Item 1.
Financial Statements
APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
May 1,
2016
|
|
April 26,
2015
|
|
May 1,
2016
|
|
April 26,
2015
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
Net sales
|
$
|
2,450
|
|
|
$
|
2,442
|
|
|
$
|
4,707
|
|
|
$
|
4,801
|
|
Cost of products sold
|
1,446
|
|
|
1,426
|
|
|
2,787
|
|
|
2,826
|
|
Gross profit
|
1,004
|
|
|
1,016
|
|
|
1,920
|
|
|
1,975
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Research, development and engineering
|
386
|
|
|
365
|
|
|
760
|
|
|
716
|
|
Marketing and selling
|
102
|
|
|
109
|
|
|
208
|
|
|
220
|
|
General and administrative
|
91
|
|
|
140
|
|
|
173
|
|
|
257
|
|
Gain on derivatives associated with terminated business combination
|
—
|
|
|
(14
|
)
|
|
—
|
|
|
(92
|
)
|
Total operating expenses
|
579
|
|
|
600
|
|
|
1,141
|
|
|
1,101
|
|
Income from operations
|
425
|
|
|
416
|
|
|
779
|
|
|
874
|
|
Interest expense
|
37
|
|
|
24
|
|
|
79
|
|
|
47
|
|
Interest and other income (loss), net
|
7
|
|
|
(3
|
)
|
|
9
|
|
|
(1
|
)
|
Income before income taxes
|
395
|
|
|
389
|
|
|
709
|
|
|
826
|
|
Provision for income taxes
|
75
|
|
|
25
|
|
|
103
|
|
|
114
|
|
Net income
|
$
|
320
|
|
|
$
|
364
|
|
|
$
|
606
|
|
|
$
|
712
|
|
Earnings per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.29
|
|
|
$
|
0.30
|
|
|
$
|
0.54
|
|
|
$
|
0.58
|
|
Diluted
|
$
|
0.29
|
|
|
$
|
0.29
|
|
|
$
|
0.53
|
|
|
$
|
0.57
|
|
Weighted average number of shares:
|
|
|
|
|
|
|
|
Basic
|
1,113
|
|
|
1,230
|
|
|
1,130
|
|
|
1,227
|
|
Diluted
|
1,119
|
|
|
1,241
|
|
|
1,137
|
|
|
1,241
|
|
See accompanying Notes to Consolidated Condensed Financial Statements.
APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
May 1,
2016
|
|
April 26,
2015
|
|
May 1,
2016
|
|
April 26,
2015
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
Net income
|
$
|
320
|
|
|
$
|
364
|
|
|
$
|
606
|
|
|
$
|
712
|
|
Other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
Change in unrealized net gain on investments
|
3
|
|
|
(3
|
)
|
|
4
|
|
|
(4
|
)
|
Change in unrealized net loss on derivative instruments
|
(4
|
)
|
|
(1
|
)
|
|
(7
|
)
|
|
—
|
|
Change in defined and postretirement benefit plans
|
—
|
|
|
(43
|
)
|
|
—
|
|
|
(43
|
)
|
Change in cumulative translation adjustments
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(2
|
)
|
Other comprehensive loss, net of tax
|
(1
|
)
|
|
(48
|
)
|
|
(3
|
)
|
|
(49
|
)
|
Comprehensive income
|
$
|
319
|
|
|
$
|
316
|
|
|
$
|
603
|
|
|
$
|
663
|
|
See accompanying Notes to Consolidated Condensed Financial Statements.
APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)
|
|
|
|
|
|
|
|
|
|
May 1,
2016
|
|
October 25,
2015
|
|
|
|
|
|
|
ASSETS
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
2,470
|
|
|
$
|
4,797
|
|
Short-term investments
|
170
|
|
|
168
|
|
Accounts receivable, net of allowance for doubtful accounts of $48 at May 1, 2016 and $49 at October 25, 2015
|
1,913
|
|
|
1,739
|
|
Inventories
|
1,924
|
|
|
1,833
|
|
Other current assets
|
251
|
|
|
724
|
|
Total current assets
|
6,728
|
|
|
9,261
|
|
Long-term investments
|
934
|
|
|
946
|
|
Property, plant and equipment, net
|
904
|
|
|
892
|
|
Goodwill
|
3,304
|
|
|
3,302
|
|
Purchased technology and other intangible assets, net
|
668
|
|
|
762
|
|
Deferred income taxes and other assets
|
537
|
|
|
145
|
|
Total assets
|
$
|
13,075
|
|
|
$
|
15,308
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
Current liabilities:
|
|
|
|
Short-term debt
|
$
|
—
|
|
|
$
|
1,200
|
|
Accounts payable and accrued expenses
|
1,630
|
|
|
1,833
|
|
Customer deposits and deferred revenue
|
981
|
|
|
765
|
|
Total current liabilities
|
2,611
|
|
|
3,798
|
|
Long-term debt
|
3,343
|
|
|
3,342
|
|
Other liabilities
|
556
|
|
|
555
|
|
Total liabilities
|
6,510
|
|
|
7,695
|
|
Stockholders’ equity:
|
|
|
|
Common stock
|
11
|
|
|
11
|
|
Additional paid-in capital
|
6,669
|
|
|
6,575
|
|
Retained earnings
|
14,353
|
|
|
13,967
|
|
Treasury stock
|
(14,373
|
)
|
|
(12,848
|
)
|
Accumulated other comprehensive loss
|
(95
|
)
|
|
(92
|
)
|
Total stockholders’ equity
|
6,565
|
|
|
7,613
|
|
Total liabilities and stockholders’ equity
|
$
|
13,075
|
|
|
$
|
15,308
|
|
Amounts as of
May 1, 2016
are unaudited. Amounts as of
October 25, 2015
are derived from the
October 25, 2015
audited consolidated financial statements.
See accompanying Notes to Consolidated Condensed Financial Statements.
APPLIED MATERIALS, INC
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
|
|
Treasury Stock
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Total
|
Six Months Ended May 1, 2016
|
Shares
|
|
Amount
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
Balance at October 25, 2015
|
1,160
|
|
|
$
|
11
|
|
|
$
|
6,575
|
|
|
$
|
13,967
|
|
|
793
|
|
|
$
|
(12,848
|
)
|
|
$
|
(92
|
)
|
|
$
|
7,613
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
606
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
606
|
|
Other comprehensive loss, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
(3
|
)
|
Dividends
|
—
|
|
|
—
|
|
|
—
|
|
|
(220
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(220
|
)
|
Share-based compensation
|
—
|
|
|
—
|
|
|
102
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
102
|
|
Issuance under stock plans, net of a tax benefit of $13 and other
|
10
|
|
|
—
|
|
|
(8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8
|
)
|
Common stock repurchases
|
(81
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
81
|
|
|
(1,525
|
)
|
|
—
|
|
|
(1,525
|
)
|
Balance at May 1, 2016
|
1,089
|
|
|
$
|
11
|
|
|
$
|
6,669
|
|
|
$
|
14,353
|
|
|
874
|
|
|
$
|
(14,373
|
)
|
|
$
|
(95
|
)
|
|
$
|
6,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
|
|
Treasury Stock
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Total
|
Six Months Ended April 26, 2015
|
Shares
|
|
Amount
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
Balance at October 26, 2014
|
1,221
|
|
|
$
|
12
|
|
|
$
|
6,384
|
|
|
$
|
13,072
|
|
|
717
|
|
|
$
|
(11,524
|
)
|
|
$
|
(76
|
)
|
|
$
|
7,868
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
712
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
712
|
|
Other comprehensive loss, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(49
|
)
|
|
(49
|
)
|
Dividends
|
—
|
|
|
—
|
|
|
—
|
|
|
(246
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(246
|
)
|
Share-based compensation
|
—
|
|
|
—
|
|
|
95
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
95
|
|
Issuance under stock plans, net of a tax benefit of $51 and other
|
11
|
|
|
—
|
|
|
(29
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(29
|
)
|
Balance at April 26, 2015
|
1,232
|
|
|
$
|
12
|
|
|
$
|
6,450
|
|
|
$
|
13,538
|
|
|
717
|
|
|
$
|
(11,524
|
)
|
|
$
|
(125
|
)
|
|
$
|
8,351
|
|
See accompanying Notes to Consolidated Condensed Financial Statements.
APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
May 1,
2016
|
|
April 26,
2015
|
|
|
|
|
|
(Unaudited)
|
Cash flows from operating activities:
|
|
|
|
Net income
|
$
|
606
|
|
|
$
|
712
|
|
Adjustments required to reconcile net income to cash provided by operating activities:
|
|
|
|
Depreciation and amortization
|
192
|
|
|
182
|
|
Share-based compensation
|
102
|
|
|
95
|
|
Excess tax benefits from share-based compensation
|
(13
|
)
|
|
(51
|
)
|
Deferred income taxes
|
(7
|
)
|
|
7
|
|
Other
|
15
|
|
|
21
|
|
Changes in operating assets and liabilities:
|
|
|
|
Accounts receivable
|
(175
|
)
|
|
(128
|
)
|
Inventories
|
(92
|
)
|
|
(146
|
)
|
Other current and non-current assets
|
54
|
|
|
(147
|
)
|
Accounts payable and accrued expenses
|
(255
|
)
|
|
(95
|
)
|
Customer deposits and deferred revenue
|
216
|
|
|
(66
|
)
|
Income taxes payable
|
44
|
|
|
(44
|
)
|
Other liabilities
|
1
|
|
|
18
|
|
Cash provided by operating activities
|
688
|
|
|
358
|
|
Cash flows from investing activities:
|
|
|
|
Capital expenditures
|
(115
|
)
|
|
(113
|
)
|
Cash paid for acquisitions, net of cash acquired
|
(8
|
)
|
|
—
|
|
Proceeds from sales and maturities of investments
|
473
|
|
|
317
|
|
Purchases of investments
|
(464
|
)
|
|
(344
|
)
|
Cash used in investing activities
|
(114
|
)
|
|
(140
|
)
|
Cash flows from financing activities:
|
|
|
|
Debt repayments
|
(1,205
|
)
|
|
—
|
|
Proceeds from common stock issuances
|
44
|
|
|
42
|
|
Common stock repurchases
|
(1,525
|
)
|
|
—
|
|
Excess tax benefits from share-based compensation
|
13
|
|
|
51
|
|
Payments of dividends to stockholders
|
(228
|
)
|
|
(245
|
)
|
Cash used in financing activities
|
(2,901
|
)
|
|
(152
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
—
|
|
|
(1
|
)
|
Increase (decrease) in cash and cash equivalents
|
(2,327
|
)
|
|
65
|
|
Cash and cash equivalents — beginning of period
|
4,797
|
|
|
3,002
|
|
Cash and cash equivalents — end of period
|
$
|
2,470
|
|
|
$
|
3,067
|
|
Supplemental cash flow information:
|
|
|
|
Cash payments for income taxes
|
$
|
95
|
|
|
$
|
207
|
|
Cash refunds from income taxes
|
$
|
103
|
|
|
$
|
5
|
|
Cash payments for interest
|
$
|
76
|
|
|
$
|
46
|
|
See accompanying Notes to Consolidated Condensed Financial Statements.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 Basis of Presentation
Basis of Presentation
In the opinion of management, the unaudited interim consolidated condensed financial statements of Applied Materials, Inc. and its subsidiaries (Applied or the Company) included herein have been prepared on a basis consistent with the October 25, 2015 audited consolidated financial statements and include all material adjustments, consisting of normal recurring adjustments, necessary to fairly present the information set forth therein. These unaudited interim consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Applied’s Annual Report on Form 10-K for the fiscal year ended October 25, 2015 (2015 Form 10-K). Applied’s results of operations for the three and
six
months ended
May 1, 2016
are not necessarily indicative of future operating results. Applied’s fiscal year ends on the last Sunday in October of each year. Fiscal 2016 and 2015 contain 53 weeks and 52 weeks, respectively, and the first half of fiscal 2016 and 2015 contained 27 weeks and 26 weeks, respectively.
Certain prior year amounts have been reclassified to conform to current year presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, Applied evaluates its estimates, including those related to accounts receivable and sales allowances, fair values of financial instruments, inventories, intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair values of share-based awards, and income taxes, among others. Applied bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Revenue Recognition
Applied recognizes revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; seller’s price to buyer is fixed or determinable; and collectability is probable. Applied’s shipping terms are customarily FOB Applied shipping point or equivalent terms. Applied’s revenue recognition policy generally results in revenue recognition at the following points: (1) for all transactions where legal title passes to the customer upon shipment or delivery, Applied recognizes revenue upon passage of title for all products that have been demonstrated to meet product specifications prior to shipment; the portion of revenue associated with certain installation-related tasks is deferred, and that revenue is recognized upon completion of the installation-related tasks; (2) for products that have not been demonstrated to meet product specifications prior to shipment, revenue is recognized at customer technical acceptance; (3) for transactions where legal title does not pass at shipment or delivery, revenue is recognized when legal title passes to the customer, which is generally at customer technical acceptance; and (4) for arrangements containing multiple elements, the revenue relating to the undelivered elements is deferred using the relative selling price method utilizing estimated sales prices until delivery of the deferred elements. Applied limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or adjustment. In cases where Applied has sold products that have been demonstrated to meet product specifications prior to shipment, Applied believes that at the time of delivery, it has an enforceable claim to amounts recognized as revenue. Spare parts revenue is generally recognized upon shipment, and services revenue is generally recognized over the period that the services are provided.
When a sales arrangement contains multiple elements, such as hardware and services and/or software products, Applied allocates revenue to each element based on a selling price hierarchy. The selling price for a deliverable is based on its vendor specific objective evidence (VSOE) if available, third party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. Applied generally utilizes the ESP due to the nature of its products. In multiple element arrangements where more-than-incidental software deliverables are included, revenue is allocated to each separate unit of accounting for each of the non-software deliverables, and to the software deliverables as a group, using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is then allocated to each software deliverable using the guidance for recognizing software revenue.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (FASB) issued authoritative guidance that simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2018. Early adoption is permitted as of the beginning of an interim or annual reporting period. Applied is currently evaluating the effect of this new guidance on Applied's consolidated financial statements.
In February 2016, the FASB issued authoritative guidance for lease accounting, which requires lessees to recognize lease assets and liabilities on the balance sheet for certain lease arrangements that are classified as operating leases under the previous standard, and to provide for enhanced disclosures. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2020 and should be applied using a modified retrospective approach. Early adoption is permitted. Applied is currently evaluating the effect of this new guidance on Applied's consolidated financial statements.
In January 2016, the FASB issued authoritative guidance that requires equity investments that do not result in consolidation, and are not accounted for under the equity method, to be measured at fair value, and requires recognition of any changes in fair value in net income unless the investments qualify for a new practicability exception. For financial liabilities measured at fair value, the change in fair value caused by a change in instrument-specific credit risk will be required to be presented separately in other comprehensive income. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2019. Early adoption is permitted only for the provisions related to the recognition of changes in fair value of financial liabilities caused by instrument-specific credit risk. Applied is currently evaluating the effect of this new guidance on Applied's consolidated financial statements.
In November 2015, the FASB issued authoritative guidance requiring all deferred tax assets and liabilities, and any related valuation allowance, to be classified as noncurrent on the balance sheet. Applied elected to prospectively adopt the authoritative guidance in the beginning of the first quarter of fiscal 2016. Prior periods were not retrospectively adjusted.
In July 2015, the FASB issued authoritative guidance that requires inventory to be measured at the lower of cost and net realizable value instead of at lower of cost or market. This guidance does not apply to inventory that is measured using last-in, first out (LIFO) or the retail inventory method but applies to all other inventory including those measured using first-in, first-out (FIFO) or the average cost method. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2018 and should be applied prospectively. Early adoption is permitted as of the beginning of an interim or annual reporting period. Applied is currently evaluating the effect of this new guidance on Applied's consolidated financial statements.
In May 2015, the FASB issued authoritative guidance to remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The new guidance also removes the requirement of certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. The guidance becomes effective retrospectively for Applied in the first quarter of fiscal 2017. Early adoption is permitted. The adoption of this guidance will only impact disclosures in Applied's financial statements.
In April 2015, the FASB issued authoritative guidance for customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This guidance will not change accounting for service contracts. Applied will adopt this guidance in the first quarter of fiscal 2017 prospectively to all arrangements entered into or materially modified after the effective date. The adoption of this guidance is not expected to have a significant impact on Applied's consolidated financial statements.
In April 2015, the FASB issued authoritative guidance that requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts. The authoritative guidance is effective for Applied in the first quarter of fiscal 2017 and should be applied retrospectively. Early adoption is permitted. The adoption of this guidance is not expected to have a significant impact on Applied's consolidated financial statements.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
In May 2014, the FASB issued authoritative guidance that requires revenue recognition to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This new standard will supersede most current revenue recognition guidance, including industry-specific guidance. Entities will have the option of using either a full retrospective or modified retrospective approach to adopting the guidance. Under the modified approach, an entity would recognize the cumulative effect of initially applying the guidance with an adjustment to the opening balance of retained earnings in the period of adoption. In addition, the modified approach will require additional disclosures. In August 2015, the FASB issued an amendment to defer the effective date by one year and allow entities to early adopt no earlier than the original effective date. With this amendment, the guidance will be effective for Applied in the first quarter of fiscal 2019. Subsequent to the amendment, the FASB issued additional clarifying implementation guidance. Applied is currently evaluating the effect of this new guidance on Applied's financial position, results of operations and its ongoing financial reporting, including the selection of a transition method.
