484 million; Silicon,
$224 million; Fab Solutions, $194 million and Display,
$116 million.
Details of amortized intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Purchased
|
|
|
Intangible
|
|
|
|
|
|
Purchased
|
|
|
Intangible
|
|
|
|
|
|
|
Technology
|
|
|
Assets
|
|
|
Total
|
|
|
Technology
|
|
|
Assets
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Gross carrying amount
|
|
$
|
469,226
|
|
|
$
|
75,617
|
|
|
$
|
544,843
|
|
|
$
|
518,042
|
|
|
$
|
224,253
|
|
|
$
|
742,295
|
|
Accumulated amortization
|
|
|
(327,335
|
)
|
|
|
(34,302
|
)
|
|
|
(361,637
|
)
|
|
|
(340,527
|
)
|
|
|
(46,450
|
)
|
|
|
(386,977
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
141,891
|
|
|
$
|
41,315
|
|
|
$
|
183,206
|
|
|
$
|
177,515
|
|
|
$
|
177,803
|
|
|
$
|
355,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased technology and other intangible assets are amortized
over their estimated useful lives of 1 to 15 years using
the straight-line method. From October 29, 2006 to
October 28, 2007, the change in gross carrying amount of
the amortized intangible assets was approximately
$197 million, primarily due to the acquisitions of HCT and
Brooks Software (see Note 12). Aggregate amortization
expense was $31 million and $57 million for fiscal
2006 and 2007, respectively. As of October 28, 2007, future
estimated amortization expense is expected to be
$92 million for fiscal 2008, $45 million for fiscal
2009, $44 million for fiscal 2010, $41 million for
fiscal 2011, $40 million for fiscal 2012, and
$93 million thereafter. As of October 28, 2007,
amortized intangible assets by reportable segment were: Adjacent
Technologies, $245 million; Fab Solutions,
$58 million; Display, $50 million; and Silicon,
$2 million.
|
|
Note 4
|
Borrowing
Facilities
|
At October 28, 2007, Applied had credit facilities for
unsecured borrowings in various currencies of up to
$1.2 billion, of which $1.0 billion is comprised of a
5-year
revolving credit agreement with a group of banks that is
scheduled to expire in January 2012. This agreement provides for
borrowings in United States dollars at interest rates keyed to
one of the two rates selected by Applied for each advance, and
includes financial and other covenants with which Applied was in
compliance at October 28, 2007. No amounts were outstanding
under this agreement at
60
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
October 28, 2007. Of the remaining credit facilities,
$167 million are with Japanese banks at rates indexed to
their prime reference rate denominated in Japanese yen. No
amounts were outstanding under these credit facilities at
October 28, 2007.
Long-term debt outstanding at the end of the fiscal year was as
follows:
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
1.61% installment note payable to Tokyo Electron Ltd., face
amount $1,800, maturing 2008, interest payable March 17,
June 17, September 17 and December 17
|
|
$
|
3,310
|
|
|
$
|
1,649
|
|
Japanese debt, 3.00%, maturing 2008 2011
|
|
|
3,933
|
|
|
|
3,193
|
|
6.75% unsecured senior notes which matured in 2007, interest
payable April 15 and October 15
|
|
|
200,000
|
|
|
|
|
|
7.125% unsecured senior notes due 2017, interest payable April
15 and October 15
|
|
|
200,000
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
407,243
|
|
|
|
204,842
|
|
Current portion
|
|
|
(202,535
|
)
|
|
|
(2,561
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
204,708
|
|
|
$
|
202,281
|
|
|
|
|
|
|
|
|
|
|
Applied has debt agreements that contain financial and other
covenants. These covenants require Applied to maintain certain
minimum financial ratios. At October 28, 2007, Applied was
in compliance with all covenants.
