10-K 1 amat10272013-10kdoc.htm FORM 10-K AMAT 10.27.2013-10K DOC
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark one)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 27, 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, P.O. Box 58039
Santa Clara, California
95052-8039
(Zip Code)
(Address of principal executive offices)
Registrant’s telephone number, including area code:
(408) 727-5555
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, par value $.01 per share
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ        No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨        No  þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ        No  ¨
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨
 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 Act).    Yes  ¨        No  þ
Aggregate market value of the voting stock held by non-affiliates of the registrant as of April 26, 2013, based upon the closing sale price reported by the NASDAQ Global Select Market on that date: $16,956,394,267
Number of shares outstanding of the registrant’s Common Stock, $.01 par value, as of November 21, 2013: 1,204,183,467
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive Proxy Statement for Applied Materials, Inc.’s 2014 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.



Caution Regarding Forward-Looking Statements
Certain information in this Annual Report on Form 10-K (report or Form 10-K) of Applied Materials, Inc. and its subsidiaries (Applied or the Company), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, is forward-looking in nature. All statements in this report and those made by the management of Applied, other than statements of historical fact, are forward-looking statements.
Forward-looking 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. Examples of forward-looking statements include statements regarding Applied’s future financial or operating results, as well as its plans or expectations regarding 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, the proposed business combination with Tokyo Electron Limited, growth opportunities, the nature and impact of 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, and general economic conditions. These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in Part I, 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. Applied undertakes no obligation to revise or update any forward-looking statements.
The following information should be read in conjunction with the Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included in this report.

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APPLIED MATERIALS, INC.
FORM 10-K FOR THE FISCAL YEAR ENDED OCTOBER 27, 2013
TABLE OF CONTENTS
 
 
 
 
 
 
Page
 
PART I
 
Item 1:
Item 1A:
Item 1B:
Item 2:
Item 3:
Item 4:
 
 
 
 
PART II
 
Item 5:
Item 6:
Item 7:
Item 7A:
Item 8:
Item 9:
Item 9A:
Item 9B:
 
 
 
 
PART III
 
Item 10:
Item 11:
Item 12:
Item 13:
Item 14:
 
 
 
 
PART IV
 
Item 15:
 

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PART I
Item 1:
Business
Incorporated in 1967, Applied, a Delaware corporation, provides manufacturing equipment, services and software to the global semiconductor, flat panel display, solar photovoltaic (PV) and related industries. Applied’s customers include manufacturers of semiconductor wafers and chips, flat panel 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’s fiscal year ends on the last Sunday in October.
Applied operates in four reportable segments: Silicon Systems Group, Applied Global Services, Display, and Energy and Environmental Solutions. Applied manages its business based upon these segments. A summary of financial information for each reportable segment is found in Note 16 of Notes to Consolidated Financial Statements. A discussion of factors that could affect operations is set forth under “Risk Factors” in Item 1A, which is incorporated herein by reference.
In November 2011, Applied completed the acquisition of Varian Semiconductor Equipment Associates, Inc. (Varian), a leading supplier of ion implantation equipment to the semiconductor and solar industries. The acquisition expanded Applied's technologies for chip and solar module manufacturing. The acquired business is primarily included in consolidated results of operations and the results of the Silicon Systems Group and Applied Global Services segments.
Net sales by reportable segment for the past three fiscal years were as follows:
 
 
2013
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions, except percentages)
Silicon Systems Group
$
4,775

 
64%
 
$
5,536

 
64%
 
$
5,415

 
51%
Applied Global Services
2,023

 
27%
 
2,285

 
26%
 
2,413

 
23%
Display
538

 
7%
 
473

 
5%
 
699

 
7%
Energy and Environmental Solutions
173

 
2%
 
425

 
5%
 
1,990

 
19%
Total
$
7,509

 
100%
 
$
8,719

 
100%
 
$
10,517

 
100%
Silicon Systems Group Segment
The Silicon Systems Group segment develops, manufactures and sells manufacturing equipment used to fabricate semiconductor chips, also referred to as integrated circuits (ICs). Most chips are built on a silicon wafer base and include a variety of circuit components, such as transistors and other devices, that are connected by multiple layers of wiring (interconnects). Applied offers systems that perform various processes used in chip fabrication, including atomic layer deposition (ALD), chemical vapor deposition (CVD), physical vapor deposition (PVD), electrochemical deposition (ECD), rapid thermal processing (RTP), ion implantation, chemical mechanical planarization (CMP), wet cleaning, and wafer metrology and inspection, as well as systems that etch or inspect circuit patterns on masks used in the photolithography process. Applied’s semiconductor manufacturing systems are used by integrated device manufacturers and foundries to build and package memory, logic and other types of chips.
The majority of the Company's new equipment sales are for leading-edge technology for advanced nodes using 28 nanometer (nm) and smaller dimensions. To build a chip, the transistors, capacitors and other circuit components are first created on the surface of the wafer by performing a series of processes to deposit and selectively remove portions of successive film layers. Similar processes are then used to build the layers of wiring structures on the wafer. As the density of the circuit components increases to enable greater computing capability in the same or smaller physical area, the complexity of building the chip also increases, necessitating more process steps to form smaller transistor structures and more intricate wiring schemes. Advanced chip designs require more than 500 steps involving these and other processes to complete the manufacturing cycle.

Today's advanced interconnects are made using copper as the main wiring material. Copper has low resistance and can carry a large amount of current in a small area, which allows signals to travel quickly. Applied is a leading supplier of systems for manufacturing copper-based interconnects, including equipment for depositing, etching and planarizing these multi-layer structures.

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To increase the speed of interconnect signals even further, low dielectric constant (low k) films are used to insulate the copper wiring. Applied provides systems for depositing low k dielectric films that enable higher device performance and longer battery life.
The transistor is another key area of the chip where semiconductor manufacturers are improving their device designs to enhance performance. Applied has technically advanced products for building smaller and faster transistors. One method of enhancing chip performance is strain engineering, a technique that stretches or compresses the space between atoms, allowing electrical current to flow more quickly. Multiple strain films are typically used in advanced devices since they have an additive effect on increasing transistor speed. Applied has systems to enable these applications using CVD and epitaxial deposition technologies.
Major chipmakers are integrating high dielectric constant (high-k) and metal materials and processes in their transistor gate structures to increase chip performance and reduce power consumption. Applied has fully characterized processes for building these high-k/metal gates. These solutions include an integrated dielectric gate stack tool that combines four critical processes in a single system, a portfolio of metallization technologies using ALD and PVD, and an innovative high temperature etch system.
To address the need for higher performance in a smaller space driven by new consumer products, a new type of chip packaging at wafer level is emerging, which enables three-dimensional (3D) ICs. Providing greater functionality in a smaller footprint, 3D ICs stack multiple chips together and electrically connect them using deep holes, called through-silicon via (TSV) structures. Applied has production-proven systems and processes required for advanced packaging manufacturing, including etch, CVD, PVD, ECD, wafer cleaning and CMP systems.
Most of Applied’s semiconductor equipment products are single-wafer systems with multiple process chambers attached to a base platform. This enables each wafer to be processed separately in its own environment, allowing precise process control, while the system’s multiple chambers enable simultaneous, high productivity manufacturing. Applied sells most of its single-wafer, multi-chamber systems on six basic platforms: the Endura®,, Centura®, Producer®, Raider®, VIISta® and Vantage® platforms. These platforms support ALD, CVD, ECD, PVD, etch, ion implantation, and RTP technologies.
Over time, the semiconductor industry has migrated to increasingly larger wafers to build chips. The predominant or common wafer size used today for volume production of advanced chips is 300 millimeter (mm), or 12-inch, wafers. Applied offers 300mm systems through its Silicon Systems Group segment. The Company also offers earlier-generation 200mm systems, as well as products and services to support all of its systems, which are reported under its Applied Global Services segment.
The following discusses in more detail the portfolio of products and their associated process technology areas reported under the Silicon Systems Group segment.
Deposition
Deposition is a fundamental step in fabricating a chip. During deposition, layers of dielectric (an insulator), barrier, or electrically conductive (typically metal) films are deposited or grown on a wafer. Applied provides equipment to perform four types of deposition: ALD, CVD, ECD and PVD. In addition, Applied’s RTP systems can be used to perform certain types of dielectric deposition.

Atomic Layer Deposition
ALD is an advanced technology in which atoms are deposited one layer at a time to build chip structures. This technology enables customers to fabricate thin films of either conducting or insulating material with uniform coverage in nanometer-sized structures. One of the most critical areas of the transistor is its gate, which is built by depositing layers of dielectric films. At the 22nm node and below, these film layers are so thin that they must be atomically engineered. The Applied Centura Integrated Gate Stack system features advanced ALD technology that builds ultrathin high-k film layers less than 2nm in thickness — about one hundred thousandth the width of a human hair.

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Chemical Vapor Deposition
CVD is used to deposit dielectric and metal films on a wafer. During the CVD process, gases that contain atoms of the material to be deposited react on the wafer surface, forming a thin film of solid material. Films deposited by CVD may be silicon oxide, single-crystal epitaxial silicon, amorphous silicon, silicon nitride, dielectric anti-reflective coatings, low k dielectric (for highly-efficient insulating materials), aluminum, titanium, titanium nitride, polysilicon, tungsten, refractory metals or silicides. Applied offers the following CVD products and technologies:
The Applied Producer CVD platform — The Producer high-throughput platform features Twin-Chamber® modules that have two single-wafer process chambers per unit. Up to three Twin-Chamber modules can be mounted on each Producer platform, giving it a simultaneous processing capacity of six wafers. Many dielectric CVD processes can be performed on this platform. The highest productivity model of this system is the Applied Producer GT, which features fast wafer handling performance and compact design.
Low k Dielectric Films — Low k dielectric materials are used in copper-based chip designs to further improve interconnect speed. Using conventional CVD equipment, the Applied Producer Black Diamond® family of low k systems provides customers with a proven, cost-effective way to integrate a variety of low k films into advanced interconnect structures. The Company's latest third-generation low k technologies are featured on the Applied Producer Black Diamond 3 system and Applied Producer Nanocure 3 system. In addition, the Company offers its Applied Producer® OnyxTM process, an innovative film treatment that optimizes the molecular structure of low k films. Together, these products are designed to enable smaller, higher performance and more power-efficient devices at 22nm and below.
Lithography-Enabling Solutions — Applied offers several technologies on the Producer system to help chipmakers extend their current 193nm lithography tools, including a line of Applied APF® (advanced patterning film) films and Applied DARC® (dielectric anti-reflective coating) films. Together, they provide a film stack with the precise dimensional control and compatibility needed to cost-effectively pattern nano-scale features without additional integration complexity.
Gap Fill Films — There are many steps during the chipmaking process in which extremely small and deep, or high aspect ratio (HAR), structures must be filled void-free with a dielectric film. Many of these applications include the deposition of silicon oxides in substrate isolation structures, contacts and interconnects. Applied's most advanced gap fill system is its Applied Producer Eterna™ FCVD™ system. Targeted for 20nm and below chips, the Eterna system delivers a liquid-like film that flows freely into virtually any structure to provide void-free dielectric fill.
Strain Engineering Solutions — The Applied Producer HARP™ system plays a key role in enhancing transistor performance, enabling chipmakers to boost chip speed by depositing strain-inducing dielectric films. Offering the industry’s first integrated stress nitride deposition and ultraviolet (UV) cure solution, the Applied Producer Celera CVD delivers benchmark levels of high-stress tensile silicon nitride films. The Company also offers the Applied Centura SiNgenPlus low pressure CVD system for low temperature silicon nitride films. Used together, and in conjunction with silicon germanium (SiGe) films using Applied’s epitaxial deposition technologies, these systems can provide additive strain engineering benefits.

Through-Silicon Via Films — Applied offers products for TSV fabrication, including the Applied Producer InVia™ system. This product uses an innovative process to deposit the critical oxide liner film layer in HAR TSV structures, enabling robust electrical isolation of the TSV, which is vital for reliable device performance. For applications where higher temperatures can damage the manufacturing process, the Applied Producer Avila™ CVD system and Applied Producer Optiva CVD system allow high quality dielectric film deposition at stable substrate temperatures at a low cost of ownership.
Epitaxial Deposition — Epitaxial silicon (epitaxy or epi) is a layer of pure silicon grown in a uniform crystalline structure on the wafer to form a high quality base for the device circuitry. Epi technology is used in an increasing number of IC devices in both the wafer substrate and transistor areas of a chip to enhance speed. The Applied Centura Epi system integrates pre- and post-epi processes on the same system to improve film quality and reduce production costs. This system is also used for SiGe epi technology, which reduces power usage and increases speed in certain types of advanced chips. For emerging transistor designs, the Applied Centura RP Epi system offers selective epi processes to enable faster transistor switching through strain engineering techniques.

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Polysilicon Deposition — Polysilicon is a type of silicon used to form portions of the transistor structure within the IC device. The Applied Centura Polygen™ LPCVD system is a single-wafer, multi-chamber product that deposits thin polysilicon films at high temperatures to create transistor gate structures. To address the challenging requirements of shrinking gate dimensions, the Applied Centura DPN Gate Stack system integrates chambers for decoupled plasma nitridation (DPN), RTP anneal, and polysilicon deposition on one platform to enable superior film quality and material properties.
Tungsten Deposition — Tungsten is used in the contact area of a chip that connects the transistors to the wiring circuitry. In aluminum-based devices, tungsten is also used in the structures that connect the multiple layers of aluminum wiring. Applied has two products for depositing tungsten: the Applied Centura Sprint® Tungsten CVD system and the Applied Centura iSprint ALD/CVD system which provide tungsten filling capability to 20nm and below.
Electrochemical Deposition
ECD is a process by which metal atoms from a chemical fluid (an electrolyte) are deposited on the surface of an immersed object. One application is to deposit copper in interconnect wiring structures. This process step follows the deposition of barrier and seed layers which prevent the copper from contaminating other areas of the device, improve the adhesion of the copper film and enable electrodeposition to occur. Another application is wafer level packaging for deposition of copper to fill TSV 3D chip-to-chip connections. Applied offers special configurations of the Applied Raider system for these ECD applications.
Physical Vapor Deposition
PVD is a physical process in which atoms of a gas, such as argon, are accelerated toward a metal target. The metal atoms chip off, or sputter away, and are then deposited on the wafer. The Applied Endura PVD system offers various advanced metal deposition processes, including aluminum, aluminum alloys, cobalt, titanium/titanium nitride, tantalum/tantalum nitride, tungsten/tungsten nitride, nickel, vanadium and copper. Introduced 23 years ago, the Company's Applied Endura platform is the most successful metal deposition system in the history of the semiconductor industry.
The Applied Endura CuBS (copper barrier/seed) PVD system is widely used by customers for fabricating copper-based chips. Using PVD technology, the system deposits a tantalum-based barrier film that prevents copper material from entering other areas of the device and then a copper seed layer that primes the structure for the subsequent deposition of bulk copper. The Applied Endura CuBS RFX PVD system extends cost-effective CuBS technology to the 22nm node. The Applied Endura Avenir™ RF PVD system sequentially deposits the multiple metal film layers that form the heart of the industry’s new, faster, metal gate transistors. The Applied Endura iLB PVD/ALD system advances the state-of-the-art in ALD technology, enabling customers to shrink their speed-critical contact structures for 20nm and below devices. The Applied Endura AmberTM PVD system uses copper reflow technology to achieve rapid, void-free fill of interconnect structures at virtually any device node.
Applied’s Endura system has also been used for many years in back-end applications to deposit metal layers before final bump or wire bonding packaging steps are performed. Additionally, the Applied Charger® UBM PVD system, which is specifically designed for under-bump metallization (UBM) and other back-end processes, features linear architecture for reliable performance and very high productivity at a low cost per wafer.
Etch
Etching is used many times throughout the IC manufacturing process to selectively remove material from the surface of a wafer. Before etching begins, the wafer is coated with a light-sensitive film, called photoresist. A photolithography process then projects the circuit pattern onto the wafer. Etching removes material only from areas dictated by the photoresist pattern. Applied offers systems for etching dielectric, metal, and silicon films to meet the requirements of advanced processing.
For etching silicon, the Applied Centris AdvantEdge™ Mesa™ system features eight process chambers for high wafer output and proprietary system intelligence software to assure every process on every chamber precisely matches. The system also saves on power, water and gas consumption, helping customers to lower operating costs and support their sustainable manufacturing initiatives. Chip manufacturers are also beginning to employ 3D architectures in advance memory chips to provide higher-density storage capacity. These structures require the precise etching of exceptionally deep and narrow structures. To meet this industry requirement, Applied offers its Applied Centura AvatarTM dielectric etch system that can etch holes and trenches up to 80:1 depth-to-width aspect ratios. Also for 3D chip manufacturing, the Applied Centura Silvia® system is specifically designed for etching small, deep holes for TSV applications.

