10-Q 1 amat-form10xqq22013.htm 10-Q AMAT-Form 10-Q (Q2 2013)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)

þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 28, 2013
or

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to                    
Commission File Number 000-06920
Applied Materials, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
94-1655526
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
3050 Bowers Avenue,
95052-8039
P.O. Box 58039
Santa Clara, California
(Address of principal executive offices)
(Zip Code)

(408) 727-5555
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ        No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ        No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
 
Accelerated filer ¨
 
 
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
 
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨        No  þ
Number of shares outstanding of the issuer’s common stock as of April 28, 2013: 1,201,600,676




APPLIED MATERIALS, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED APRIL 28, 2013
TABLE OF CONTENTS
 
 
 
Page
 
PART I. FINANCIAL INFORMATION
 
Item 1:    
 
 
 
 
 
 
Item 2:    
Item 3:    
Item 4:    
 
 
 
 
PART II. OTHER INFORMATION
 
Item 1:    
Item 1A:
Item 2:    
Item 6:    
 




PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
 
Three Months Ended
 
Six Months Ended
 
April 28,
2013
 
April 29,
2012
 
April 28,
2013
 
April 29,
2012
 
(Unaudited)
 
(In millions, except per share amounts)
Net sales
$
1,973

 
$
2,541

 
$
3,546

 
$
4,730

Cost of products sold
1,165

 
1,530

 
2,156

 
2,933

Gross margin
808

 
1,011

 
1,390

 
1,797

Operating expenses:
 
 
 
 
 
 
 
Research, development and engineering
344

 
321

 
648

 
625

Selling, general and administrative
244

 
281

 
474

 
584

Impairment of goodwill and intangible assets (Note 8)
278

 

 
278

 

Restructuring charges and asset impairments (Note 10)
10

 

 
19

 

Total operating expenses
876

 
602

 
1,419

 
1,209

Income (loss) from operations
(68
)
 
409

 
(29
)
 
588

Impairments of strategic investments (Notes 3 and 4)
2

 
3

 
2

 
3

Interest and other expenses (Note 9)
24

 
23

 
48

 
47

Interest and other income, net
4

 
4

 
7

 
8

Income (loss) before income taxes
(90
)
 
387

 
(72
)
 
546

Provision for income taxes
39

 
98

 
23

 
140

Net income (loss)
$
(129
)
 
$
289

 
$
(95
)
 
$
406

Earnings (loss) per share:
 
 
 
 
 
 
 
Basic and diluted
$
(0.11
)
 
$
0.22

 
$
(0.08
)
 
$
0.31

Weighted average number of shares:
 
 
 
 
 
 
 
Basic
1,203

 
1,289

 
1,200

 
1,294

Diluted
1,203

 
1,301

 
1,200

 
1,305

See accompanying Notes to Consolidated Condensed Financial Statements.

3



APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
Three Months Ended
 
Six Months Ended
 
April 28,
2013
 
April 29,
2012
 
April 28,
2013
 
April 29,
2012
 
(Unaudited)
 
(In millions)
Net income (loss)
$
(129
)
 
$
289

 
$
(95
)
 
$
406

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in unrealized net gain on investments
7

 
2

 
7

 
3

Change in unrealized net gain on derivative investments
2

 

 
7

 

Change in defined benefit plan liability (Note 12)
1

 

 
(2
)
 

Change in cumulative translation adjustments
(2
)
 
(2
)
 
(5
)
 
(2
)
Other comprehensive income (loss), net of tax
8

 

 
7

 
1

Comprehensive income (loss)
$
(121
)
 
$
289

 
$
(88
)
 
$
407

See accompanying Notes to Consolidated Condensed Financial Statements.



4


APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
 
April 28,
2013
 
October 28,
2012
 
 
 
 
 
(In millions)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents (Notes 3 and 4)
$
1,545

 
$
1,392

Short-term investments (Notes 3 and 4)
225

 
545

Accounts receivable, net (Note 6)
1,275

 
1,220

Inventories (Note 7)
1,318

 
1,272

Other current assets (Note 7)
750

 
673

Total current assets
5,113

 
5,102

Long-term investments (Notes 3 and 4)
1,080

 
1,055

Property, plant and equipment, net (Note 7)
886

 
910

Goodwill (Note 8)
3,294

 
3,518

Purchased technology and other intangible assets, net (Note 8)
1,194

 
1,355

Deferred income taxes and other assets (Note 13)
128

 
162

Total assets
$
11,695

 
$
12,102

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable and accrued expenses (Note 7)
$
1,462

 
$
1,510

Customer deposits and deferred revenue (Note 7)
739

 
755

Total current liabilities
2,201

 
2,265

Long-term debt (Note 9)
1,946

 
1,946

Other liabilities (Note 7)
650

 
656

Total liabilities
4,797

 
4,867

Stockholders’ equity (Note 11):
 
 
 
Common stock
12

 
12

Additional paid-in capital
5,989

 
5,863

Retained earnings
12,378

 
12,700

Treasury stock
(11,427
)
 
(11,279
)
Accumulated other comprehensive loss
(54
)
 
(61
)
Total stockholders’ equity
6,898

 
7,235

Total liabilities and stockholders’ equity
$
11,695

 
$
12,102

Amounts as of April 28, 2013 are unaudited. Amounts as of October 28, 2012 are derived from the October 28, 2012 audited consolidated financial statements.
See accompanying Notes to Consolidated Condensed Financial Statements.