|
|
Note 2
|
Earnings Per Share
|
Basic earnings per share is determined using the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined using the weighted average number of common shares and potential common shares (representing the dilutive effect of stock options, restricted stock units, and employee stock purchase plan shares) outstanding during the period. Applied's net income has not been adjusted for any period presented for purposes of computing basic or diluted earnings per share due to the Company's non-complex capital structure.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
May 1,
2016
|
|
April 26,
2015
|
|
May 1,
2016
|
|
April 26,
2015
|
|
|
|
|
|
|
|
|
|
(In millions, except per share amounts)
|
Numerator:
|
|
|
|
|
|
|
|
Net income
|
$
|
320
|
|
|
$
|
364
|
|
|
$
|
606
|
|
|
$
|
712
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
1,113
|
|
|
1,230
|
|
|
1,130
|
|
|
1,227
|
|
Effect of dilutive stock options, restricted stock units and employee stock purchase plan shares
|
6
|
|
|
11
|
|
|
7
|
|
|
14
|
|
Denominator for diluted earnings per share
|
1,119
|
|
|
1,241
|
|
|
1,137
|
|
|
1,241
|
|
Basic earnings per share
|
$
|
0.29
|
|
|
$
|
0.30
|
|
|
$
|
0.54
|
|
|
$
|
0.58
|
|
Diluted earnings per share
|
$
|
0.29
|
|
|
$
|
0.29
|
|
|
$
|
0.53
|
|
|
$
|
0.57
|
|
Potentially dilutive securities
|
5
|
|
|
1
|
|
|
6
|
|
|
1
|
|
Potentially dilutive securities attributable to outstanding stock options and restricted stock units were excluded from the calculation of diluted earnings per share because the combined exercise price, average unamortized fair value and assumed tax benefits upon the exercise of options and the vesting of restricted stock units were greater than the average market price of Applied common stock, and therefore their inclusion would have been anti-dilutive.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
|
|
Note 3
|
Cash, Cash Equivalents and Investments
|
Summary of Cash, Cash Equivalents and Investments
The following tables summarize Applied’s cash, cash equivalents and investments by security type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 1, 2016
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Cash
|
$
|
1,313
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,313
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market funds
|
1,111
|
|
|
—
|
|
|
—
|
|
|
1,111
|
|
Municipal securities
|
18
|
|
|
—
|
|
|
—
|
|
|
18
|
|
Commercial paper, corporate bonds and medium-term notes
|
28
|
|
|
—
|
|
|
—
|
|
|
28
|
|
Total Cash equivalents
|
1,157
|
|
|
—
|
|
|
—
|
|
|
1,157
|
|
Total Cash and Cash equivalents
|
$
|
2,470
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,470
|
|
Short-term and long-term investments:
|
|
|
|
|
|
|
|
U.S. Treasury and agency securities
|
$
|
81
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
81
|
|
Non-U.S. government securities*
|
9
|
|
|
—
|
|
|
—
|
|
|
9
|
|
Municipal securities
|
389
|
|
|
2
|
|
|
—
|
|
|
391
|
|
Commercial paper, corporate bonds and medium-term notes
|
234
|
|
|
1
|
|
|
—
|
|
|
235
|
|
Asset-backed and mortgage-backed securities
|
276
|
|
|
—
|
|
|
1
|
|
|
275
|
|
Total fixed income securities
|
989
|
|
|
3
|
|
|
1
|
|
|
991
|
|
Publicly traded equity securities
|
33
|
|
|
25
|
|
|
3
|
|
|
55
|
|
Equity investments in privately-held companies
|
58
|
|
|
—
|
|
|
—
|
|
|
58
|
|
Total short-term and long-term investments
|
$
|
1,080
|
|
|
$
|
28
|
|
|
$
|
4
|
|
|
$
|
1,104
|
|
Total Cash, Cash equivalents and Investments
|
$
|
3,550
|
|
|
$
|
28
|
|
|
$
|
4
|
|
|
$
|
3,574
|
|
_________________________
* Includes agency debt securities guaranteed by non-U.S. governments, which consist of Canada and Germany.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 25, 2015
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Cash
|
$
|
1,010
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,010
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market funds
|
3,272
|
|
|
—
|
|
|
—
|
|
|
3,272
|
|
Non-U.S. government securities
|
60
|
|
|
—
|
|
|
—
|
|
|
60
|
|
Municipal securities
|
73
|
|
|
—
|
|
|
—
|
|
|
73
|
|
Commercial paper, corporate bonds and medium-term notes
|
382
|
|
|
—
|
|
|
—
|
|
|
382
|
|
Total Cash equivalents
|
3,787
|
|
|
—
|
|
|
—
|
|
|
3,787
|
|
Total Cash and Cash equivalents
|
$
|
4,797
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,797
|
|
Short-term and long-term investments:
|
|
|
|
|
|
|
|
U.S. Treasury and agency securities
|
$
|
84
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
84
|
|
Non-U.S. government securities
|
9
|
|
|
—
|
|
|
—
|
|
|
9
|
|
Municipal securities
|
384
|
|
|
2
|
|
|
—
|
|
|
386
|
|
Commercial paper, corporate bonds and medium-term notes
|
250
|
|
|
—
|
|
|
—
|
|
|
250
|
|
Asset-backed and mortgage-backed securities
|
262
|
|
|
—
|
|
|
—
|
|
|
262
|
|
Total fixed income securities
|
989
|
|
|
2
|
|
|
—
|
|
|
991
|
|
Publicly traded equity securities
|
28
|
|
|
17
|
|
|
—
|
|
|
45
|
|
Equity investments in privately-held companies
|
78
|
|
|
—
|
|
|
—
|
|
|
78
|
|
Total short-term and long-term investments
|
$
|
1,095
|
|
|
$
|
19
|
|
|
$
|
—
|
|
|
$
|
1,114
|
|
Total Cash, Cash equivalents and Investments
|
$
|
5,892
|
|
|
$
|
19
|
|
|
$
|
—
|
|
|
$
|
5,911
|
|
Maturities of Investments
The following table summarizes the contractual maturities of Applied’s investments at
May 1, 2016
:
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Estimated
Fair Value
|
|
|
|
|
|
(In millions)
|
Due in one year or less
|
$
|
152
|
|
|
$
|
152
|
|
Due after one through five years
|
561
|
|
|
563
|
|
No single maturity date**
|
367
|
|
|
389
|
|
|
$
|
1,080
|
|
|
$
|
1,104
|
|
_________________________
** Securities with no single maturity date include publicly-traded and privately-held equity securities, and asset-backed and mortgage-backed securities.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
Gains and Losses on Investments
During the three and
six
months ended
May 1, 2016
and
April 26, 2015
, gross realized gains and losses on investments were not material.
At
May 1, 2016
and
October 25, 2015
, gross unrealized losses related to Applied's investment portfolio were not material. Applied regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether an unrealized loss is considered to be temporary, or other-than-temporary and therefore impaired, include: the length of time and extent to which fair value has been lower than the cost basis; the financial condition, credit quality and near-term prospects of the investee; and whether it is more likely than not that Applied will be required to sell the security prior to recovery. Generally, the contractual terms of investments in marketable securities do not permit settlement at prices less than the amortized cost of the investments. Applied determined that the gross unrealized losses on its marketable securities at
May 1, 2016
and
April 26, 2015
were temporary in nature and therefore it did not recognize any impairment of its marketable securities during the three and
six
months ended
May 1, 2016
or
April 26, 2015
. Impairment charges on equity investments in privately-held companies during the three and
six
months ended
May 1, 2016
and
April 26, 2015
were not material. These impairment charges are included in interest and other income, net in the Consolidated Condensed Statement of Operations.
Unrealized gains and temporary losses on investments classified as available-for-sale are included within accumulated other comprehensive income (loss), net of any related tax effect. Upon realization, those amounts are reclassified from accumulated other comprehensive income (loss) to results of operations.
|
|
Note 4
|
Fair Value Measurements
|
Applied’s financial assets are measured and recorded at fair value, except for equity investments in privately-held companies. These equity investments are generally accounted for under the cost method of accounting and are periodically assessed for other-than-temporary impairment when events or circumstances indicate that an other-than-temporary decline in value may have occurred. Applied’s nonfinancial assets, such as goodwill, intangible assets, and property, plant and equipment, are recorded at cost and are assessed for impairment when events or circumstances indicate that an other-than-temporary decline in value may have occurred.
Fair Value Hierarchy
Applied uses the following fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
|
|
•
|
Level 1 — Quoted prices in active markets for identical assets or liabilities;
|
|
|
•
|
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
|
|
|
•
|
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
Applied’s investments consist primarily of debt securities that are classified as available-for-sale and recorded at their fair values. In determining the fair value of investments, Applied uses pricing information from pricing services that value securities based on quoted market prices and models that utilize observable market inputs. In the event a fair value estimate is unavailable from a pricing service, Applied generally obtains non-binding price quotes from brokers. Applied then reviews the information provided by the pricing services or brokers to determine the fair value of its short-term and long-term investments. In addition, to validate pricing information obtained from pricing services, Applied periodically performs supplemental analysis on a sample of securities. Applied reviews any significant unanticipated differences identified through this analysis to determine the appropriate fair value.
Investments with remaining effective maturities of
12 months or less
from the balance sheet date are classified as short-term investments. Investments with remaining effective maturities of
more than 12 months
from the balance sheet date are classified as long-term investments. As of
May 1, 2016
, substantially all of Applied’s available-for-sale, short-term and long-term investments were recognized at fair value that was determined based upon observable inputs.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
Assets Measured at Fair Value on a Recurring Basis
Financial assets (excluding cash balances) measured at fair value on a recurring basis are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 1, 2016
|
|
October 25, 2015
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
1,111
|
|
|
$
|
—
|
|
|
$
|
1,111
|
|
|
$
|
3,272
|
|
|
$
|
—
|
|
|
$
|
3,272
|
|
U.S. Treasury and agency securities
|
61
|
|
|
20
|
|
|
81
|
|
|
72
|
|
|
12
|
|
|
84
|
|
Non-U.S. government securities
|
—
|
|
|
9
|
|
|
9
|
|
|
—
|
|
|
69
|
|
|
69
|
|
Municipal securities
|
—
|
|
|
409
|
|
|
409
|
|
|
—
|
|
|
459
|
|
|
459
|
|
Commercial paper, corporate bonds and medium-term notes
|
—
|
|
|
263
|
|
|
263
|
|
|
—
|
|
|
632
|
|
|
632
|
|
Asset-backed and mortgage-backed securities
|
—
|
|
|
275
|
|
|
275
|
|
|
—
|
|
|
262
|
|
|
262
|
|
Publicly traded equity securities
|
55
|
|
|
—
|
|
|
55
|
|
|
45
|
|
|
—
|
|
|
45
|
|
Total
|
$
|
1,227
|
|
|
$
|
976
|
|
|
$
|
2,203
|
|
|
$
|
3,389
|
|
|
$
|
1,434
|
|
|
$
|
4,823
|
|
There were
no
transfers between Level 1 and Level 2 fair value measurements during the three and
six
months ended
May 1, 2016
or
April 26, 2015
. Applied did not have any financial assets measured at fair value on a recurring basis within Level 3 fair value measurements as of
May 1, 2016
or
October 25, 2015
.
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
Equity investments in privately-held companies are generally accounted for under the cost method of accounting and are periodically assessed for other-than-temporary impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred. If Applied determines that an other-than-temporary impairment has occurred, the investment will be written down to its estimated fair value based on available information, such as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operational performance and any other readily available market data. At
May 1, 2016
, equity investments in privately-held companies totaled
$58 million
, of which
$51 million
of investments were accounted for under the cost method of accounting and
$7 million
of investments had been measured at fair value on a non-recurring basis within Level 3 fair value measurements due to an other-than-temporary decline in value. At
October 25, 2015
, equity investments in privately-held companies totaled
$78 million
, of which
$70 million
of investments were accounted for under the cost method of accounting and
$8 million
of investments had been measured at fair value on a non-recurring basis within Level 3 fair value measurements due to an other-than-temporary decline in value. Impairment charges on equity investments in privately-held companies during the three and
six
months ended
May 1, 2016
and
April 26, 2015
were not material.
Other
The carrying amounts of Applied’s financial instruments, including cash and cash equivalents, accounts receivable, notes payable - short term, and accounts payable and accrued expenses, approximate fair value due to their short maturities. At
May 1, 2016
, the carrying amount of long-term debt was
$3.3 billion
and the estimated fair value was
$3.7 billion
. At
October 25, 2015
, the carrying amount of long-term debt was
$3.3 billion
and the estimated fair value was
$3.5 billion
. The estimated fair value of long-term debt is determined by Level 2 inputs and is based primarily on quoted market prices for the same or similar issues. See Note 8 of the Notes to the Consolidated Condensed Financial Statements for further detail of existing debt.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
|
|
Note 5
|
Derivative Instruments and Hedging Activities
|
Derivative Financial Instruments
Applied conducts business in a number of foreign countries, with certain transactions denominated in local currencies, such as the Japanese yen, euro, Israeli shekel and Taiwanese dollar. Applied uses derivative financial instruments, such as forward exchange contracts and currency option contracts, to hedge certain forecasted foreign currency denominated transactions expected to occur typically within the next
24 months
. The purpose of Applied’s foreign currency management is to mitigate the effect of exchange rate fluctuations on certain foreign currency denominated revenues, costs and eventual cash flows. The terms of currency instruments used for hedging purposes are generally consistent with the timing of the transactions being hedged.
During fiscal 2015, Applied entered into and settled a series of forward-starting interest rate swap agreements, with a total notional amount of
$600 million
to hedge against the variability of cash flows due to changes in the benchmark interest rate of fixed rate debt. These instruments were designated as cash flow hedges at inception and settled in conjunction with the issuance of debt in September 2015. The loss from the settlement of the interest rate swap agreement that was included in accumulated other comprehensive income (AOCI) in stockholders' equity is being amortized to interest expense over the term of the senior unsecured
10
-year notes issued in September 2015.
Applied does not use derivative financial instruments for trading or speculative purposes. Derivative instruments and hedging activities, including foreign currency exchange contracts and interest rate swap agreements, are recognized on the balance sheet at fair value. Changes in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of any hedges, are recognized currently in earnings. All of Applied’s derivative financial instruments are recorded at their fair value in other current assets or in accounts payable and accrued expenses.
Hedges related to anticipated transactions are designated and documented at the inception of the hedge as cash flow hedges and foreign exchange derivatives are typically entered into once per month. Cash flow hedges are evaluated for effectiveness quarterly. The effective portion of the gain or loss on these hedges is reported as a component of AOCI in stockholders’ equity and is reclassified into earnings when the hedged transaction affects earnings. The majority of the after-tax net income or loss related to foreign exchange derivative instruments included in AOCI at
May 1, 2016
is expected to be reclassified into earnings within
12 months
. Changes in the fair value of currency forward exchange and option contracts due to changes in time value are excluded from the assessment of effectiveness. Both ineffective hedge amounts and hedge components excluded from the assessment of effectiveness are recognized in earnings. If the transaction being hedged is no longer probable to occur, or if a portion of any derivative is deemed to be ineffective, Applied promptly recognizes the gain or loss on the associated financial instrument in earnings. The amount recognized due to discontinuance of cash flow hedges that were probable not to occur by the end of the originally specified time period was not significant for the three and
six
months ended
May 1, 2016
and
April 26, 2015
.
Additionally, forward exchange contracts are generally used to hedge certain foreign currency denominated assets or liabilities. These derivatives are typically entered into once per month and are not designated for hedge accounting treatment. Accordingly, changes in the fair value of these hedges are recorded in earnings to offset the changes in the fair value of the assets or liabilities being hedged.
In September 2013, Applied purchased foreign exchange option contracts to limit its foreign exchange risk associated with the then-anticipated business combination with Tokyo Electron Limited (TEL). These derivatives did not qualify for hedge accounting treatment and were marked to market at the end of each reporting period with gains and losses recorded as part of operating expenses. During the three and
six
months ended
April 26, 2015
, Applied recorded an unrealized gain of
$14 million
and
$92 million
, respectively, related to these contracts. The cash flow impact of these derivatives has been classified as operating cash flows in the Consolidated Condensed Statements of Cash Flows. Due to the termination of the then-anticipated business combination with TEL on April 26, 2015, these foreign exchange option contracts were sold during the third quarter of fiscal 2015.
The fair values of other foreign exchange derivative instruments at
May 1, 2016
and
October 25, 2015
were not material.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
The effects of derivative instruments and hedging activities on the Consolidated Condensed Statements of Operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
May 1, 2016
|
|
April 26, 2015
|
Effective Portion
|
|
Ineffective Portion and Amount
Excluded from
Effectiveness
Testing
|
|
Effective Portion
|
|
Ineffective Portion and Amount
Excluded from
Effectiveness
Testing
|
|
Location of Gain or
(Loss) Reclassified
from AOCI into
Income
|
|
Gain or
(Loss)
Recognized
in AOCI
|
|
Gain or (Loss)
Reclassified
from AOCI into
Income
|
|
Gain or (Loss)
Recognized in
Income
|
|
Gain or
(Loss)
Recognized
in AOCI
|
|
Gain or (Loss)
Reclassified
from AOCI into
Income
|
|
Gain or (Loss)
Recognized in
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Derivatives in Cash Flow Hedging Relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Cost of products sold
|
|
$
|
(17
|
)
|
|
$
|
(9
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
(1
|
)
|
Foreign exchange contracts
|
General and administrative
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
(1
|
)
|
Interest rate swaps
|
Interest expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
|
$
|
(17
|
)
|
|
$
|
(9
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
May 1, 2016
|
|
April 26, 2015
|
Effective Portion
|
|
Ineffective Portion and Amount
Excluded from
Effectiveness
Testing
|
|
Effective Portion
|
|
Ineffective Portion and Amount
Excluded from
Effectiveness
Testing
|
|
Location of Gain or
(Loss) Reclassified
from AOCI into
Income
|
|
Gain or
(Loss)
Recognized
in AOCI
|
|
Gain or (Loss)
Reclassified
from AOCI into
Income
|
|
Gain or (Loss)
Recognized in
Income
|
|
Gain or
(Loss)
Recognized
in AOCI
|
|
Gain or (Loss)
Reclassified
from AOCI into
Income
|
|
Gain or (Loss)
Recognized in
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Derivatives in Cash Flow Hedging Relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Cost of products sold
|
|
$
|
(23
|
)
|
|
$
|
(8
|
)
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
13
|
|
|
$
|
(2
|
)
|
Foreign exchange contracts
|
General and administrative
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
(8
|
)
|
|
(1
|
)
|
Interest rate swaps
|
Interest expense
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
|
$
|
(23
|
)
|
|
$
|
(10
|
)
|
|
$
|
(1
|
)
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
(3
|
)
|
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss)
Recognized in Income
|
|
|
Three Months Ended
|
|
Six Months Ended
|
Location of Gain or
(Loss) Recognized
in Income
|
|
May 1, 2016
|
|
April 26, 2015
|
|
May 1, 2016
|
|
April 26, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Derivatives Not Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Gain on derivatives associated with terminated business combination
|
|
$
|
—
|
|
|
$
|
14
|
|
|
$
|
—
|
|
|
$
|
92
|
|
Foreign exchange contracts
|
General and
administrative
|
|
(32
|
)
|
|
(1
|
)
|
|
(36
|
)
|
|
20
|
|
Total
|
|
|
$
|
(32
|
)
|
|
$
|
13
|
|
|
$
|
(36
|
)
|
|
$
|
112
|
|
Credit Risk Contingent Features
If Applied’s credit rating were to fall below investment grade, it would be in violation of credit risk contingent provisions of the derivative instruments discussed above, and certain counterparties to the derivative instruments could request immediate payment on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a net liability position was immaterial as of
May 1, 2016
.