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Rapid Thermal Processing
RTP is a process in which a wafer is subjected to rapid bursts of intense heat that can take the wafer from room temperature to more than 1,000 degrees Celsius in less than 10 seconds. A rapid thermal process is used mainly for annealing, which modifies the properties of deposited films. The Applied Centura Radiance®Plus and Applied Vantage RadOx™ RTP systems feature advanced RTP technology with differing platform designs. While the multi-chamber Centura platform offers exceptional process flexibility, the streamlined two-chamber Vantage platform is designed for dedicated high-volume manufacturing. These single-wafer RTP systems are also used for growing high quality oxide and oxynitride films, deposition steps that traditional large batch furnaces can no longer achieve with the necessary precision and control.
Applied’s latest RTP systems address the critical need for controlling wafer temperature to increase chip performance and yield. The laser-based Applied Vantage Astra™ millisecond anneal system abruptly raises the surface temperature of the wafer locally to modify material properties at the atomic level. The Applied Vantage Vulcan system, the first RTP system to heat the wafer entirely from the backside, brings a new level of precision and control to the anneal process, allowing chipmakers to produce more high performance devices per wafer.
Ion Implantation
Ion implantation is a key technology for forming transistors and is used many times during chip fabrication. During ion implantation, wafers are bombarded by a beam of electrically-charged ions, called dopants, which change the electrical properties of the exposed surface films. These dopants are accelerated to an energy that permits them to penetrate the substrate at a precise quantity and depth. Dopant concentration is determined by controlling the number of ions in the beam and the number of times the wafer passes through the beam; the depth of the dopants is determined by the energy of beam. Ion implantation systems may also be used in other areas of IC manufacturing to modify the material properties of the semiconductor devices, as well as in manufacturing crystalline-silicon solar cells.
Applied offers a line of single-wafer ion implantation equipment that covers the entire energy and current range required to manufacture advanced devices. The VIISta 3000XP implanter delivers the angle precision required for advanced high-energy applications, while the VIISta 900XP implanter provides medium current precision doping. The VIISta PLAD implanter enables manufacturers to rapidly implant high dopant concentrations over the entire wafer using a low-energy process that preserves sensitive circuit features in next-generation devices. The VIISta Trident high current ion implanter provides the precise dose and angle control needed for advanced transistor structures.
Chemical Mechanical Planarization
The CMP process removes material from a wafer to create a flat (planarized) surface. This process allows subsequent photolithography patterning and material deposition steps to occur with greater accuracy, resulting in more highly uniform film layers with minimal thickness variations. Applied has led the industry with its 300mm Applied Reflexion® LK system, with features such as integrated cleaning, film measurement and process control capabilities. Applied’s latest CMP product, the Applied Reflexion GT system, has an innovative dual-wafer design that increases performance while lowering system cost of ownership in fabricating copper interconnects and tungsten contacts.

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Metrology and Wafer Inspection
Applied offers several products for measuring features and inspecting defects on the wafer during various stages of the fabrication process. These systems enable customers to characterize and control critical dimension (CD) and defect issues, especially at advanced generation technology nodes.
Critical Dimension and Defect Review Scanning Electron Microscopes (CD-SEMs and DR-SEMs) — Scanning electron microscopes (SEMs) use an electron beam to form images of microscopic features of a patterned wafer at extremely high magnification. Applied’s SEM products provide customers with full automation, along with the high accuracy and sensitivity needed for measuring very small CDs. The Applied VeritySEM® 4i+ metrology system uses proprietary SEM imaging technology to enable precise control of the lithography and etching processes, measuring CDs at a precision of less than 0.3nm. Applied’s OPC Check™ software for the VeritySEM system performs automated qualification of OPC-based (optical proximity correction) chip designs, significantly reducing mask verification time over conventional manual methods.
DR-SEMs review defects on the wafer (such as particles, scratches or residues) that are first located by a defect detection system and then classify the defects to identify their source. The high-throughput, fully automatic Applied SEMVision™ Defect Analysis products enable customers to use this technology as an integral part of their production lines to analyze critical defects with industry-leading throughput. In 2013, Applied introduced the latest generation of defect review and classification technology with its Applied SEMVision G6 system, designed to accelerate time-to-yield for leading-edge chip manufacturing at the 1X-nm node and beyond. The system delivers a 30% resolution improvement over the previous SEMVision generation, making it the highest available in the industry.
Wafer Inspection — Using deep ultraviolet (DUV) laser-based technology, defects can be detected on patterned wafers (wafers with printed circuit images) as they move between processing steps. Defects include particles, open circuit lines, and shorts between lines. The Applied UVision® 5 wafer inspection system detects yield-limiting defects in the critical patterning layers of logic and memory devices.
Mask Making
Masks are used by photolithography systems to transfer microscopic circuit designs onto wafers. Since an imperfection in a mask may be replicated on the wafer, the mask must be virtually defect-free. Applied provides systems for etching and inspecting masks.
Applied's Tetra™ line of systems has been used by mask makers worldwide to etch the majority of high-end masks over the last five years. The Applied Centura Tetra EUV (extreme ultraviolet) Advanced Reticle Etch system is an advanced etch tool for fabricating leading-edge masks at 22nm and below. The Applied Aera3™ Mask inspection system also addresses the challenges of detecting defects on 22nm masks, using sophisticated aerial imaging technology that allows users to immediately see how the pattern on the mask will appear on the wafer, revealing only the defects most likely to print and significantly reducing inspection time. These systems also address the challenge of fabricating emerging EUV lithography masks.

9


Applied Global Services Segment
The Applied Global Services segment encompasses services, products and integrated solutions to optimize equipment and fab performance and productivity. Leveraging the Company's experience with complex manufacturing technology and processes, skilled equipment and process engineers are deployed at or near customer sites in more than a dozen countries to support approximately 33,000 installed Applied semiconductor, display and solar manufacturing systems worldwide. Applied offers the following general types of services and products under the Applied Global Services segment:
Fab and Equipment Services — Applied's fab and equipment services are designed to help customers improve cost of ownership, process control and device performance. They include corrective and preventive maintenance programs, comprehensive spare parts packages, and consulting and advanced service offerings.
For example, Applied Performance Services offers customers comprehensive equipment support with performance-based pricing and predictable costs. This program includes Applied’s ExpertConnect remote diagnostic capability, providing specialized support around the clock. In addition, Applied FabVantage™ Consulting Services are delivered by teams of technology, equipment and engineering experts who provide key insights to help customers solve some of their most difficult manufacturing challenges. Applied’s TechEdge™ advanced service offerings combine equipment and engineering expertise with software and connectivity technologies to address manufacturing issues like excursion control and predictive maintenance.
Legacy Systems — Applied offers products to extend the performance and productive life of 200mm semiconductor fabs, including new and remanufactured 200mm equipment, system enhancements to lower cost of ownership and extend technology and fab transition services. Applied’s 200mm systems are available in production-proven technologies that provide productive, cost-effective manufacturing solutions for mainstream, as well as specialty processes including micro-electro-mechanical systems (MEMS), power transistors and image sensors.
Automation Systems — Applied offers automated factory-level and tool-level control software systems for semiconductor, display and solar manufacturing facilities. These enterprise solutions include manufacturing execution systems (MES) to automate the production of wafers, display and solar substrates; advanced process control systems; and scheduling and materials handling control systems.
Applied also offers computerized maintenance management systems, performance tracking, and modeling and simulation tools for improving asset utilization. Applied’s E3™ equipment engineering system solution, for example, integrates all critical equipment automation and process control components.
Display Segment
Applied’s products for manufacturing liquid crystal displays (LCDs), organic light-emitting diodes (OLEDs), and other display technologies for televisions, personal computers (PCs), tablets, smartphones, and other consumer-oriented devices are reported under its Display segment. While similarities exist between the technologies utilized in chipmaking and display fabrication, the most significant differences are in the size and composition of the substrate. Substrates used to manufacture display panels can be more than 120 times larger in area than 300mm wafers and are made of glass, while wafers used in semiconductor fabrication are made of silicon.
Applied supplies systems that process and test different glass substrate sizes. To meet consumer demand for larger, more cost-effective LCD TVs, Applied’s latest generation (Gen) 10 systems can process substrates sized at approximately 2.85 x 3.05 meters, with each substrate enabling the production of up to six 65-inch LCD TV screens.
Applied is also extending its core LCD technology to enable ultra-high resolution displays for next-generation smartphones, tablet PCs, and OLED TVs. These higher-performance displays are fabricated using newer materials such as low-temperature polysilicon (LTPS) and metal oxide films in the transistor layer of the panel to gain significantly faster switching speeds. Applied also offers its line of plasma-enhanced CVD (PECVD) systems for depositing LTPS films with the AKT-15K PX, AKT-25K PX, and AKT-55K PX systems. These CVD systems are available for a range of display substrate sizes to enable manufacturers to achieve economies of scale.


10


Applied also offers technology for fabricating advanced metal oxide-based transistors in displays. The AKT-PiVot™ PVD system, which features rotary cathode array technology, deposits indium gallium zinc oxide (IZGO) film to form the transistor channel. The AKT-PECVD system is used to deposit the dielectric film needed to insulate the transistor gate. Together, these systems offer a cost-effective solution for producing smaller, faster switching pixels to create higher resolution screens.
For manufacturing the color filter of LCD panels, Applied offers the AKT-NEW ARISTO™ system for transparent conductive oxide film deposition. Providing customers with new levels of productivity and flexibility, the Applied AKT-AristoTwin system is used for manufacturing touch-enabled displays. The system's two independent processing tracks achieve more capacity with a smaller footprint than traditional platforms.
To complement these systems, Applied also offers a line of electron beam array test (EBT) systems for testing substrates during production for defective pixels and other imperfections, including the Gen-10 AKT-90K EBT product. Featuring one of the industry’s fastest and most accurate pixel test technologies, the EBT systems’ non-contact test technology enables the safe testing of thin film transistors (TFTs) used in high-value TV panels without damaging or scratching the display.
Energy and Environmental Solutions Segment
The Energy and Environmental Solutions segment includes systems for manufacturing wafer-based crystalline silicon (c-Si) cells and modules. These systems are designed to increase the conversion efficiency and yields of solar PV devices in order to help reduce the cost per watt of solar generated electricity. The segment also includes high-throughput roll-to-roll, vacuum web coating systems for high-performance deposition of a range of films on flexible substrates for flexible electronics, packaging and other applications.
The solar equipment products offered under this segment include:
Cell manufacturing — Applied offers a comprehensive line of automated metallization and test systems for c-Si cell manufacturing. These systems include high-precision printing capability for increasing the efficiency of c-Si solar cells.
Wafer manufacturing — Applied’s precision wafering systems crop and square silicon ingots into bricks and slice silicon bricks into thin wafers. These wafers are subsequently processed by cell manufacturing systems to create the PV cells used in making c-Si solar panels.
Ion implantation — Applied offers ion implantation technology for c-Si cell manufacturing, a process that enables the volume production of high efficiency c-Si cells with better yield and reduced cost.


11


Backlog
Applied manufactures systems to meet demand represented by order backlog and customer commitments. 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.
Backlog by reportable segment as of October 27, 2013 and October 28, 2012 was as follows:
 
 
2013
 
2012
 
 
 
 
 
 
 
 
 
(In millions, except percentages)
Silicon Systems Group
$
1,295

 
55%
 
$
705

 
44%
Applied Global Services
591

 
25%
 
580

 
36%
Display
361

 
15%
 
206

 
13%
Energy and Environmental Solutions
125

 
5%
 
115

 
7%
Total
$
2,372

 
100%
 
$
1,606

 
100%
 
Applied’s backlog on any particular date 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. Customers may delay delivery of products or cancel orders prior to shipment, subject to possible cancellation penalties. Delays in delivery schedules and/or a reduction of backlog during any particular period could have a material adverse effect on Applied’s business and results of operations.
Manufacturing, Raw Materials and Supplies
Applied’s manufacturing activities consist primarily of assembly, test and integration of various proprietary and commercial parts, components and subassemblies (collectively, parts) that are used to manufacture systems. Applied has implemented a distributed manufacturing model under which manufacturing and supply chain activities are conducted in various countries, including the United States, Europe, Israel, Singapore, Taiwan, and other countries in Asia, and assembly of some systems is completed at customer sites. Applied uses numerous vendors, including contract manufacturers, to supply parts and assembly services for the manufacture and support of its products. Although Applied makes reasonable efforts to assure that parts are available from multiple qualified suppliers, this is not always possible. Accordingly, some key parts may be obtained from only a single supplier or a limited group of suppliers. Applied seeks to reduce costs and to lower the risks of manufacturing and service interruptions by: (1) selecting and qualifying alternate suppliers for key parts; (2) monitoring the financial condition of key suppliers; (3) maintaining appropriate inventories of key parts; (4) qualifying new parts on a timely basis; and (5) locating certain manufacturing operations in close proximity to suppliers and customers.
Research, Development and Engineering
Applied’s long-term growth strategy requires continued development of new products. The Company’s significant investment in research, development and engineering (RD&E) has generally enabled it to deliver new products and technologies before the emergence of strong demand, thus allowing customers to incorporate these products into their manufacturing plans at an early stage in the technology selection cycle. Applied works closely with its global customers to design systems and processes that meet their planned technical and production requirements. Product development and engineering organizations are located primarily in the United States, as well as in Europe, Israel, Taiwan, and China. In addition, Applied outsources certain RD&E activities, some of which are performed outside the United States, primarily in India. Process support and customer demonstration laboratories are located in the United States, China, Taiwan, Europe, and Israel.
Applied’s investments in RD&E for product development and engineering programs to create or improve products and technologies over the last three years were as follows: $1.3 billion (18 percent of net sales) in fiscal 2013, $1.2 billion (14 percent of net sales) in fiscal 2012, and $1.1 billion (11 percent of net sales) in fiscal 2011. Applied has spent an average of 14 percent of net sales in RD&E over the last five years. In addition to RD&E for specific product technologies, Applied maintains ongoing programs for automation control systems, materials research, and environmental control that are applicable to its products.

