Business Combination

9 Months Ended

Jul. 29, 2012

Business Combinations [Abstract]

Business Combination

Business Combination

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

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

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

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

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

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

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

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

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

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