Entering into derivative contracts with banks exposes Applied to credit-related losses in the event of the banks’ nonperformance. However, Applied’s exposure is not considered significant.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
|
|
Note 6
|
Balance Sheet Detail
|
|
|
|
|
|
|
|
|
|
|
May 1,
2016
|
|
October 25,
2015
|
|
|
|
|
|
(In millions)
|
Inventories
|
|
|
|
Customer service spares
|
$
|
412
|
|
|
$
|
382
|
|
Raw materials
|
475
|
|
|
461
|
|
Work-in-process
|
337
|
|
|
271
|
|
Finished goods
|
700
|
|
|
719
|
|
|
$
|
1,924
|
|
|
$
|
1,833
|
|
Included in finished goods inventory are
$131 million
at
May 1, 2016
, and
$155 million
at
October 25, 2015
, of newly-introduced systems at customer locations where the sales transaction did not meet Applied’s revenue recognition criteria as set forth in Note 1. Finished goods inventory includes
$189 million
and
$185 million
of evaluation inventory at
May 1, 2016
and
October 25, 2015
, respectively.
|
|
|
|
|
|
|
|
|
|
May 1,
2016
|
|
October 25,
2015
|
|
|
|
|
|
(In millions)
|
Other Current Assets
|
|
|
|
Deferred income taxes, net
1
|
$
|
—
|
|
|
$
|
403
|
|
Prepaid income taxes and income taxes receivable
|
72
|
|
|
127
|
|
Prepaid expenses and other
|
179
|
|
|
194
|
|
|
$
|
251
|
|
|
$
|
724
|
|
1
May 1, 2016
balance reflects the effects of the prospective adoption of the authoritative guidance in the first quarter of fiscal 2016, which required all deferred tax assets and liabilities, and any related valuation allowance to be classified as noncurrent on the balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
May 1,
2016
|
|
October 25,
2015
|
|
|
|
|
|
|
|
(In years)
|
|
(In millions)
|
Property, Plant and Equipment, Net
|
|
|
|
Land and improvements
|
|
|
$
|
157
|
|
|
$
|
157
|
|
Buildings and improvements
|
3-30
|
|
1,249
|
|
|
1,247
|
|
Demonstration and manufacturing equipment
|
3-5
|
|
986
|
|
|
920
|
|
Furniture, fixtures and other equipment
|
3-15
|
|
567
|
|
|
574
|
|
Construction in progress
|
|
|
53
|
|
|
48
|
|
Gross property, plant and equipment
|
|
|
3,012
|
|
|
2,946
|
|
Accumulated depreciation
|
|
|
(2,108
|
)
|
|
(2,054
|
)
|
|
|
|
$
|
904
|
|
|
$
|
892
|
|
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
|
|
|
|
|
|
|
|
|
|
May 1,
2016
|
|
October 25,
2015
|
|
|
|
|
|
(In millions)
|
Accounts Payable and Accrued Expenses
|
|
|
|
Accounts payable
|
$
|
644
|
|
|
$
|
658
|
|
Compensation and employee benefits
|
361
|
|
|
509
|
|
Warranty
|
121
|
|
|
126
|
|
Dividends payable
|
109
|
|
|
116
|
|
Income taxes payable
|
46
|
|
|
60
|
|
Other accrued taxes
|
43
|
|
|
58
|
|
Interest payable
|
31
|
|
|
36
|
|
Other
|
275
|
|
|
270
|
|
|
$
|
1,630
|
|
|
$
|
1,833
|
|
|
|
|
|
|
|
|
|
|
|
May 1,
2016
|
|
October 25,
2015
|
|
|
|
|
|
(In millions)
|
Customer Deposits and Deferred Revenue
|
|
|
|
Customer deposits
|
$
|
306
|
|
|
$
|
132
|
|
Deferred revenue
|
675
|
|
|
633
|
|
|
$
|
981
|
|
|
$
|
765
|
|
Applied typically receives deposits on future deliverables from customers in the Display and Energy and Environmental Solutions segments. In certain instances, customer deposits may be received from customers in the Applied Global Services segment.
|
|
|
|
|
|
|
|
|
|
May 1,
2016
|
|
October 25,
2015
|
|
|
|
|
|
(In millions)
|
Other Liabilities
|
|
|
|
Deferred income taxes
|
$
|
14
|
|
|
$
|
56
|
|
Income taxes payable
|
272
|
|
|
227
|
|
Defined and postretirement benefit plans
|
188
|
|
|
187
|
|
Other
|
82
|
|
|
85
|
|
|
$
|
556
|
|
|
$
|
555
|
|
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
|
|
Note 7
|
Goodwill, Purchased Technology and Other Intangible Assets
|
Goodwill and Purchased Intangible Assets
Applied’s methodology for allocating the purchase price relating to purchase acquisitions is determined through established and generally accepted valuation techniques. Goodwill is measured as the excess of the purchase price over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. Applied assigns assets acquired (including goodwill) and liabilities assumed to one or more reporting units as of the date of acquisition. Typically, acquisitions relate to a single reporting unit and thus do not require the allocation of goodwill to multiple reporting units. If the products obtained in an acquisition are assigned to multiple reporting units, the goodwill is distributed to the respective reporting units as part of the purchase price allocation process.
Goodwill and purchased intangible assets with indefinite useful lives are not amortized, but are reviewed for impairment annually during the fourth quarter of each fiscal year and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The process of evaluating the potential impairment of goodwill and intangible assets requires significant judgment, especially in emerging markets. Applied regularly monitors current business conditions and considers other factors including, but not limited to, adverse industry or economic trends, restructuring actions and lower projections of profitability that may impact future operating results.
To test goodwill for impairment, Applied first performs a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, Applied then performs the two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. Under the two-step goodwill impairment test, Applied would in the first step compare the estimated fair value of each reporting unit to its carrying value. Applied determines the fair value of each of its reporting units based on a weighting of income and market approaches. If the carrying value of a reporting unit exceeds its fair value, Applied would then perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If Applied determines that the carrying value of a reporting unit’s goodwill exceeds its implied fair value, Applied would record an impairment charge equal to the difference.
As of
May 1, 2016
, Applied's reporting units include Transistor and Interconnect Group, Patterning and Packaging Group, and Imaging and Process Control Group, which combine to form the Silicon Systems reporting segment, Applied Global Services, Display and Energy and Environmental Solutions.
The evaluation of goodwill and intangible assets for impairment requires the exercise of significant judgment. In the event of future changes in business conditions, Applied will be required to reassess and update its forecasts and estimates used in future impairment analyses. If the results of these future analyses are lower than current estimates, a material impairment charge may result at that time.
Details of goodwill and other indefinite-lived intangible assets as of
May 1, 2016
and
October 25, 2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 1, 2016
|
|
October 25, 2015
|
|
Goodwill
|
|
Other
Intangible
Assets
|
|
Total
|
|
Goodwill
|
|
Other
Intangible
Assets
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Silicon Systems
|
$
|
2,151
|
|
|
$
|
—
|
|
|
$
|
2,151
|
|
|
$
|
2,151
|
|
|
$
|
—
|
|
|
$
|
2,151
|
|
Applied Global Services
|
1,029
|
|
|
5
|
|
|
1,034
|
|
|
1,027
|
|
|
5
|
|
|
1,032
|
|
Display
|
124
|
|
|
18
|
|
|
142
|
|
|
124
|
|
|
18
|
|
|
142
|
|
Energy and Environmental Solutions
|
—
|
|
|
2
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
2
|
|
Carrying amount
|
$
|
3,304
|
|
|
$
|
25
|
|
|
$
|
3,329
|
|
|
$
|
3,302
|
|
|
$
|
25
|
|
|
$
|
3,327
|
|
From time to time, Applied makes acquisitions of and investments in companies related to existing or new markets for Applied.
Other intangible assets that are not subject to amortization consist primarily of in-process technology, which will be subject to amortization upon commercialization. The fair value assigned to in-process technology was determined using the income approach taking into account estimates and judgments regarding risks inherent in the development process, including the likelihood of achieving technological success and market acceptance. If an in-process technology project is abandoned, the acquired technology attributable to the project will be written-off.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
A summary of Applied's purchased technology and intangible assets is set forth below:
|
|
|
|
|
|
|
|
|
|
May 1,
2016
|
|
October 25,
2015
|
|
|
|
|
|
(In millions)
|
Purchased technology, net
|
$
|
491
|
|
|
$
|
575
|
|
Intangible assets - finite-lived, net
|
152
|
|
|
162
|
|
Intangible assets - indefinite-lived
|
25
|
|
|
25
|
|
Total
|
$
|
668
|
|
|
$
|
762
|
|
Finite-Lived Purchased Intangible Assets
Applied amortizes purchased intangible assets with finite lives using the straight-line method over the estimated economic lives of the assets, ranging from
1
to
15
years.
Applied evaluates long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset group may not be recoverable. Applied assesses the fair value of the assets based on the amount of the undiscounted future cash flow that the assets are expected to generate and recognizes an impairment loss when estimated undiscounted future cash flow expected to result from the use of the asset, plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When Applied identifies an impairment, Applied reduces the carrying value of the group of assets to comparable market values, when available and appropriate, or to its estimated fair value based on a discounted cash flow approach.
Intangible assets, such as purchased technology, are generally recorded in connection with a business acquisition. The value assigned to intangible assets is usually based on estimates and judgments regarding expectations for the success and life cycle of products and technology acquired. Applied evaluates the useful lives of its intangible assets each reporting period to determine whether events and circumstances require revising the remaining period of amortization. In addition, Applied reviews intangible assets for impairment when events or changes in circumstances indicate their carrying value may not be recoverable. Management considers such indicators as significant differences in actual product acceptance from the estimates, changes in the competitive and economic environments, technological advances, and changes in cost structure.
Details of finite-lived intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 1, 2016
|
|
October 25, 2015
|
|
Purchased
Technology
|
|
Other
Intangible
Assets
|
|
Total
|
|
Purchased
Technology
|
|
Other
Intangible
Assets
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Gross carrying amount:
|
|
|
|
|
|
|
|
|
|
|
|
Silicon Systems
|
$
|
1,449
|
|
|
$
|
252
|
|
|
$
|
1,701
|
|
|
$
|
1,449
|
|
|
$
|
252
|
|
|
$
|
1,701
|
|
Applied Global Services
|
28
|
|
|
44
|
|
|
72
|
|
|
28
|
|
|
44
|
|
|
72
|
|
Display
|
110
|
|
|
33
|
|
|
143
|
|
|
110
|
|
|
33
|
|
|
143
|
|
Energy and Environmental Solutions
|
4
|
|
|
12
|
|
|
16
|
|
|
4
|
|
|
12
|
|
|
16
|
|
Corporate
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Gross carrying amount
|
$
|
1,592
|
|
|
$
|
341
|
|
|
$
|
1,933
|
|
|
$
|
1,591
|
|
|
$
|
341
|
|
|
$
|
1,932
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
|
|
|
Silicon Systems
|
$
|
(960
|
)
|
|
$
|
(103
|
)
|
|
$
|
(1,063
|
)
|
|
$
|
(876
|
)
|
|
$
|
(95
|
)
|
|
$
|
(971
|
)
|
Applied Global Services
|
(27
|
)
|
|
(44
|
)
|
|
(71
|
)
|
|
(26
|
)
|
|
(44
|
)
|
|
(70
|
)
|
Display
|
(110
|
)
|
|
(33
|
)
|
|
(143
|
)
|
|
(110
|
)
|
|
(33
|
)
|
|
(143
|
)
|
Energy and Environmental Solutions
|
(4
|
)
|
|
(9
|
)
|
|
(13
|
)
|
|
(4
|
)
|
|
(7
|
)
|
|
(11
|
)
|
Accumulated amortization
|
$
|
(1,101
|
)
|
|
$
|
(189
|
)
|
|
$
|
(1,290
|
)
|
|
$
|
(1,016
|
)
|
|
$
|
(179
|
)
|
|
$
|
(1,195
|
)
|
Carrying amount
|
$
|
491
|
|
|
$
|
152
|
|
|
$
|
643
|
|
|
$
|
575
|
|
|
$
|
162
|
|
|
$
|
737
|
|
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
Details of amortization expense by segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
May 1,
2016
|
|
April 26,
2015
|
|
May 1,
2016
|
|
April 26,
2015
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Silicon Systems
|
$
|
46
|
|
|
$
|
44
|
|
|
$
|
92
|
|
|
$
|
87
|
|
Applied Global Services
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
Display
|
—
|
|
|
1
|
|
|
—
|
|
|
2
|
|
Energy and Environmental Solutions
|
1
|
|
|
1
|
|
|
2
|
|
|
2
|
|
Total
|
$
|
47
|
|
|
$
|
46
|
|
|
$
|
95
|
|
|
$
|
92
|
|
Amortization expense was charged to the following categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
May 1,
2016
|
|
April 26,
2015
|
|
May 1,
2016
|
|
April 26,
2015
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Cost of products sold
|
$
|
42
|
|
|
$
|
40
|
|
|
$
|
84
|
|
|
$
|
80
|
|
Research, development and engineering
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Marketing and selling
|
5
|
|
|
5
|
|
|
10
|
|
|
10
|
|
General and administrative
|
—
|
|
|
1
|
|
|
—
|
|
|
2
|
|
Total
|
$
|
47
|
|
|
$
|
46
|
|
|
$
|
95
|
|
|
$
|
92
|
|
As of
May 1, 2016
, future estimated amortization expense is expected to be as follows:
|
|
|
|
|
|
Amortization
Expense
|
|
(In millions)
|
2016 (remaining 6 months)
|
$
|
94
|
|
2017
|
187
|
|
2018
|
185
|
|
2019
|
44
|
|
2020
|
39
|
|
Thereafter
|
94
|
|
Total
|
$
|
643
|
|
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
|
|
Note 8
|
Borrowing Facilities and Debt
|
Applied has credit facilities for unsecured borrowings in various currencies of up to
$1.6 billion
, of which
$1.5 billion
is comprised of a committed revolving credit agreement with a group of banks that is scheduled to expire in
September 2020
. This agreement provides for borrowings in United States dollars at interest rates keyed to one of various benchmark rates selected by Applied for each advance, plus a margin based on Applied's public debt rating and includes financial and other covenants. Remaining credit facilities in the amount of approximately
$72 million
are with Japanese banks. Applied’s ability to borrow under these facilities is subject to bank approval at the time of the borrowing request, and any advances will be at rates indexed to the banks’ prime reference rate denominated in Japanese yen.
No
amounts were outstanding under any of these facilities at both
May 1, 2016
and
October 25, 2015
, and Applied has not utilized these credit facilities.
In September 2015, Applied issued senior unsecured notes in the aggregate principal amount of
$1.8 billion
and used a portion of the net proceeds to redeem
$400 million
in principal amount of its
2.650%
senior notes due in 2016 at a redemption price of
$405 million
in November 2015. After adjusting for the carrying value of debt issuance costs and discounts, Applied recorded a
$5 million
loss on the prepayment of the
$400 million
debt, which is included in interest and other income, net in the Consolidated Condensed Statement of Operations for the first quarter of fiscal 2016.
In October 2015, a wholly-owned foreign subsidiary of Applied entered into a short-term loan agreement with multiple lenders, under which it borrowed
$800 million
to facilitate the return of capital to Applied. In January 2016, Applied repaid the
$800 million
aggregated principal amount of the loan.
Debt outstanding as of
May 1, 2016
and
October 25, 2015
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount
|
|
|
|
|
|
May 1,
2016
|
|
October 25,
2015
|
|
Effective
Interest Rate
|
|
Interest
Pay Dates
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
Short-term debt:
|
|
|
|
|
|
|
|
2.650% Senior Notes Due 2016
|
$
|
—
|
|
|
$
|
400
|
|
|
2.666%
|
|
June 15, December 15
|
Other debt
|
—
|
|
|
800
|
|
|
1.0% - 1.25%
|
|
|
Total short-term debt
|
—
|
|
|
1,200
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
7.125% Senior Notes Due 2017
|
200
|
|
|
200
|
|
|
7.190%
|
|
April 15, October 15
|
2.625% Senior Notes Due 2020
|
600
|
|
|
600
|
|
|
2.640%
|
|
April 1, October 1
|
4.300% Senior Notes Due 2021
|
750
|
|
|
750
|
|
|
4.326%
|
|
June 15, December 15
|
3.900% Senior Notes Due 2025
|
700
|
|
|
700
|
|
|
3.944%
|
|
April 1, October 1
|
5.100% Senior Notes Due 2035
|
500
|
|
|
500
|
|
|
5.127%
|
|
April 1, October 1
|
5.850% Senior Notes Due 2041
|
600
|
|
|
600
|
|
|
5.879%
|
|
June 15, December 15
|
|
3,350
|
|
|
3,350
|
|
|
|
|
|
Total unamortized discount
|
(7
|
)
|
|
(8
|
)
|
|
|
|
|
Total long-term debt
|
3,343
|
|
|
3,342
|
|
|
|
|
|
Total debt
|
$
|
3,343
|
|
|
$
|
4,542
|
|
|
|
|
|
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
|
|
Note 9
|
Stockholders’ Equity, Comprehensive Income and Share-Based Compensation
|
Accumulated Other Comprehensive Income (Loss)
Changes in the components of AOCI, net of tax, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain on Investments, Net
|
|
Unrealized Gain (Loss) on Derivative Instruments Qualifying as Cash Flow Hedges
|
|
Defined and Postretirement Benefit Plans
|
|
Cumulative Translation Adjustments
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Balance at October 25, 2015
|
$
|
14
|
|
|
$
|
(15
|
)
|
|
$
|
(105
|
)
|
|
$
|
14
|
|
|
$
|
(92
|
)
|
Other comprehensive income (loss) before reclassifications
|
4
|
|
|
(14
|
)
|
|
—
|
|
|
—
|
|
|
(10
|
)
|
Amounts reclassified out of AOCI
|
—
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
7
|
|
Other comprehensive income (loss), net of tax
|
4
|
|
|
(7
|
)
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
Balance at May 1, 2016
|
$
|
18
|
|
|
$
|
(22
|
)
|
|
$
|
(105
|
)
|
|
$
|
14
|
|
|
$
|
(95
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain on Investments, Net
|
|
Unrealized Gain (Loss) on Derivative Instruments Qualifying as Cash Flow Hedges
|
|
Defined and Postretirement Benefit Plans
|
|
Cumulative Translation Adjustments
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Balance at October 26, 2014
|
$
|
24
|
|
|
$
|
—
|
|
|
$
|
(105
|
)
|
|
$
|
5
|
|
|
$
|
(76
|
)
|
Other comprehensive income (loss) before reclassifications
|
(4
|
)
|
|
3
|
|
|
(45
|
)
|
|
(2
|
)
|
|
(48
|
)
|
Amounts reclassified out of AOCI
|
—
|
|
|
(3
|
)
|
|
2
|
|
|
—
|
|
|
(1
|
)
|
Other comprehensive income (loss), net of tax
|
(4
|
)
|
|
—
|
|
|
(43
|
)
|
|
(2
|
)
|
|
(49
|
)
|
Balance at April 26, 2015
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
(148
|
)
|
|
$
|
3
|
|
|
$
|
(125
|
)
|
The effects on net income of amounts reclassified from AOCI for the three and
six
months ended
May 1, 2016
and
April 26, 2015
were not material.
Stock Repurchase Program
On April 26, 2015, Applied's Board of Directors approved a common stock repurchase program authorizing up to
$3.0 billion
in repurchases over the
three
years ending April 2018. At
May 1, 2016
,
$150 million
remained available for future stock repurchases under this repurchase program.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
The following table summarizes Applied’s stock repurchases for the three and
six
months ended
May 1, 2016
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
May 1,
2016
|
|
May 1,
2016
|
|
|
|
|
|
(in millions, except per share amount)
|
Shares of common stock repurchased
|
45.1
|
|
|
80.5
|
|
Cost of stock repurchased
|
$
|
900
|
|
|
$
|
1,525
|
|
Average price paid per share
|
$
|
19.93
|
|
|
$
|
18.92
|
|
Applied did not purchase any shares of its common stock during the three and six months ended
April 26, 2015
.
Applied records treasury stock purchases under the cost method using the first-in, first-out (FIFO) method. Upon reissuance of treasury stock, amounts in excess of the acquisition cost are credited to additional paid in capital. If Applied reissues treasury stock at an amount below its acquisition cost and additional paid in capital associated with prior treasury stock transactions is insufficient to cover the difference between the acquisition cost and the reissue price, this difference is recorded against retained earnings.
Dividends
In March 2016 and December 2015, Applied's Board of Directors declared quarterly cash dividends in the amount of
$0.10
per share. Dividends paid during the
six
months ended
May 1, 2016
and
April 26, 2015
totaled
$228 million
and
$245 million
, respectively. Applied currently anticipates that cash dividends will continue to be paid on a quarterly basis, although the declaration of any future cash dividend is at the discretion of the Board of Directors and will depend on Applied’s financial condition, results of operations, capital requirements, business conditions and other factors, as well as a determination by the Board of Directors that cash dividends are in the best interests of Applied’s stockholders.
Share-Based Compensation
Applied has a stockholder-approved equity plan, the Employee Stock Incentive Plan, which permits grants to employees of share-based awards, including stock options, restricted stock, restricted stock units, performance shares and performance units. In addition, the plan provides for the automatic grant of restricted stock units to non-employee directors and permits the grant of share-based awards to non-employee directors and consultants. Share-based awards made under the plan may be subject to accelerated vesting under certain circumstances in the event of a change in control of Applied. Applied also has
two
Employee Stock Purchase Plans,
one
generally for United States employees and a second for employees of international subsidiaries (collectively, ESPP), which enable eligible employees to purchase Applied common stock.