Aggregate debt maturities at October 28, 2007 were:
$3 million in fiscal 2008, $913,000 in fiscal 2009,
$912,000 in fiscal 2010, $456,000 in fiscal 2011 and
$200 million thereafter.
|
|
Note 6
|
Restructuring
and Asset Impairments
|
During fiscal 2007, Applied recognized restructuring and asset
impairment charges of $26 million, including
$18 million in restructuring charges and $8 million in
asset impairments. Fiscal 2007 restructuring and asset
impairment charges included $30 million associated with the
decision to cease development of beamline implant products,
offset by $3 million in adjustments associated with
subsequent sales of properties held for sale. During fiscal
2006, Applied recognized restructuring and asset impairment
charges of $212 million, including $128 million in
asset impairments and $92 million in restructuring charges
primarily associated with the closure of its Hayward, California
facility, offset by $8 million in adjustments associated
with realignment programs of prior years.
On February 9, 2007, the Board of Directors of Applied
approved a plan (the Plan) to cease development of beamline
implant products for semiconductor manufacturing and curtail the
operations of its Implant group based in Horsham, England. Under
the Plan, Applied closed its research and development and
manufacturing operations in Horsham in October 2007. The total
cost of implementing the Plan is expected to be in the range of
$95 million to $110 million, and is reported in the
Consolidated Statements of Operations under cost of products
sold and operating expenses (including restructuring and asset
impairment charges). The majority of the cash outlays in
connection with the Plan occurred in fiscal 2007. The Implant
group operated in the Silicon segment and the results of its
operations were not material to the segments financial
position or results of operations.
Costs under the Plan in fiscal 2007 consisted primarily of
inventory-related charges reported as cost of products sold of
$56 million, other operating expenses of $10 million,
and restructuring and asset impairment charges of
$30 million. Applied recorded restructuring charges of
$22 million, consisting primarily of employee termination
costs to reduce its workforce by approximately 215 positions.
The majority of the affected employees were based in Horsham,
England, and represented multiple functions. Asset impairment
charges included $8 million of fixed asset write-offs.
61
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Changes in restructuring reserves related to the Plan for fiscal
2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
Facilities
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Provision for restructuring reserves
|
|
$
|
19,992
|
|
|
$
|
1,105
|
|
|
$
|
21,097
|
|
Consumption of reserves
|
|
|
(10,902
|
)
|
|
|
(285
|
)
|
|
|
(11,187
|
)
|
Foreign currency changes
|
|
|
649
|
|
|
|
2
|
|
|
|
651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 28, 2007
|
|
$
|
9,739
|
|
|
$
|
822
|
|
|
$
|
10,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the first quarter of fiscal 2006, Applieds Board of
Directors approved a plan to disinvest a portion of
Applieds real estate and facilities portfolio (the
Disinvestment Plan). Properties with an estimated fair value of
$56 million were reported as assets held-for-sale and
reclassified from property, plant and equipment on the
Consolidated Balance Sheet. During fiscal 2006, Applied recorded
an asset impairment charge of $124 million to write down
the following properties to estimated fair value:
(1) facilities in Narita, Japan, Chunan, Korea, Hillsboro,
Oregon, and Danvers, Massachusetts; and (2) 26 acres
of unimproved land in Hillsboro, Oregon. During fiscal 2006,
Applied sold the Danvers facility for net proceeds of
$16 million and recognized a gain of $4 million.
During fiscal 2007, Applied sold the Hillsboro, Chunan, and
Narita facilities and the Hillsboro land for total net proceeds
of $38 million and recognized a gain of $3 million.
During fiscal 2006 as part of the Disinvestment Plan, Applied
recorded lease termination charges in the amount of
$89 million, related to the closure of its leased Hayward,
California facility.
There were no restructuring, asset impairments or other charges
for fiscal 2005.