12


Marketing and Sales
Net sales by geographic region, determined by the location of customers' facilities to which products were shipped, were as follows:
 
 
2013
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions, except percentages)
Taiwan
$
2,640

 
35%
 
$
2,411

 
28%
 
$
2,093

 
20%
China
787

 
11%
 
783

 
9%
 
2,574

 
24%
Korea
924

 
12%
 
1,897

 
22%
 
1,263

 
12%
Japan
685

 
9%
 
704

 
8%
 
912

 
9%
Southeast Asia
320

 
4%
 
312

 
3%
 
592

 
5%
Asia Pacific
5,356

 
71%
 
6,107

 
70%
 
7,434

 
70%
United States
1,473

 
20%
 
1,749

 
20%
 
1,963

 
19%
Europe
680

 
9%
 
863

 
10%
 
1,120

 
11%
Total
$
7,509

 
100%
 
$
8,719

 
100%
 
$
10,517

 
100%

Because of the highly technical nature of its products, Applied markets and sells products worldwide almost entirely through a direct sales force. Approximately 80 percent of Applied’s fiscal 2013 net sales were to regions outside of the United States.
General economic conditions impact Applied’s business and financial results. From time to time, the markets in which products are sold experience weak economic conditions that may negatively impact sales. Applied’s business is usually not seasonal in nature, but it is highly cyclical, based on capital equipment investment by major semiconductor, flat panel display, solar PV and other manufacturers. Customers’ expenditures depend on many factors, including: anticipated market demand and pricing for semiconductors, display, solar cells and modules, and other substrates; the development of new technologies; customers’ factory utilization; capital resources and financing; government policies and incentives; and global and regional economic conditions.
Information on net sales to unaffiliated customers and long-lived assets attributable to Applied’s geographic regions is included in Note 16 of Notes to Consolidated Financial Statements. The following companies accounted for at least 10 percent of Applied’s net sales in 2013, 2012, and 2011, which were for products in multiple reportable segments.
 
 
2013
 
2012
 
2011
Taiwan Semiconductor Manufacturing Company Limited
27%
 
16%
 
10%
Samsung Electronics Co., Ltd.
13%
 
20%
 
12%
Intel Corporation
*
 
*
 
10%
 ________________________
*
Less than 10%.
Competition
The industries in which Applied operates are highly competitive and characterized by rapid technological change. Applied’s ability to compete generally depends on its ability to timely commercialize its technology, continually improve its products, and develop new products that meet constantly evolving customer requirements. Significant competitive factors include technical capability and differentiation, productivity and cost-effectiveness. The importance of these factors varies according to customers’ needs, including product mix and respective product requirements, applications, and the timing and circumstances of purchasing decisions. Substantial competition exists in all areas of Applied’s business. Competitors range from small companies that compete in a single region, which may benefit from policies and regulations that favor domestic companies, to global, diversified companies. Applied’s ability to compete requires a high level of investment in RD&E, marketing and sales, and global customer support activities. Management believes that many of Applied’s products have strong competitive positions.

13


The competitive environment for each segment is described below.
The semiconductor industry has been increasingly driven by consumer demand for lower-cost electronic products with increased capability. As a result, products within the Silicon Systems Group segment are subject to significant changes in customer requirements, including transitions to smaller dimensions, new materials and an increasing number of applications. While certain existing technologies may be adapted to new requirements, some applications create the need for an entirely different technological approach. The rapid pace of technological change can quickly diminish the value of current technologies and products and create opportunities for existing and new competitors. Applied offers a variety of technologically differentiated products that must continuously evolve to satisfy customers’ requirements in order to compete effectively. Applied allocates resources among its numerous product offerings and therefore may decide not to invest in an individual product to the same degree as competitors who specialize in fewer products. There are a number of competitors serving the semiconductor manufacturing equipment industry, with some offering a single product line and others offering multiple product lines. These competitors range from suppliers serving a single region to global, diversified companies. The competitive environment for the Silicon Systems Group in fiscal 2013 reflected continued investment in the semiconductor industry driven by capacity demand for mobile computing. Foundry customers led capacity additions for advanced technology nodes and were the primary drivers for net sales of the Silicon Systems Group in fiscal 2013.
Products and services within the Applied Global Services segment complement the Silicon Systems Group, Display, and Energy and Environmental Solutions segments’ products, in markets that are characterized by demanding worldwide service requirements and a diverse group of numerous competitors. To compete effectively, Applied offers products and services to improve tool performance, lower overall cost of ownership, and increase the productivity and energy efficiency of customers’ fab operations. Significant competitive factors include productivity, cost-effectiveness, and the level of technical service and support. The importance of these factors varies according to customers’ needs and the type of products or services offered. Industry conditions that affected Applied Global Services’ sales of spares and services in fiscal 2013 were principally semiconductor manufacturers' wafer starts and factory utilization rates.
Products in the Display segment are generally subject to strong competition from a number of major competitors primarily in Asia. Applied holds established market positions with its technically-differentiated LCD and OLED manufacturing solutions for PECVD, color filter PVD, PVD array, PVD touch panel, and TFT array testing, although its market position could change quickly due to customers' evolving requirements. The competitive environment for the Display segment in fiscal 2013 was characterized by a recovery in demand for TV manufacturing equipment compared to weak industry levels the prior year, while demand continued for equipment to make touch screen and high-end mobile devices. Important factors affecting the competitive position of Applied's Display products include: industry trends, Applied's ability to innovate and develop new products, and the extent to which Applied's products are technically-differentiated, as well as which customers within a highly concentrated customer base are making capital equipment investments and Applied's existing position at these customers.
Applied's products within the Energy and Environmental Solutions segment compete in several diverse market areas, including primarily the c-Si solar equipment market. The solar equipment market is characterized by significant pressure to reduce customers' overall production costs and improve performance. In fiscal 2013, while solar end-market demand continued to be robust as the industry further reduced manufacturing costs and made conversion efficiency improvements, enabling PV-generated electricity to reach parity with retail electricity rates in an increasing number of areas around the world, investment levels in capital equipment remained depressed. Global solar PV production capacity exceeds end-demand, resulting in a continued challenging environment and causing solar cell and wafering customers to defer purchases of new capacity to preserve capital. The rationalization of capacity will be an important factor in determining when supply and demand come back into balance. Adding to market uncertainty are international trade actions against Chinese solar manufacturers commenced in the U.S. and other regions that have resulted in the imposition of some import sanctions, with others still under consideration. With respect to its c-Si equipment products, Applied competes with a number of other companies, some of which have significant experience with solar applications and some of which are new entrants to the solar equipment market. The solar industry downturn has affected many of Applied's competitors and customers adversely, with some companies going through extensive financial and organizational restructuring, and in some instances ceasing operations.

14


Patents and Licenses
Management believes that Applied’s competitive position significantly depends upon the Company’s research, development, engineering, manufacturing and marketing capabilities, and not just on its patent position. However, protection of Applied’s technological assets through enforcement of its intellectual property rights, including patents, is important. Therefore, Applied’s practice is to file patent applications in the United States and other countries for inventions that Applied considers significant. Applied has approximately 10,400 patents in the United States and other countries, and additional applications are pending for new inventions. Although Applied does not consider its business materially dependent upon any one patent, the rights of Applied and the products made and sold under its patents, taken as a whole, are a significant element of Applied’s business. In addition to patents, Applied also possesses other intellectual property, including trademarks, know-how, trade secrets, and copyrights.
Applied enters into patent and technology licensing agreements with other companies when management determines that it is in Applied’s best interest to do so. Applied pays royalties under existing patent license agreements for the use, in several of its products, of certain patented technologies. Applied also receives royalties from licenses granted to third parties. Royalties received from or paid to third parties have not been, and are not expected to be, material to Applied’s consolidated results of operations.
In the normal course of business, Applied periodically receives and makes inquiries regarding possible patent infringement. In responding to such inquiries, it may become necessary or useful for Applied to obtain or grant licenses or other rights. However, there can be no assurance that such licenses or rights will be available to Applied on commercially reasonable terms, or at all. If Applied is not able to resolve or settle claims, obtain necessary licenses on commercially reasonable terms, and/or successfully prosecute or defend its position, Applied’s business, financial condition and results of operations could be materially and adversely affected.
Environmental Matters
Applied maintains a number of environmental, health, and safety programs that are primarily preventive in nature. As part of these programs, Applied regularly monitors ongoing compliance with applicable laws and regulations. In addition, Applied has trained personnel to conduct investigations of any environmental, health, or safety incidents, including, but not limited to, spills, releases, or possible contamination.
Compliance with federal, state and local environmental, health, and safety provisions, including, but not limited to, those regulating the discharge of materials into the environment, remedial agreements, and other actions relating to the environment have not had, and are not expected to have, a material effect on Applied’s capital expenditures, competitive position, financial condition, or results of operations.
The most recent report on Applied’s environmental, health, and safety activities can be found in the Company’s latest Citizenship Report on its website at http://www.appliedmaterials.com/about/cr/sustainability. The Citizenship Report is updated periodically. This website address is intended to be an inactive textual reference only. None of the information on, or accessible through, Applied’s website is part of this Form 10-K or is incorporated by reference herein.
Employees
At October 27, 2013, Applied employed approximately 13,700 regular employees and 800 temporary employees. In the high-technology industry, competition for highly-skilled employees is intense. Applied believes that its future success is highly dependent upon its continued ability to attract, retain, and motivate qualified employees. There can be no assurance that Applied will be able to attract, hire, assimilate, motivate, and retain a sufficient number of qualified employees.

15


Executive Officers of the Registrant
The following table and notes set forth information about Applied’s executive officers as of October 27, 2013:
 
Name of Individual
Position
Michael R. Splinter(1)
Executive Chairman of the Board of Directors
Gary E. Dickerson(2)
President, Chief Executive Officer
Randhir Thakur(3)
Executive Vice President, General Manager Silicon Systems
Robert J. Halliday(4)
Senior Vice President, Chief Financial Officer
Mary Humiston(5)
Senior Vice President, Human Resources, Communications and Public Affairs
Thomas F. Larkins(6)
Senior Vice President, General Counsel and Corporate Secretary
Omkaram Nalamasu(7)
Senior Vice President, Chief Technology Officer
Ali Salehpour(8)
Senior Vice President, General Manager Applied Global Services and Growth Markets
Jay Kerley(9)
Group Vice President, Chief Information Officer
Charles Read(10)
Corporate Vice President, Corporate Controller and Chief Accounting Officer
(1)
Mr. Splinter, age 63, has been Executive Chairman of the Board of Directors of Applied since September 2013 and Chairman of the Board of Directors since March 2009. Mr. Splinter served as Chief Executive Officer of Applied from April 2003 until September 2013, and as President from April 2003 to June 2012. Prior to joining Applied, Mr. Splinter was an executive at Intel Corporation, a manufacturer of chips and computer, networking and communications products, where he held a number of positions, including Executive Vice President and Director of Sales and Marketing, and Executive Vice President and General Manager of the Technology and Manufacturing Group.
(2)
Mr. Dickerson, age 56, has been Chief Executive Officer and member of the Board of Directors of Applied since September 2013. Mr. Dickerson was named President of Applied in June 2012, after joining Applied following its acquisition of Varian in November 2011. Mr. Dickerson had served as Chief Executive Officer and a director of Varian since 2004. Prior to joining Varian in 2004, Mr. Dickerson served 18 years with KLA-Tencor Corporation (KLA-Tencor), a supplier of process control and yield management solutions for the semiconductor and related industries, where he held a variety of operations and product development roles before being appointed Chief Operating Officer in 1999 and then President and Chief Operating Officer in 2002. Mr. Dickerson started his semiconductor career in manufacturing and engineering management at General Motors' Delco Electronics Division and then AT&T, Inc.
(3)
Dr. Thakur, age 51, has been Executive Vice President, General Manager Silicon Systems Group since December 2009, after serving as Senior Vice President, General Manager Silicon Systems Group since October 2009. Previously, he was Senior Vice President, General Manager, Thin Film Solar and Display. He was appointed Senior Vice President, General Manager, Strategic Operations when he rejoined Applied in May 2008. He previously was with Applied from 2000 to 2005 in a variety of executive roles including Group Vice President, General Manager for Front End Products. From September 2005 to May 2008, Dr. Thakur served as Executive Vice President of Technology and Fab Operations at SanDisk Corporation, a data storage solutions manufacturer, and as head of SanDisk’s worldwide operations.
(4)
Mr. Halliday, age 59, has been Senior Vice President, Chief Financial Officer of Applied since February 2013. Mr. Halliday previously served as a group vice president and general manager in Applied’s Silicon Systems Group segment following the completion of Applied’s acquisition of Varian in November 2011. Mr. Halliday had served as Chief Financial Officer of Varian since 2001 and as an Executive Vice President of Varian since 2004. Mr. Halliday served as Varian's Treasurer from November 2002 to October 2006 and from February 2009 to February 2010.
(5)
Ms. Humiston, age 48, has been Senior Vice President, Human Resources, Communications and Public Affairs since February 2013. She served as Senior Vice President, Global Human Resources from July 2011 to February 2013; Group Vice President, Global Human Resources from July 2010 to July 2011; and Corporate Vice President, Global Human Resources from June 2009 to June 2010. Prior to June 2009, she served as the Corporate Vice President of Human Resources for both the Energy and Environmental Solutions and Display groups. Prior to joining Applied, Ms. Humiston was Vice President of Human Resources at Honeywell International Inc. (Honeywell), a diversified global technology and manufacturing company, from October 2002 to June 2008, with responsibility for various corporate and international organizations.