5


APPLIED MATERIALS, INC
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Unaudited)
 
(In millions)
Balance at October 28, 2012
1,197

 
$
12

 
$
5,863

 
$
12,700

 
699

 
$
(11,279
)
 
$
(61
)
 
$
7,235

Net loss

 

 

 
(95
)
 

 

 

 
(95
)
Other comprehensive income, net of tax

 

 

 

 

 

 
7

 
7

Dividends

 

 

 
(227
)
 

 

 

 
(227
)
Share-based compensation

 

 
81

 

 

 

 

 
81

Issuance under stock plans, net of a tax detriment of $3 and other
17

 

 
45

 

 

 

 

 
45

Common stock repurchases
(12
)
 

 

 

 
12

 
(148
)
 

 
(148
)
Balance at April 28, 2013
1,202

 
$
12

 
$
5,989

 
$
12,378

 
711

 
$
(11,427
)
 
$
(54
)
 
$
6,898

See accompanying Notes to Consolidated Condensed Financial Statements.



6


APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 
Six Months Ended
 
April 28,
2013
 
April 29,
2012
 
 
 
 
 
(Unaudited)
 
(In millions)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(95
)
 
$
406

Adjustments required to reconcile net income (loss) to cash provided by operating activities:
 
 
 
Depreciation and amortization
212

 
220

Impairment of goodwill and intangible assets
278

 

Restructuring charges and asset impairments
19

 

Deferred income taxes and other
(46
)
 
53

Share-based compensation
81

 
96

Changes in operating assets and liabilities, net of amounts acquired:
 
 
 
Accounts receivable
(54
)
 
(67
)
Inventories
(46
)
 
357

Other assets
(29
)
 
132

Accounts payable and accrued expenses
(96
)
 
(361
)
Customer deposits and deferred revenue
(16
)
 
(55
)
Other liabilities
32

 
3

Cash provided by operating activities
240

 
784

Cash flows from investing activities:
 
 
 
Capital expenditures
(100
)
 
(76
)
Cash paid for acquisitions, net of cash acquired
(1
)
 
(4,186
)
Proceeds from sales and maturities of investments
603

 
560

Purchases of investments
(310
)
 
(714
)
Cash provided by (used in) investing activities
192

 
(4,416
)
Cash flows from financing activities:
 
 
 
Proceeds from common stock issuances
85

 
45

Common stock repurchases
(148
)
 
(400
)
Payments of dividends to stockholders
(216
)
 
(208
)
Cash used in financing activities
(279
)
 
(563
)
Effect of exchange rate changes on cash and cash equivalents

 
(4
)
Increase (decrease) in cash and cash equivalents
153

 
(4,199
)
Cash and cash equivalents — beginning of year
1,392

 
5,960

Cash and cash equivalents — end of year
$
1,545

 
$
1,761

Supplemental cash flow information:
 
 
 
Cash payments for income taxes
$
154

 
$
179

Cash refunds from income taxes
$
67

 
$
4

Cash payments for interest
$
46

 
$
48



See accompanying Notes to Consolidated Condensed Financial Statements.

7


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 28, 2012 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 28, 2012 (2012 Form 10-K). Applied’s results of operations for the three and six months ended April 28, 2013 are not necessarily indicative of future operating results. Applied’s fiscal year ends on the last Sunday in October of each year. Fiscal 2013 and 2012 each contain 52 weeks, and the first half of fiscal 2013 and 2012 each contained 26 weeks.
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, Applied recognizes revenue upon shipment for all products that have been demonstrated to meet product specifications prior to shipment; the portion of revenue associated with certain installation-related tasks is deferred, and that revenue is recognized upon completion of the installation-related tasks; (2) for products that have not been demonstrated to meet product specifications prior to shipment, revenue is recognized at customer technical acceptance; (3) for transactions where legal title does not pass at shipment, revenue is recognized when legal title passes to the customer, which is generally at customer technical acceptance; and (4) for arrangements containing multiple elements, the revenue relating to the undelivered elements is deferred using the relative selling price method utilizing estimated sales prices until delivery of the deferred elements. Applied limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or adjustment. In cases where Applied has sold products that have been demonstrated to meet product specifications prior to shipment, Applied believes that at the time of delivery, it has an enforceable claim to amounts recognized as revenue. Spare parts revenue is generally recognized upon shipment, and services revenue is generally recognized over the period that the services are provided.

8


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)




When a sales arrangement contains multiple elements, such as hardware and services and/or software products, Applied allocates revenue to each element based on a selling price hierarchy. The selling price for a deliverable is based on its vendor specific objective evidence (VSOE) if available, third party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. Applied generally utilizes the ESP due to the nature of its products. In multiple element arrangements where more-than-incidental software deliverables are included, revenue is allocated to each separate unit of accounting for each of the non-software deliverables and to the software deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is then allocated to each software deliverable using the guidance for recognizing software revenue.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (FASB) issued authoritative guidance that will require a public entity to present in its annual and interim financial statements information about reclassification adjustments from accumulated other comprehensive income in a single note or on the face of the financial statements. The authoritative guidance becomes effective for Applied in the first quarter of fiscal 2014, with early adoption permitted, and is not expected to have an impact on Applied's financial position or results of operations.

Note 2
Earnings (loss) Per Share
Basic earnings (loss) per share is determined using the weighted average number of common shares outstanding during the period. Diluted earnings (loss) 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 plans shares) outstanding during the period. Net income (loss) has not been adjusted for any period presented for purposes of computing basic or diluted earnings (loss) per share as Applied has a non-complex capital structure.
 