Changes in restructuring reserves for facilities realignment
programs for fiscal 2005, 2006 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facilities
|
|
|
Other
|
|
|
Total
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumption of reserves
|
|
|
(8,368
|
)
|
|
|
|
|
|
|
(8,368
|
)
|
Adjustment of restructuring reserves
|
|
|
(3,732
|
)
|
|
|
|
|
|
|
(3,732
|
)
|
Foreign currency changes
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 28, 2007
|
|
$
|
12,632
|
|
|
$
|
|
|
|
$
|
12,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 7
|
Stockholders
Equity
|
Accumulated Other Comprehensive Income/(Loss) See the
Consolidated Statements of Stockholders Equity for the
components of comprehensive income. Accumulated other
comprehensive income/(loss), net of taxes, consisted of the
following components:
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Unrealized gain (loss) on investments
|
|
$
|
(5,132
|
)
|
|
$
|
16,755
|
|
Unrealized gain (loss) on derivative instruments qualifying as
cash flow hedges
|
|
|
4,319
|
|
|
|
(1,409
|
)
|
Pension liability
|
|
|
(17,985
|
)
|
|
|
(12,232
|
)
|
Retiree medical benefits
|
|
|
|
|
|
|
(1,132
|
)
|
Cumulative translation adjustments
|
|
|
(212
|
)
|
|
|
9,371
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(19,010
|
)
|
|
$
|
11,353
|
|
|
|
|
|
|
|
|
|
|
Stock Repurchase Program Since March 1996, Applied has
systematically repurchased shares of its common stock in the
open market. In March 2006, the Board of Directors approved a
stock repurchase program for up to $5.0 billion in
repurchases over the next three years ending in March 2009.
Pursuant to this authorization, on September 18, 2006,
Applied entered into accelerated stock buyback agreements with
Goldman, Sachs & Co. (Goldman Sachs), under which
Applied agreed to purchase from Goldman Sachs outstanding shares
of Applied common stock for an initial purchase price of
$2.5 billion. Under the agreements, Applied purchased
145 million shares of its common stock on
September 18, 2006 at a price per share of $17.20, and
Goldman Sachs agreed to purchase an equivalent number of shares
in the open market over the following four months. At the end of
the four month period, Applied was entitled or subject to a
price adjustment based upon the volume weighted average price of
Applied common stock during the purchase period. On
January 24, 2007, Applied settled the price adjustment of
$132 million by payment in cash to Goldman Sachs, resulting
in an adjusted price per share of $18.08. The repurchase was
funded with Applieds existing cash and investments and
reported as treasury stock.
On September 15, 2006, the Board of Directors approved a
new stock repurchase program for up to $5.0 billion in
repurchases over the next three years ending in September 2009,
of which authorization for $3.8 billion of repurchases
remained as of October 28, 2007. Under this authorization,
Applied is continuing a systematic stock repurchase program and
also may make supplemental stock repurchases from time to time,
depending on market conditions, stock price and other factors.
In fiscal 2006, there were 238,397,000 shares repurchased
at an average price of $17.35 per share. In fiscal 2007, there
were 60,561,000 shares repurchased at an average price of
$19.81 per share.
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. During fiscal 2007, Applieds
Board of Directors declared one quarterly cash dividend in the
amount of $0.05 per share and three quarterly cash dividends in
the amount of $0.06 per share each. The fourth quarterly cash
dividend declared in fiscal 2007 was paid on December 6,
2007 to stockholders of record as of November 15, 2007.
Dividends paid during fiscal 2005, 2006 and fiscal 2007 amounted
to $98 million, $251 million and $306 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 Applieds stockholders.