16



(6)
Mr. Larkins, age 52, has been Senior Vice President, General Counsel and Corporate Secretary of Applied since November 2012. Previously, Mr. Larkins was employed by Honeywell, where he was Vice President, Corporate Secretary and Deputy General Counsel from 2002 until joining Applied.  Mr. Larkins served in various other positions at Honeywell (formerly AlliedSignal) after joining the company in 1997.
(7)
Dr. Nalamasu, age 55, has been Senior Vice President, Chief Technology Officer since June 2013, and had served as Group Vice President, Chief Technology Officer from January 2012 to June 2013, and as Corporate Vice President, Chief Technology Officer from January 2011 to January 2012. Upon joining Applied in June 2006 until January 2011, Dr. Nalamasu was an Appointed Vice President of Research and served as Deputy Chief Technology Officer and General Manager for the Advanced Technologies Group. From 2002 to 2006, Dr. Nalamasu was a NYSTAR distinguished professor of Materials Science and Engineering at Rensselaer Polytechnic Institute, where he also served as Vice President of Research from 2005 to 2006.
(8)
Mr. Salehpour, age 52, has been Senior Vice President, General Manager Applied Global Services and Growth Markets since September 2013. He previously served as Group Vice President, General Manager Energy and Environmental Solutions and Display Business Groups, since joining Applied in November 2012. Prior to Applied, Mr. Salehpour worked at KLA-Tencor for 16 years, where he served most recently as Senior Vice President and General Manager SFS-ADE Divisions from 2008.
(9)
Mr. Kerley, age 47, has been Group Vice President, Chief Information Officer since March 2013. Mr. Kerley joined Applied in 2006, and has served as Chief Information Officer since October 2011. Mr. Kerley has more than 20 years of information technology (IT) experience in various industries, leading IT transformation and globalization.
(10)
Mr. Read, age 47, has been Corporate Vice President, Corporate Controller and Chief Accounting Officer of Applied since joining the Company in September 2013. Prior to Applied, Mr. Read worked at Brocade Communications Systems, Inc., a provider of semiconductor and software-based network solutions, since October 2002, where he most recently served as Vice President, Corporate Controller. Prior to Brocade, Mr. Read worked at KPMG LLP, an audit, tax and advisory firm, from 1996 to 2002.
Available Information
Applied’s website is http://www.appliedmaterials.com. Applied makes available free of charge, on or through its website, its annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with, or furnishing them to, the SEC. This website address is intended to be an inactive textual reference only. None of the information on, or accessible through, Applied’s website is part of this Form 10-K or is incorporated by reference herein.
 

17


Item 1A:
Risk Factors
The following factors could materially and adversely affect Applied’s business, financial condition or results of operations and cause reputational harm, and they should be carefully considered in evaluating the Company and its business, in addition to other information presented elsewhere in this report.
The industries that Applied serves are volatile and difficult to predict.
As a supplier to the global semiconductor, flat panel display, and solar industries, Applied is subject to business cycles, the timing, length and volatility of which can be difficult to predict and which vary by reportable segment. These industries historically have been cyclical due to sudden changes in customers’ requirements for new manufacturing capacity and advanced technology, which depend in part on customers’ capacity utilization, production volumes, access to affordable capital, end-use demand, consumer buying patterns, and inventory levels relative to demand, as well as the rate of technology transitions and general economic conditions. These changes have affected the timing and amounts of customers’ purchases and investments in technology, and continue to affect Applied’s orders, net sales, operating expenses and net income.
To meet rapidly changing demand in the industries it serves, Applied must accurately forecast demand and effectively manage its resources and production capacity for each of its segments as well as across multiple segments, and may incur unexpected or additional costs to align its business operations. During periods of increasing demand for its products, Applied must have sufficient manufacturing capacity and inventory to meet customer demand; effectively manage its supply chain; attract, retain and motivate a sufficient number of qualified employees; and continue to control costs. During periods of decreasing demand, Applied must reduce costs and align its cost structure with prevailing market conditions; effectively manage its supply chain; and motivate and retain key employees.
Applied is exposed to risks associated with the uncertain global economy.
Uncertain global economic conditions and weak or moderate growth in China, Europe, and the United States, along with uncertainties in the financial markets, national debt and fiscal concerns in various regions, and government austerity measures, are posing challenges to the industries in which Applied operates. The markets for semiconductors and flat panel displays in particular depend largely on consumer spending, while the solar market depends in part on government incentives and the availability of financing for PV installations. Economic uncertainty and related factors exacerbate negative trends in business and consumer spending and may cause certain Applied customers to push out, cancel, or refrain from placing orders for equipment or services, which may in turn reduce Applied's net sales, reduce backlog, and affect Applied’s ability to convert backlog to sales. Uncertain market conditions, difficulties in obtaining capital, or reduced profitability may also cause some customers to scale back operations, exit businesses, merge with other manufacturers, or file for bankruptcy protection and potentially cease operations, which can also result in lower sales and/or additional inventory or bad debt expense for Applied. These conditions may similarly affect key suppliers, which could impair their ability to deliver parts and result in delays for Applied’s products or added costs. In addition, these conditions may lead to strategic alliances by, or consolidation of, other equipment manufacturers, which could adversely affect Applied’s ability to compete effectively.
Uncertainty about future economic and industry conditions also makes it more challenging for Applied to forecast its operating results, make business decisions, and identify and prioritize the risks that may affect its businesses, sources and uses of cash, financial condition and results of operations. Applied may be required to implement additional cost reduction efforts, including restructuring activities, which may adversely affect Applied’s ability to capitalize on opportunities. In addition, Applied maintains an investment portfolio that is subject to general credit, liquidity, foreign exchange, market and interest rate risks. The risks to Applied’s investment portfolio may be exacerbated if financial market conditions deteriorate and, as a result, the value and liquidity of the investment portfolio, as well as returns on pension assets, could be negatively impacted and lead to impairment charges. Applied also maintains cash balances in various bank accounts globally in order to fund normal operations. If any of these financial institutions becomes insolvent, it could limit Applied’s ability to access cash in the affected accounts.

18


Applied is exposed to risks as a result of ongoing changes in the various industries in which it operates.
The global semiconductor, flat panel display, solar and related industries in which Applied operates are characterized by ongoing changes affecting some or all of these industries that impact demand for and/or the profitability of Applied's products, including:
the nature, timing and degree of visibility of changes in end demand for electronic products, including those related to fluctuations in consumer buying patterns tied to seasonality or the introduction of new products, and the effects of these changes on foundry and other customers’ businesses and, in turn, on demand for Applied’s products;
increasing capital requirements for building and operating new fabrication plants and customers’ ability to raise the necessary capital;
differences in growth rates among the semiconductor, display and solar industries;
the increasing importance of establishing, improving and maintaining strong relationships with customers;
the increasing cost and complexity for customers to move from product design to volume manufacturing, which may slow the adoption rate of new manufacturing technology;
the need to continually reduce the total cost of manufacturing system ownership, due in part to greater demand for lower-cost consumer electronics compared to business information technology spending;
the heightened importance to customers of system reliability and productivity and the effect on demand for fabrication systems as a result of their increasing productivity, device yield and reliability;
manufacturers’ ability to reconfigure and re-use fabrication systems;
the increasing importance of, and difficulties in, developing products with sufficient differentiation to influence customers’ purchasing decisions;
requirements for shorter cycle times for the development, manufacture and installation of manufacturing equipment;
price and performance trends for semiconductor devices, displays and solar PVs, and the corresponding effect on demand for such products;
the increasing importance of the availability of spare parts to maximize the time that customers’ systems are available for production;
the increasing role for and complexity of software in Applied products; and
the increasing focus on reducing energy usage and improving the environmental impact and sustainability associated with manufacturing operations.
Applied is exposed to risks as a result of ongoing changes specific to the semiconductor industry.
The largest proportion of Applied’s consolidated net sales and profitability has been and continues to be derived from sales of manufacturing equipment by the Silicon Systems Group to the global semiconductor industry. In addition, a majority of the revenues of Applied Global Services is from sales of service products to semiconductor manufacturers. The semiconductor industry is characterized by ongoing changes particular to this industry that impact demand for and/or the profitability of Applied's semiconductor equipment and service products, including:
the increasing cost of research and development due to many factors, including: decreasing linewidths on a chip, the use of new materials, new and more complex device structures, more applications and process steps, increasing chip design costs, and the increasing cost and complexity of integrated manufacturing processes;
the need to reduce product development time, despite the increasing difficulty of technical challenges;
the growing number of types and varieties of semiconductors and number of applications across multiple substrate sizes;
the increasing cost and complexity for semiconductor manufacturers to move more technically advanced capability and smaller linewidths to volume manufacturing, and the resulting impact on the rates of technology transition and investment in capital equipment;
challenges in generating organic growth given semiconductor manufacturers’ levels of capital expenditures and the allocation of capital investment to market segments that Applied does not serve, such as lithography, or segments where Applied's products have lower relative market presence;
the importance of increasing market positions in under-penetrated segments, such as etch and inspection;

19


the growing demand for mobility products, such as tablets and smartphones, and corresponding industry investment in devices that require fewer Applied products to manufacture, such as NAND flash memory, than are needed to make devices used in other applications, such as DRAM for personal computers;
the adoption of cloud-based memory storage particularly for mobility products, and the associated inhibiting effect on NAND bit growth rates;
the increasing frequency and complexity of technology transitions and inflections, such as 3-D transistors and advanced interconnects, and Applied’s ability to timely and effectively anticipate and adapt to these changes;
shorter cycle times between order placements by customers (particularly foundries) and product shipment, which may lead to inventory write-offs and manufacturing inefficiencies that decrease gross margin;
competitive factors that make it difficult to enhance position, including challenges in securing development-tool-of-record (DTOR) and production-tool-of-record (PTOR) positions with customers;
shifts in sourcing strategies by computer and electronics companies that impact the equipment requirements of Applied's foundry customers;
the concentration of new wafer starts in Korea and Taiwan, where Applied’s service penetration and service-revenue-per-wafer-start have been lower than in other regions; and
the increasing fragmentation of semiconductor markets, leading certain markets to become too small to support the cost of a new fabrication plant, while others require less technologically advanced products.

Applied must accurately forecast, and allocate appropriate resources and investment towards addressing, key technology changes and inflections, such as the transition to 20nm devices, in order to enable opportunities for gains. In addition, the industry transition from 300mm to 450mm wafers presents opportunities as well as risks and uncertainties, including those related to cost, technical complexity, timing, and the resulting effect on demand for manufacturing equipment and services. Several semiconductor customers have invested in another wafer fabrication equipment supplier to help fund development of 450mm and other new technologies, which may influence the timing of technology transitions, funding allocations or other matters.
Applied is exposed to risks as a result of ongoing changes specific to the flat panel display industry.
The global flat panel display industry historically has experienced considerable volatility in capital equipment investment levels, due in part to the limited number of display manufacturers, the concentrated nature of end-use applications, excess production capacity relative to end-use demand, and panel manufacturer profitability. Industry growth has depended primarily on consumer demand for increasingly larger and more advanced TVs and, more recently, on demand for smartphones and other mobile devices, which demand is highly sensitive to cost and improvements in technologies and features. The display industry is characterized by ongoing changes particular to this industry that impact demand for and/or the profitability of Applied's display products, including:
the timing and extent of an expansion of manufacturing facilities in China by Chinese display manufacturers and manufacturers from other countries, and the ability of non-Chinese manufacturers to obtain government approvals on a timely basis;
the rate of transition to larger substrate sizes for TVs and the resulting effect on capital intensity in the industry and on Applied’s product differentiation, gross margin and return on investment;
the importance of new types of display technologies, such as low temperature polysilicon (LTPS), organic light-emitting diode (OLED) and metal oxide, and new touch panel films, such as anti-reflective and anti-fingerprint; and
uncertainty with respect to future display technology end-use applications and growth drivers.

20


Applied is exposed to risks as a result of ongoing changes specific to the solar industry.
Investment levels in capital equipment for the global solar industry have experienced considerable volatility. In recent years, global solar PV production capacity has exceeded end-use demand, causing customers to significantly reduce or delay investments in manufacturing capacity and new technology, or to cease operations. The global solar market is characterized by ongoing changes specific to this industry that impact demand for and/or the profitability of Applied’s solar products, including:
the need to continually decrease the cost-per-watt of electricity produced by solar PV products to at or below grid parity in more global regions by, among other things, reducing operating costs and increasing throughputs for solar PV manufacturing, and improving the conversion efficiency of solar PVs;
the variability and uncertainty of government energy policies and their effect in influencing the rate of growth of the solar PV market, including the availability and amount of incentives for solar power such as tax credits, feed-in tariffs, rebates, renewable portfolio standards that require electricity providers to sell a targeted amount of energy from renewable sources, and goals for solar installations on government facilities;
the number of solar PV manufacturers and amount of global production capacity for solar PVs, primarily in China;
the filing of regulatory unfair trade proceedings against solar PVs from China, where most of Applied’s solar equipment sales are concentrated, which has resulted in the assessment of duties on solar cells and modules imported from China and led to other trade-related conflicts and outcomes;
the varying levels of operating and industry experience among solar PV manufacturers and the resulting differences in the nature and extent of customer support services requested from Applied;
challenges associated with marketing and selling manufacturing equipment and services to a diverse and diffuse customer base;
the growth of market segments in which Applied does not participate, such as passivation and furnaces;
the availability and condition of used solar equipment, which impacts demand for new equipment;
complexities associated with government-affiliated entities as customers, for example in China;
the financial condition of solar PV customers and their access to affordable financing and capital; and
solar panel manufacturing overcapacity, which has led to weak industry operating performance and outlooks, deterioration of the solar equipment market, and a worsening of the financial condition of certain customers.
Applied must continually innovate, commercialize its products, and adapt its business and product offerings to respond to competition and rapid technological changes.
As Applied operates in a highly competitive environment in which innovation is critical, its future success depends on many factors, including the effective commercialization and customer acceptance of its equipment, services and related products. In addition, Applied must successfully execute its growth strategy, including enhancing its presence in existing markets, expanding into related markets, cultivating new markets and exceeding industry growth rates, while constantly improving its operational performance. The development, introduction and support of a broadening set of products in more collaborative, geographically diverse, open and varied competitive environments have grown more complex and expensive over time. Furthermore, new or improved products may entail higher costs and reduced profits. Applied’s performance may be adversely affected if it does not timely, cost-effectively and successfully:
identify and address technology inflections, market changes, new applications, customer requirements and end-use demand;
develop new products (including disruptive technologies), improve and/or develop new applications for existing products, and adapt similar products for use by customers in different applications and/or markets with varying technical requirements;
differentiate its products from those of competitors and any disruptive technologies, meet customers’ performance specifications, appropriately price products, and achieve market acceptance;
maintain operating flexibility to enable different responses to different markets, customers and applications;
enhance its worldwide operations across all business segments to reduce cycle time, enable continuous quality improvement, reduce costs, and enhance design for manufacturability and serviceability;
focus on product development and sales and marketing strategies that address customers' high value problems and foster strong customer relationships;