 
Three Months Ended
 
Six Months Ended
 
April 28,
2013
 
April 29,
2012
 
April 28,
2013
 
April 29,
2012
 
 
 
 
 
 
 
 
 
(In millions, except per share amounts)
Numerator:
 
 
 
 
 
 
 
Net income (loss)
$
(129
)
 
$
289

 
$
(95
)
 
$
406

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
1,203

 
1,289

 
1,200

 
1,294

Effect of dilutive stock options, restricted stock units and employee stock purchase plan shares

 
12

 

 
11

Denominator for diluted earnings (loss) per share
1,203

 
1,301

 
1,200

 
1,305

Basic and diluted earnings (loss) per share
$
(0.11
)
 
$
0.22

 
$
(0.08
)
 
$
0.31

Potentially dilutive securities
50

 
8

 
50

 
13


Potentially dilutive securities attributable to outstanding stock options and restricted stock units were excluded from the calculation of diluted earnings per share for the three and six months ended April 29, 2012 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. Due to the net loss for the three and six months ended April 28, 2013, all potentially dilutive securities were excluded from the calculation of diluted loss per share, as their inclusion would have been anti-dilutive.




9


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:
 
April 28, 2013
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair  Value
 
 
 
 
 
 
 
 
 
(In millions)
Cash
$
590

 
$

 
$

 
$
590

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
955

 

 

 
955

Total Cash equivalents
955

 

 

 
955

Total Cash and Cash equivalents
$
1,545

 
$

 
$

 
$
1,545

Short-term and long-term investments:
 
 
 
 
 
 
 
U.S. Treasury and agency securities
$
217

 
$
1

 
$

 
$
218

Non-U.S. government securities*
14

 

 

 
14

Municipal securities
385

 
2

 

 
387

Commercial paper, corporate bonds and medium-term notes
262

 
3

 

 
265

Asset-backed and mortgage-backed securities
289

 
3

 
1

 
291

Total fixed income securities
1,167

 
9

 
1

 
1,175

Publicly traded equity securities
31

 
26

 

 
57

Equity investments in privately-held companies
73

 

 

 
73

Total short-term and long-term investments
$
1,271

 
$
35

 
$
1

 
$
1,305

Total Cash, Cash equivalents and Investments
$
2,816

 
$
35

 
$
1

 
$
2,850

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

10


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)




October 28, 2012
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair  Value
 
 
 
 
 
 
 
 
 
(In millions)
Cash
$
876

 
$

 
$

 
$
876

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
483

 

 

 
483

Municipal securities
33

 

 

 
33

Total Cash equivalents
516

 

 

 
516

Total Cash and Cash equivalents
$
1,392

 
$

 
$

 
$
1,392

Short-term and long-term investments:
 
 
 
 
 
 
 
U.S. Treasury and agency securities
$
373

 
$
1

 
$

 
$
374

Non-U.S. government securities
29

 

 

 
29

Municipal securities
396

 
2

 

 
398

Commercial paper, corporate bonds and medium-term notes
381

 
3

 

 
384

Asset-backed and mortgage-backed securities
294

 
4

 

 
298

Total fixed income securities
1,473

 
10

 

 
1,483

Publicly traded equity securities
32

 
15

 

 
47

Equity investments in privately-held companies
70

 

 

 
70

Total short-term and long-term investments
$
1,575

 
$
25

 
$

 
$
1,600

Total Cash, Cash equivalents and Investments
$
2,967

 
$
25

 
$

 
$
2,992


 Maturities of Investments
The following table summarizes the contractual maturities of Applied’s investments at April 28, 2013:
 
 
Cost
 
Estimated
Fair  Value
 
 
 
 
 
(In millions)
Due in one year or less
$
189

 
$
189

Due after one through five years
689

 
695

No single maturity date**
393

 
421

 
$
1,271

 
$
1,305

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

11


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)




Gains and Losses on Investments
At April 28, 2013 and October 28, 2012, 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 was considered to be temporary, or other-than-temporary and therefore impaired, include: the length of time and extent to which fair value has been lower than the cost basis; the financial condition, credit quality and near-term prospects of the investee; and whether it is more likely than not that Applied will be required to sell the security prior to recovery. Generally, the contractual terms of investments in marketable securities do not permit settlement at prices less than the amortized cost of the investments. Applied determined that the gross unrealized losses on its marketable securities at April 28, 2013 and April 29, 2012 were temporary in nature and therefore it did not recognize any impairment of its marketable securities during the three and six months ended April 28, 2013 or April 29, 2012. Applied recognized $2 million of impairment charges on its equity investments in privately-held companies during the three and six months ended April 28, 2013 and $3 million of impairment charges during the three and six months ended April 29, 2012.
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 are comprised primarily of debt securities that are classified as available-for-sale and recorded at their fair values. In determining the fair value of investments, Applied uses pricing information from pricing services that value securities based on quoted market prices and models that utilize observable market inputs. In the event a fair value estimate is unavailable from a pricing service, Applied generally obtains non-binding price quotes from brokers. Applied then reviews the information provided by the pricing services or brokers to determine the fair value of its short-term and long-term investments. In addition, to validate pricing information obtained from pricing services, Applied periodically performs supplemental analysis on a sample of securities. Applied reviews any significant unanticipated differences identified through this analysis to determine the appropriate fair value.
Investments with remaining effective maturities of 12 months or less from the balance sheet date are classified as short-term investments. Investments with remaining effective maturities of more than 12 months from the balance sheet date are classified as long-term investments. As of April 28, 2013, 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.