During the three and
six
months ended
May 1, 2016
and
April 26, 2015
, Applied recognized share-based compensation expense related to stock options, ESPP shares, restricted stock, restricted stock units, performance shares and performance units. The effect of share-based compensation on the results of operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
May 1,
2016
|
|
April 26,
2015
|
|
May 1,
2016
|
|
April 26,
2015
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Cost of products sold
|
$
|
15
|
|
|
$
|
14
|
|
|
$
|
32
|
|
|
$
|
29
|
|
Research, development, and engineering
|
18
|
|
|
17
|
|
|
38
|
|
|
35
|
|
Marketing and selling
|
6
|
|
|
7
|
|
|
13
|
|
|
13
|
|
General and administrative
|
9
|
|
|
9
|
|
|
19
|
|
|
18
|
|
Total share-based compensation
|
$
|
48
|
|
|
$
|
47
|
|
|
$
|
102
|
|
|
$
|
95
|
|
The cost associated with share-based awards that are subject solely to time-based vesting requirements, less expected forfeitures, is recognized over the awards’ service period for the entire award on a straight-line basis. The cost associated with performance-based equity awards is recognized for each tranche over the service period, based on an assessment of the likelihood that the applicable performance goals will be achieved.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
At
May 1, 2016
, Applied had
$337 million
in total unrecognized compensation expense, net of estimated forfeitures, related to grants of share-based awards and shares issued under Applied’s ESPP, which will be recognized over a weighted average period of
2.7
years. At
May 1, 2016
, there were
107 million
shares available for grants of share-based awards under the Employee Stock Incentive Plan, and an additional
26 million
shares available for issuance under the ESPP.
Restricted Stock Units, Restricted Stock, Performance Shares and Performance Units
A summary of the changes in restricted stock units, restricted stock, performance shares and performance units outstanding under Applied’s equity compensation plans during the
six
months ended
May 1, 2016
is presented below:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
|
|
|
(In millions, except per share amounts)
|
Outstanding at October 25, 2015
|
27
|
|
|
$
|
16.41
|
|
Granted
|
11
|
|
|
$
|
18.27
|
|
Vested
|
(10
|
)
|
|
$
|
14.24
|
|
Canceled
|
(1
|
)
|
|
$
|
17.43
|
|
Outstanding at May 1, 2016
|
27
|
|
|
$
|
17.94
|
|
At
May 1, 2016
,
1 million
additional performance-based awards could be earned upon certain levels of achievement of Applied's total shareholder return relative to a peer group at a future date.
During the first quarter of fiscal 2016, certain executive officers were granted awards that are subject to the achievement of specified performance goals (performance-based awards). These performance-based awards become eligible to vest only if performance goals are achieved and will vest only if the grantee remains employed by Applied through each applicable vesting date. These performance-based awards require the achievement of targeted levels of adjusted annual operating profit margin. Additional shares become eligible for time-based vesting if Applied achieves certain levels of total shareholder return (TSR) relative to a peer group, comprised of companies in the Standard & Poor's 500 Information Technology Index, measured at the end of a
two
-year period.
The fair value of these performance-based awards is estimated on the date of grant and assumes that the specified performance goals will be achieved. If the goals are achieved, these awards vest over a specified remaining service period of generally
four years
, provided that the grantee remains employed by Applied through each scheduled vesting date. If the performance goals are not met as of the end of the performance period, no compensation expense is recognized and any previously recognized compensation expense is reversed. The expected cost of each award is reflected over the service period and is reduced for estimated forfeitures.
Employee Stock Purchase Plans
Under the ESPP, substantially all employees may purchase Applied common stock through payroll deductions at a price equal to
85 percent
of the lower of the fair market value of Applied common stock at the beginning or end of each
6
-month purchase period, subject to certain limits. Applied issued
3 million
shares during the three and
six
months ended
May 1, 2016
and
2 million
shares during the three and
six
months ended
April 26, 2015
. Compensation expense is calculated using the fair value of the employees’ purchase rights under the Black-Scholes model. Underlying assumptions used in the model are outlined in the following table:
|
|
|
|
|
|
Three and Six Months Ended
|
|
May 1, 2016
|
|
April 26, 2015
|
ESPP:
|
|
|
|
Dividend yield
|
2.07%
|
|
1.56%
|
Expected volatility
|
29.8%
|
|
31.4%
|
Risk-free interest rate
|
0.49%
|
|
0.07%
|
Expected life (in years)
|
0.5
|
|
0.5
|
Weighted average estimated fair value
|
$4.47
|
|
$6.04
|
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
Note 10 Employee Benefit Plans
Applied sponsors a number of employee benefit plans, including defined benefit plans of certain foreign subsidiaries, and a plan that provides certain medical and vision benefits to eligible retirees. A summary of the components of net periodic benefit costs of these defined and postretirement benefit plans for the three and six months ended
May 1, 2016
and
April 26, 2015
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
May 1,
2016
|
|
April 26,
2015
|
|
May 1,
2016
|
|
April 26,
2015
|
|
|
|
|
|
|
|
(In millions)
|
Service cost
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
7
|
|
|
$
|
7
|
|
Interest cost
|
3
|
|
|
3
|
|
|
7
|
|
|
7
|
|
Expected return on plan assets
|
(4
|
)
|
|
(4
|
)
|
|
(8
|
)
|
|
(8
|
)
|
Amortization of actuarial loss
|
1
|
|
|
1
|
|
|
2
|
|
|
3
|
|
Curtailment and settlement gain
|
(1
|
)
|
|
—
|
|
|
(5
|
)
|
|
(1
|
)
|
Net periodic benefit cost
|
$
|
3
|
|
|
$
|
4
|
|
|
$
|
3
|
|
|
$
|
8
|
|
Note 11 Income Taxes
Applied’s effective tax rates for the second quarters of fiscal 2016 and 2015 were
19.0 percent
and
6.4 percent
, respectively. Applied's effective tax rates for the first half of fiscal 2016 and 2015 were
14.5 percent
and
13.8 percent
, respectively. The effective tax rates for the second quarter and first half of fiscal 2015 included the effect of an adjustment primarily to correct an error in the recognition of cost of sales in the U.S. related to intercompany sales. While this error had no impact on Applied’s consolidated cost of sales, it resulted in overstating profitability in the U.S. and the provision for income taxes, income taxes payable and other tax balance sheet accounts in each year since fiscal 2010. The impact of the adjustment to the second quarter and first half of fiscal 2015 was a decrease in provision for income taxes of $
39 million
and $
35 million
, respectively, which was determined to be immaterial on the originating periods and fiscal 2015. Accordingly, a restatement was not considered necessary. In addition, the effective tax rates for the second quarter and first half of fiscal 2015 included benefits from acquisition costs that became deductible as a result of the termination of the proposed business combination with TEL, and resolutions and changes related to income tax liabilities for prior years. As a result, the effective tax rates for the second quarter and first half of fiscal 2016 were higher than in the same periods in fiscal 2015. The higher effective tax rates in fiscal 2016 were partially offset by the benefit from changes in the geographical composition of income. The effective tax rates for the first half of fiscal 2016 and 2015 both included the benefit from the reinstatement of the U.S. federal research and development tax credit during these periods retroactive to its expiration in December of the prior years.
During the next twelve months, it is reasonably possible that existing liabilities for unrecognized tax benefits could be reduced by up to
$15 million
as a result of the expiration of statutes of limitation.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
|
|
Note 12
|
Warranty, Guarantees and Contingencies
|
Warranty
Changes in the warranty reserves are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
May 1,
2016
|
|
April 26,
2015
|
|
May 1,
2016
|
|
April 26,
2015
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Beginning balance
|
$
|
119
|
|
|
$
|
119
|
|
|
$
|
126
|
|
|
$
|
113
|
|
Warranties issued
|
30
|
|
|
32
|
|
|
56
|
|
|
69
|
|
Change in reserves related to preexisting warranty
|
(5
|
)
|
|
(1
|
)
|
|
(16
|
)
|
|
(2
|
)
|
Consumption of reserves
|
(23
|
)
|
|
(27
|
)
|
|
(45
|
)
|
|
(57
|
)
|
Ending balance
|
$
|
121
|
|
|
$
|
123
|
|
|
$
|
121
|
|
|
$
|
123
|
|
Applied products are generally sold with a warranty for a
12
-month period following installation. The provision for the estimated cost of warranty is recorded when revenue is recognized. Parts and labor are covered under the terms of the warranty agreement. The warranty provision is based on historical experience by product, configuration and geographic region. Quarterly warranty consumption is generally associated with sales that occurred during the preceding four quarters, and quarterly warranty provisions are generally related to the current quarter’s sales.
Guarantees
In the ordinary course of business, Applied provides standby letters of credit or other guarantee instruments to third parties as required for certain transactions initiated by either Applied or its subsidiaries. As of
May 1, 2016
, the maximum potential amount of future payments that Applied could be required to make under these guarantee agreements was approximately
$57 million
. Applied has not recorded any liability in connection with these guarantee agreements beyond that required to appropriately account for the underlying transaction being guaranteed. Applied does not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under these guarantee agreements.
Applied also has agreements with various banks to facilitate subsidiary banking operations worldwide, including overdraft arrangements, issuance of bank guarantees, and letters of credit. As of
May 1, 2016
, Applied has provided parent guarantees to banks for approximately
$100 million
to cover these arrangements.
Legal Matters
Korea Criminal Proceedings
In 2010, the Seoul Eastern District Court began hearings on indictments brought by the Seoul Prosecutor's Office for the Eastern District of Korea (the Prosecutor's Office) alleging that employees of several companies improperly received and used confidential information belonging to Samsung Electronics Co., Ltd. (Samsung), a major Applied customer based in Korea. The individuals charged included the former head of Applied Materials Korea (AMK), who at the time of the indictment was a vice president of Applied Materials, Inc., and certain other AMK employees. Neither Applied nor any of its subsidiaries was named as a party to the proceedings. Hearings on these matters concluded in November 2012 and the Court issued its decision on February 7, 2013. As part of the ruling,
nine
AMK employees (including the former head of AMK) were acquitted of all charges, while
one
AMK employee was found guilty on some of the charges and received a suspended jail sentence. The Prosecutor's Office and various individuals appealed the matter to the High Court. On June 20, 2014, the High Court rendered its decision, finding all defendants not guilty, including all
ten
AMK employees. The prosecutor has appealed the High Court decision to the Korean Supreme Court.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
Other Matters
From time to time, Applied receives notification from third parties, including customers and suppliers, seeking indemnification, litigation support, payment of money or other actions by Applied in connection with claims made against them. In addition, from time to time, Applied receives notification from third parties claiming that Applied may be or is infringing or misusing their intellectual property or other rights. Applied also is subject to various other legal proceedings and claims, both asserted and unasserted, that arise in the ordinary course of business.
Although the outcome of the above-described matters, claims and proceedings cannot be predicted with certainty, Applied does not believe that any will have a material effect on its consolidated financial condition or results of operations.
|
|
Note 13
|
Industry Segment Operations
|
Applied’s
four
reportable segments are: Silicon Systems, Applied Global Services, Display, and Energy and Environmental Solutions. As defined under the accounting literature, Applied’s chief operating decision-maker has been identified as the President and Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Segment information is presented based upon Applied’s management organization structure as of
May 1, 2016
and the distinctive nature of each segment. Future changes to this internal financial structure may result in changes to Applied’s reportable segments.
Each operating segment is separately managed and has separate financial results that are reviewed by Applied’s chief operating decision-maker. Each reportable segment contains closely related products that are unique to the particular segment. Segment operating income is determined based upon internal performance measures used by Applied’s chief operating decision-maker.
Applied derives the segment results directly from its internal management reporting system. The accounting policies Applied uses to derive reportable segment results are substantially the same as those used for external reporting purposes. Management measures the performance of each reportable segment based upon several metrics including orders, net sales and operating income. Management uses these results to evaluate the performance of, and to assign resources to, each of the reportable segments. Applied does not allocate to its reportable segments certain operating expenses that it manages separately at the corporate level, which include costs related to share-based compensation; certain management, finance, legal, human resources, and research, development and engineering functions provided at the corporate level; and unabsorbed information technology and occupancy. In addition, Applied does not allocate to its reportable segments restructuring and asset impairment charges and any associated adjustments related to restructuring actions, unless these actions pertain to a specific reportable segment. Segment operating income excludes interest income/expense and other financial charges and income taxes. Management does not consider the unallocated costs in measuring the performance of the reportable segments.
The Silicon Systems reportable segment includes semiconductor capital equipment for etch, rapid thermal processing, deposition, chemical mechanical planarization, metrology and inspection, wafer packaging, and ion implantation.
The Applied Global Services segment includes technically differentiated products and services to improve operating efficiency, reduce operating costs and lessen the environmental impact of semiconductor, display and solar customers’ factories. Applied Global Services’ products consist of spares, services, certain earlier generation products, remanufactured equipment, and products that have reached a particular stage in the product lifecycle. Customer demand for these products and services is fulfilled through a global distribution system with trained service engineers located in close proximity to customer sites.
The Display segment includes products for manufacturing liquid crystal displays (LCDs), organic light-emitting diodes (OLEDs), and other display technologies for TVs, personal computers, tablets, smart phones, and other consumer-oriented devices.
The Energy and Environmental Solutions segment includes products for fabricating solar photovoltaic cells and modules, as well as high throughput roll-to-roll deposition equipment for flexible electronics and other applications.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
Net sales and operating income (loss) for each reportable segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
Net Sales
|
|
Operating
Income (Loss)
|
|
Net Sales
|
|
Operating
Income (Loss)
|
|
|
|
|
|
|
|
|
|
(In millions)
|
May 1, 2016:
|
|
|
|
|
|
|
|
Silicon Systems
|
$
|
1,587
|
|
|
$
|
364
|
|
|
$
|
2,960
|
|
|
$
|
629
|
|
Applied Global Services
|
648
|
|
|
171
|
|
|
1,274
|
|
|
327
|
|
Display
|
167
|
|
|
29
|
|
|
380
|
|
|
67
|
|
Energy and Environmental Solutions
|
48
|
|
|
—
|
|
|
93
|
|
|
6
|
|
Total Segment
|
$
|
2,450
|
|
|
$
|
564
|
|
|
$
|
4,707
|
|
|
$
|
1,029
|
|
April 26, 2015:
|
|
|
|
|
|
|
|
Silicon Systems
|
$
|
1,560
|
|
|
$
|
374
|
|
|
$
|
3,006
|
|
|
$
|
681
|
|
Applied Global Services
|
646
|
|
|
170
|
|
|
1,229
|
|
|
323
|
|
Display
|
163
|
|
|
40
|
|
|
438
|
|
|
112
|
|
Energy and Environmental Solutions
|
73
|
|
|
(5
|
)
|
|
128
|
|
|
(9
|
)
|
Total Segment
|
$
|
2,442
|
|
|
$
|
579
|
|
|
$
|
4,801
|
|
|
$
|
1,107
|
|
Reconciliations of total segment operating results to Applied consolidated totals were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
May 1,
2016
|
|
April 26,
2015
|
|
May 1,
2016
|
|
April 26,
2015
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Total segment operating income
|
$
|
564
|
|
|
$
|
579
|
|
|
$
|
1,029
|
|
|
$
|
1,107
|
|
Corporate and unallocated costs
|
(139
|
)
|
|
(148
|
)
|
|
(250
|
)
|
|
(276
|
)
|
Certain items associated with terminated business combination
|
—
|
|
|
(29
|
)
|
|
—
|
|
|
(49
|
)
|
Gain on derivatives associated with terminated business combination
|
—
|
|
|
14
|
|
|
—
|
|
|
92
|
|
Income from operations
|
$
|
425
|
|
|
$
|
416
|
|
|
$
|
779
|
|
|
$
|
874
|
|
The following customers accounted for at least
10 percent
of Applied’s net sales for the
six
months ended
May 1, 2016
, which were for products in multiple reportable segments.
|
|
|
|
|
Percentage of Net Sales
|
Micron Technology, Inc.
|
12
|
%
|
Samsung Electronics Co., Ltd.
|
12
|
%
|
Intel Corporation
|
11
|
%
|
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following management's discussion and analysis is provided in addition to the accompanying consolidated condensed financial statements and notes to assist in understanding Applied's results of operations and financial condition. Financial information as of
May 1, 2016
should be read in conjunction with the financial statements for the fiscal year ended October 25, 2015 contained in the Company's Form 10-K filed December 9, 2015.
This report contains forward-looking statements that involve a number of risks and uncertainties. Examples of forward-looking statements include those regarding Applied’s future financial or operating results, cash flows and cash deployment strategies, declaration of dividends, share repurchases, business strategies and priorities, costs and cost controls, products, competitive positions, management’s plans and objectives for future operations, research and development, strategic acquisitions and investments, growth opportunities, restructuring activities, backlog, working capital, liquidity, investment portfolio and policies, taxes, supply chain, manufacturing properties, legal proceedings and claims, customer demand and spending, end-use demand, market and industry trends and outlooks, general economic conditions and other statements that are not historical facts, as well as their underlying assumptions. Forward-looking statements include statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “potential” and “continue,” the negative of these terms, or other comparable terminology. All forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in Part II, Item 1A, “Risk Factors,” below and elsewhere in this report. These and many other factors could affect Applied’s 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. Forward-looking statements are based on management's estimates, projections and expectations as of the date hereof, and Applied undertakes no obligation to revise or update any such statements.
Overview
Applied provides manufacturing equipment, services and software to the global semiconductor, display, solar photovoltaic (PV) and related industries. Applied’s customers include manufacturers of semiconductor wafers and chips, liquid crystal and other displays, solar PV cells and modules, and other electronic devices. These customers may use what they manufacture in their own end products or sell the items to other companies for use in advanced electronic components. Applied operates in four reportable segments: Silicon Systems, Applied Global Services, Display, and Energy and Environmental Solutions. A summary of financial information for each reportable segment is found in Note 13 of Notes to Consolidated Condensed Financial Statements. A discussion of factors that could affect Applied’s operations is set forth under “Risk Factors” in Part II, Item 1A, which is incorporated herein by reference. Product development and manufacturing activities occur primarily in the United States, Europe, Israel, and Asia. Applied’s broad range of equipment and service products are highly technical and are sold primarily through a direct sales force.
Applied’s results are driven primarily by worldwide demand for semiconductors, which in turn depends on end-user demand for electronic products. Each of Applied’s businesses is subject to cyclical industry conditions, as demand for manufacturing equipment and services can change depending on supply and demand for chips, display technologies, solar PVs and other electronic devices, as well as other factors, such as global economic and market conditions, and the nature and timing of technological advances in fabrication processes. In addition, a significant driver in the semiconductor and display industries is end-demand for mobile consumer products, which is characterized by seasonality that impacts the timing of customer investments in manufacturing equipment and, in turn, Applied's business. In light of these conditions, Applied's results can vary significantly year-over-year, as well as quarter-over-quarter.