21


allocate resources, including people and R&D funding, among Applied’s products and between the development of new products and the enhancement of existing products, as most appropriate and effective for future growth;
reduce the cost and improve the productivity of capital invested in R&D activities;
accurately forecast demand, work with suppliers and meet production schedules for its products;
improve its manufacturing processes and achieve cost efficiencies across product offerings;
adapt to changes in value offered by companies in different parts of the supply chain;
qualify products for evaluation and, in turn, volume manufacturing with its customers; and
implement changes in its design engineering methodology, including those that enable reduction of material costs and cycle time, greater commonality of platforms and types of parts used in different systems, greater effectiveness of product life cycle management, and reduced energy usage and environmental impact.
Applied is exposed to risks associated with a highly concentrated customer base.
Applied’s semiconductor customer base historically has been, and is becoming even more, highly concentrated as a result of economic and industry conditions. In fiscal 2013, three semiconductor manufacturers accounted for approximately 65 percent of Silicon Systems Group net sales and two customers accounted for 40 percent of Applied’s consolidated net sales. Applied’s display customer base is also highly concentrated, while concentration within Applied’s solar customer base varies depending on the product line but is increasing due to challenging industry conditions. Applied’s customer base is also geographically-concentrated. See Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for tabular presentations of net sales by geographic region.
In addition, certain customers have experienced significant ownership or management changes, consolidated with other manufacturers, outsourced manufacturing activities, or engaged in collaboration or cooperation arrangements with other manufacturers. Customers have entered into strategic alliances or industry consortia that have increased the influence of key industry participants in technology decisions made by their partners. Also, certain customers are making an increasingly greater percentage of their respective industry’s capital equipment investments. Further, claims or litigation involving key industry participants have resulted and may continue to result in changes in their sourcing strategies and other outcomes. In this environment, contracts or orders from a relatively limited number of manufacturers have accounted for, and are expected to continue to account for, a substantial portion of Applied’s business. The mix and type of customers, and sales to any single customer, may vary significantly from quarter to quarter and from year to year. If customers do not place orders, or they substantially reduce, delay or cancel orders, Applied may not be able to replace the business. As Applied’s products are configured to customer specifications, changing, rescheduling or canceling orders may result in significant, non-recoverable costs. Major customers may also seek, and on occasion receive, pricing, payment, intellectual property-related, or other commercial terms that are less favorable to Applied.
Applied is exposed to the risks of operating a global business.
In fiscal 2013, approximately 80 percent of Applied’s net sales were to customers in regions outside the United States. Moreover, China now represents the largest market for various electronic products, such as TVs, PCs, and smartphones. Certain of Applied’s R&D and manufacturing facilities, as well as suppliers to Applied, are also located outside the United States, including in Singapore, Taiwan, China, Korea, Israel, Germany and Italy. Applied is also expanding its business and operations in new countries. The global nature of Applied’s business and operations, combined with the need to continually improve the Company’s operating cost structure, presents challenges, including but not limited to those arising from:
varying regional and geopolitical business conditions and demands;
political and social attitudes, laws, rules, regulations and policies within countries that favor domestic companies over non-domestic companies, including customer- or government-supported efforts to promote the development and growth of local competitors;
customer- or government-supported efforts to influence Applied to conduct more of its operations and sourcing in a particular country, such as Korea and China;
variations among, and changes in, local, regional, national or international laws and regulations (including intellectual property, labor, tax, and import/export laws), as well as the interpretation and application of such laws and regulations;
global trade issues, including those related to the interpretation and application of import and export licenses, as well as international trade disputes;

22


positions taken by governmental agencies regarding possible national commercial and/or security issues posed by international business operations;
fluctuating raw material, commodity, energy and shipping costs or shipping delays;
challenges associated with managing more geographically diverse operations and projects, which require an effective organizational structure and appropriate business processes, procedures and controls;
a more diverse workforce with different experience levels, cultures, customs, business practices and worker expectations;
variations in the ability to develop relationships with local customers, suppliers and governments;
fluctuations in interest rates and currency exchange rates, including the relative strength or weakness of the U.S. dollar against the Japanese yen, euro, Taiwanese dollar, Israeli shekel or Chinese yuan;
the need to provide sufficient levels of technical support in different locations around the world;
political instability, natural disasters (such as earthquakes, floods or storms), pandemics, social unrest, terrorism or acts of war in locations where Applied has operations, suppliers or sales, or that may influence the value chain of the industries that Applied serves;
the need for an effective business continuity plan if a disaster or other event occurs that could disrupt business operations;
the need to regularly reassess the size, capability and location of global infrastructure and make appropriate changes;
cultural and language differences;
difficulties and uncertainties associated with the entry into new countries;
hiring and integration of an increasing number of new workers, including in countries such as India and China;
the increasing need for the workforce to be more mobile and work in or travel to different regions;
uncertainties with respect to economic growth rates in various countries; and
uncertainties with respect to growth rates for the manufacture and sale of semiconductors, displays and solar PVs in the developing economies of certain countries.
Many of these challenges are present in China and Korea, which are experiencing significant growth of customers, suppliers and competitors to Applied. Applied further believes that China and Korea present large potential markets for its products and opportunity for growth over the long term, although at lower projected levels of profitability and margins for certain products than historically have been achieved in other regions.
Applied is exposed to risks associated with business combinations, acquisitions and strategic investments.
Applied has made, and in the future may make, acquisitions of or investments in companies, technologies or products in existing, related or new markets for Applied. Business combinations, acquisitions and investments involve numerous risks that vary depending on their scale and nature, including but not limited to:
diversion of management’s attention from other operational matters;
contractual restrictions on the conduct of Applied’s business during the pendency of a proposed transaction;
inability to complete proposed transactions as anticipated or at all and any ensuing obligation to pay a termination fee;
the failure of acquired businesses to meet or exceed expected returns;
requirements imposed by government regulators in connection with their review of a transaction, which may include, among other things, divestitures and/or restrictions on the conduct of Applied’s existing business or the acquired business;
ineffective integration of operations, systems, technologies, products or employees, which can impact the ability to realize anticipated synergies or other benefits;


23


failure to commercialize purchased technologies;
initial dependence on unfamiliar supply chains or relatively small supply partners;
inability to capitalize on characteristics of new markets that may be significantly different from Applied’s existing markets and where competitors may have stronger market positions and customer relationships;
failure to attract, retain and motivate key employees;
the potential impact of the announcement or consummation of a proposed transaction on relationships with third parties;
potential changes in Applied’s credit rating, which could adversely impact the Company’s access to and cost of capital;
reductions in cash balances and/or increases in debt obligations to finance activities associated with a transaction, which reduce the availability of cash flow for general corporate or other purposes;
exposure to new operational risks, rules, regulations, worker expectations, customs and practices to the extent acquired businesses are located in regions where Applied has not historically conducted business;
challenges associated with managing new, more diverse and more widespread operations, projects and people;
inability to obtain and protect intellectual property rights in key technologies;
inadequacy or ineffectiveness of an acquired company’s internal financial controls, disclosure controls and procedures, and/or environmental, health and safety, anti-corruption, human resource, or other policies or practices;
impairment of acquired intangible assets and goodwill as a result of changing business conditions, technological advancements or worse-than-expected performance of the segment;
the risk of litigation or claims associated with a proposed or completed transaction;
unknown, underestimated and/or undisclosed commitments or liabilities; and
the inappropriate scale of acquired entities’ critical resources or facilities for business needs.
Applied also makes strategic investments in other companies, including companies formed as joint ventures, which may decline in value and/or not meet desired objectives. The success of these investments depends on various factors over which Applied may have limited or no control and, particularly with respect to joint ventures, requires ongoing and effective cooperation with strategic partners. The risks to Applied’s strategic investment portfolio may be exacerbated by unfavorable financial market and macroeconomic conditions and, as a result, the value of the investment portfolio could be negatively impacted and lead to impairment charges.

The proposed business combination with Tokyo Electron Limited may not be completed or, if completed, the intended benefits may not be fully realized.
On September 24, 2013, Applied entered into an agreement with Tokyo Electron Limited (TEL), a Japanese corporation and global provider of semiconductor, flat panel display and photovoltaic panel production equipment, to effect a strategic combination of their respective businesses. The closing of the transaction is subject to customary conditions, including approval by Applied’s and TEL’s shareholders and regulatory approvals. The proposed business combination is subject to the risk factors described immediately above, including the risks that the combination may not be consummated in a timely manner or at all; that required  regulatory approvals may not be obtained or may be subject to conditions that reduce the estimated benefits of the combination; that the businesses and operations of Applied and TEL may not be integrated successfully; and, following completion of the transaction, that the inability to effectively integrate operations, systems, technologies, products or employees, or other factors, may impact the combined company’s ability to realize anticipated synergies and benefits.
Operating in multiple industries, and the entry into new markets and industries, entail additional challenges and obligations.
As part of its growth strategy, Applied must successfully expand into related or new markets and industries, either with its existing products or with new products developed internally or obtained through acquisitions. The entry into different markets involves additional challenges, including those arising from:
the need to devote additional resources to develop new products for, and operate in, new markets;
the need to develop new sales and technical marketing strategies, cultivate relationships with new customers and meet different customer service requirements;
differing rates of profitability and growth among multiple businesses;
Applied’s ability to anticipate demand, capitalize on opportunities, and avoid or minimize risks;

24


the complexity of managing multiple businesses with variations in production planning, execution, supply chain management and logistics;
the adoption of new business models, business processes and systems;
Applied’s ability to rapidly expand or reduce its operations to meet increased or decreased demand, respectively, and the associated effect on working capital;
new materials, processes and technologies;
the need to attract, motivate and retain employees with skills and expertise in these new areas;
new and more diverse customers and suppliers, including some with limited operating histories, uncertain and/or limited funding, evolving business models and/or locations in regions where Applied does not have, or has limited, operations;
new or different competitors with potentially more financial or other resources, industry experience and/or established customer relationships;
entry into new industries and countries, with differing levels of government involvement, laws and regulations, and business, employment and safety practices;
third parties’ intellectual property rights; and
the need to comply with, or work to establish, industry standards and practices.
In addition, Applied from time to time receives funding from United States and other government agencies for certain strategic development programs to increase its research and development resources and address new market opportunities. As a condition to this government funding, Applied may be subject to certain record-keeping, audit, intellectual property rights-sharing and/or other obligations.
Manufacturing interruptions or delays could affect Applied’s ability to meet customer demand and lead to higher costs, while the failure to estimate customer demand accurately could result in excess or obsolete inventory.
Applied’s business depends on its timely supply of equipment, services and related products that meet the rapidly changing technical and volume requirements of its customers, which depends in part on the timely delivery of parts, components and subassemblies (collectively, parts) from suppliers, including contract manufacturers. Some key parts are subject to long lead-times and/or obtainable only from a single supplier or limited group of suppliers, and some sourcing or subassembly is provided by suppliers located in countries other than the countries where Applied conducts its manufacturing, including China and Korea. Cyclical industry conditions and the volatility of demand for manufacturing equipment increase capital, technical, operational and other risks for Applied and for companies throughout its supply chain. Further, these conditions may cause some suppliers to scale back operations, exit businesses, merge with other companies, or file for bankruptcy protection and possibly cease operations. Applied may also experience significant interruptions of its manufacturing operations, delays in its ability to deliver products or services, increased costs or customer order cancellations as a result of:
the failure or inability of suppliers to timely deliver sufficient quantities of quality parts on a cost-effective basis;
volatility in the availability and cost of materials, including rare earth elements;
difficulties or delays in obtaining required import or export approvals;
information technology or infrastructure failures; and
natural disasters or other events beyond Applied's control (such as earthquakes, floods or storms, regional economic downturns, pandemics, social unrest, political instability, terrorism, or acts of war), particularly where it conducts manufacturing.
If a supplier fails to meet Applied’s requirements concerning quality, cost, socially-responsible business practices, or other performance factors, Applied may transfer its business to alternative sources, which could entail manufacturing delays, additional costs, or other difficulties. In addition, if Applied needs to rapidly increase its business and manufacturing capacity to meet increases in demand or expedited shipment schedules, this may exacerbate any interruptions in Applied’s manufacturing operations and supply chain and the associated effect on Applied’s working capital. Moreover, if actual demand for Applied’s products is different than expected, Applied may purchase more/fewer parts than necessary or incur costs for canceling, postponing or expediting delivery of parts. If Applied purchases inventory in anticipation of customer demand that does not materialize, or if customers reduce or delay orders, Applied may incur excess inventory charges.

25


The ability to attract, retain and motivate key employees is vital to Applied’s success.
Applied’s success, competitiveness and ability to execute on its global strategies and maintain a culture of innovation depend in large part on its ability to attract, retain and motivate key employees, especially in critical positions. Achieving this objective may be difficult due to many factors, including fluctuations in global economic and industry conditions, management changes, Applied’s organizational structure, hiring practices of competitors and other companies, cost reduction activities (including workforce reductions and unpaid shutdowns), availability of career development opportunities, the ability to obtain necessary authorizations for workers to provide services outside their home countries, and the effectiveness of Applied’s compensation and benefit programs, including its share-based programs. Restructuring programs present particular challenges to the extent they involve the departure of knowledgeable and experienced employees and the resulting need to identify and train existing or new workers to perform necessary functions, which may result in unexpected costs, reduced productivity, and/or difficulties with respect to internal processes and controls.
Applied is exposed to various risks related to protection and enforcement of intellectual property rights.
Applied’s success depends in significant part on the protection of its intellectual property and other rights. Infringement of Applied’s rights by a third party, such as the unauthorized manufacture or sale of equipment or spare parts, could result in uncompensated lost market and revenue opportunities for Applied. Policing any unauthorized use of intellectual property is difficult and costly and Applied cannot be certain that the measures it has implemented will prevent misuse. Applied’s intellectual property rights may not provide significant competitive advantages if they are circumvented, invalidated, rendered obsolete by the rapid pace of technological change, or if Applied does not adequately protect or assert these rights or obtain necessary licenses on commercially reasonable terms. Furthermore, the laws and practices of other countries, including China, India, Taiwan and Korea, permit the protection and enforcement of Applied’s rights to varying extents, which may not be sufficient to adequately protect Applied’s rights. In addition, changes in intellectual property laws or their interpretation, such as recent changes in U.S. patent laws, may impact Applied's ability to protect and assert its intellectual property rights, increase costs and uncertainties in the prosecution of patent applications and enforcement or defense of issued patents, and diminish the value of Applied's intellectual property.
   
Applied is exposed to risks related to cybersecurity threats and incidents.
In the conduct of its business, Applied collects, uses, transmits and stores data on information technology systems. This data includes confidential information belonging to Applied or its customers or other business partners, as well as personally-identifiable information of individuals. Applied has experienced, and expects to continue to be subject to, cybersecurity threats and incidents, ranging from employee error or misuse to individual attempts to gain unauthorized access to information systems to sophisticated and targeted measures known as advanced persistent threats, none of which have been material to the Company to date. Applied devotes significant resources to network security, data encryption and other measures to protect its systems and data from unauthorized access or misuse. However, depending on their nature and scope, cybersecurity incidents could result in business disruption; the misappropriation, corruption or loss of confidential information and critical data (Applied's and that of third parties); reputational damage; litigation with third parties; diminution in the value of Applied's investment in research, development and engineering; data privacy issues; and increased cybersecurity protection and remediation costs.