12


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)




Assets and Liabilities Measured at Fair Value on a Recurring Basis
Financial assets and liabilities (excluding cash balances) measured at fair value on a recurring basis are summarized below as of April 28, 2013 and October 28, 2012:
 
 
April 28, 2013
 
October 28, 2012
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Assets:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
955

 
$

 
$
955

 
$
483

 
$

 
$
483

U.S. Treasury and agency securities
98

 
120

 
218

 
128

 
246

 
374

Non-U.S. government securities

 
14

 
14

 

 
29

 
29

Municipal securities

 
387

 
387

 

 
431

 
431

Commercial paper, corporate bonds and medium-term notes

 
265

 
265

 

 
384

 
384

Asset-backed and mortgage-backed securities

 
291

 
291

 

 
298

 
298

Publicly traded equity securities
57

 

 
57

 
47

 

 
47

Total
$
1,110

 
$
1,077

 
$
2,187

 
$
658

 
$
1,388

 
$
2,046

There were no transfers between Level 1 and Level 2 fair value measurements during the three and six months ended April 28, 2013 or April 29, 2012. Applied did not have any financial assets measured at fair value on a recurring basis within Level 3 fair value measurements as of April 28, 2013 or October 28, 2012.
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 April 28, 2013, equity investments in privately-held companies totaled $73 million, of which $62 million of investments were accounted for under the cost method of accounting and $11 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 28, 2012, equity investments in privately-held companies totaled $70 million, of which $57 million of investments were accounted for under the cost method of accounting and $13 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. Applied recognized $2 million of impairment charges on its equity investments in privately-held companies during the three and six months ended April 28, 2013 and $3 million during the three and six months ended April 29, 2012.

13


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)




Other
The carrying amounts of Applied’s financial instruments, including cash and cash equivalents, accounts receivable, notes payable, and accounts payable and accrued expenses, approximate fair value due to the short maturities of these financial instruments. At April 28, 2013, the carrying amount of long-term debt was $1.9 billion and the estimated fair value was $2.2 billion. At October 28, 2012, the carrying amount of long-term debt was $1.9 billion and the estimated fair value was $2.3 billion. The estimated fair value of long-term debt is determined by Level 2 inputs and is based primarily on quoted market prices for the same or similar issues.

Note 5
Derivative Instruments and Hedging Activities
Derivative Financial Instruments
Applied conducts business in a number of foreign countries, with certain transactions denominated in local currencies, such as the Japanese yen, euro, Israeli shekel, Taiwanese dollar and Swiss franc. Applied uses derivative financial instruments, such as forward exchange contracts and currency option contracts, to hedge certain forecasted foreign currency denominated transactions expected to occur typically up to the next 24 months. The purpose of Applied’s foreign currency management is to mitigate the effect of exchange rate fluctuations on certain foreign currency denominated revenues, costs and eventual cash flows. The terms of currency instruments used for hedging purposes are generally consistent with the timing of the transactions being hedged. Applied does not use derivative financial instruments for trading or speculative purposes.
Derivative instruments and hedging activities, including foreign currency exchange contracts, are recognized on the balance sheet at fair value. Changes in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of any hedges, are recognized currently in earnings. All of Applied’s derivative financial instruments are recorded at their fair value in other current assets or in accounts payable and accrued expenses.
 
Hedges related to anticipated transactions are designated and documented at the inception of the hedge as cash flow hedges and are typically entered into once per month. Cash flow hedges are evaluated for effectiveness quarterly. The effective portion of the gain or loss on these hedges is reported as a component of accumulated other comprehensive income or loss (AOCI) in stockholders’ equity and is reclassified into earnings when the hedged transaction affects earnings. The majority of the after-tax net income or loss related to derivative instruments included in AOCI at April 28, 2013 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 general and administrative expenses. The amount recognized due to discontinuance of cash flow hedges that were probable not to occur by the end of the originally specified time period was not significant for the three and six months ended April 28, 2013 and April 29, 2012.
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.
The fair values of derivative instruments at April 28, 2013 and October 28, 2012 were not material.


14


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)




The effect of derivative instruments on the Consolidated Condensed Statements of Operations for the three and six months ended April 28, 2013 and April 29, 2012 was as follows:
 
 
 
Three Months Ended April 28, 2013
 
Three Months Ended April 29, 2012
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
 
$
13

 
$
6

 
$

 
$
6

 
$
4

 
$
(1
)
Foreign exchange contracts
General and administrative
 

 
3

 
(1
)
 

 
1

 

Total
 
 
$
13

 
$
9

 
$
(1
)
 
$
6

 
$
5

 
$
(1
)
 
 
 
Six Months Ended April 28, 2013
 
Six Months Ended April 29, 2012
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
 
$
22

 
$
9

 
$
(1
)
 
$
5

 
$
6

 
$

Foreign exchange contracts
General and administrative
 

 
3

 
(1
)
 

 
(2
)
 
(1
)
Total
 
 
$
22

 
$
12

 
$
(2
)
 
$
5

 
$
4

 
$
(1
)
 
 
 
Amount of Gain or (Loss) 
Recognized in Income
 
 
Three Months Ended
 
Six Months Ended
Location of Gain or
(Loss) Recognized
in Income
 
April 28, 2013
 
April 29, 2012
 
April 28, 2013
 
April 29, 2012
 
 
 
(In millions)
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
General and
administrative
 
$
17

 
$
8

 
$
29

 
$
14

Total
 
 
$
17

 
$
8

 
$
29

 
$
14

 

15


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)




Credit Risk Contingent Features
If Applied’s credit rating were to fall below investment grade, it would be in violation of credit risk contingent provisions of the derivative instruments discussed above, and certain counterparties to the derivative instruments could request immediate payment on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a net liability position was immaterial as of April 28, 2013.
Entering into foreign exchange contracts with banks exposes Applied to credit-related losses in the event of the banks’ nonperformance. However, Applied’s exposure is not considered significant.