63
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
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
138,377,000 shares available for grant at October 30,
2005, 144,582,000 shares available for grant at
October 29, 2006, and 156,322,624 shares available for
grant at October 28, 2007. Stock option activity was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
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
|
|
|
227,588
|
|
|
$
|
17.93
|
|
|
|
200,007
|
|
|
$
|
18.67
|
|
|
|
163,214
|
|
|
$
|
18.83
|
|
Granted and assumed
|
|
|
24,186
|
|
|
$
|
16.97
|
|
|
|
12,174
|
|
|
$
|
16.92
|
|
|
|
311
|
|
|
$
|
17.98
|
|
Exercised
|
|
|
(22,759
|
)
|
|
$
|
8.49
|
|
|
|
(18,498
|
)
|
|
$
|
15.34
|
|
|
|
(46,885
|
)
|
|
$
|
17.86
|
|
Canceled
|
|
|
(29,008
|
)
|
|
$
|
19.48
|
|
|
|
(30,469
|
)
|
|
$
|
19.14
|
|
|
|
(21,739
|
)
|
|
$
|
25.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year
|
|
|
200,007
|
|
|
$
|
18.67
|
|
|
|
163,214
|
|
|
$
|
18.83
|
|
|
|
94,901
|
|
|
$
|
17.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of year
|
|
|
135,714
|
|
|
$
|
20.21
|
|
|
|
130,065
|
|
|
$
|
19.59
|
|
|
|
83,178
|
|
|
$
|
17.84
|
|
The following table summarizes information with respect to
options outstanding and exercisable at October 28, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
44
|
|
|
$
|
3.09
|
|
|
|
1.30
|
|
|
$
|
696
|
|
|
|
44
|
|
|
$
|
3.09
|
|
|
$
|
696
|
|
$5.00 $9.99
|
|
|
98
|
|
|
$
|
6.58
|
|
|
|
4.11
|
|
|
|
1,199
|
|
|
|
98
|
|
|
$
|
6.58
|
|
|
|
1,199
|
|
$10.00 $19.99
|
|
|
68,568
|
|
|
$
|
16.23
|
|
|
|
2.84
|
|
|
|
187,820
|
|
|
|
57,797
|
|
|
$
|
16.06
|
|
|
|
168,588
|
|
$20.00 $29.99
|
|
|
26,182
|
|
|
$
|
22.01
|
|
|
|
2.44
|
|
|
|
|
|
|
|
25,230
|
|
|
$
|
21.98
|
|
|
|
|
|
$30.00 $59.99
|
|
|
9
|
|
|
$
|
41.32
|
|
|
|
2.25
|
|
|
|
|
|
|
|
9
|
|
|
$
|
41.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94,901
|
|
|
$
|
17.81
|
|
|
|
2.73
|
|
|
$
|
189,715
|
|
|
|
83,178
|
|
|
$
|
17.84
|
|
|
$
|
170,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable and expected to become exercisable
|
|
|
93,961
|
|
|
$
|
17.80
|
|
|
|
2.7
|
|
|
$
|
188,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
64
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the changes in restricted stock units outstanding
under Applieds equity compensation plans during fiscal
2007 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Grant Date
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Contractual Term
|
|
|
Value
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Non-vested restricted stock units at October 29, 2006
|
|
|
14,117
|
|
|
$
|
17.67
|
|
|
|
3.7 Years
|
|
|
$
|
243,653
|
|
Granted
|
|
|
10,691
|
|
|
|
19.18
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(4,512
|
)
|
|
|
17.80
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(1,699
|
)
|
|
|
17.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock units at October 28, 2007
|
|
|
18,597
|
|
|
|
18.51
|
|
|
|
2.9
|
|
|
$
|
350,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock units expected to vest
|
|
|
16,186
|
|
|
|
18.46
|
|
|
|
3.2
|
|
|
$
|
305,262
|
|
Employees Stock Purchase Plan Applied sponsors two
Employee Stock Purchase Plans (collectively, ESPP) for the
benefit of United States (U.S.) and international employees,
respectively. The U.S. plan is qualified under
Section 423 of the Internal Revenue Code. Under the ESPP,
substantially all employees may purchase Applied common stock
through payroll deductions at a price equal to 85 percent
of the lower of the fair market value of the stock at the
beginning of the offering period or at the end of each
applicable purchase period. The ESPP provides for consecutive
and overlapping offering periods of up to 24 months in
duration, with each offering period composed of four consecutive
six-month purchase periods. ESPP contributions are limited to a
maximum of 10 percent of an employees eligible
compensation, up to a maximum of $6,500 per six-month purchase
period. ESPP participants are also limited to purchasing a
maximum of 1,000 shares per purchase period. Shares issued
under the ESPP were 4,879,000 for fiscal 2005, 4,065,000 for
fiscal 2006, and 4,310,000 for fiscal 2007. At October 28,
2007, there were 76,359,252 shares available for future
issuance under the ESPP.
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 who are not eligible for other performance-based
incentive plans, up to a maximum percentage of eligible
compensation. Other plans award annual bonuses to Applieds
executives and other key contributors based on the achievement
of profitability
and/or other
specified performance criteria. Applied also has agreements with
key technical employees that provide for additional compensation
related to the success of new product development and
achievement of specified profitability criteria. Charges to
expense under these plans were $138 million for fiscal
2005, $262 million for fiscal 2006 and $271 million
for fiscal 2007.