Applied is exposed to various risks related to legal proceedings.
Applied from time to time is, and in the future may be, involved in legal proceedings or claims regarding patent infringement, intellectual property rights, antitrust, environmental regulations, securities, contracts, product performance, product liability, unfair competition, misappropriation of trade secrets, employment, workplace safety, and other matters. Applied also on occasion receives notification from customers who believe that Applied owes them indemnification or other obligations related to claims made against such customers by third parties.
Legal proceedings and claims, whether with or without merit, and associated internal investigations, may (1) be time-consuming and expensive to prosecute, defend or conduct; (2) divert management’s attention and other Applied resources; (3) inhibit Applied’s ability to sell its products; (4) result in adverse judgments for damages, injunctive relief, penalties and fines; and/or (5) negatively affect Applied’s business. There can be no assurance regarding the outcome of current or future legal proceedings, claims or investigations.

26


The failure to successfully implement and conduct outsourcing activities and other operational initiatives could adversely affect results of operations.
To better align its costs with market conditions, locate closer to customers, enhance productivity, and improve efficiencies, Applied conducts certain engineering, software development, manufacturing, sourcing and other operations in regions outside the United States, including India, Taiwan, China, and Korea. Applied has implemented a distributed manufacturing model, under which certain manufacturing and supply chain activities are conducted in various countries, including the United States, Europe, Israel, Singapore, Taiwan and other countries in Asia, and assembly of some systems is completed at customer sites. In addition, Applied outsources certain functions to third parties, including companies in the United States, India, China, Korea, Malaysia and other countries. Outsourced functions include contract manufacturing, engineering, customer support, software development, information technology support, finance and administrative activities. The expanding role of third party providers has required changes to Applied’s existing operations and the adoption of new procedures and processes for retaining and managing these providers, as well as redistributing responsibilities as warranted, in order to realize the potential productivity and operational efficiencies, assure quality and continuity of supply, and protect the intellectual property of Applied and its customers, suppliers and other partners. If Applied does not accurately forecast the amount, timing and mix of demand for products, or if contract manufacturers or other outsource providers fail to perform in a timely manner or at satisfactory quality levels, Applied’s ability to meet customer requirements could suffer, particularly during a market upturn.
In addition, Applied must regularly implement or update comprehensive programs and processes to better align its global organizations, including initiatives to enhance the Asia supply chain and improve back office and information technology infrastructure for more efficient transaction processing. Applied also is implementing a multi-year, company-wide program to transform certain business processes or extend established processes, including the transition to a single enterprise resource planning (ERP) software system to perform various functions. The implementation of additional functionality to the ERP system entails certain risks, including difficulties with changes in business processes that could disrupt Applied’s operations, such as its ability to track orders and timely ship products, project inventory requirements, manage its supply chain and aggregate financial and operational data. During transitions Applied must continue to rely on legacy information systems, which may be costly or inefficient, while the implementation of new initiatives may not achieve the anticipated benefits and may divert management’s attention from other operational activities, negatively affect employee morale, or have other unintended consequences.
If Applied does not effectively develop and implement its outsourcing and relocation strategies, if required export and other governmental approvals are not timely obtained, if Applied’s third party providers do not perform as anticipated, or if there are delays or difficulties in enhancing business processes, Applied may not realize anticipated productivity improvements or cost efficiencies, and may experience operational difficulties, increased costs (including energy and transportation), manufacturing interruptions or delays, inefficiencies in the structure and/or operation of its supply chain, loss of its intellectual property rights, quality issues, reputational harm, increased product time-to-market, and/or inefficient allocation of human resources.
Applied may incur impairment charges to goodwill or long-lived assets.
Applied has a significant amount of goodwill and other acquired intangible assets related to acquisitions. 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 more frequently when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The review compares the fair value for each of Applied’s reporting units to its associated carrying value, including goodwill. Factors that could lead to impairment of goodwill and intangible assets include adverse industry or economic trends, reduced estimates of future cash flows, declines in the market price of Applied common stock, changes in Applied’s strategies or product portfolio, and restructuring activities. Applied’s valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and projections of future operating performance. For example, in the second quarter of fiscal 2013, Applied recorded goodwill and intangible asset impairment charges. Applied may be required to record future charges to earnings during the period in which an impairment of goodwill or intangible assets is determined to exist.

27


Changes in tax rates or tax assets and liabilities could affect results of operations.
As a global company, Applied is subject to taxation in the United States and various other countries. Significant judgment is required to determine and estimate worldwide tax liabilities. Applied’s future annual and quarterly tax rates could be affected by numerous factors, including changes in the: (1) applicable tax laws; (2) amount and composition of pre-tax income in countries with differing tax rates; (3) plans of the Company to permanently reinvest certain funds held outside of the U.S.; or (4) valuation of Applied’s deferred tax assets and liabilities.
To better align with the international nature of its business, Applied conducts certain manufacturing, supply chain, and other operations in Asia, bringing these activities closer to customers and reducing operating costs. Applied has received authorization to use tax incentives that provide that income earned in certain countries outside the U.S. will be subject to tax holidays or reduced income tax rates. To obtain the benefit of these tax provisions, Applied must meet requirements relating to various activities. Applied’s ability to realize benefits from these provisions could be materially affected if, among other things, applicable requirements are not met, or if Applied incurs net losses for which it cannot claim a deduction.
In addition, Applied is subject to regular examination by the Internal Revenue Service and other tax authorities, and from time to time initiates amendments to previously filed tax returns. Applied regularly assesses the likelihood of favorable or unfavorable outcomes resulting from these examinations and amendments to determine the adequacy of its provision for income taxes, which requires estimates and judgments. Although Applied believes its tax estimates are reasonable, there can be no assurance that the tax authorities will agree with such estimates. Applied may have to engage in litigation to achieve the results reflected in the estimates, which may be time-consuming and expensive. There can be no assurance that Applied will be successful or that any final determination will not be materially different from the treatment reflected in Applied’s historical income tax provisions and accruals.
Applied is subject to risks of non-compliance with environmental and safety regulations.
Applied is subject to environmental and safety regulations in connection with its global business operations, including but not limited to: regulations related to the development, manufacture and use of its products; recycling and disposal of materials used in its products or in producing its products; the operation of its facilities; and the use of its real property. The failure or inability to comply with existing or future environmental and safety regulations, such as those related to climate change, could result in: (1) significant remediation liabilities; (2) the imposition of fines; (3) the suspension or termination of the development, manufacture, sale or use of certain of its products; (4) limitations on the operation of its facilities or ability to use its real property; and/or (5) a decrease in the value of its real property.
Applied is exposed to various risks related to the regulatory environment.
Applied is subject to various risks related to: (1) new, different, inconsistent or even conflicting laws, rules and regulations that may be enacted by executive order, legislative bodies and/or regulatory agencies in the countries in which Applied operates; (2) disagreements or disputes between national or regional regulatory agencies related to international trade; and (3) the interpretation and application of laws, rules and regulations. For example, as a public company with global operations, Applied is subject to the laws of multiple jurisdictions and the rules and regulations of various governing bodies, including those related to financial and other disclosures, corporate governance, privacy, and anti-corruption. Changes in laws, regulations and standards may create uncertainty regarding compliance matters. Efforts to comply with new and changing regulations have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.
 
Item 1B:
Unresolved Staff Comments
None.


28


Item 2:
Properties
Information concerning Applied’s principal properties at October 27, 2013 is set forth below:
 
Location
Type
Principal Use
Square
Footage
 
Ownership
Santa Clara, CA
Office, Plant & Warehouse
Headquarters; Marketing; Manufacturing; Distribution; Research, Development,
Engineering; Customer Support
1,476,000
150,000

 
Owned
Leased
Austin, TX
Office, Plant & Warehouse
Manufacturing
1,719,000
145,000

 
Owned
Leased
Rehovot, Israel
Office, Plant & Warehouse
Manufacturing; Research,
Development, Engineering;
Customer Support
417,000
5,000

 
Owned
Leased
Singapore
Office, Plant & Warehouse
Manufacturing and
Customer Support
392,000
10,000

 
Owned
Leased
Gloucester, MA
Office, Plant & Warehouse
Manufacturing; Research,
Development, Engineering;
Customer Support
315,000
131,000

 
Owned
Leased
Tainan, Taiwan
Office, Plant & Warehouse
Manufacturing and
Customer Support
320,000

 
Owned

Because of the interrelation of Applied’s operations, properties within a country may be shared by the segments operating within that country. Products in the Silicon Systems Group are manufactured in Austin, Texas; Singapore; Gloucester, Massachusetts; and Rehovot, Israel. Remanufactured equipment products in the Applied Global Services segment are produced primarily in Austin, Texas. Products in the Display segment are manufactured in Tainan, Taiwan; Santa Clara, California; and Alzenau, Germany. Products in the Energy and Environmental Solutions segment are primarily manufactured in Alzenau, Germany; Treviso, Italy; and Cheseaux, Switzerland.
In addition to the above properties, Applied also owns and leases offices, plants and/or warehouse locations in 78 locations throughout the world: 18 in Europe, 21 in Japan, 15 in North America (principally the United States), 8 in China, 7 in Korea, 6 in Southeast Asia, and 3 in Taiwan. These facilities are principally used for manufacturing; research, development and engineering; and marketing, sales and/or customer support.
Applied also owns a total of approximately 139 acres of buildable land in Texas, California, Israel and Italy that could accommodate additional building space.
Applied considers the properties that it owns or leases as adequate to meet its current and future requirements. Applied regularly assesses the size, capability and location of its global infrastructure and periodically makes adjustments based on these assessments.

29


Item 3:
Legal Proceedings
The information set forth under “Legal Matters” in Note 15 of Notes to Consolidated Financial Statements is incorporated herein by reference.
 
Item 4:
Mine Safety Disclosures
None.

PART II

Item 5:
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
The following table sets forth the high and low closing sale prices for the periods presented as reported on the NASDAQ Global Select Market.
 
 
Price Range
 
High
 
Low
Fiscal 2013
 
 
 
First quarter
$
12.83

 
$
10.15

Second quarter
$
14.15

 
$
12.80

Third quarter
$
16.69

 
$
14.40

Fourth quarter
$
18.10

 
$
14.97

Fiscal 2012
 
 
 
First quarter
$
12.73

 
$
10.13

Second quarter
$
13.21

 
$
11.49

Third quarter
$
11.99

 
$
10.01

Fourth quarter
$
12.05

 
$
10.65

Applied’s common stock is traded on the NASDAQ Global Select Market under the symbol AMAT. As of November 21, 2013, there were 3,676 registered holders of Applied common stock.

30


Performance Graph
The performance graph below shows the five-year cumulative total stockholder return on Applied common stock during the period from October 26, 2008 through October 27, 2013. This is compared with the cumulative total return of the Standard & Poor’s 500 Stock Index and the RDG Semiconductor Composite Index over the same period. The comparison assumes $100 was invested on October 26, 2008 in Applied common stock and in each of the foregoing indices and assumes reinvestment of dividends, if any. Dollar amounts in the graph are rounded to the nearest whole dollar. The performance shown in the graph represents past performance and should not be considered an indication of future performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Applied Materials, Inc., the S&P 500 Index
and the RDG Semiconductor Composite Index
 

* Assumes $100 invested on 10/26/08 in stock or 10/31/08 in index, including reinvestment of dividends.
Indexes calculated on month-end basis.
“S&P” is a registered trademark of Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc.
 
 
10/26/2008
 
10/25/2009
 
10/31/2010
 
10/30/2011
 
10/28/2012
 
10/27/2013
Applied Materials
100.00

 
116.07

 
113.08

 
118.21

 
102.77

 
175.76

S&P 500 Index
100.00

 
109.80

 
127.94

 
138.29

 
159.32

 
202.61

RDG Semiconductor Composite Index
100.00

 
124.98

 
153.98

 
166.89

 
149.81

 
200.47

Dividends
During fiscal 2013, Applied’s Board of Directors declared three quarterly cash dividends of $0.10 per share each and one quarterly cash dividend of $0.09 per share. During fiscal 2012, Applied’s Board of Directors declared three quarterly cash dividends of $0.09 per share each and one quarterly cash dividend of $0.08 per share. During fiscal 2011, Applied’s Board of Directors declared three quarterly cash dividends of $0.08 per share each and one quarterly cash dividend of $0.07. Dividends declared during fiscal 2013, 2012 and 2011 totaled $469 million, $438 million and $408 million, respectively. Applied currently anticipates that it will continue to pay cash dividends on a quarterly basis in the future, although the declaration and amount of any future cash dividends are 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 that cash dividends are in the best interests of Applied’s stockholders.

31


Repurchases of Applied Common Stock
The following table provides information as of October 27, 2013, with respect to the shares of common stock repurchased by Applied during the fourth quarter of fiscal 2013 pursuant to the publicly-announced stock repurchase program approved by the Board of Directors on March 5, 2012, which authorized up to $3.0 billion in repurchases over the next three years ending March 2015.
 
Period
Total Number of
Shares Purchased
 
Average
Price Paid
per Share
 
Aggregate
Price Paid
 
Total Number of
Shares  Purchased as
Part of Publicly
Announced Program
 
Maximum Dollar
Value of Shares
That May Yet be
Purchased Under
the Program
 
 
 
 
 
 
 
 
 
 
 
(In millions, except per share amounts)
Month #1
 
 
 
 
 
 
 
 
 
(July 29, 2013 to August 25, 2013)
0.8

 
$
15.78

 
$
13

 
0.8

 
$
1,619

Month #2
 
 
 
 
 
 
 
 
 
(August 26, 2013 to September 22, 2013)
2.1

 
$
15.58

 
33

 
2.1

 
$
1,586

Month #3
 
 
 
 
 
 
 
 
 
(September 23, 2013 to October 27, 2013)
0.1

 
$
15.97

 
1

 
0.1

 
$
1,585

Total
3.0

 
$
15.65

 
$
47

 
3.0

 
 
 



32


Item 6:
Selected Financial Data
The following selected financial information has been derived from Applied’s historical audited consolidated financial statements and should be read in conjunction with the consolidated financial statements and the accompanying notes for the corresponding fiscal years:
 
Fiscal Year(1)
2013
 
2012
 
2011
 
2010
 
2009
 
 
 
 
 
 
 
 
 
 
 
(In millions, except percentages and per share amounts)
New orders
$
8,466

 
$
8,037

 
$
10,142

 
$
10,249

 
$
4,097

Net sales
$
7,509

 
$
8,719

 
$
10,517

 
$
9,549

 
$
5,014

Gross margin
$
2,991

 
$
3,313

 
$
4,360

 
$
3,715

 
$
1,431

(% of net sales)
39.8

 
38.0

 
41.5

 
38.9

 
28.5

Research, development and engineering
$
1,320

 
$
1,237

 
$
1,118

 
$
1,143

 
$
934

Operating income (loss)
$
432

 
$
411

 
$
2,398

 
$
1,384

 
$
(394
)
(% of net sales)
5.8

 
4.7

 
22.8

 
14.5

 
(7.9
)
Income (loss) before income taxes
$
350

 
$
316

 
$
2,378

 
$
1,387

 
$
(486
)
Net income (loss)
$
256

 
$
109

 
$
1,926

 
$
938

 
$
(305
)
Earnings (loss) per diluted share
$
0.21

 
$
0.09

 
$
1.45

 
$
0.70

 
$
(0.23
)
Long-term debt
$
1,946

 
$
1,946

 
$
1,947

 
$
204

 
$
201

Cash dividends declared per common share
$
0.39

 
$
0.35

 
$
0.31

 
$
0.27

 
$
0.24

Total assets
$
12,043

 
$
12,102

 
$
13,861

 
$
10,943

 
$
9,574

 
(1)
Each fiscal year ended on the last Sunday in October. Fiscal 2013, 2012, 2011 and 2009 each contained 52 weeks, while fiscal 2010 contained 53 weeks.