Note 6    Accounts Receivable, Net
Applied has agreements with various financial institutions to sell accounts receivable and discount promissory notes from selected customers. Applied, from time to time, also discounts letters of credit through various financial institutions. Applied sells its accounts receivable without recourse.
Applied did not utilize programs to discount letters of credit issued by customers during the three and six months ended April 28, 2013 and April 29, 2012. 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. There was no factoring of accounts receivable or discounting of promissory notes during the three and six months ended April 28, 2013 or the three months ended April 29, 2012. Applied factored accounts receivable and discounted promissory notes of $70 million during the six months ended April 29, 2012. Financing charges on the sale of receivables and discounting of letters of credit are included in interest expense in the accompanying Consolidated Condensed Statements of Operations and were not material for all periods presented.
Accounts receivable are presented net of allowance for doubtful accounts of $82 million at April 28, 2013 and $87 million at October 28, 2012. Applied sells principally to manufacturers within the semiconductor, display and solar industries. While Applied believes that its allowance for doubtful accounts is adequate and represents Applied’s best estimate as of April 28, 2013, Applied continues to closely monitor customer liquidity and other economic conditions, which may result in changes to Applied’s estimates regarding collectability.


Note 7
Balance Sheet Detail
 
 
April 28,
2013
 
October 28,
2012
 
 
 
 
 
(In millions)
Inventories
 
 
 
Customer service spares
$
278

 
$
312

Raw materials
311

 
331

Work-in-process
248

 
234

Finished goods
481

 
395

 
$
1,318

 
$
1,272

 
Included in finished goods inventory are $123 million at April 28, 2013, and $60 million at October 28, 2012, 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 $173 million and $176 million of evaluation inventory at April 28, 2013 and October 28, 2012, respectively.


16


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)



 
April 28,
2013
 
October 28,
2012
 
 
 
 
 
(In millions)
Other Current Assets
 
 
 
Deferred income taxes, net
$
398

 
$
369

Prepaid expenses
110

 
101

Income taxes receivable
52

 
87

Other
190

 
116

 
$
750

 
$
673

 
 
Useful Life
 
April 28,
2013
 
October 28,
2012
 
 
 
 
 
 
 
(In years)
 
(In millions)
Property, Plant and Equipment, Net
 
 
 
Land and improvements
 
 
$
168

 
$
169

Buildings and improvements
3-30
 
1,208

 
1,196

Demonstration and manufacturing equipment
3-5
 
797

 
760

Furniture, fixtures and other equipment
3-15
 
602

 
734

Construction in progress
 
 
47

 
58

Gross property, plant and equipment
 
 
2,822

 
2,917

Accumulated depreciation
 
 
(1,936
)
 
(2,007
)
 
 
 
$
886

 
$
910


 
April 28,
2013
 
October 28,
2012
 
 
 
 
 
(In millions)
Accounts Payable and Accrued Expenses
 
 
 
Accounts payable
$
531

 
$
396

Compensation and employee benefits
362

 
426

Warranty
104

 
119

Dividends payable
120

 
108

Income taxes payable
60

 
74

Other accrued taxes
20

 
18

Interest payable
30

 
30

Restructuring reserve
25

 
133

Other
210

 
206

 
$
1,462

 
$
1,510

 
 
April 28,
2013
 
October 28,
2012
 
 
 
 
 
(In millions)
Customer Deposits and Deferred Revenue
 
 
 
Customer deposits
$
150

 
$
143

Deferred revenue
589

 
612

 
$
739

 
$
755

 
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.

17


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)



 
April 28,
2013
 
October 28,
2012
 
 
 
 
 
(In millions)
Other Liabilities
 
 
 
Deferred income taxes
$
152

 
$
201

Income taxes payable
147

 
140

Defined benefit pension plan liability
190

 
184

Other
161

 
131

 
$
650

 
$
656


Note 8
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 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. Applied’s reporting units are consistent with the reportable segments identified in Note 15, Industry Segment Operations, which are based on the manner in which Applied operates its business and the nature of those operations.

18


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)




During the second quarter of fiscal 2013, the solar industry experienced further deterioration of market conditions associated with continued manufacturing overcapacity and weaker operating performance and outlook, resulting in increased uncertainties regarding the timing and nature of a recovery in solar capital equipment expenditures. Taking these factors into account, Applied reassessed its financial outlook for the Energy and Environmental Solutions reporting unit and consequently reevaluated the recoverability of this reporting unit's goodwill. Applied performed the two-step impairment test and concluded that the Energy and Environmental Solutions reporting unit's carrying value exceeded its fair value. Based on Applied's analyses, the implied fair value of goodwill was substantially lower than the carrying value of goodwill for the reporting unit. As a result, in the second quarter of fiscal 2013, Applied recorded a goodwill impairment charge of $224 million, representing all of the remaining goodwill for this reporting unit. Applied also performed an impairment test for long-lived assets associated with the reporting unit and determined that the majority of intangible assets were impaired mostly due to the lower long-term revenue and profitability outlook associated with products related to these intangible assets. Accordingly, during the second quarter of fiscal 2013, Applied recorded an impairment charge of $54 million related to these intangible assets, which was the amount by which the carrying value of these intangible assets exceeded their estimated fair value, based on discounted projected cash flows.
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 April 28, 2013 and October 28, 2012 were as follows :
 
 
April 28, 2013
 
October 28, 2012
 
Goodwill
 
Other
Intangible
Assets
 
Total
 
Goodwill
 
Other
Intangible
Assets
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Silicon Systems Group
$
2,151

 
$
142

 
$
2,293

 
$
2,151

 
$
142

 
$
2,293

Applied Global Services
1,027

 

 
1,027

 
1,027

 

 
1,027

Display
116

 

 
116

 
116

 

 
116

Energy and Environmental Solutions

 

 

 
224

 

 
224

Carrying amount
$
3,294

 
$
142

 
$
3,436

 
$
3,518

 
$
142

 
$
3,660

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.