Employee Savings and Retirement Plan Applieds
Employee Savings and Retirement Plan (401(k) Plan) is qualified
under Sections 401(a) and (k) of the Internal Revenue
Code. Eligible employees may make salary deferral and
catch-up
contributions under the 401(k) Plan on a pre-tax basis. Applied
matches a percentage of each participants salary deferral
contributions with cash contributions. In general, these
matching contributions become 20 percent vested at the end
of an employees second year of service with Applied, and
vest 20 percent per year of service thereafter, becoming
fully vested at the end of six years of service. Participants
may direct that funds held in their 401(k) Plan accounts,
including any Applied matching contributions, be invested in any
of the diversified investment funds available under the 401(k)
Plan or in the Applied Materials, Inc. Common Stock Fund (Stock
Fund), which invests solely in shares of Applied common stock.
Effective June 21, 2007, the Stock Fund was converted into
a non-leveraged employee stock ownership plan (within the
meaning of Section 4975(e)(7) of the Internal Revenue Code)
and, as a result, participants have the option of specifying
that any future cash dividends paid on shares held in the Stock
Fund be either reinvested in the Stock Fund or distributed
directly to them in cash no later than 90 days after the
calendar year for which the dividends were paid. Applieds
matching contributions under this plan were approximately
$25 million, net of $1 million in forfeitures, for
fiscal 2005, $27 million, net of $2 million in
forfeitures, for fiscal 2006 and $28 million, net of
$1 million in forfeitures, for fiscal 2007.
65
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
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.
On October 28, 2007, Applied implemented the recognition
and disclosure provisions of SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of FASB
Statements 87, 88, 106 and 132(R) (SFAS 158).
SFAS 158 required Applied to recognize the funded status
(the difference between the fair value of plan assets and the
projected benefit obligations) of the defined benefit plan in
the Consolidated Balance Sheet, with a corresponding adjustment
to accumulated other comprehensive income, net of tax, to
measure the fair value of plan benefit obligations as of its
fiscal year ending October 28, 2007 and to provide
additional disclosures.
Upon implementation, SFAS 158 requires an adjustment to
accumulated other comprehensive income for the net unrecognized
actuarial losses, unrecognized prior service costs and
unrecognized transition obligations remaining from the initial
adoption of SFAS No. 87, Employers
Accounting for Pensions (SFAS 87), all of which were
previously netted against the plans funded status in the
Consolidated Balance Sheet. These amounts will be subsequently
recognized as net periodic pension cost in accordance with
SFAS 87. The implementation of SFAS 158 had no effect
on Applieds Consolidated Statement of Operations for the
year ended October 28, 2007, or for any prior period
presented, and it is not expected to affect Applieds
operating results in future periods.
The incremental effect of applying SFAS 158 on the
Consolidated Balance Sheet at October 28, 2007 is presented
in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After
|
|
|
|
Before
|
|
|
SFAS No.
|
|
|
Adoption
|
|
|
|
Adoption of
|
|
|
158
|
|
|
of SFAS
|
|
|
|
SFAS 158
|
|
|
Adjustment
|
|
|
No. 158
|
|
|
|
(In thousands)
|
|
|
Deferred income taxes
|
|
$
|
487,444
|
|
|
$
|
(959
|
)
|
|
$
|
486,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for pension benefits
|
|
$
|
131,853
|
|
|
$
|
(3,250
|
)
|
|
$
|
128,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
2,835,916
|
|
|
$
|
(3,250
|
)
|
|
$
|
2,832,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$
|
9,062
|
|
|
$
|
2,291
|
|
|
$
|
11,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
7,819,118
|
|
|
$
|
2,291
|
|
|
$
|
7,821,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in accumulated other comprehensive income at
October 28, 2007 are the following amounts that have not
yet been recognized in net periodic pension cost: unrecognized
transition obligation of $343,000 ($240,000 net of tax),
unrecognized prior service costs of $2.4 million
($1.6 million net of tax) and unrecognized actuarial losses
of $19.5 million ($13.6 million net of tax). The
transition obligation, prior service cost, and actuarial loss
expected to be recognized in net periodic pension cost during
the fiscal year-ended October 28, 2008 are $80,000
($51,000 net of tax), $230,000 ($197,000 net of tax),
and $585,000 ($374,000 net of tax), respectively.