The following tables present certain significant measurements for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Change
|
|
May 1,
2016
|
|
January 31,
2016
|
|
April 26,
2015
|
|
Q2 2016
over
Q1 2016
|
|
Q2 2016
over
Q2 2015
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share amounts and percentages)
|
New orders
|
$
|
3,451
|
|
|
$
|
2,275
|
|
|
$
|
2,515
|
|
|
$
|
1,176
|
|
|
$
|
936
|
|
Net sales
|
$
|
2,450
|
|
|
$
|
2,257
|
|
|
$
|
2,442
|
|
|
$
|
193
|
|
|
$
|
8
|
|
Gross profit
|
$
|
1,004
|
|
|
$
|
916
|
|
|
$
|
1,016
|
|
|
$
|
88
|
|
|
$
|
(12
|
)
|
Gross margin
|
41.0
|
%
|
|
40.6
|
%
|
|
41.6
|
%
|
|
0.4 points
|
|
(0.6) points
|
Operating income
|
$
|
425
|
|
|
$
|
354
|
|
|
$
|
416
|
|
|
$
|
71
|
|
|
$
|
9
|
|
Operating margin
|
17.3
|
%
|
|
15.7
|
%
|
|
17.0
|
%
|
|
1.6 points
|
|
0.3 points
|
Net income
|
$
|
320
|
|
|
$
|
286
|
|
|
$
|
364
|
|
|
$
|
34
|
|
|
$
|
(44
|
)
|
Earnings per diluted share
|
$
|
0.29
|
|
|
$
|
0.25
|
|
|
$
|
0.29
|
|
|
$
|
0.04
|
|
|
$
|
—
|
|
Non-GAAP Adjusted Results
|
|
|
|
|
|
|
|
|
|
Non-GAAP adjusted gross profit
|
$
|
1,045
|
|
|
$
|
957
|
|
|
$
|
1,055
|
|
|
$
|
88
|
|
|
$
|
(10
|
)
|
Non-GAAP adjusted gross margin
|
42.7
|
%
|
|
42.4
|
%
|
|
43.2
|
%
|
|
0.3 points
|
|
(0.5) points
|
Non-GAAP adjusted operating income
|
$
|
470
|
|
|
$
|
401
|
|
|
$
|
476
|
|
|
$
|
69
|
|
|
$
|
(6
|
)
|
Non-GAAP adjusted operating margin
|
19.2
|
%
|
|
17.8
|
%
|
|
19.5
|
%
|
|
1.4 points
|
|
(0.3) points
|
Non-GAAP adjusted net income
|
$
|
376
|
|
|
$
|
302
|
|
|
$
|
362
|
|
|
$
|
74
|
|
|
$
|
14
|
|
Non-GAAP adjusted earnings per diluted share
|
$
|
0.34
|
|
|
$
|
0.26
|
|
|
$
|
0.29
|
|
|
$
|
0.08
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Change
|
|
May 1,
2016
|
|
April 26,
2015
|
|
YTD Q2 2016
over
YTD Q2 2015
|
|
|
|
|
|
|
|
(In millions, except per share amounts and percentages)
|
New orders
|
$
|
5,726
|
|
|
$
|
4,788
|
|
|
$
|
938
|
|
Net sales
|
$
|
4,707
|
|
|
$
|
4,801
|
|
|
$
|
(94
|
)
|
Gross profit
|
$
|
1,920
|
|
|
$
|
1,975
|
|
|
$
|
(55
|
)
|
Gross margin
|
40.8
|
%
|
|
41.1
|
%
|
|
(0.3) points
|
Operating income
|
$
|
779
|
|
|
$
|
874
|
|
|
$
|
(95
|
)
|
Operating margin
|
16.5
|
%
|
|
18.2
|
%
|
|
(1.7) points
|
Net income
|
$
|
606
|
|
|
$
|
712
|
|
|
$
|
(106
|
)
|
Earnings per diluted share
|
$
|
0.53
|
|
|
$
|
0.57
|
|
|
$
|
(0.04
|
)
|
Non-GAAP Adjusted Results
|
|
|
|
|
|
Non-GAAP adjusted gross profit
|
$
|
2,002
|
|
|
$
|
2,054
|
|
|
$
|
(52
|
)
|
Non-GAAP adjusted gross margin
|
42.5
|
%
|
|
42.8
|
%
|
|
(0.3) points
|
Non-GAAP adjusted operating income
|
$
|
871
|
|
|
$
|
923
|
|
|
$
|
(52
|
)
|
Non-GAAP adjusted operating margin
|
18.5
|
%
|
|
19.2
|
%
|
|
(0.7) points
|
Non-GAAP adjusted net income
|
$
|
678
|
|
|
$
|
700
|
|
|
$
|
(22
|
)
|
Non-GAAP adjusted earnings per diluted share
|
$
|
0.60
|
|
|
$
|
0.56
|
|
|
$
|
0.04
|
|
Reconciliations of non-GAAP adjusted measures are presented below under "Non-GAAP Adjusted Results." Fiscal
2016
and
2015
contains
53
weeks and
52
weeks, respectively, and the first
six
months of fiscal
2016
and
2015
contained
27
weeks and
26
weeks, respectively.
Mobility, and the increasing technological functionality of mobile devices, continues to be a strong driver of semiconductor industry spending. During the first
six
months of fiscal
2016
, memory manufacturers invested in technology upgrades and additional capacity while foundry customers invested to meet demand for advanced mobile chips. For the remainder of the year, Applied anticipates 3D NAND and advanced foundry and logic node spending will drive our semiconductor business. Mobility investments, including increasing investments in new technology, represents a significant driver of display industry spending, which has resulted in higher manufacturing capacity expansion for mobile applications. As a result, new orders for display equipment increased in the second quarter of fiscal 2016 compared to the prior quarter and the same period in the prior year, and Applied expects strong demand for mobile display manufacturing equipment for the remainder of fiscal 2016. Demand for larger LCD TVs is also a factor for display industry investments, although demand for TV manufacturing equipment remains susceptible to highly cyclical conditions. Investment in solar equipment remained low due to ongoing excess manufacturing capacity in the industry.
Results of Operations
New Orders
New orders by reportable segment for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Change
|
|
May 1,
2016
|
|
January 31,
2016
|
|
April 26,
2015
|
|
Q2 2016
over
Q1 2016
|
|
Q2 2016
over
Q2 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages)
|
Silicon Systems
|
$
|
1,966
|
|
|
57%
|
|
$
|
1,275
|
|
|
56%
|
|
$
|
1,704
|
|
|
68%
|
|
54%
|
|
15%
|
Applied Global Services
|
677
|
|
|
20%
|
|
773
|
|
|
34%
|
|
641
|
|
|
25%
|
|
(12)%
|
|
6%
|
Display
|
700
|
|
|
20%
|
|
183
|
|
|
8%
|
|
120
|
|
|
5%
|
|
283%
|
|
483%
|
Energy and Environmental Solutions
|
108
|
|
|
3%
|
|
44
|
|
|
2%
|
|
50
|
|
|
2%
|
|
145%
|
|
116%
|
Total
|
$
|
3,451
|
|
|
100%
|
|
$
|
2,275
|
|
|
100%
|
|
$
|
2,515
|
|
|
100%
|
|
52%
|
|
37%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Change
|
|
May 1,
2016
|
|
April 26,
2015
|
|
YTD Q2 2016
over
YTD Q2 2015
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages)
|
Silicon Systems
|
$
|
3,241
|
|
|
57%
|
|
$
|
3,130
|
|
|
65%
|
|
4%
|
Applied Global Services
|
1,450
|
|
|
25%
|
|
1,331
|
|
|
28%
|
|
9%
|
Display
|
883
|
|
|
15%
|
|
227
|
|
|
5%
|
|
289%
|
Energy and Environmental Solutions
|
152
|
|
|
3%
|
|
100
|
|
|
2%
|
|
52%
|
Total
|
$
|
5,726
|
|
|
100%
|
|
$
|
4,788
|
|
|
100%
|
|
20%
|
New orders for the
second
quarter of fiscal
2016
increased compared to the prior quarter primarily due to higher demand for semiconductor, display and solar equipment, partially offset by lower orders for semiconductor services, reflecting seasonally lower service contract renewals. New orders for the
second
quarter and first half of fiscal
2016
increased across all segments compared to the same periods in the prior year. New orders for the Silicon Systems and Applied Global Services segment continued to comprise the majority of Applied's consolidated total new orders.
New orders by geographic region, determined by the product shipment destination specified by the customer, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Change
|
|
May 1,
2016
|
|
January 31,
2016
|
|
April 26,
2015
|
|
Q2 2016
over
Q1 2016
|
|
Q2 2016
over
Q2 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages)
|
Taiwan
|
$
|
445
|
|
|
13%
|
|
$
|
534
|
|
|
23%
|
|
$
|
589
|
|
|
23%
|
|
(17)%
|
|
(24)%
|
China
|
903
|
|
|
26%
|
|
502
|
|
|
22%
|
|
352
|
|
|
14%
|
|
80%
|
|
157%
|
Korea
|
792
|
|
|
23%
|
|
373
|
|
|
17%
|
|
607
|
|
|
24%
|
|
112%
|
|
30%
|
Japan
|
339
|
|
|
10%
|
|
109
|
|
|
5%
|
|
365
|
|
|
15%
|
|
211%
|
|
(7)%
|
Southeast Asia
|
392
|
|
|
11%
|
|
232
|
|
|
10%
|
|
103
|
|
|
4%
|
|
69%
|
|
281%
|
Asia Pacific
|
2,871
|
|
|
83%
|
|
1,750
|
|
|
77%
|
|
2,016
|
|
|
80%
|
|
64%
|
|
42%
|
United States
|
386
|
|
|
11%
|
|
369
|
|
|
16%
|
|
368
|
|
|
15%
|
|
5%
|
|
5%
|
Europe
|
194
|
|
|
6%
|
|
156
|
|
|
7%
|
|
131
|
|
|
5%
|
|
24%
|
|
48%
|
Total
|
$
|
3,451
|
|
|
100%
|
|
$
|
2,275
|
|
|
100%
|
|
$
|
2,515
|
|
|
100%
|
|
52%
|
|
37%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Change
|
|
May 1,
2016
|
|
April 26,
2015
|
|
YTD Q2 2016
over
YTD Q2 2015
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages)
|
Taiwan
|
$
|
979
|
|
|
17%
|
|
$
|
1,134
|
|
|
24%
|
|
(14)%
|
China
|
1,405
|
|
|
25%
|
|
648
|
|
|
13%
|
|
117%
|
Korea
|
1,165
|
|
|
20%
|
|
1,153
|
|
|
24%
|
|
1%
|
Japan
|
448
|
|
|
8%
|
|
607
|
|
|
13%
|
|
(26)%
|
Southeast Asia
|
624
|
|
|
11%
|
|
188
|
|
|
4%
|
|
232%
|
Asia Pacific
|
4,621
|
|
|
81%
|
|
3,730
|
|
|
78%
|
|
24%
|
United States
|
755
|
|
|
13%
|
|
779
|
|
|
16%
|
|
(3)%
|
Europe
|
350
|
|
|
6%
|
|
279
|
|
|
6%
|
|
25%
|
Total
|
$
|
5,726
|
|
|
100%
|
|
$
|
4,788
|
|
|
100%
|
|
20%
|
The increases in new orders from customers in Korea, China, Japan and Southeast Asia in the second quarter of fiscal 2016 compared to the prior quarter primarily reflected increased demand from memory customers, while the decrease in new orders from customers in Taiwan reflected lower demand for memory and foundry equipment, partially offset by higher demand for display equipment. The increases in new orders from customers in Korea and Japan also reflected higher demand for display equipment. The increase in new orders from customers in Europe in the second quarter and first half of fiscal 2016 compared to the prior quarter and the same periods in the prior year was primarily due to higher demand from logic customers.
The increase in new orders from customers in China and Southeast Asia for the second quarter and first half of fiscal 2016 compared to the same periods in the prior year was primarily due to higher demand from memory customers. The increase in new orders from customers in Korea in the second quarter compared to the same period in the prior year primarily reflected higher demand for display equipment, partially offset by lower demand from memory and foundry customers. The decreases in new orders from customers in Taiwan and Japan for the second quarter and first half of fiscal 2016 compared to the same periods in the prior year were due to lower demand from semiconductor equipment, partially offset by higher demand for display equipment.
Changes in backlog during the
six
months ended
May 1, 2016
were as follows:
|
|
|
|
|
|
May 1,
2016
|
|
(In millions)
|
Beginning balance
|
$
|
3,142
|
|
New orders
|
5,726
|
|
Net sales
|
(4,707
|
)
|
Net adjustments
|
7
|
|
Ending balance
|
$
|
4,168
|
|
Backlog consists of: (1) orders for which written authorizations have been accepted and assigned shipment dates are within the next 12 months, or shipment has occurred but revenue has not been recognized; and (2) contractual service revenue and maintenance fees to be earned within the next 12 months. Applied’s backlog at any particular time is not necessarily indicative of actual sales for any future periods due to the potential for customer changes in delivery schedules or cancellation of orders. Approximately 73 percent of backlog as of the end of the
second
quarter of fiscal 2016 is anticipated to be shipped within the next two quarters. Backlog adjustments during the first
six
months of fiscal 2016 totaled
$7 million
, primarily consisting of favorable foreign currency impact, partially offset by order cancellations.
Backlog by reportable segment as of the end of the most recent three fiscal quarters was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 1,
2016
|
|
January 31,
2016
|
|
October 25,
2015
|
|
Q2 2016
over
Q1 2016
|
|
Q2 2016
over
Q4 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages)
|
Silicon Systems
|
$
|
2,044
|
|
|
49%
|
|
$
|
1,602
|
|
|
51%
|
|
$
|
1,720
|
|
|
55%
|
|
28%
|
|
19%
|
Applied Global Services
|
945
|
|
|
23%
|
|
928
|
|
|
30%
|
|
812
|
|
|
26%
|
|
2%
|
|
16%
|
Display
|
1,033
|
|
|
25%
|
|
495
|
|
|
16%
|
|
525
|
|
|
16%
|
|
109%
|
|
97%
|
Energy and Environmental Solutions
|
146
|
|
|
3%
|
|
84
|
|
|
3%
|
|
85
|
|
|
3%
|
|
74%
|
|
72%
|
Total
|
$
|
4,168
|
|
|
100%
|
|
$
|
3,109
|
|
|
100%
|
|
$
|
3,142
|
|
|
100%
|
|
34%
|
|
33%
|
Total backlog in the
second
quarter of fiscal 2016 compared to the prior quarter increased primarily due to higher demand for semiconductor and display equipment. In the
second
quarter of fiscal 2016, approximately 62 percent of net sales in the Silicon Systems segment, Applied’s largest business segment, were for orders received and shipped within the quarter, up from 60 percent in the prior quarter.
Net Sales
Net sales by reportable segment for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Change
|
|
May 1,
2016
|
|
January 31,
2016
|
|
April 26,
2015
|
|
Q2 2016
over
Q1 2016
|
|
Q2 2016
over
Q2 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages)
|
Silicon Systems
|
$
|
1,587
|
|
|
65%
|
|
$
|
1,373
|
|
|
61%
|
|
$
|
1,560
|
|
|
64%
|
|
16%
|
|
2%
|
Applied Global Services
|
648
|
|
|
26%
|
|
626
|
|
|
28%
|
|
646
|
|
|
26%
|
|
4%
|
|
—%
|
Display
|
167
|
|
|
7%
|
|
213
|
|
|
9%
|
|
163
|
|
|
7%
|
|
(22)%
|
|
2%
|
Energy and Environmental Solutions
|
48
|
|
|
2%
|
|
45
|
|
|
2%
|
|
73
|
|
|
3%
|
|
7%
|
|
(34)%
|
Total
|
$
|
2,450
|
|
|
100%
|
|
$
|
2,257
|
|
|
100%
|
|
$
|
2,442
|
|
|
100%
|
|
9%
|
|
—%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Change
|
|
May 1,
2016
|
|
April 26,
2015
|
|
YTD Q2 2016
over
YTD Q2 2015
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages)
|
Silicon Systems Group
|
$
|
2,960
|
|
|
63%
|
|
$
|
3,006
|
|
|
63%
|
|
(2)%
|
Applied Global Services
|
1,274
|
|
|
27%
|
|
1,229
|
|
|
25%
|
|
4%
|
Display
|
380
|
|
|
8%
|
|
438
|
|
|
9%
|
|
(13)%
|
Energy and Environmental Solutions
|
93
|
|
|
2%
|
|
128
|
|
|
3%
|
|
(27)%
|
Total
|
$
|
4,707
|
|
|
100%
|
|
$
|
4,801
|
|
|
100%
|
|
(2)%
|
Net sales for the
second
quarter of fiscal 2016 increased compared to the prior quarter primarily due to increased investments in semiconductor equipment, partially offset by lower customer spending on display equipment. The Silicon Systems segment’s relative share of total net sales increased slightly compared to the prior quarter and remains the largest contributor of net sales.
For the
second
quarter of fiscal 2016 compared to the same period in the prior year, net sales remained relatively flat. Net sales for the first half of fiscal 2016 slightly decreased compared to the same period in the prior year, primarily due to lower customer spending on display semiconductor and solar equipment, partially offset by higher customer spending on semiconductor spares and services.
Net sales by geographic region, determined by the location of customers' facilities to which products were shipped, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Change
|
|
May 1,
2016
|
|
January 31,
2016
|
|
April 26,
2015
|
|
Q2 2016
over
Q1 2016
|
|
Q2 2016
over
Q2 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages)
|
Taiwan
|
$
|
311
|
|
|
13%
|
|
$
|
637
|
|
|
28%
|
|
$
|
461
|
|
|
19%
|
|
(51)%
|
|
(33)%
|
China
|
752
|
|
|
31%
|
|
495
|
|
|
22%
|
|
434
|
|
|
18%
|
|
52%
|
|
73%
|
Korea
|
506
|
|
|
21%
|
|
273
|
|
|
12%
|
|
536
|
|
|
22%
|
|
85%
|
|
(6)%
|
Japan
|
260
|
|
|
10%
|
|
334
|
|
|
15%
|
|
274
|
|
|
11%
|
|
(22)%
|
|
(5)%
|
Southeast Asia
|
252
|
|
|
10%
|
|
87
|
|
|
4%
|
|
96
|
|
|
4%
|
|
190%
|
|
163%
|
Asia Pacific
|
2,081
|
|
|
85%
|
|
1,826
|
|
|
81%
|
|
1,801
|
|
|
74%
|
|
14%
|
|
16%
|
United States
|
272
|
|
|
11%
|
|
293
|
|
|
13%
|
|
472
|
|
|
19%
|
|
(7)%
|
|
(42)%
|
Europe
|
97
|
|
|
4%
|
|
138
|
|
|
6%
|
|
169
|
|
|
7%
|
|
(30)%
|
|
(43)%
|
Total
|
$
|
2,450
|
|
|
100%
|
|
$
|
2,257
|
|
|
100%
|
|
$
|
2,442
|
|
|
100%
|
|
9%
|
|
—%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Change
|
|
May 1,
2016
|
|
April 26,
2015
|
|
YTD Q2 2016
over
YTD Q2 2015
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages)
|
Taiwan
|
$
|
948
|
|
|
20%
|
|
$
|
1,017
|
|
|
21%
|
|
(7)%
|
China
|
1,247
|
|
|
26%
|
|
844
|
|
|
18%
|
|
48%
|
Korea
|
779
|
|
|
17%
|
|
1,072
|
|
|
22%
|
|
(27)%
|
Japan
|
594
|
|
|
13%
|
|
517
|
|
|
11%
|
|
15%
|
Southeast Asia
|
339
|
|
|
7%
|
|
188
|
|
|
4%
|
|
80%
|
Asia Pacific
|
3,907
|
|
|
83%
|
|
3,638
|
|
|
76%
|
|
7%
|
United States
|
565
|
|
|
12%
|
|
841
|
|
|
17%
|
|
(33)%
|
Europe
|
235
|
|
|
5%
|
|
322
|
|
|
7%
|
|
(27)%
|
Total
|
$
|
4,707
|
|
|
100%
|
|
$
|
4,801
|
|
|
100%
|
|
(2)%
|
The increases in net sales from customers in China and Southeast Asia for the second quarter of fiscal 2016 compared to the prior quarter and the same period in the prior year, and the increase in net sales from customers in Korea for the second quarter of fiscal 2016 compared to the prior quarter, primarily reflected higher spending by memory customers. The decrease in net sales from customers in Taiwan for the second quarter of fiscal 2016 compared to the prior quarter and the same periods in the prior year reflected lower spending by foundry customers. The decrease in net sales from customers in Japan for the second quarter of fiscal 2016 compared to the prior quarter and the same period in the prior year primarily reflected lower spending by logic customers. The decrease in net sales from customers in Europe for the second quarter of fiscal 2016 compared to the prior quarter and the same period in the prior year was primarily due to lower customer spending on display and semiconductor equipment by customers in Europe.