A summary of Applied's purchased technology and intangible assets is set forth below:
 
April 28,
2013
 
October 28,
2012
 
 
 
 
 
(In millions)
Purchased technology, net
$
824

 
$
945

Intangible assets - finite-lived, net
228

 
268

Intangible assets - indefinite-lived
142

 
142

Total
$
1,194

 
$
1,355



19


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)




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 as of April 28, 2013 and October 28, 2012:
 

 
April 28, 2013
 
October 28, 2012
 
Purchased
Technology
 
Other
Intangible
Assets
 
Total
 
Purchased
Technology
 
Other
Intangible
Assets
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Gross carrying amount:
 
 
 
 
 
 
 
 
 
 
 
Silicon Systems Group
$
1,300

 
$
252

 
$
1,552

 
$
1,300

 
$
252

 
$
1,552

Applied Global Services
28

 
44

 
72

 
28

 
44

 
72

Display
110

 
33

 
143

 
110

 
33

 
143

Energy and Environmental Solutions
4

 
16

 
20

 
105

 
232

 
337

Gross carrying amount
$
1,442

 
$
345

 
$
1,787

 
$
1,543

 
$
561

 
$
2,104

Accumulated amortization:
 
 
 
 
 
 
 
 
 
 
 
Silicon Systems Group
$
(486
)
 
$
(49
)
 
$
(535
)
 
$
(411
)
 
$
(36
)
 
$
(447
)
Applied Global Services
(23
)
 
(40
)
 
(63
)
 
(22
)
 
(39
)
 
(61
)
Display
(109
)
 
(28
)
 
(137
)
 
(106
)
 
(27
)
 
(133
)
Energy and Environmental Solutions

 

 

 
(59
)
 
(191
)
 
(250
)
Accumulated amortization
$
(618
)
 
$
(117
)
 
$
(735
)
 
$
(598
)
 
$
(293
)
 
$
(891
)
Carrying amount
$
824

 
$
228

 
$
1,052

 
$
945

 
$
268

 
$
1,213


During the second quarter of fiscal 2013, the impact of impairment of certain intangible assets associated with the Energy and Environmental Solutions segment on the gross carrying amount and accumulated amortization of the finite-lived intangible assets was approximately $317 million and $262 million, respectively.

20


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)



Details of amortization expense by segment for the three and six months ended April 28, 2013 and April 29, 2012 were as follows:
 
Three Months Ended
 
Six Months Ended
 
April 28,
2013
 
April 29,
2012
 
April 28,
2013
 
April 29,
2012
 
 
 
 
 
 
 
 
 
(In millions)
Silicon Systems Group
$
44

 
$
45

 
$
88

 
$
93

Applied Global Services
1

 
2

 
2

 
7

Display
2

 
2

 
4

 
3

Energy and Environmental Solutions
7

 
6

 
13

 
13

Total
$
54

 
$
55

 
$
107

 
$
116

For the three and six months ended April 28, 2013 and April 29, 2012, amortization expense was charged to the following categories:
 
Three Months Ended
 
Six Months Ended
 
April 28,
2013
 
April 29,
2012
 
April 28,
2013
 
April 29,
2012
 
 
 
 
 
 
 
 
 
(In millions)
Cost of products sold
$
43

 
$
45

 
$
86

 
$
97

Research, development and engineering
1

 
1

 
1

 
1

Selling, general and administrative
10

 
9

 
20

 
18

Total
$
54

 
$
55

 
$
107

 
$
116

As of April 28, 2013, future estimated amortization expense is expected to be as follows:
 
 
Amortization
Expense
 
(In millions)
2013
92

2014
180

2015
175

2016
168

2017
166

Thereafter
271

Total
$
1,052



21


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)




Note 9
Borrowing Facilities and Long-Term Debt
Applied has credit facilities for unsecured borrowings in various currencies of up to $1.6 billion, of which $1.5 billion is comprised of a committed revolving credit agreement with a group of banks that is scheduled to expire in May 2016. This agreement provides for borrowings in United States dollars at interest rates keyed to one of the two rates selected by Applied for each advance and includes financial and other covenants with which Applied was in compliance at April 28, 2013. Remaining credit facilities in the amount of approximately $81 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 April 28, 2013 and October 28, 2012 and Applied has not utilized these credit facilities.
Long-term debt outstanding as of April 28, 2013 and October 28, 2012 was as follows:
 
 
Principal Amount
 
Effective
Interest Rate
 
Interest
Pay Dates
 
(In millions)
 
 
 
 
2.650% Senior Notes Due 2016
$
400

 
2.666%
 
June 15, December 15
7.125% Senior Notes Due 2017
200

 
7.190%
 
April 15, October 15
4.300% Senior Notes Due 2021
750

 
4.326%
 
June 15, December 15
5.850% Senior Notes Due 2041
600

 
5.879%
 
June 15, December 15
 
1,950

 
 
 
 
Total unamortized discount
(4
)
 
 
 
 
Total long-term debt
$
1,946

 
 
 
 

Applied has debt agreements that contain financial and other covenants. These covenants require Applied to maintain certain minimum financial ratios. At April 28, 2013, Applied was in compliance with all such covenants.