33


Item 7:
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to facilitate an understanding of Applied’s business and results of operations. This MD&A should be read in conjunction with Applied’s Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included elsewhere in this Form 10-K. The following discussion contains forward-looking statements and should also be read in conjunction with the cautionary statement set forth at the beginning of this Form 10-K. MD&A consists of the following sections:
 
Overview: a summary of Applied’s business and measurements
Results of Operations: a discussion of operating results
Segment Information: a discussion of segment operating results
Business Combinations: a summary of announced or completed business combinations and acquisitions
Recent Accounting Pronouncements: a discussion of new accounting pronouncements and its impact to Applied's consolidated financial statements
Financial Condition, Liquidity and Capital Resources: an analysis of cash flows, sources and uses of cash, contractual obligations and financial position
Off-Balance Sheet Arrangements and Contractual Obligations
Critical Accounting Policies and Estimates: a discussion of critical accounting policies that require the exercise of judgments and estimates
Non-GAAP Adjusted Results: a presentation of results reconciling GAAP to non-GAAP adjusted measures
Overview
Applied provides manufacturing equipment, services and software to the global semiconductor, flat panel display, solar photovoltaic (PV) and related industries. Applied’s customers include manufacturers of semiconductor wafers and chips, flat panel 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 Group, Applied Global Services, Display, and Energy and Environmental Solutions. A summary of financial information for each reportable segment is found in Note 16 of Notes to Consolidated Financial Statements. A discussion of factors that could affect Applied’s operations is set forth under “Risk Factors” in Part I, Item 1A, which is incorporated herein by reference. Product development and manufacturing activities occur primarily in North America, Europe and Asia. Applied’s equipment and service products are highly technical and are sold primarily through a direct sales force.
Applied’s results historically have been 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 highly 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 technological advances in fabrication processes. In light of this cyclicality, Applied's results can vary significantly year-over-year, as well as quarter-over-quarter. As a result of these conditions and the changing global economic environment, there were significant fluctuations in Applied’s quarterly new orders and net sales within and across the last three fiscal years.
Applied's strategic priorities for fiscal 2014 include growing its presence in wafer fab equipment and display, reducing its losses in the solar business, and expanding its overall available market. As part of this strategy, the Company has implemented initiatives to decrease overhead spending and further reduce solar operating expense to fund research and development in semiconductor and other key product areas. In semiconductor equipment, Applied intends to continue investment in 300mm, 450mm and other semiconductor technologies to strengthen the product pipeline and investment in the enhancement of technical relationships with customers.
On September 24, 2013, Applied entered into an agreement with Tokyo Electron Limited (TEL), a Japanese corporation and global supplier of semiconductor, flat panel display and photovoltaic panel production equipment, to effect a combination of their respective businesses into a new combined company. The combination is expected to bring together leading technologies and products and create an expanded set of capabilities in precision materials engineering and patterning. The closing of the transaction is subject to customary conditions, including approval by Applied’s and TEL’s stockholders and regulatory approvals.

34


Results of Operations
The following table presents certain significant measurements for the past three fiscal years:
 
 
 
 
 
 
 
 
Change
Fiscal Year
2013
 
2012
 
2011
 
2013 over 2012
 
2012 over 2011
 
 
 
 
 
 
 
 
 
 
 
(In millions, except per share amounts and percentages)
New orders
$
8,466

 
$
8,037

 
$
10,142

 
$
429

 
$
(2,105
)
Net sales
$
7,509

 
$
8,719

 
$
10,517

 
$
(1,210
)
 
$
(1,798
)
Gross margin
$
2,991

 
$
3,313

 
$
4,360

 
$
(322
)
 
$
(1,047
)
Gross margin percent
39.8
%
 
38.0
%
 
41.5
%
 
1.8 points
 
(3.5) points
Operating income
$
432

 
$
411

 
$
2,398

 
$
21

 
$
(1,987
)
Operating margin percent
5.8
%
 
4.7
%
 
22.8
%
 
1.1 points
 
(18.1) points
Net income
$
256

 
$
109

 
$
1,926

 
$
147

 
$
(1,817
)
Earnings per diluted share
$
0.21

 
$
0.09

 
$
1.45

 
$
0.12

 
$
(1.36
)
Non-GAAP Adjusted Results
 
 
 
 
 
 
 
 
 
Non-GAAP adjusted gross margin
$
3,160

 
$
3,566

 
$
4,397

 
$
(406
)
 
$
(831
)
Non-GAAP adjusted gross margin percent
42.1
%
 
40.9
%
 
41.8
%
 
1.2 points
 
(0.9) points
Non-GAAP adjusted operating income
$
1,032

 
$
1,379

 
$
2,411

 
$
(347
)
 
$
(1,032
)
Non-GAAP adjusted operating margin percent
13.7
%
 
15.8
%
 
22.9
%
 
(2.1) points
 
(7.1) points
Non-GAAP adjusted net income
$
718

 
$
960

 
$
1,717

 
$
(242
)
 
$
(757
)
Non-GAAP adjusted earnings per diluted share
$
0.59

 
$
0.75

 
$
1.29

 
$
(0.16
)
 
$
(0.54
)

Reconciliations of non-GAAP adjusted measures are presented under "Non-GAAP Adjusted Results" below. Fiscal 2013, 2012 and 2011 each contained 52 weeks.
Mobility continued to be the largest influence on semiconductor industry spending during fiscal 2013. The first half of fiscal 2013 was characterized by strong demand for semiconductor equipment from foundry customers driven by demand for advanced mobile chips. In the second half of the year, demand from foundry customers softened, reflecting seasonal consumer buying patterns for mobility products, while demand from memory and logic customers improved. Mobility also represents a significant driver of display industry spending, and demand for mobile display equipment remained strong during fiscal 2013. Fiscal 2013 was also characterized by a recovery in demand for TV manufacturing equipment compared to weak industry levels in the prior year, resulting from higher consumer demand in emerging markets and for larger LCD TVs. In solar, while end market growth continued, investment in solar equipment remained low during fiscal 2013 due to continued excess manufacturing capacity in the industry.
Applied expects the mobility trend to remain the main growth driver for the semiconductor industry, and in turn for the Silicon Systems Group, in 2014. Applied also expects the overall display investment cycle to continue into 2014, while solar equipment demand is expected to remain soft in 2014.
Fiscal 2012 was characterized by significant fluctuations in demand for semiconductor equipment, coupled with an extremely weak market environment for display and solar equipment. Applied completed its acquisition of Varian Semiconductor Equipment Associates, Inc. (Varian) in the first quarter of fiscal 2012. Mobility was the greatest influence on semiconductor industry spending in fiscal 2012. Consumer buying patterns for electronic products, combined with growing semiconductor customer concentration, contributed to a seasonality effect, with relatively strong demand for semiconductor equipment led by foundry customers during the first half of fiscal 2012, followed by softening of demand from foundry and logic customers in the third quarter of fiscal 2012 and further declines across all categories of wafer fab equipment customers in the fourth quarter of fiscal 2012.  Low investment levels for display equipment continued in fiscal 2012 due to decreased capacity requirements for larger flat panel televisions as conditions in this industry remained challenging. As with the semiconductor industry, demand for mobility products, such as smartphones and tablets, significantly influenced equipment spending in the display industry. In the solar industry, fiscal 2012 was characterized by continued excess manufacturing capacity, which led to significantly reduced demand for crystalline-silicon (c-Si) equipment, as well as weaker operating performance and outlook by the fourth quarter.

35


The first nine months of fiscal 2011 reflected increased demand across all segments except Display, due to improved global economic and industry conditions, although demand softened for semiconductor, display and solar equipment in the last quarter of fiscal 2011. Towards the end of fiscal 2011, each of the semiconductor, display and solar industries was negatively impacted by uncertainty in the macroeconomic environment, and the display and solar equipment industries were also negatively impacted by overcapacity.

New Orders
New orders by reportable segment for the past three fiscal years were as follows:
 
 
2013
 
Change
2013 over 2012
 
2012
 
Change
2012 over 2011
 
2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions, except percentages)
Silicon Systems Group
$
5,507

 
65%
 
4%
 
$
5,294

 
66%
 
(4)%
 
$
5,489

 
54%
Applied Global Services
2,090

 
25%
 
(8)%
 
2,274

 
28%
 
(3)%
 
2,333

 
23%
Display
703

 
8%
 
157%
 
274

 
4%
 
(57)%
 
636

 
6%
Energy and Environmental Solutions
166

 
2%
 
(15)%
 
195

 
2%
 
(88)%
 
1,684

 
17%
Total
$
8,466

 
100%
 
5%
 
$
8,037

 
100%
 
(21)%
 
$
10,142

 
100%
New orders for fiscal 2013 increased compared to fiscal 2012, primarily due to a recovery in demand for display manufacturing equipment and increased demand in semiconductor equipment, partially offset by lower demand for service products, as well as depressed demand for c-Si solar equipment due to continued excess manufacturing capacity in the solar industry. New orders for the Silicon Systems Group and Applied Global Services continued to comprise a majority of Applied's consolidated total new orders.
New orders for fiscal 2012 decreased for all segments compared to the same periods in the prior year, mostly due to the lower demand for c-Si solar and display equipment due to excess manufacturing capacity in the solar industry and the continued down cycle in the display industry, respectively, partially offset by the addition of orders attributable to Varian of $1.0 billion. The Silicon Systems Group's and Applied Global Services' relative share of total new orders increased compared to the prior year as a result of the addition of Varian and the sharp decrease in orders in Display and Energy and Environmental Solutions.
New orders by geographic region, determined by the product shipment destination specified by the customer, were as follows:
 
 
2013
 
Change
2013 over 2012
 
2012
 
Change
2012 over 2011
 
2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions, except percentages)
Taiwan
$
2,885

 
34%
 
34%
 
$
2,155

 
27%
 
(4)%
 
$
2,235

 
22%
China
1,339

 
16%
 
232%
 
403

 
5%
 
(80)%
 
2,066

 
20%
Korea
915

 
11%
 
(49)%
 
1,784

 
22%
 
39%
 
1,286

 
13%
Japan
822

 
10%
 
37%
 
600

 
7%
 
(40)%
 
1,001

 
10%
Southeast Asia
351

 
4%
 
24%
 
283

 
4%
 
(39)%
 
463

 
5%
Asia Pacific
6,312

 
75%
 
21%
 
5,225

 
65%
 
(26)%
 
7,051

 
70%
United States
1,419

 
17%
 
(29)%
 
1,995

 
25%
 
(4)%
 
2,069

 
20%
Europe
735

 
8%
 
(10)%
 
817

 
10%
 
(20)%
 
1,022

 
10%
Total
$
8,466

 
100%
 
5%
 
$
8,037

 
100%
 
(21)%
 
$
10,142

 
100%
 The recovery in demand for display manufacturing equipment in fiscal 2013 led to the increase in new orders from customers in China. The change in the composition of new orders from customers in Taiwan, Korea, Japan and the United States was primarily related to changes in customer demand for semiconductor equipment.
The decrease in new orders from customers in China in fiscal 2012 compared to fiscal 2011 primarily reflected reduced investments by solar manufacturers due to industry overcapacity.

36


Changes in backlog during fiscal 2013 and 2012 were as follows:
 
2013
 
2012
 
(In millions)
Beginning balance
$
1,606

 
$
2,392

New orders
8,466

 
8,037

Net sales
(7,509
)
 
(8,719
)
Net adjustments
(191
)
 
(104
)
Ending balance
$
2,372

 
$
1,606

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 80 percent of the backlog as of the end of fiscal 2013 is anticipated to be shipped within the first two quarters of fiscal 2014.
Applied’s backlog was $2.4 billion at October 27, 2013 compared to $1.6 billion at October 28, 2012. Backlog adjustments were negative for fiscal 2013 and totaled $191 million, primarily consisting of customer cancellations and financial debookings.
Backlog by reportable segment as of October 27, 2013 and October 28, 2012 was as follows:
 
 
2013
 
Change
2013 over 2012
 
2012
 
 
 
 
 
 
 
 
 
 
 
(In millions, except percentages)
Silicon Systems Group
$
1,295

 
55%
 
84%
 
$
705

 
44%
Applied Global Services
591

 
25%
 
2%
 
580

 
36%
Display
361

 
15%
 
75%
 
206

 
13%
Energy and Environmental Solutions
125

 
5%
 
9%
 
115

 
7%
Total
$
2,372

 
100%
 
48%
 
$
1,606

 
100%
Backlog increased in fiscal 2013 from fiscal 2012 across all segments. The increase in backlog was primarily due to increases in demand from memory customers and the recovery in demand for display manufacturing equipment. In the fourth quarter of fiscal 2013 approximately 49 percent of net sales in the Silicon Systems Group, Applied’s largest business segment, were for orders received and shipped within the quarter, down from 53 percent in the fourth quarter of fiscal 2012.