The changes in net sales from customers in all regions in the first half of fiscal 2016 compared to the same period in the prior year primarily reflected changes in customers for semiconductor equipment. The increase in net sales from customers in China in the first half of fiscal 2016 compared to the same period in the prior year was partially offset by the lower spending from display customers.
Gross Margin
Gross margins for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Change
|
|
Six Months Ended
|
|
Change
|
|
May 1,
2016
|
|
January 31,
2016
|
|
April 26,
2015
|
|
Q2 2016
over
Q1 2016
|
|
Q2 2016
over
Q2 2015
|
|
May 1,
2016
|
|
April 26,
2015
|
|
YTD Q2 2016
over
YTD Q2 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages)
|
Gross profit
|
$
|
1,004
|
|
|
$
|
916
|
|
|
$
|
1,016
|
|
|
$
|
88
|
|
|
$
|
(12
|
)
|
|
$
|
1,920
|
|
|
$
|
1,975
|
|
|
$
|
(55
|
)
|
Gross margin
|
41.0
|
%
|
|
40.6
|
%
|
|
41.6
|
%
|
|
0.4 points
|
|
(0.6) points
|
|
40.8
|
%
|
|
41.1
|
%
|
|
(0.3) points
|
Non-GAAP Adjusted Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP adjusted gross profit
|
$
|
1,045
|
|
|
$
|
957
|
|
|
$
|
1,055
|
|
|
$
|
88
|
|
|
$
|
(10
|
)
|
|
$
|
2,002
|
|
|
$
|
2,054
|
|
|
$
|
(52
|
)
|
Non-GAAP adjusted gross margin
|
42.7
|
%
|
|
42.4
|
%
|
|
43.2
|
%
|
|
0.3 points
|
|
(0.5) points
|
|
42.5
|
%
|
|
42.8
|
%
|
|
(0.3) points
|
Reconciliations of non-GAAP adjusted measures are presented below under "Non-GAAP Adjusted Results."
Gross profit, non-GAAP adjusted gross profit, gross margin and non-GAAP adjusted gross margin in the
second
quarter of fiscal 2016 increased compared to the prior quarter, primarily reflecting higher net sales and favorable changes in product and customer mix. Gross profit, non-GAAP adjusted gross profit, gross margin and non-GAAP adjusted gross margin in the
second
quarter and first half of fiscal 2016 decreased compared to the same periods in the prior year, primarily due to unfavorable changes in product mix.
Gross profit and non-GAAP adjusted gross profit during each of the three months ended
May 1, 2016
,
January 31, 2016
and
April 26, 2015
included
$15 million
, $17 million and
$14 million
, respectively, of share-based compensation expense. Gross profit and non-GAAP adjusted gross margin during the
six
months ended
May 1, 2016
and
April 26, 2015
included
$32 million
and
$29 million
, respectively, of share-based compensation expense.
Research, Development and Engineering
Research, Development and Engineering (RD&E) expenses for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Change
|
|
Six Months Ended
|
|
Change
|
|
May 1,
2016
|
|
January 31,
2016
|
|
April 26,
2015
|
|
Q2 2016
over
Q1 2016
|
|
Q2 2016
over
Q2 2015
|
|
May 1,
2016
|
|
April 26,
2015
|
|
YTD Q2 2016
over
YTD Q2 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Research, development and engineering
|
$
|
386
|
|
|
$
|
374
|
|
|
$
|
365
|
|
|
$
|
12
|
|
|
$
|
21
|
|
|
$
|
760
|
|
|
$
|
716
|
|
|
$
|
44
|
|
Applied’s future operating results depend to a considerable extent on its ability to maintain a competitive advantage in the equipment and service products it provides. 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 Applied’s 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.
Management 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 maintained and intends to continue its commitment to investing in RD&E in order to continue to offer new products and technologies. RD&E expenses increased slightly during the second quarter and first half of fiscal 2016 compared to the prior quarter and the same periods in the prior year, reflecting ongoing investment in product development initiatives. RD&E expenses during the three months ended
May 1, 2016
,
January 31, 2016
and
April 26, 2015
included
$18 million
, $20 million and
$17 million
, respectively, of share-based compensation expense. RD&E expense during the
six
months ended
May 1, 2016
and
April 26, 2015
included
$38 million
and
$35 million
, respectively, of share-based compensation expense.
Marketing and Selling
Marketing and selling expenses for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Change
|
|
Six Months Ended
|
|
Change
|
|
May 1,
2016
|
|
January 31,
2016
|
|
April 26,
2015
|
|
Q2 2016
over
Q1 2016
|
|
Q2 2016
over
Q2 2015
|
|
May 1,
2016
|
|
April 26,
2015
|
|
YTD Q2 2016
over
YTD Q2 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Marketing and selling
|
$
|
102
|
|
|
$
|
106
|
|
|
$
|
109
|
|
|
$
|
(4
|
)
|
|
$
|
(7
|
)
|
|
$
|
208
|
|
|
$
|
220
|
|
|
$
|
(12
|
)
|
Marketing and selling expenses decreased slightly in the
second
quarter and first half of fiscal 2016 compared to the prior quarter and the same periods in the prior year due to continued cost management efforts. Marketing and selling expenses during the three months ended
May 1, 2016
,
January 31, 2016
and
April 26, 2015
included
$6 million
, $7 million and
$7 million
, respectively, of share-based compensation expense. Marketing and selling expenses during the
six
months ended
May 1, 2016
and
April 26, 2015
each included
$13 million
of share-based compensation expense.
General and Administrative
General and administrative (G&A) expenses for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Change
|
|
Six Months Ended
|
|
Change
|
|
May 1,
2016
|
|
January 31,
2016
|
|
April 26,
2015
|
|
Q2 2016
over
Q1 2016
|
|
Q2 2016
over
Q2 2015
|
|
May 1,
2016
|
|
April 26,
2015
|
|
YTD Q2 2016
over
YTD Q2 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
General and administrative
|
$
|
91
|
|
|
$
|
82
|
|
|
$
|
140
|
|
|
$
|
9
|
|
|
$
|
(49
|
)
|
|
$
|
173
|
|
|
$
|
257
|
|
|
$
|
(84
|
)
|
G&A expenses for the
second
quarter of fiscal 2016 increased compared to the prior quarter primarily due to higher variable compensation. G&A expenses for the
second
quarter and first half of fiscal 2016 decreased compared to the same periods in the prior year primarily due to lower acquisition-related and integration costs related to the terminated business combination with Tokyo Electron Limited (TEL) and change in foreign currency impact.
G&A expenses during the three months ended
May 1, 2016
,
January 31, 2016
and
April 26, 2015
included
$9 million
, $10 million and $
9 million
of share-based compensation expense, respectively. G&A expenses during the
six
months ended
May 1, 2016
and
April 26, 2015
included
$19 million
and
$18 million
, respectively, of share-based compensation expense.
Gain on Derivatives Associated with Terminated Business Combination
During the three and
six
months ended
April 26, 2015
, Applied recorded an unrealized gain of
$14 million
and
$92 million
, respectively, on the foreign exchanges option contracts associated with the then-anticipated business combination with TEL. Due to the termination of the then-anticipated business combination, the derivatives were sold during the third quarter of fiscal 2015. For further details, see Note 5 of Notes to Consolidated Condensed Financial Statements.
Interest Expense and Interest and Other Income (loss), net
Interest expense and interest and other income (loss), net for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Change
|
|
Six Months Ended
|
|
Change
|
May 1,
2016
|
|
January 31,
2016
|
|
April 26,
2015
|
|
Q2 2016
over
Q1 2016
|
|
Q2 2016
over
Q2 2015
|
|
May 1,
2016
|
|
April 26,
2015
|
|
YTD Q2 2016
over
YTD Q2 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Interest expense
|
$
|
37
|
|
|
$
|
42
|
|
|
$
|
24
|
|
|
$
|
(5
|
)
|
|
$
|
13
|
|
|
$
|
79
|
|
|
$
|
47
|
|
|
$
|
32
|
|
Interest and other income (loss), net
|
$
|
7
|
|
|
$
|
2
|
|
|
$
|
(3
|
)
|
|
$
|
5
|
|
|
$
|
10
|
|
|
$
|
9
|
|
|
$
|
(1
|
)
|
|
$
|
10
|
|
Interest expenses incurred were primarily associated with the senior unsecured notes issued in June 2011 and September 2015. Interest expense decreased in the
second
quarter of fiscal
2016
compared to the prior quarter primarily due to the repayment of an $800 million short-term loan in the first quarter of fiscal 2016. Interest expense increased in the
second
quarter and the first half of fiscal
2016
compared to the same periods in the prior year primarily due to the issuance of senior unsecured notes in September 2015.
Interest and other income, net included a $5 million loss from redemption of $400 million in principal amount of senior unsecured notes recorded in the first quarter and first half of fiscal 2016. Interest and other income, net in the
second
quarter and first half of fiscal 2016 compared to the same period in the prior year increased primarily due to lower impairment of strategic investments net of realized gain and higher interest income from investments.
Income Taxes
Provision for income taxes and effective tax rates for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Change
|
|
Six Months Ended
|
|
Change
|
May 1,
2016
|
|
January 31,
2016
|
|
April 26,
2015
|
|
Q2 2016
over
Q1 2016
|
|
Q2 2016
over
Q2 2015
|
|
May 1,
2016
|
|
April 26,
2015
|
|
YTD Q2 2016
over
YTD Q2 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages)
|
Provision for income taxes
|
$
|
75
|
|
|
$
|
28
|
|
|
$
|
25
|
|
|
$
|
47
|
|
|
$
|
50
|
|
|
$
|
103
|
|
|
$
|
114
|
|
|
$
|
(11
|
)
|
Effective tax rate
|
19.0
|
%
|
|
8.9
|
%
|
|
6.4
|
%
|
|
10.1 points
|
|
12.6 points
|
|
14.5
|
%
|
|
13.8
|
%
|
|
0.7 points
|
Applied’s provision for income taxes and effective tax rate are affected by the geographical composition of pre-tax income which includes jurisdictions with differing tax rates, income tax holidays and other income tax incentives. It is also affected by events that are not consistent from period to period, such as changes in income tax laws and the resolution of income tax filings.
The effective tax rate for the second quarter of fiscal 2016 was higher than in the prior quarter primarily due to the benefit from reinstatement of the U.S. federal research and development tax credit during the first quarter of fiscal 2016 which was retroactive to its expiration in December 2014 and resolutions and changes related to income tax liabilities for prior years, partially offset by the benefit from changes in the geographical composition of income.
The effective tax rates for the second quarter and first half of fiscal 2015 included the effect of an adjustment primarily to correct an error in the recognition of cost of sales in the U.S. related to intercompany sales. While this error had no impact on Applied’s consolidated cost of sales, it resulted in overstating profitability in the U.S. and the provision for income taxes, income taxes payable and other tax balance sheet accounts in each year since fiscal 2010. The impact of the adjustment to the second quarter and first half of fiscal 2015 was a decrease in provision for income taxes of $39 million and $35 million, respectively, which was determined to be immaterial on the originating periods and fiscal 2015. Accordingly, a restatement was not considered necessary. In addition, the effective tax rates for the second quarter and first half of fiscal 2015 included benefits from acquisition costs that became deductible as a result of the termination of the proposed business combination with TEL, and resolutions and changes related to income tax liabilities for prior years. As a result, the effective tax rates for the second quarter and first half of fiscal 2016 were higher than in the same periods in fiscal 2015. The higher effective tax rates in fiscal 2016 were partially offset by the benefit from changes in the geographical composition of income. The effective tax rates for the first half of fiscal 2016 and 2015 both included the benefit from the reinstatement of the U.S. federal research and development tax credit during these periods retroactive to its expiration in December of the prior years.
Segment Information
Applied reports financial results in four segments: Silicon Systems, Applied Global Services, Display, and Energy and Environmental Solutions. A description of the products and services, as well as financial data, for each reportable segment can be found in Note 13 of Notes to Consolidated Condensed Financial Statements. Applied does not allocate to its reportable segments certain operating expenses that it manages separately at the corporate level. These unallocated costs include costs for share-based compensation; certain management, finance, legal, human resource, and RD&E functions provided at the corporate level; and unabsorbed information technology and occupancy. In addition, Applied does not allocate to its reportable segments restructuring and asset impairment charges and any associated adjustments related to restructuring actions, unless these actions pertain to a specific reportable segment.
The results for each reportable segment are discussed below.
Silicon Systems Segment
The Silicon Systems segment includes semiconductor capital equipment for deposition, etch, ion implantation, rapid thermal processing, chemical mechanical planarization, metrology and inspection, and wafer packaging. Development efforts are focused on solving customers' key technical challenges in transistor, interconnect, patterning and packaging performance as devices scale to advanced technology nodes. The mobility trend remains the largest influence on industry spending, as it drives device manufacturers to continually improve their ability to deliver high-performance, low-power processors and affordable solid-state storage.
The competitive environment for Silicon Systems in the first
six
months of fiscal 2016 reflected steady investment by semiconductor manufacturers. Memory manufacturers invested in technology upgrades and additional capacity. Foundry customers invested to meet demand for advanced mobile chips.
Certain significant measures for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Change
|
May 1,
2016
|
|
January 31,
2016
|
|
April 26,
2015
|
Q2 2016
over
Q1 2016
|
|
Q2 2016
over
Q2 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages and ratios)
|
New orders
|
$
|
1,966
|
|
|
$
|
1,275
|
|
|
$
|
1,704
|
|
|
$
|
691
|
|
|
54%
|
|
$
|
262
|
|
|
15%
|
Net sales
|
1,587
|
|
|
1,373
|
|
|
1,560
|
|
|
214
|
|
|
16%
|
|
27
|
|
|
2%
|
Book to bill ratio
|
1.2
|
|
|
0.9
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
Operating income
|
364
|
|
|
265
|
|
|
374
|
|
|
99
|
|
|
37%
|
|
(10
|
)
|
|
(3)%
|
Operating margin
|
22.9
|
%
|
|
19.3
|
%
|
|
24.0
|
%
|
|
|
|
3.6 points
|
|
|
|
(1.1) points
|
Non-GAAP Adjusted Results
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP adjusted operating income
|
$
|
410
|
|
|
$
|
312
|
|
|
$
|
418
|
|
|
98
|
|
|
31%
|
|
(8
|
)
|
|
(2)%
|
Non-GAAP adjusted operating margin
|
25.8
|
%
|
|
22.7
|
%
|
|
26.8
|
%
|
|
|
|
3.1 points
|
|
|
|
(1.0) points
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Change
|
May 1,
2016
|
|
April 26,
2015
|
YTD Q2 2016
over
YTD Q2 2015
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages and ratios)
|
New orders
|
$
|
3,241
|
|
|
$
|
3,130
|
|
|
$
|
111
|
|
|
4%
|
Net sales
|
2,960
|
|
|
3,006
|
|
|
(46
|
)
|
|
(2)%
|
Book to bill ratio
|
1.1
|
|
|
1.0
|
|
|
|
|
|
Operating income
|
629
|
|
|
681
|
|
|
(52
|
)
|
|
(8)%
|
Operating margin
|
21.3
|
%
|
|
22.7
|
%
|
|
|
|
(1.4) points
|
Non-GAAP Adjusted Results
|
|
|
|
|
|
|
Non-GAAP adjusted operating income
|
$
|
722
|
|
|
$
|
768
|
|
|
(46
|
)
|
|
(6)%
|
Non-GAAP adjusted operating margin
|
24.4
|
%
|
|
25.5
|
%
|
|
|
|
(1.1) points
|
Reconciliations of non-GAAP adjusted measures are presented below under "Non-GAAP Adjusted Results."
New orders for the Silicon Systems by end use application for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
May 1,
2016
|
|
January 31,
2016
|
|
April 26,
2015
|
|
May 1,
2016
|
|
April 26,
2015
|
Foundry
|
23%
|
|
38%
|
|
36%
|
|
29%
|
|
35%
|
Memory
|
66%
|
|
51%
|
|
52%
|
|
60%
|
|
52%
|
Logic and other
|
11%
|
|
11%
|
|
12%
|
|
11%
|
|
13%
|
|
100%
|
|
100%
|
|
100%
|
|
100%
|
|
100%
|
New orders for the
second
quarter of fiscal 2016 increased compared to the prior quarter and to the same period in the prior year primarily due to higher demand from memory and logic customers, partially offset by lower demand from foundry customers. Net sales for the
second
quarter of fiscal 2016 increased compared to the prior quarter and to the same period in the prior year primarily due to higher spending from memory customers.
Approximately
62
percent of net sales in the
second
quarter of fiscal 2016 were for orders received and shipped within the quarter. The increase in the o
perating income, non-GAAP adjusted operating income, operating margin and non-GAAP adjusted operating margin for the second quarter of fiscal 2016 compared to the prior quarter was driven by favorable change in product mix.
The decrease in the o
perating income, non-GAAP adjusted operating income, operating margin and non-GAAP adjusted operating margin for the second quarter of fiscal 2016 compared to the same period in the prior year was due to higher research and development costs. In the
second
quarter of fiscal 2016, three customers accounted for approximately 61 percent of this segment's total new orders and five customers accounted for approximately 71 percent of this segment's total net sales.
New orders for the first half of fiscal 2016 increased compared to the same period in the prior year primarily due to increased demand from memory customers, partially offset by lower demand from foundry and logic customers. Net sales for the first half of fiscal 2016 slightly decreased compared to the same period in the prior period primarily due to lower spending from foundry customers, partially offset by higher spending from memory customers. Operating income, non-GAAP adjusted operating income, operating margin and non-GAAP adjusted operating margin decreased in the first half of fiscal 2016 compared to the same period in the prior year, primarily reflecting the decrease in net sales and higher research and development costs.
The following regions accounted for at least 30 percent of total net sales for the Silicon Systems segment for one or more of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Change
|
|
May 1,
2016
|
|
January 31,
2016
|
|
April 26,
2015
|
Q2 2016
over
Q1 2016
|
|
Q2 2016
over
Q2 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages)
|
China
|
$
|
588
|
|
|
37%
|
|
$
|
213
|
|
|
16%
|
|
$
|
197
|
|
|
13%
|
|
176%
|
|
198%
|
Korea
|
$
|
352
|
|
|
22%
|
|
$
|
205
|
|
|
15%
|
|
$
|
466
|
|
|
30%
|
|
72%
|
|
(24)%
|
Taiwan
|
$
|
169
|
|
|
11%
|
|
$
|
502
|
|
|
37%
|
|
$
|
311
|
|
|
20%
|
|
(66)%
|
|
(46)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Change
|
|
May 1,
2016
|
|
April 26,
2015
|
YTD Q2 2016
over
YTD Q2 2015
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages)
|
China
|
$
|
801
|
|
|
27%
|
|
$
|
276
|
|
|
9%
|
|
190%
|
Taiwan
|
$
|
671
|
|
|
23%
|
|
$
|
732
|
|
|
24%
|
|
(8)%
|
Korea
|
$
|
557
|
|
|
19%
|
|
$
|
907
|
|
|
30%
|
|
(39)%
|
Applied Global Services Segment
The Applied Global Services segment encompasses integrated solutions to optimize equipment and fab performance and productivity, including spares, upgrades, services, remanufactured earlier generation equipment and factory automation software for semiconductor, display and solar products. Customer demand for products and services is fulfilled through a global distribution system with trained service engineers located in close proximity to customer sites.