22


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)



Note 10
Restructuring Charges and Asset Impairments

From time to time, Applied initiates restructuring activities to appropriately align its cost structure relative to prevailing economic and industry conditions and associated customer demand as well as in connection with certain acquisitions. Costs associated with restructuring actions can include termination benefits and related charges in addition to facility closure, contract termination and other related activities.
The following table summarizes major components of the restructuring and asset impairment charges during the three and six months ended April 28, 2013:
 
 
Three Months Ended
 
Six Months Ended
 
April 28, 2013
 
April 28, 2013
 
 
 
 
 
(In millions)
2012 Global Restructuring Plan
 
 
 
Severance and other employee-related costs1
$
4

 
$
8

2012 EES Restructuring Plan
 
 
 
Severance and other employee-related costs2
2

 
2

Contract cancellation and other costs
2

 
2

Asset impairments
2

 
5

Others
 
 
 
Severance and other employee-related costs

 
2

 
$
10

 
$
19

______________________________
1 Includes share-based compensation expense which was recorded in additional paid-in capital.
2 Includes post-retirement benefit expense which was recorded in accumulated other comprehensive loss.

Restructuring and asset impairment charges were recorded as follows:
 
Three Months Ended
 
Six Months Ended
 
April 28, 2013
 
April 28, 2013
 
 
 
 
 
(In millions)
Silicon Systems Group
$

 
$
1

Applied Global Services
1

 
2

Energy and Environmental Solutions
5

 
8

Corporate Unallocated
4

 
8

Total
$
10

 
$
19


Global Restructuring Plan
On October 3, 2012, Applied announced a restructuring plan (the 2012 Global Restructuring Plan) to realign its global workforce and enhance its ability to invest for growth. Under this plan, Applied implemented a voluntary retirement program and other workforce reduction actions that are expected to affect approximately 900 to 1,300 positions, or 6 percent to 9 percent of its global workforce. The voluntary retirement program was available to certain U.S. employees who met minimum age and length of service requirements, as well as other business-specific criteria. Applied implemented other workforce reduction actions globally across multiple business segments and functions, the extent of which depended on the number of employees who participated in the voluntary retirement program and other considerations. Applied expects to substantially complete this plan by the end of the third quarter of fiscal 2013, depending on local legal requirements.

23


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)




In connection with the 2012 Global Restructuring Plan, Applied expects to incur aggregate pre-tax restructuring charges comprised of severance and other termination benefits in the range of $120 million to $160 million (including costs incurred to date of $114 million discussed below), which is below the original estimate of $180 million to $230 million. The change in the estimate is primarily due to lower relative participation in the voluntary retirement program and a reduced estimate of the final cost of benefits. Applied began recording these restructuring charges in the fourth quarter of fiscal 2012 and expects that the remainder will be recorded during fiscal 2013. The change in the range of estimated pre-tax restructuring costs of this plan did not have an effect on the restructuring charges recognized to date.
During the second quarter and first half of fiscal 2013, Applied recognized $4 million and $8 million of employee-related costs in connection with the 2012 Global Restructuring Plan, respectively. These costs were not allocated to the segments. As of April 28, 2013, employee-related costs of $114 million have been incurred since the inception of this plan.
2012 EES Restructuring Plan
On May 10, 2012, Applied announced a plan (the 2012 EES Restructuring Plan) to restructure its Energy and Environmental Solutions segment in light of challenging industry conditions affecting the solar photovoltaic and light-emitting diode (LED) equipment markets. As of April 28, 2013, as part of this plan, Applied was in the process of relocating certain manufacturing, business operations and customer support functions of its precision wafering systems business and had ceased LED development activities. This plan also impacted certain LED support activities in the Applied Global Services segment. The total estimated pre-tax cost of implementing this plan is expected to be in the range of approximately $70 million to $100 million, which will be incurred over a period of 12 to 18 months beginning in the third quarter of fiscal 2012, and reported primarily in the Energy and Environmental Solutions segment. This estimate consists of: (i) up to $30 million in fixed asset impairment charges; (ii) up to $15 million of inventory-related charges; (iii) up to $15 million in charges arising from lease terminations and other obligations, and (iv) up to $40 million in severance and other employee-related costs. The 2012 EES Restructuring Plan impacted up to approximately 250 positions globally. As the Energy and Environmental Solutions segment continues to consolidate infrastructure and reduce its operating expenses, Applied expects approximately 150 additional positions to be impacted globally. No changes in the estimated pre-tax cost of the implementation of this plan are anticipated. During the second quarter and first half of fiscal 2013, Applied recognized $6 million and $9 million, respectively, of restructuring and asset impairment charges in connection with this plan, which were reported in the Energy and Environmental Solutions segment. As of April 28, 2013, total costs incurred in implementing this plan totaled $70 million, of which $13 million were inventory-related charges.
Integration of Varian Semiconductor Associates, Inc. (Varian)
During the first half of fiscal 2013, Applied recognized $2 million of severance and other employee-related costs in connection with the integration of Varian, acquired in the first quarter of fiscal 2012, which costs were reported in the Silicon Systems Group and Applied Global Services segments. As of April 28, 2013, the remaining severance accrual associated with restructuring reserves under this program was $2 million.