66
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the changes in benefit obligations and plan assets
for fiscal 2006 and 2007 is presented below.
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands, except percentages)
|
|
|
Change in projected benefit obligation
|
|
|
|
|
|
|
|
|
Beginning projected benefit obligation
|
|
$
|
186,435
|
|
|
$
|
224,321
|
|
Service cost
|
|
|
15,429
|
|
|
|
15,768
|
|
Interest cost
|
|
|
8,938
|
|
|
|
10,776
|
|
Plan participants contributions
|
|
|
1,176
|
|
|
|
1,331
|
|
Actuarial loss
|
|
|
(12,113
|
)
|
|
|
(20,198
|
)
|
Curtailments, settlements and special termination benefits
|
|
|
(5,446
|
)
|
|
|
(5,970
|
)
|
Foreign currency exchange rate changes
|
|
|
9,332
|
|
|
|
20,361
|
|
Benefits paid
|
|
|
(7,763
|
)
|
|
|
(8,981
|
)
|
Plan amendments and business combinations
|
|
|
28,844
|
|
|
|
10,421
|
|
Transfers out
|
|
|
(511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending projected benefit obligation
|
|
$
|
224,321
|
|
|
$
|
247,829
|
|
|
|
|
|
|
|
|
|
|
Ending accumulated benefit obligation
|
|
$
|
185,449
|
|
|
$
|
214,073
|
|
|
|
|
|
|
|
|
|
|
Range of assumptions to determine benefit obligations
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
2.3% - 5.8%
|
|
|
|
2.3% - 6.3%
|
|
Rate of compensation increase
|
|
|
2.0% - 6.0%
|
|
|
|
2.0% - 6.0%
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Beginning fair value of plan assets
|
|
$
|
64,151
|
|
|
$
|
92,422
|
|
Return on plan assets
|
|
|
6,790
|
|
|
|
6,276
|
|
Employer contributions
|
|
|
23,354
|
|
|
|
11,424
|
|
Plan participants contributions
|
|
|
1,176
|
|
|
|
1,331
|
|
Foreign currency exchange rate changes
|
|
|
4,714
|
|
|
|
8,846
|
|
Divestitures, settlements and business combinations
|
|
|
|
|
|
|
6,741
|
|
Benefits paid
|
|
|
(7,763
|
)
|
|
|
(8,981
|
)
|
|
|
|
|
|
|
|
|
|
Ending fair value of plan assets
|
|
$
|
92,422
|
|
|
$
|
118,059
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(131,899
|
)
|
|
$
|
(129,766
|
)
|
Unrecognized transition obligations
|
|
|
372
|
|
|
|
|
|
Unrecognized prior service costs
|
|
|
(1,827
|
)
|
|
|
|
|
Unrecognized net actuarial loss
|
|
|
48,197
|
|
|
|
|
|
Employer contributions after the measurement date
|
|
|
1,330
|
|
|
|
1,163
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(83,827
|
)
|
|
$
|
(128,603
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheets
|
|
|
|
|
|
|
|
|
Prepaid benefit cost
|
|
$
|
|
|
|
$
|
|
|
Accrued benefit cost
|
|
|
(112,807
|
)
|
|
|
|
|
Intangible asset
|
|
|
1,403
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
27,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(83,827
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheets
|
|
|
|
|
|
|
|
|
Noncurrent asset
|
|
$
|
|
|
|
$
|
897
|
|
Current liability
|
|
|
|
|
|
|
(1,973
|
)
|
Noncurrent liability
|
|
|
|
|
|
|
(127,527
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
(128,603
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive
income
|
|
|
|
|
|
|
|
|
Noncurrent asset
|
|
$
|
|
|
|
$
|
19,521
|
|
Current liability
|
|
|
|
|
|
|
(2,354
|
)
|
Noncurrent liability
|
|
|
|
|
|
|
343
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
17,510
|
|
|
|
|
|
|
|
|
|
|
Plans with projected benefit obligations in excess of plan
assets
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
224,321
|
|
|
$
|
239,297
|
|
Fair value of plan assets
|
|
$
|
92,422
|
|
|
|
108,794