Industry conditions that affected Applied Global Services' sales of spares and services during the first
six
months of fiscal 2016 were principally semiconductor manufacturers' wafer starts, as well as utilization rates.
Certain significant measures for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Change
|
May 1,
2016
|
|
January 31,
2016
|
|
April 26,
2015
|
Q2 2016
over
Q1 2016
|
|
Q2 2016
over
Q2 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages and ratios)
|
New orders
|
$
|
677
|
|
|
$
|
773
|
|
|
$
|
641
|
|
|
$
|
(96
|
)
|
|
(12)%
|
|
$
|
36
|
|
|
6%
|
Net sales
|
648
|
|
|
626
|
|
|
646
|
|
|
22
|
|
|
4%
|
|
2
|
|
|
—%
|
Book to bill ratio
|
1.0
|
|
|
1.2
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
Operating income
|
171
|
|
|
156
|
|
|
170
|
|
|
15
|
|
|
10%
|
|
1
|
|
|
1%
|
Operating margin
|
26.4
|
%
|
|
24.9
|
%
|
|
26.3
|
%
|
|
|
|
1.5 points
|
|
|
|
0.1 points
|
Non-GAAP Adjusted Results
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP adjusted operating income
|
171
|
|
|
156
|
|
|
170
|
|
|
15
|
|
|
10%
|
|
1
|
|
|
1%
|
Non-GAAP adjusted operating margin
|
26.4
|
%
|
|
24.9
|
%
|
|
26.3
|
%
|
|
|
|
1.5 points
|
|
|
|
0.1 points
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Change
|
May 1,
2016
|
|
April 26,
2015
|
YTD Q2 2016
over
YTD Q2 2015
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages and ratios)
|
New orders
|
$
|
1,450
|
|
|
$
|
1,331
|
|
|
$
|
119
|
|
|
9%
|
Net sales
|
1,274
|
|
|
1,229
|
|
|
45
|
|
|
4%
|
Book to bill ratio
|
1.1
|
|
|
1.1
|
|
|
|
|
|
Operating income
|
327
|
|
|
323
|
|
|
4
|
|
|
1%
|
Operating margin
|
25.7
|
%
|
|
26.3
|
%
|
|
|
|
(0.6) points
|
Non-GAAP Adjusted Results
|
|
|
|
|
|
|
Non-GAAP adjusted operating income
|
$
|
327
|
|
|
$
|
324
|
|
|
3
|
|
|
1%
|
Non-GAAP adjusted operating margin
|
25.7
|
%
|
|
26.4
|
%
|
|
|
|
(0.7) points
|
Reconciliations of non-GAAP adjusted measures are presented below under "Non-GAAP Adjusted Results."
New orders for the second quarter of fiscal 2016 decreased compared to the prior quarter primarily due to service contract renewals being seasonally higher in the first quarter, partially offset by higher demand for semiconductor spares. Net sales for the second quarter of fiscal 2016 compared to the prior quarter slightly increased primarily due to higher spending on semiconductor spares as well as investment in 200mm equipment systems and mask equipment. Operating income, operating margin, non-GAAP adjusted operating income and non-GAAP adjusted operating margin for the second quarter of fiscal 2016 increased compared to the prior quarter primarily due to higher net sales and utilization rates.
New orders and net sales for the second quarter and first half of fiscal 2016 increased compared to the same periods in the prior year due to higher demand and spending for semiconductor services, partially offset by lower demand and investment in 200mm equipment systems. Operating income and non-GAAP adjusted operating income, operating margin and non-GAAP adjusted operating margin for the second quarter of fiscal 2016 compared to the same period in the prior year remained flat. Operating margin and non-GAAP adjusted operating margin in the first half of fiscal 2016 decreased compared to the same period in the prior year, despite the increase in net sales, primarily due to increased headcount to support business growth.
There was no single region that accounted for at least 30 percent of total net sales for the Applied Global Services segment for any of the periods presented.
Display Segment
The Display segment encompasses products for manufacturing liquid crystal displays (LCDs), organic light-emitting diodes (OLEDs), and other display technologies for TVs, personal computers (PCs), tablets, smart phones, and other consumer-oriented devices. The segment is focused on expanding its presence through technologically-differentiated equipment for manufacturing large-scale TVs; emerging markets such as OLED, low temperature polysilicon (LTPS), metal oxide, and touch panel sectors; and development of products that provide customers with improved performance and yields. Display industry growth depends primarily on consumer demand for increasingly larger and more advanced TVs as well as larger and higher resolution displays for next generation mobile devices, including OLED.
The market environment for Applied's Display segment in the first
six
months of fiscal 2016 has been characterized by increasing demand for manufacturing equipment for high-end mobile devices and continued demand for TV manufacturing equipment, although this sector remains susceptible to highly cyclical conditions. Uneven order and revenue patterns in the Display segment can cause significant fluctuations quarter-over-quarter, as well as year-over year.
Certain significant measures for the periods presented were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Change
|
May 1,
2016
|
|
January 31,
2016
|
|
April 26,
2015
|
Q2 2016
over
Q1 2016
|
|
Q2 2016
over
Q2 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages and ratios)
|
New orders
|
$
|
700
|
|
|
$
|
183
|
|
|
$
|
120
|
|
|
$
|
517
|
|
|
283%
|
|
$
|
580
|
|
|
483%
|
Net sales
|
167
|
|
|
213
|
|
|
163
|
|
|
(46
|
)
|
|
(22)%
|
|
4
|
|
|
2%
|
Book to bill ratio
|
4.2
|
|
|
0.9
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
Operating income
|
29
|
|
|
38
|
|
|
40
|
|
|
(9
|
)
|
|
(24)%
|
|
(11
|
)
|
|
(28)%
|
Operating margin
|
17.4
|
%
|
|
17.8
|
%
|
|
24.5
|
%
|
|
|
|
(0.4) points
|
|
|
|
(7.1) points
|
Non-GAAP Adjusted Results
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP adjusted operating income
|
$
|
29
|
|
|
$
|
38
|
|
|
$
|
40
|
|
|
(9
|
)
|
|
(24)%
|
|
(11
|
)
|
|
(28)%
|
Non-GAAP adjusted operating margin
|
17.4
|
%
|
|
17.8
|
%
|
|
24.5
|
%
|
|
|
|
(0.4) points
|
|
|
|
(7.1) points
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Change
|
May 1,
2016
|
|
April 26,
2015
|
YTD Q2 2016
over
YTD Q2 2015
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages and ratios)
|
New orders
|
$
|
883
|
|
|
$
|
227
|
|
|
$
|
656
|
|
|
289%
|
Net sales
|
380
|
|
|
438
|
|
|
(58
|
)
|
|
(13)%
|
Book to bill ratio
|
2.3
|
|
|
0.5
|
|
|
|
|
|
Operating income
|
67
|
|
|
112
|
|
|
(45
|
)
|
|
(40)%
|
Operating margin
|
17.6
|
%
|
|
25.6
|
%
|
|
|
|
(8.0) points
|
Non-GAAP Adjusted Results
|
|
|
|
|
|
|
Non-GAAP adjusted operating income
|
$
|
67
|
|
|
$
|
113
|
|
|
(46
|
)
|
|
(41)%
|
Non-GAAP adjusted operating margin
|
17.6
|
%
|
|
25.8
|
%
|
|
|
|
(8.2) points
|
Reconciliations of non-GAAP adjusted measures are presented below under "Non-GAAP Adjusted Results."
New orders for the
second
quarter and first half of fiscal 2016 increased compared to the prior quarter and the same periods in the prior year primarily due to demand for new mobile display products during the quarter, as well as increased orders for mobile display and TV manufacturing equipment. Net sales for the
second
quarter of fiscal 2016 were lower compared to the prior quarter which reflected lower level of orders received in the prior quarters. Operating income, operating margin, non-GAAP adjusted operating income and non-GAAP adjusted operating margin decreased compared to the prior quarter, as a result of lower net sales. Three customers accounted for approximately 76 percent of new orders for this segment during the second quarter of fiscal 2016, with one customer accounting for approximately 41 percent of new orders. Two customers accounted for approximately 73 percent of net sales for the Display segment in the second quarter of fiscal 2016, with one customer accounting for approximately 60 percent of net sales.
Net sales for the
second
quarter of fiscal 2016 was essentially flat compared to the same period in the prior year. Net sales for the first half of fiscal 2016 decreased compared to the same period in the prior year due to lower shipments of TV manufacturing equipment. Operating income, operating margin, non-GAAP adjusted operating income and non-GAAP adjusted operating margin for the
second
quarter and first half of fiscal 2016 decreased compared to the same periods in the prior year, reflecting unfavorable product mix and higher research and development cost for new product development.
The following regions accounted for at least 30 percent of total net sales for the Display segment for one or more of the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Change
|
|
May 1,
2016
|
|
January 31,
2016
|
|
April 26,
2015
|
Q2 2016
over
Q1 2016
|
|
Q2 2016
over
Q2 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages)
|
China
|
$
|
43
|
|
|
26%
|
|
$
|
170
|
|
|
80%
|
|
$
|
138
|
|
|
85%
|
|
(75)%
|
|
(69)%
|
Korea
|
$
|
101
|
|
|
60%
|
|
$
|
7
|
|
|
3%
|
|
$
|
16
|
|
|
10%
|
|
N/A
|
|
531%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Change
|
|
May 1,
2016
|
|
April 26,
2015
|
YTD Q2 2016
over
YTD Q2 2015
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages)
|
China
|
$
|
213
|
|
|
56%
|
|
$
|
377
|
|
|
86%
|
|
(44)%
|
Korea
|
$
|
107
|
|
|
28%
|
|
$
|
56
|
|
|
13%
|
|
91%
|
Energy and Environmental Solutions Segment
The Energy and Environmental Solutions segment includes products for fabricating crystalline-silicon (c-Si) solar PV wafers and cells, as well as high throughput roll-to-roll deposition equipment for flexible electronics, packaging and other applications. While end-demand for solar PVs has been robust over the last several years, investment in capital equipment has remained low as global PV production capacity exceeds anticipated demand.
Certain significant measures for the periods presented were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Change
|
May 1,
2016
|
|
January 31,
2016
|
|
April 26,
2015
|
Q2 2016
over
Q1 2016
|
|
Q2 2016
over
Q2 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages and ratios)
|
New orders
|
$
|
108
|
|
|
$
|
44
|
|
|
$
|
50
|
|
|
$
|
64
|
|
|
145%
|
|
$
|
58
|
|
|
116%
|
Net sales
|
48
|
|
|
45
|
|
|
73
|
|
|
3
|
|
|
7%
|
|
(25
|
)
|
|
(34)%
|
Book to bill ratio
|
2.3
|
|
|
1.0
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
—
|
|
|
6
|
|
|
(5
|
)
|
|
(6
|
)
|
|
(100)%
|
|
5
|
|
|
100%
|
Operating margin
|
—
|
%
|
|
13.3
|
%
|
|
(6.8
|
)%
|
|
|
|
(13.3) points
|
|
|
|
6.8 points
|
Non-GAAP Adjusted Results
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP adjusted operating income (loss)
|
(1
|
)
|
|
4
|
|
|
(4
|
)
|
|
(5
|
)
|
|
(125)%
|
|
3
|
|
|
75%
|
Non-GAAP adjusted operating margin
|
(2.1
|
)%
|
|
8.9
|
%
|
|
(5.5
|
)%
|
|
|
|
(11.0) points
|
|
|
|
3.4 points
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Change
|
May 1,
2016
|
|
April 26,
2015
|
YTD Q2 2016
over
YTD Q2 2015
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages and ratios)
|
New orders
|
$
|
152
|
|
|
$
|
100
|
|
|
$
|
52
|
|
|
52%
|
Net sales
|
93
|
|
|
128
|
|
|
(35
|
)
|
|
(27)%
|
Book to bill ratio
|
1.6
|
|
|
0.8
|
|
|
|
|
|
Operating income (loss)
|
6
|
|
|
(9
|
)
|
|
15
|
|
|
167%
|
Operating margin
|
6.5
|
%
|
|
(7.0
|
)%
|
|
|
|
13.5 points
|
Non-GAAP Adjusted Results
|
|
|
|
|
|
|
Non-GAAP adjusted operating income (loss)
|
$
|
3
|
|
|
$
|
(7
|
)
|
|
10
|
|
|
143%
|
Non-GAAP adjusted operating margin
|
3.2
|
%
|
|
(5.5
|
)%
|
|
|
|
8.7 points
|
Reconciliations of non-GAAP adjusted measures are presented below under "Non-GAAP Adjusted Results."
Financial results during the periods presented remained at low levels due to continued excess manufacturing capacity in the solar industry. The changes in operating margin and non-GAAP adjusted operating margin during the periods presented were primarily driven by changes in product mix. Four customers accounted for approximately 64 percent of new orders during the second quarter of fiscal 2016. Three customers accounted for approximately 57 percent of net sales for this segment during the second quarter of fiscal 2016.
The following region accounted for at least 30 percent of total net sales for the Energy and Environmental Solutions segment for one or more of the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Change
|
|
May 1,
2016
|
|
January 31,
2016
|
|
April 26,
2015
|
Q2 2016
over
Q1 2016
|
|
Q2 2016
over
Q2 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages)
|
China
|
$
|
29
|
|
|
60%
|
|
$
|
40
|
|
|
89%
|
|
$
|
24
|
|
|
33%
|
|
(28)%
|
|
21%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Change
|
|
May 1,
2016
|
|
April 26,
2015
|
YTD Q2 2016
over
YTD Q2 2015
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except percentages)
|
China
|
$
|
69
|
|
|
74%
|
|
$
|
54
|
|
|
42%
|
|
28%
|
Financial Condition, Liquidity and Capital Resources
Applied's cash, cash equivalents and investments consist of the following:
|
|
|
|
|
|
|
|
|
|
May 1,
2016
|
|
October 25,
2015
|
|
|
|
|
|
(In millions)
|
Cash and cash equivalents
|
$
|
2,470
|
|
|
$
|
4,797
|
|
Short-term investments
|
170
|
|
|
168
|
|
Long-term investments
|
934
|
|
|
946
|
|
Total cash, cash-equivalents and investments
|
$
|
3,574
|
|
|
$
|
5,911
|
|
Sources and Uses of Cash
A summary of cash provided by (used in) operating, investing, and financing activities is as follows:
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
May 1, 2016
|
|
April 26, 2015
|
|
|
|
|
|
(In millions)
|
Cash provided by operating activities
|
$
|
688
|
|
|
$
|
358
|
|
Cash used in investing activities
|
$
|
(114
|
)
|
|
$
|
(140
|
)
|
Cash used in financing activities
|
$
|
(2,901
|
)
|
|
$
|
(152
|
)
|
Operating Activities
Cash from operating activities for the
six
months ended
May 1, 2016
was
$688 million
, which reflects net income adjusted for the effect of non-cash charges and changes in working capital components. Non-cash charges included depreciation, amortization, share-based compensation and deferred income taxes. The primary drivers of cash from operating activities during the first half of fiscal 2016 included higher net income and increases in customer deposits and deferred revenue, partially offset by increases in accounts receivable and inventory and decreases in accounts payable and accrued expenses due to variable compensation and accounts payable payments.
Applied has agreements with various financial institutions to sell accounts receivable and discount promissory notes from selected customers. Applied sells its accounts receivable without recourse. Applied, from time to time, also discounts letters of credit issued by customers through various financial institutions. The 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. Applied did not discount promissory notes or utilize programs to discount letters of credit issued by customers or factored any accounts receivable during the
six
months ended
May 1, 2016
or
April 26, 2015
.
Applied’s working capital was
$4.1 billion
at
May 1, 2016
and
$5.5 billion
at
October 25, 2015
. Applied’s working capital at
May 1, 2016
includes the effects of the adoption of the authoritative guidance requiring all deferred tax assets and liabilities, and any related valuation allowance, to be classified as noncurrent on the balance sheet. Prior periods were not retrospectively adjusted.
Days sales, inventory and payable outstanding at the end of each of the periods indicated were:
|
|
|
|
|
|
|
|
May 1,
2016
|
|
January 31,
2016
|
|
April 26,
2015
|
|
|
|
|
|
|
Days sales outstanding
|
71
|
|
71
|
|
67
|
Days inventory outstanding
|
121
|
|
134
|
|
109
|
Days payable outstanding
|
41
|
|
40
|
|
41
|
Days sales outstanding varies due to the timing of shipments and payment terms. Days sales outstanding remained flat in the second quarter of fiscal 2016 compared to the prior quarter primarily due to increased revenue and unfavorable linearity, offset by an additional week in the prior quarter. Days inventory outstanding decreased during the second quarter of fiscal 2016 compared to the prior quarter primarily due to an additional week in the prior quarter and higher cost of products sold. The increase in days inventory outstanding during the current quarter compared to the same period in the prior year also reflected higher inventory balances at the end of the second quarter of fiscal 2016 due to higher expected future business volume. Days payable outstanding increased slightly during the second quarter of fiscal 2016 compared to the prior quarter primarily reflecting higher accounts payable balances at the end of the current quarter, partially offset by an additional week during the prior quarter.
Investing Activities
Applied used
$114 million
of cash in investing activities during the
six
months ended
May 1, 2016
. Proceeds from sales and maturities of investments, net of purchases of investments, totaled
$9 million
and capital expenditures were
$115 million
during the
six
months ended
May 1, 2016
.
Applied’s investment portfolio consists principally of investment grade money market mutual funds, U.S. Treasury and agency securities, municipal bonds, corporate bonds and mortgage-backed and asset-backed securities, as well as equity securities. Applied regularly monitors the credit risk in its investment portfolio and takes appropriate measures, which may include the sale of certain securities, to manage such risks prudently in accordance with its investment policies. During the three and
six
months ended
May 1, 2016
, Applied did not recognize any impairment of its fixed income or publicly traded equity securities. At
May 1, 2016
, gross unrealized losses related to Applied's investment portfolio were not material.
Financing Activities
Applied used cash for financing activities in the amount of
$2.9 billion
during the
six
months ended
May 1, 2016
, consisting primarily of
$1.2 billion
in debt repayments,
$1.5 billion
in repurchases of common stock, and
$228 million
in cash dividends to stockholders, offset by excess tax benefits from share-based compensation of
$13 million
and proceeds from common stock issuances of
$44 million
.
In March 2016 and December 2015, Applied's Board of Directors declared quarterly cash dividends in the amount of
$0.10
per share. Applied currently anticipates that cash dividends will continue to be paid on a quarterly basis, although the declaration of any future cash dividend is at the discretion of the Board of Directors and will depend on Applied’s financial condition, results of operations, capital requirements, business conditions and other factors, as well as a determination by the Board of Directors that cash dividends are in the best interests of Applied’s stockholders.
Applied has credit facilities for unsecured borrowings in various currencies of up to
$1.6 billion
, of which
$1.5 billion
is comprised of a committed revolving credit agreement with a group of banks that is scheduled to expire in
September 2020
. 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
May 1, 2016
. Remaining credit facilities in the amount of approximately
$72 million
are with Japanese banks. Applied’s ability to borrow under these facilities is subject to bank approval at the time of the borrowing request, and any advances will be at rates indexed to the banks’ prime reference rate denominated in Japanese yen.
No
amounts were outstanding under any of these facilities at both
May 1, 2016
and
October 25, 2015
, and Applied has not utilized these credit facilities.
In fiscal 2011, Applied established a short-term commercial paper program of up to $1.5 billion. At
May 1, 2016
, Applied did not have any commercial paper outstanding, but may issue commercial paper notes under this program from time to time in the future.