Restructuring Reserves
Changes in restructuring reserves during the six months ended April 28, 2013 were as follows:
 
 
2012 Global Restructuring Plan
 
2012 EES Restructuring Plan
 
Others
 
 
 
Severance and Other Employee-Related Costs
 
Severance and Other Employee-Related Costs
 
Contract Cancellation and Other Costs
 
Severance and Other Employee-Related Costs
 
Contract Cancellation and Other Costs
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Balance, October 28, 2012
$
106

 
$
16

 
$
1

 
$
5

 
$
5

 
$
133

Provision for restructuring reserves
4

 
1

 
2

 
2

 

 
9

Consumption of reserves
(99
)
 
(12
)
 
(1
)
 
(5
)
 

 
(117
)
Balance, April 28, 2013
$
11

 
5

 
2

 
$
2

 
$
5

 
$
25



24


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)




Note 11
Stockholders’ Equity, Comprehensive Income and Share-Based Compensation
Accumulated Other Comprehensive Income (Loss)
Components of accumulated other comprehensive income (loss), on an after-tax basis where applicable, were as follows:
 
 
April 28,
2013
 
October 28,
2012
 
 
 
 
 
(In millions)
Unrealized gain on investments, net
$
23

 
$
16

Unrealized gain on derivative instruments qualifying as cash flow hedges
8

 
1

Pension liability
(92
)
 
(90
)
Cumulative translation adjustments
7

 
12

 
$
(54
)
 
$
(61
)
Stock Repurchase Program

On March 5, 2012, Applied's Board of Directors approved a stock repurchase program authorizing up to $3.0 billion in repurchases over the next three years ending in March 2015. Under this authorization, Applied purchases shares of its common stock under a systematic stock repurchase program and may also make supplemental stock repurchases from time to time, depending on market conditions, stock price and other factors. At April 28, 2013, $1.7 billion remained available for future stock repurchases under this repurchase program.
The following table summarizes Applied’s stock repurchases for the periods indicated:
 
 
Three Months Ended
 
Six Months Ended
 
April 28,
2013
 
April 29,
2012
 
April 28,
2013
 
April 29,
2012
 
 
 
 
 
 
 
 
 
(In millions, except per share amounts)
Shares of common stock repurchased
8

 
16

 
12

 
34

Cost of stock repurchased
$
100

 
$
200

 
$
148

 
$
400

Average price paid per share
$
13.41

 
$
12.33

 
$
12.58

 
$
11.60

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 2013, Applied's Board of Directors declared a quarterly cash dividend in the amount of $0.10 per share, and in December 2012, declared a quarterly cash dividend in the amount of $0.09 per share. Dividends declared during the six months ended April 28, 2013 and April 29, 2012 were $227 million and $218 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.

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APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)




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 beginning in March 2012 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 April 28, 2013 and April 29, 2012, Applied recognized share-based compensation expense related to stock options, ESPP shares, restricted stock, restricted stock units, performance shares and performance units. Total share-based compensation and related tax benefits were as follows:
 
 
Three Months Ended
 
Six Months Ended
 
April 28,
2013
 
April 29,
2012
 
April 28,
2013
 
April 29,
2012
 
 
 
 
 
 
 
 
 
(In millions)
Share-based compensation
$
39

 
$
43

 
$
81

 
$
96

Tax benefit recognized
$
11

 
$
12

 
$
23

 
$
27

The effect of share-based compensation on the results of operations for the three and six months ended April 28, 2013 and April 29, 2012 was as follows:
 
 
Three Months Ended
 
Six Months Ended
 
April 28,
2013
 
April 29,
2012
 
April 28,
2013
 
April 29,
2012
 
 
 
 
 
 
 
 
 
(In millions)
Cost of products sold
$
12

 
$
14

 
$
24

 
$
27

Research, development, and engineering
13

 
13

 
25

 
26

Selling, general and administrative
14

 
16

 
27

 
43

Restructuring charge

 

 
5

 

Total
$
39

 
$
43

 
$
81

 
$
96

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.
At April 28, 2013, Applied had $306 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 April 28, 2013, there were 183 million shares available for grants of share-based awards under the Employee Stock Incentive Plan, and an additional 44 million shares available for issuance under the ESPP.


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APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)




Stock Options
Applied grants options to purchase, at future dates, shares of its common stock to employees and consultants. The exercise price of each stock option equals the fair market value of Applied common stock on the date of grant. Options typically vest over three to four years, subject to the grantee’s continued service with Applied through the scheduled vesting date, and expire no later than seven years from the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. This model was developed for use in estimating the value of publicly traded options that have no vesting restrictions and are fully transferable. Applied employee stock options have characteristics significantly different from those of publicly traded options. There were no stock options granted during the three and six months ended April 28, 2013 and April 29, 2012. As part of the acquisition of Varian in the first quarter of fiscal 2012, stock options to purchase 5 million shares of Applied common stock were assumed.
 
Stock option activity for the six months ended April 28, 2013 was as follows:
 
 
Shares
 
Weighted
Average
Exercise
Price
 
 
 
 
 
(In millions, except per share amounts)
Outstanding at October 28, 2012
21

 
$
10.53

Granted

 
$

Exercised
(6
)
 
$
8.04

Canceled and forfeited
(4
)
 
$
18.26

Outstanding at April 28, 2013
11

 
$
9.35

Exercisable at April 28, 2013
10

 
$
9.44

 
Restricted Stock Units, Restricted Stock, Performance Shares and Performance Units
Restricted stock units are converted into shares of Applied common stock upon vesting on a one-for-one basis. Restricted stock has the same rights as other issued and outstanding shares of Applied common stock except these shares generally have no right to dividends and are held in escrow until the award vests. Performance shares and performance units are awards that result in a payment to a grantee in shares of Applied common stock on a one-for-one basis if performance goals and/or other vesting criteria established by the Human Resources and Compensation Committee of Applied's Board of Directors (the Committee) are achieved or the awards otherwise vest. Restricted stock units, restricted stock, performance shares and performance units typically vest over four years and vesting is usually subject to the grantee’s continued service with Applied and, in some cases, achievement of specified performance goals. The compensation expense related to the service-based awards is determined using the fair market value of Applied common stock on the date of the grant, and the compensation expense is recognized over the vesting period.

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APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)




Restricted stock, performance shares and performance units granted to certain executive officers are also subject to the achievement of specified per