|
|
Plans with accumulated benefit obligations in excess of plan
assets
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
|
$
|
181,787
|
|
|
$
|
209,090
|
|
Fair value of plan assets
|
|
$
|
86,010
|
|
|
$
|
108,794
|
|
67
APPLIED
MATERIALS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
Plan assets allocation
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
58
|
%
|
|
|
60
|
%
|
Debt securities
|
|
|
37
|
%
|
|
|
34
|
%
|
Cash
|
|
|
5
|
%
|
|
|
4
|
%
|
Real Estate
|
|
|
|
|
|
|
1
|
%
|
Other
|
|
|
|
|
|
|
1
|
%
|
On February 9, 2007, the Board of Directors of Applied
approved a plan to cease development of beamline implant
products for semiconductor manufacturing and curtail the
operations of its Implant group based in Horsham, England (see
Note 6). A reduction in force led to a curtailment loss of
$629,000, which is included in restructuring and asset
impairment expenses on the Consolidated Statement of Operations.
Applieds investment strategy for its defined benefit plans
is to invest assets in a prudent manner, maintaining
well-diversified portfolios with the long-term objective of
meeting the obligations of the plans as they come due. Asset
allocation decisions are typically made by plan fiduciaries with
input from Applieds pension committee. Applieds
asset allocation strategy incorporates a sufficient equity
exposure in order for the plans to benefit from the expected
long-term outperformance of equities relative to the plans
liabilities. Applied retains investment managers, where
appropriate, to manage the assets of the plans. Performance of
investment managers is monitored by plan fiduciaries with the
assistance of local investment consultants. The investment
managers make investment decisions within the guidelines set
forth by plan fiduciaries. Risk management practices include
diversification across asset classes and investment styles, and
periodic rebalancing toward target asset allocation ranges.
Investment managers may use derivative instruments for efficient
portfolio management purposes. Plan assets do not include any of
Applieds own equity or debt securities.
A summary of the components of net periodic pension costs and
the weighted average assumptions used for net periodic pension
cost and benefit obligation calculations for fiscal 2005, 2006
and 2007 is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
(In thousands, except percentages)
|
|
|
Components of net periodic pension cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
13,835
|
|
|
$
|
15,429
|
|
|
$
|
15,768
|
|
Interest cost
|
|
|
7,440
|
|
|
|
8,938
|
|
|
|
10,777
|
|
Expected return on plan assets
|
|
|
(2,727
|
)
|
|
|
(4,362
|
)
|
|
|
(6,050
|
)
|
Amortization of transition obligation
|
|
|
67
|
|
|
|
63
|
|
|
|
281
|
|
Amortization of prior service costs
|
|
|
140
|
|
|
|
174
|
|
|
|
(139
|
)
|
Settlement gain to be recognized
|
|
|
|
|
|
|
(5,569
|
)
|
|
|
|
|
Curtailment loss
|
|
|
|
|
|
|
|
|
|
|
629
|
|
Amortization of net (gain)/loss
|
|
|
1,641
|
|
|
|
2,601
|
|
|
|
1,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$
|
20,396
|
|
|
$
|
17,274
|
|
|
$
|
22,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
2.0% - 6.3%
|
|
|
|
2.0% - 6.3%
|
|
|
|
2.3% - 5.8%
|
|
Expected long-term return on assets
|
|
|
3.5% - 7.5%
|
|
|
|
3.5% - 7.5%
|
|
|
|
2.5% - 8.0%
|
|
Rate of compensation increase
|
|
|
2.0% - 5.0%
|
|
|
|
2.0% - 5.0%
|
|
|
|
2.0% - 6.0%
|
|