Applied had senior unsecured notes in the aggregate principal amount of
$3.4 billion
outstanding as of
May 1, 2016
. The indentures governing these notes include covenants with which Applied was in compliance at
May 1, 2016
. See Note 8 of Notes to Consolidated Condensed Financial Statements for additional discussion of existing debt. Applied may seek to refinance its existing debt and may incur additional indebtedness depending on Applied's capital requirements and the availability of financing.
In the ordinary course of business, Applied provides standby letters of credit or other guarantee instruments to third parties as required for certain transactions initiated by either Applied or its subsidiaries. As of
May 1, 2016
, the maximum potential amount of future payments that Applied could be required to make under these guarantee agreements was approximately
$57 million
. Applied has not recorded any liability in connection with these guarantee agreements beyond that required to appropriately account for the underlying transaction being guaranteed. Applied does not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under these guarantee agreements.
Applied also has agreements with various banks to facilitate subsidiary banking operations worldwide, including overdraft arrangements, issuance of bank guarantees, and letters of credit. As of
May 1, 2016
, Applied Materials, Inc. has provided parent guarantees to banks for approximately
$100 million
to cover these arrangements.
Others
During the three and
six
months ended
May 1, 2016
, Applied did not record a bad debt provision. While Applied believes that its allowance for doubtful accounts at
May 1, 2016
is adequate, it will continue to closely monitor customer liquidity and economic conditions.
As of
May 1, 2016
, approximately $2.4 billion of cash, cash equivalents and marketable securities held by non-U.S. subsidiaries may be subject to U.S. taxes if repatriated for U.S. operations. Of this amount, Applied intends to indefinitely reinvest approximately
$1.9 billion
of these funds outside of the U.S. and does not plan to repatriate these funds. Applied would need to accrue and pay U.S. taxes if these funds were repatriated. For the remaining cash, cash equivalents and marketable securities held by non-U.S. subsidiaries, U.S. taxes have been provided for in the financial statements.
Although cash requirements will fluctuate based on the timing and extent of factors such as those discussed above, Applied’s management believes that cash generated from operations, together with the liquidity provided by existing cash balances and borrowing capability, will be sufficient to satisfy Applied’s liquidity requirements for the next 12 months. For further details regarding Applied’s operating, investing and financing activities, see the Consolidated Condensed Statements of Cash Flows in this report.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported. Note 1 of Notes to Consolidated Financial Statements in Applied's Annual Report on Form 10-K and Note 1 of Notes to Consolidated Condensed Financial Statements in this report describe 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 Applied's consolidated financial statements and that requires management to make difficult, subjective or complex judgments that could have a material effect on Applied's 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 Applied's 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 Applied's operating environment changes. These changes have historically been minor and have been included in the consolidated financial statements as soon as they became known. In addition, management is periodically faced with uncertainties, the outcomes of which are not within its control and will not be known for prolonged periods of time. These uncertainties include those discussed in Part II, Item 1A, “Risk Factors.” Based on a critical assessment of its accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that Applied's 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 Applied's financial condition and results of operations.
Management believes that the following are critical accounting policies and estimates:
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; sales price is fixed or determinable; and collectability is probable. Each sale arrangement may contain commercial terms that differ from other arrangements. In addition, Applied frequently enters into contracts that contain multiple deliverables. Judgment is required to properly identify the accounting units of the multiple deliverable transactions and to determine the manner in which revenue should be allocated among the accounting units. Moreover, judgment is used in interpreting the commercial terms and determining when all criteria of revenue recognition have been met in order for revenue recognition to occur in the appropriate accounting period. While changes in the allocation of the estimated sales price between the units of accounting will not affect the amount of total revenue recognized for a particular sales arrangement, any material changes in these allocations could impact the timing of revenue recognition, which could have a material effect on Applied's financial condition and results of operations.
Warranty Costs
Applied provides for the estimated cost of warranty when revenue is recognized. Estimated warranty costs are determined by analyzing specific product, current and historical configuration statistics and regional warranty support costs. Applied's 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 Applied's 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 Applied's estimates, revisions to the estimated warranty liability would be required, which could have a material adverse effect on Applied's business, financial condition and results of operations.
Allowance for Doubtful Accounts
Applied maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. This allowance is based on historical experience, credit evaluations, specific customer collection history and any customer-specific issues Applied has identified. Changes in circumstances, such as an unexpected material adverse change in a major customer's ability to meet its financial obligation to Applied or its payment trends, may require Applied to further adjust its estimates of the recoverability of amounts due to Applied, which could have a material adverse effect on Applied's business, financial condition and results of operations.
Inventory Valuation
Inventories are generally stated at the lower of cost or market, with cost determined on a first-in, first-out basis. The carrying value of inventory is reduced for estimated obsolescence by the difference between its cost and the estimated market value based upon assumptions about future demand. Applied evaluates the inventory carrying value for potential excess and obsolete inventory exposures by analyzing historical and anticipated demand. In addition, inventories are evaluated for potential obsolescence due to the effect of known and anticipated engineering change orders and new products. If actual demand were to be substantially lower than estimated, additional adjustments for excess or obsolete inventory may be required, which could have a material adverse effect on Applied's business, financial condition and results of operations.
Goodwill and Intangible Assets
Applied reviews goodwill and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable, and also annually reviews goodwill and intangibles with indefinite lives for impairment. Intangible assets, such as purchased technology, are generally 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 reduce the carrying value of the reporting unit to its estimated fair value.
To test goodwill for impairment, Applied first performs a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, Applied then performs the two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. Under the two-step goodwill impairment test, Applied would in the first step compare the estimated fair value of each reporting unit to its carrying value. If the carrying value of a reporting unit exceeds its estimated fair value, Applied would then perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If Applied determines that the carrying value of a reporting unit’s goodwill exceeds its implied fair value, Applied would record an impairment charge equal to the difference.
Applied determines the fair value of each reporting unit based on a weighting of an income and a market approach. Applied bases the fair value estimates on assumptions that it believes to be reasonable but that are unpredictable and inherently uncertain. Under the income approach, Applied estimates the fair value based on discounted cash flow method.
The estimates used in the impairment testing are consistent with the discrete forecasts that Applied uses to manage its business, and considers any significant developments during the period. Under the discounted cash flow method, cash flows beyond the discrete forecasts are estimated using a terminal growth rate, which considers the long-term earnings growth rate specific to the reporting units. The estimated future cash flows are discounted to present value using each reporting unit's weighted average cost of capital. The weighted average cost of capital measures a reporting unit's cost of debt and equity financing weighted by the percentage of debt and equity in a reporting unit's target capital structure. In addition, the weighted average cost of capital is derived using both known and estimated market metrics, and is adjusted to reflect both the timing and risks associated with the estimated cash flows. The tax rate used in the discounted cash flow method is the median tax rate of comparable companies and reflects Applied's current international structure, which is consistent with the market participant perspective. Under the market approach, Applied uses the guideline company method which applies market multiples to forecasted revenues and earnings before interest, taxes, depreciation and amortization. Applied uses market multiples that are consistent with comparable publicly-traded companies and considers each reporting unit's size, growth and profitability relative to its comparable companies.
Management uses significant judgment when assessing goodwill for potential impairment, especially in emerging markets. Indicators of potential impairment include, but are not limited to, challenging economic conditions, an unfavorable industry or economic environment or other severe decline in market conditions. Such conditions could have the effect of changing one of the critical assumptions or estimates used for the fair value calculation, resulting in an unexpected goodwill impairment charge, which could have a material adverse effect on Applied’s business, financial condition and results of operations.
Income Taxes
Applied’s effective tax rate is affected by the geographical composition of income and income tax laws and regulations in multiple jurisdictions.
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 carryovers. 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 Applied’s future taxable income will be sufficient to realize its deferred tax assets, net of existing valuation allowance.
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 Applied’s expectations could have a material impact on Applied’s results of operations and financial condition.
Non-GAAP Adjusted Results
Management uses non-GAAP adjusted results to evaluate operating and financial performance in light of business objectives and for planning purposes. Applied believes these measures enhance investors’ ability to review the Company’s business from the same perspective as management and facilitate comparisons of this period’s results with prior periods. The non-GAAP adjusted results presented below exclude the impact of the following, where applicable: certain items related to acquisitions; restructuring charges and any associated adjustments; impairments of assets, goodwill, or investments; gain or loss on sale of strategic investments or facilities; and certain discrete adjustments and tax items. These non-GAAP adjusted measures are not in accordance with GAAP and may differ from non-GAAP methods of accounting and reporting used by other companies. The presentation of this additional information should not be considered a substitute for results prepared in accordance with GAAP.
The following tables present a reconciliation of the GAAP and non-GAAP adjusted consolidated results:
APPLIED MATERIALS, INC.
UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In millions, except percentages)
|
|
May 1,
2016
|
|
January 31,
2016
|
|
April 26,
2015
|
|
May 1,
2016
|
|
April 26,
2015
|
Non-GAAP Adjusted Gross Profit
|
|
|
|
|
|
|
|
|
|
|
Reported gross profit - GAAP basis
|
|
$
|
1,004
|
|
|
$
|
916
|
|
|
$
|
1,016
|
|
|
$
|
1,920
|
|
|
$
|
1,975
|
|
Certain items associated with acquisitions
1
|
|
41
|
|
|
42
|
|
|
39
|
|
|
83
|
|
|
79
|
|
Reversals related to restructuring, net
4
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
Non-GAAP adjusted gross profit
|
|
$
|
1,045
|
|
|
$
|
957
|
|
|
$
|
1,055
|
|
|
$
|
2,002
|
|
|
$
|
2,054
|
|
Non-GAAP adjusted gross margin
|
|
42.7
|
%
|
|
42.4
|
%
|
|
43.2
|
%
|
|
42.5
|
%
|
|
42.8
|
%
|
Non-GAAP Adjusted Operating Income
|
|
|
|
|
|
|
|
|
|
|
Reported operating income - GAAP basis
|
|
$
|
425
|
|
|
$
|
354
|
|
|
$
|
416
|
|
|
$
|
779
|
|
|
$
|
874
|
|
Certain items associated with acquisitions
1
|
|
46
|
|
|
48
|
|
|
45
|
|
|
94
|
|
|
91
|
|
Acquisition integration costs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Gain on derivatives associated with terminated business combination, net
|
|
—
|
|
|
—
|
|
|
(14
|
)
|
|
—
|
|
|
(92
|
)
|
Certain items associated with terminated business combination
2
|
|
—
|
|
|
—
|
|
|
29
|
|
|
—
|
|
|
49
|
|
Reversals related to restructuring, net
3,4
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
Non-GAAP adjusted operating income
|
|
$
|
470
|
|
|
$
|
401
|
|
|
$
|
476
|
|
|
$
|
871
|
|
|
$
|
923
|
|
Non-GAAP adjusted operating margin
|
|
19.2
|
%
|
|
17.8
|
%
|
|
19.5
|
%
|
|
18.5
|
%
|
|
19.2
|
%
|
Non-GAAP Adjusted Net Income
|
|
|
|
|
|
|
|
|
|
|
Reported net income - GAAP basis
5
|
|
$
|
320
|
|
|
$
|
286
|
|
|
$
|
364
|
|
|
$
|
606
|
|
|
$
|
712
|
|
Certain items associated with acquisitions
1
|
|
46
|
|
|
48
|
|
|
45
|
|
|
94
|
|
|
91
|
|
Acquisition integration costs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Gain on derivatives associated with terminated business combination, net
|
|
—
|
|
|
—
|
|
|
(14
|
)
|
|
—
|
|
|
(92
|
)
|
Certain items associated with terminated business combination
2
|
|
—
|
|
|
—
|
|
|
29
|
|
|
—
|
|
|
49
|
|
Reversals related to restructuring, net
3,4
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
Impairment (gain on sale) of strategic investments, net
|
|
(1
|
)
|
|
(2
|
)
|
|
6
|
|
|
(3
|
)
|
|
7
|
|
Loss on early extinguishment of debt
|
|
—
|
|
|
5
|
|
|
—
|
|
|
5
|
|
|
—
|
|
Reinstatement of federal R&D tax credit, resolution of prior years’ income tax filings and other tax items
5
|
|
16
|
|
|
(29
|
)
|
|
(54
|
)
|
|
(13
|
)
|
|
(71
|
)
|
Income tax effect of non-GAAP adjustments
|
|
(4
|
)
|
|
(5
|
)
|
|
(14
|
)
|
|
(9
|
)
|
|
3
|
|
Non-GAAP adjusted net income
|
|
$
|
376
|
|
|
$
|
302
|
|
|
$
|
362
|
|
|
$
|
678
|
|
|
$
|
700
|
|
|
|
|
1
|
These items are incremental charges attributable to completed acquisitions, consisting of amortization of purchased intangible assets.
|
2
|
These items are incremental charges related to the terminated business combination agreement with Tokyo Electron Limited, consisting of acquisition-related and integration planning costs.
|
3
|
Results for the three months ended May 1, 2016 included a $1 million favorable adjustment of employee-related costs associated with the cost reductions in the solar business.
|
4
|
Results for the three months ended January 31, 2016 included a $1 million benefit from sales of solar equipment tools for which inventory had been previously reserved related to the cost reductions in the solar business.
|
5
|
Amounts for three and six months ended April 26, 2015 included an adjustment to decrease the provision for income taxes by $39 million and $35 million, respectively, with a corresponding increase in net income, resulting in an increase in diluted earnings per share of $0.03. The adjustment was excluded in Applied's non-GAAP adjusted results and was made primarily to correct an error in the recognition of cost of sales in the U.S. related to intercompany sales, which resulted in overstating profitability in the U.S. and the provision for income taxes in immaterial amounts in each year since fiscal 2010.
|
APPLIED MATERIALS, INC.
UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In millions, except per share amounts)
|
|
May 1,
2016
|
|
January 31,
2016
|
|
April 26,
2015
|
|
May 1,
2016
|
|
April 26,
2015
|
|
|
|
|
|
Non-GAAP Adjusted Earnings Per Diluted Share
|
|
|
|
|
|
|
|
|
|
|
Reported earnings per diluted share - GAAP basis
1
|
|
$
|
0.29
|
|
|
$
|
0.25
|
|
|
$
|
0.29
|
|
|
$
|
0.53
|
|
|
$
|
0.57
|
|
Certain items associated with acquisitions
|
|
0.04
|
|
|
0.04
|
|
|
0.03
|
|
|
0.08
|
|
|
0.07
|
|
Certain items associated with terminated business combination
|
|
—
|
|
|
—
|
|
|
0.02
|
|
|
—
|
|
|
0.03
|
|
Gain on derivative associated with terminated business combination, net
|
|
—
|
|
|
—
|
|
|
(0.01
|
)
|
|
—
|
|
|
(0.05
|
)
|
Reinstatement of federal R&D tax credit, resolution of prior years’ income tax filings and other tax items
1
|
|
0.01
|
|
|
(0.03
|
)
|
|
(0.04
|
)
|
|
(0.01
|
)
|
|
(0.06
|
)
|
Non-GAAP adjusted earnings per diluted share
|
|
0.34
|
|
|
0.26
|
|
|
0.29
|
|
|
0.60
|
|
|
0.56
|
|
Weighted average number of diluted shares
|
|
1,119
|
|
|
1,154
|
|
|
1,241
|
|
|
1,137
|
|
|
1,241
|
|
|
|
|
1
|
Amounts for three and six months ended April 26, 2015 included an adjustment to decrease the provision for income taxes by $39 million and $35 million, respectively, with a corresponding increase in net income, resulting in an increase in diluted earnings per share of $0.03. The adjustment was excluded in Applied's non-GAAP adjusted results and was made primarily to correct an error in the recognition of cost of sales in the U.S. related to intercompany sales, which resulted in overstating profitability in the U.S. and the provision for income taxes in immaterial amounts in each year since fiscal 2010.
|
|
|
The following table presents a reconciliation of the GAAP and non-GAAP adjusted segment results:
APPLIED MATERIALS, INC.
UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
(In millions, except percentages)
|
|
May 1,
2016
|
|
January 31,
2016
|
|
April 26,
2015
|
|
May 1,
2016
|
|
April 26,
2015
|
|
|
|
|
|
|
|
|
|
Silicon Systems Non-GAAP Adjusted Operating Income
|
|
|
|
|
|
|
|
|
|
|
Reported operating income - GAAP basis
|
|
$
|
364
|
|
|
$
|
265
|
|
|
$
|
374
|
|
|
$
|
629
|
|
|
$
|
681
|
|
Certain items associated with acquisitions
1
|
|
46
|
|
|
47
|
|
|
44
|
|
|
93
|
|
|
87
|
|
Non-GAAP adjusted operating income
|
|
$
|
410
|
|
|
$
|
312
|
|
|
$
|
418
|
|
|
$
|
722
|
|
|
$
|
768
|
|
Non-GAAP adjusted operating margin
|
|
25.8
|
%
|
|
22.7
|
%
|
|
26.8
|
%
|
|
24.4
|
%
|
|
25.5
|
%
|
AGS Non-GAAP Adjusted Operating Income
|
|
|
|
|
|
|
|
|
|
|
Reported operating income - GAAP basis
|
|
$
|
171
|
|
|
$
|
156
|
|
|
$
|
170
|
|
|
$
|
327
|
|
|
$
|
323
|
|
Certain items associated with acquisitions
1
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Non-GAAP adjusted operating income
|
|
$
|
171
|
|
|
$
|
156
|
|
|
$
|
170
|
|
|
$
|
327
|
|
|
$
|
324
|
|
Non-GAAP adjusted operating margin
|
|
26.4
|
%
|
|
24.9
|
%
|
|
26.3
|
%
|
|
25.7
|
%
|
|
26.4
|
%
|
Display Non-GAAP Adjusted Operating Income
|
|
|
|
|
|
|
|
|
|
|
Reported operating income - GAAP basis
|
|
$
|
29
|
|
|
$
|
38
|
|
|
$
|
40
|
|
|
$
|
67
|
|
|
$
|
112
|
|
Certain items associated with acquisitions
1
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Non-GAAP adjusted operating income
|
|
$
|
29
|
|
|
$
|
38
|
|
|
$
|
40
|
|
|
$
|
67
|
|
|
$
|
113
|
|
Non-GAAP adjusted operating margin
|
|
17.4
|
%
|
|
17.8
|
%
|
|
24.5
|
%
|
|
17.6
|
%
|
|
25.8
|
%
|
EES Non-GAAP Adjusted Operating Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
Reported operating income (loss) - GAAP basis
|
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
(5
|
)
|
|
$
|
6
|
|
|
$
|
(9
|
)
|
Certain items associated with acquisitions
1
|
|
—
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
2
|
|
Reversals related to restructuring, net
2
|
|
(1
|
)
|
|
(3
|
)
|
|
—
|
|
|
(4
|
)
|
|
—
|
|
Non-GAAP adjusted operating income (loss)
|
|
$
|
(1
|
)
|
|
$
|
4
|
|
|
$
|
(4
|
)
|
|
$
|
3
|
|
|
$
|
(7
|
)
|
Non-GAAP adjusted operating margin
|
|
(2.1
|
)%
|
|
8.9
|
%
|
|
(5.5
|
)%
|
|
3.2
|
%
|
|
(5.5
|
)%
|
|
|
|
1
|
These items are incremental charges attributable to completed acquisitions, consisting of amortization of purchased intangible assets.
|
|
|
2
|
Results for the three months ended May 1, 2016 and January 31, 2016 and six months ended May 1, 2016 primarily included favorable adjustments of employee-related costs associated with the cost reductions in the solar business.
|
|
|
|
|
Note: The reconciliation of GAAP and non-GAAP adjusted segment results above does not include certain operating expenses that are managed separately at the corporate level and certain expenses that are not absorbed by the segments, which are reported within corporate and unallocated costs and included in consolidated operating income.