37


Net Sales
Net sales by reportable segment for the past three fiscal years were as follows:
 
 
2013
 
Change
2013 over 2012
 
2012
 
Change
2012 over 2011
 
2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions, except percentages)
Silicon Systems Group
$
4,775

 
64%
 
(14)%
 
$
5,536

 
64%
 
2%
 
$
5,415

 
51%
Applied Global Services
2,023

 
27%
 
(11)%
 
2,285

 
26%
 
(5)%
 
2,413

 
23%
Display
538

 
7%
 
14%
 
473

 
5%
 
(32)%
 
699

 
7%
Energy and Environmental Solutions
173

 
2%
 
(59)%
 
425

 
5%
 
(79)%
 
1,990

 
19%
Total
$
7,509

 
100%
 
(14)%
 
$
8,719

 
100%
 
(17)%
 
$
10,517

 
100%
For fiscal 2013 as compared to fiscal 2012, net sales in Display increased, reflecting the recovery of TV manufacturing equipment investment, while net sales across all other segments decreased. The decrease primarily reflected continued excess manufacturing capacity in the solar industry and lower investments in semiconductor equipment, spares and services. The Silicon Systems Group remains the largest contributor of net sales.
For fiscal 2012 as compared to fiscal 2011, net sales in the Silicon Systems Group increased slightly while net sales across all other segments decreased. The decreases reflected lower investments in c-Si solar and LCD TV equipment, partially offset by sales attributable to Varian.
Net sales by geographic region, determined by the location of customers' facilities to which products were shipped, were as follows:
 
 
2013
 
Change
2013 over 2012
 
2012
 
Change
2012 over 2011
 
2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions, except percentages)
Taiwan
$
2,640

 
35%
 
9%
 
$
2,411

 
28%
 
15%
 
$
2,093

 
20%
China
787

 
11%
 
1%
 
783

 
9%
 
(70)%
 
2,574

 
24%
Korea
924

 
12%
 
(51)%
 
1,897

 
22%
 
50%
 
1,263

 
12%
Japan
685

 
9%
 
(3)%
 
704

 
8%
 
(23)%
 
912

 
9%
Southeast Asia
320

 
4%
 
3%
 
312

 
3%
 
(47)%
 
592

 
5%
Asia Pacific
5,356

 
71%
 
(12)%
 
6,107

 
70%
 
(18)%
 
7,434

 
70%
United States
1,473

 
20%
 
(16)%
 
1,749

 
20%
 
(11)%
 
1,963

 
19%
Europe
680

 
9%
 
(21)%
 
863

 
10%
 
(23)%
 
1,120

 
11%
Total
$
7,509

 
100%
 
(14)%
 
$
8,719

 
100%
 
(17)%
 
$
10,517

 
100%
The increase in net sales from customers in China in fiscal 2013 was primarily due to the recovery in demand for display manufacturing equipment. The changes in net sales from customers in Korea, the United States and Taiwan were primarily related to changes in customer demand for semiconductor equipment.
The decrease in net sales from customers in China in fiscal 2012 compared to fiscal 2011 primarily reflected decreased investments in the solar and display industries due to overcapacity.

38


Gross Margin
Gross margins for the past three fiscal years were as follows:
 
 
 
 
 
 
 
 
Change
 
2013
 
2012
 
2011
 
2013 over 2012
 
2012 over 2011
 
 
 
 
 
 
 
 
 
 
 
(In millions, except percentages)
Gross margin
$
2,991

 
$
3,313

 
$
4,360

 
$
(322
)
 
$
(1,047
)
Gross margin (% of net sales)
39.8
%
 
38.0
%
 
41.5
%
 
1.8 points
 
(3.5) points
Non-GAAP Adjusted Results
 
 
 
 
 
 
 
 
 
Non-GAAP adjusted gross margin
$
3,160

 
$
3,566

 
$
4,397

 
$
(406
)
 
$
(831
)
Non-GAAP adjusted gross margin (% of net sales)
42.1
%
 
40.9
%
 
41.8
%
 
1.2 points
 
(0.9) points
Reconciliations of non-GAAP adjusted measures are presented under "Non-GAAP Adjusted Results" below.
Gross margin and non-GAAP adjusted gross margin decreased in fiscal 2013 compared to fiscal 2012 reflecting lower sales. Gross margin percent and non-GAAP adjusted gross margin percent increased in fiscal 2013 compared to fiscal 2012 despite lower sales, due primarily to lower inventory charges, a favorable product mix, and material cost reductions. Gross margin and non-GAAP adjusted gross margin decreased in fiscal 2012 from fiscal 2011 due primarily to changes in segment and customer mix, additional inventory charges, and lower net sales, partially offset by sales for a thin film solar production line in fiscal 2012, for which inventory was fully reserved prior to fiscal 2012. In addition, the decrease in gross margin in fiscal 2012 was also affected by inventory fair value adjustments and intangible asset amortization associated with purchase accounting, mostly associated with the acquisition of Varian, which amounted to $253 million in fiscal 2012. Gross margin and non-GAAP adjusted gross margin during fiscal 2013, 2012 and 2011 included $50 million, $54 million and $48 million, respectively, of share-based compensation expense.
Research, Development and Engineering
Research, Development and Engineering (RD&E) expenses for the past three fiscal years were as follows:
 
 
 
 
 
 
 
 
Change
 
2013
 
2012
 
2011
 
2013 over 2012
 
2012 over 2011
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Research, development and engineering
$
1,320

 
$
1,237

 
$
1,118

 
$
83

 
$
119


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. Applied believes that it is critical to continue to make substantial investments in RD&E to assure the availability of innovative technology that meets the current and projected requirements of its customers’ most advanced designs. Applied has maintained and intends to continue its commitment to investing in RD&E in order to continue to offer new products and technologies. 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.

39


In fiscal 2013, Applied increased its investment in 300mm product development. Applied developed new applications for its epitaxial technology, enabling industry transition to NMOS transistors at the 20nm node and enabling chip makers to build faster devices and deliver next-generation mobile computing power. Applied also released its next-generation defect review and classification technology that delivers industry-leading resolution used for finding, identifying and analyzing defects in 3D FinFET and high aspect ratio structures at 10nm nodes. Applied also continued to invest in the development of 450mm wafer fabrication equipment.
RD&E expenses increased in fiscal 2013 compared to the prior year. As part of its growth strategy, Applied has taken certain actions, including workforce reductions and reprioritization of existing spend, to enable increased funding for investments in technical capabilities and critical R&D programs in current and new markets, with a focus on semiconductor technologies. The increase in RD&E for fiscal 2012 compared to fiscal 2011 was primarily due to RD&E expenses related to Varian of approximately $180 million and continued investment in the development of equipment for smaller linewidths and 450mm wafers, partially offset by lower investments in solar R&D projects and the cessation of light-emitting diode (LED) equipment development. RD&E expense during fiscal 2013, 2012 and 2011 included $53 million, $54 million and $46 million, respectively, of share-based compensation expense.
Marketing and Selling
Marketing and selling expenses for the past three fiscal years were as follows:
 
 
 
 
 
 
 
 
Change
 
2013
 
2012
 
2011
 
2013 over 2012
 
2012 over 2011
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Marketing and selling
$
433

 
$
481

 
$
432

 
$
(48
)
 
$
49

The decrease in marketing and selling expenses for fiscal 2013 compared to fiscal 2012 was primarily attributable to savings from restructuring programs along with a reduction in the bad debt provision during the year as a result of lower risk exposures in display and solar customers. The increase in marketing and selling expenses for fiscal 2012 compared to fiscal 2011 was primarily attributable to marketing and selling expenses incurred in connection with the acquisition of Varian. Marketing and selling expenses during fiscal 2013, 2012 and 2011 included $20 million, $22 million and $16 million, respectively, of share-based compensation expense.
General and Administrative
General and administrative (G&A) expenses for the past three fiscal years were as follows:
 
 
 
 
 
 
 
 
Change
 
2013
 
2012
 
2011
 
2013 over 2012
 
2012 over 2011
 
 
 
 
 
 
 
 
 
 
 
(In millions)
General and administrative
$
469

 
$
595

 
$
469

 
$
(126
)
 
$
126

The decrease in G&A for fiscal 2013 compared to fiscal 2012 was primarily due to the absence of certain costs incurred during fiscal 2012 associated with the acquisition of Varian, savings from restructuring programs, and lower share-based compensation expense, partially offset by costs incurred associated with the business combination with TEL. The increase in G&A expenses for fiscal 2012 compared to fiscal 2011 is primarily attributable to acquisition-related costs and other G&A expenses incurred in connection with the acquisition of Varian, partially offset by lower variable compensation and savings associated with temporary shutdowns. G&A expenses during fiscal 2013, 2012 and 2011 included $34 million, $52 million and $36 million respectively, of share-based compensation expense.

40


Impairment of Goodwill

During fiscal 2012, the solar industry faced increasing challenges, including manufacturing overcapacity and weak operating performance and outlook, which led to a deterioration in market conditions. As a result, Applied performed a two-step goodwill impairment test and recorded a $421 million goodwill impairment charge in its Energy and Environmental Solutions segment.
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.
In the fourth quarter of fiscal 2013, Applied also performed a qualitative assessment to test goodwill for the remaining reporting units for impairment and determined that it was more likely than not that each of the Silicon Systems Group, Applied Global Services, and Display reporting units' fair values exceeded its respective carrying values and that it was not necessary to perform the two-step goodwill impairment test for these reporting units.
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 analyses are lower than current estimates, a material impairment charge may result at that time.
For further details, see Note 9 of Notes to Consolidated Financial Statements.
Restructuring and Asset Impairments
Restructuring and asset impairment expenses for the past three fiscal years were as follows:
 
 
 
 
 
 
 
 
Change
 
2013
 
2012
 
2011
 
2013 over 2012
 
2012 over 2011
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Restructuring and asset impairments, net
$
63

 
$
168

 
$
(30
)
 
$
(105
)
 
$
198

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 were expected to affect approximately 900 to 1,300 positions, or 6 percent to 9 percent of its global workforce. In connection with the 2012 Global Restructuring Plan, Applied expects to incur aggregate pre-tax restructuring charges comprised of severance and other termination benefits of up to $160 million (including costs incurred to date of $145 million discussed below). Applied expects to substantially complete this plan by the end of the first quarter of fiscal 2014.
During fiscal 2013 and 2012, Applied recognized $39 million and $106 million, respectively, of employee-related costs in connection with the 2012 Global Restructuring Plan. These costs were not allocated to the segments. Applied has incurred aggregate pre-tax restructuring charges comprised of severance and other termination benefits of $145 million under this plan.

41


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 part of the 2012 EES Restructuring Plan, Applied relocated certain manufacturing, business operations and customer support functions of its precision wafering systems business and ceased LED development activities. This plan impacted approximately 300 positions globally. As of October 27, 2013, principal activities related to this plan were complete. Total costs incurred in implementing this plan were $87 million, of which $13 million were inventory-related charges.
During fiscal 2013 and 2012, Applied recognized $26 million and $48 million, respectively, of restructuring and asset impairment charges in connection with the 2012 EES Restructuring Plan. As of October 27, 2013, remaining severance accrual associated with restructuring reserves under this program was $5 million.
Also in fiscal 2013 and 2012, Applied incurred $2 million and $14 million, respectively of severance and other employee-related costs in connection with the integration of Varian.
Results for fiscal 2011 included favorable adjustments of $60 million related to restructuring program charges recorded in prior years, offset in part by asset impairment charges of $30 million primarily related to certain intangible assets.
For further details, see Note 11 of Notes to Consolidated Financial Statements.
Gain on Sale of Facilities, net
In the first quarter of fiscal 2011, Applied received $39 million in proceeds from the sale of a property located in North America and incurred a loss of $1 million on the transaction. In the third quarter of fiscal 2011, Applied received $60 million in proceeds from the sale of another property located in North America and incurred a gain of $28 million on the transaction.
Impairments of Strategic Investments
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. During fiscal 2013, 2012 and 2011, Applied determined that certain of its equity investments held in privately-held companies were other-than-temporarily impaired and, accordingly, recognized impairment charges of $6 million, $17 million and $3 million, respectively.
Interest Expense and Interest and Other Income, net
Interest expense and interest and other income, net for the past three fiscal years were as follows:
 
 
 
 
 
 
 
 
Change
2013
 
2012
 
2011
2013 over 2012
 
2012 over 2011
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Interest expense
$
95

 
$
95

 
$
59

 
$

 
$
36

Interest and other income, net
$
19

 
$
17

 
$
42

 
$
2

 
$
(25
)
Interest expenses incurred were primarily associated with the senior unsecured notes issued in June 2011 to fund a portion of the consideration and certain costs associated with the acquisition of Varian. Interest expense remained flat during fiscal 2013 from the prior year, while interest expense increased in fiscal 2012 compared to fiscal 2011 mainly due to the full year of interest expense incurred on the senior unsecured notes in fiscal 2012.
Interest income primarily includes interest earned on cash and investments and realized gains on sale of securities. Interest and other income was essentially flat for fiscal 2013 from fiscal 2012. The decrease in interest income in fiscal 2012 from fiscal 2011 is due to lower cash and investment balances after completion of the acquisition of Varian, decreased realized gains on investment securities, and lower interest rates.

42


Income Taxes
Income tax expenses for the past three fiscal years were as follows:
 
 
 
 
 
 
 
 
Change
2013
 
2012
 
2011
 
2013 over 2012
 
2012 over 2011
 
 
 
 
 
 
 
 
 
 
 
(In millions, except percentages)
Provision for income taxes
$
94

 
$
207

 
$
452

 
$
(113
)
 
$
(245
)
Effective income tax rate
26.9
%
 
65.5
%
 
19.0
%
 
(38.6) points
 
46.5 points
The effective tax rate for fiscal 2013 was significantly lower than the rate for fiscal 2012 due primarily to the geographic composition of Applied's pre-tax income, lower nondeductible goodwill impairment charges, and reinstatement of the U.S. federal research and development tax credit retroactive to its expiration in December 2012. These reductions were partially offset by a lower benefit in fiscal 2013 from the U.S. federal domestic production deduction, which was limited by U.S. federal taxable income.
The effective income tax rate for fiscal 2012 was significantly higher than the rate for fiscal 2011 due primarily to nondeductible goodwill impairment charges in fiscal 2012 and the fiscal 2011 benefit from the December 2010 reinstatement of the U.S. R&D tax credit retroactive to its expiration in December 2009.

Segment Information
Applied reports financial results in four segments: Silicon Systems Group, 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 16 of Notes to Consolidated 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 resources, 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 Group Segment
The Silicon Systems Group 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, patterning, interconnect 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 deliver high-performance, low-power processors and affordable solid-state storage in a small form factor.
With the acquisition of Varian, Applied acquired ion implantation technology for semiconductor as well as c-Si solar cell manufacturing, which was recorded under the Silicon Systems Group segment in fiscal 2012. In fiscal 2013, Applied began marketing the solar implant products commercially through its Energy and Environmental Solutions segment. Accordingly, effective in the first quarter of fiscal 2013, Applied accounts for its solar implant products under the Energy and Environmental Solutions segment. The effect of the solar implant products was not material to the operations of either the Silicon Systems Group or Energy and Environmental Solutions segments.

43


Certain significant measures for the past three fiscal years were as follows:
 
 
 
 
 
 
 
 
Change
2013
 
2012
 
2011
2013 over 2012
 
2012 over 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions, except percentages and ratios)
New orders
$
5,507

 
$
5,294

 
$
5,489

 
$
213

 
4%
 
$
(195
)
 
(4)%
Net sales
4,775

 
5,536

 
5,415

 
(761
)
 
(14)%
 
121

 
2%
Book to bill ratio
1.2

 
1.0

 
1.0

 
 
 
 
 
 
 
 
Operating income
876

 
1,243

 
1,764

 
(367
)
 
(30)%
 
(521
)
 
(30)%
Operating margin
18.3
%
 
22.5
%
 
32.6
%
 
 
 
(4.2) points
 
 
 
(10.1) points
Non-GAAP Adjusted Results
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP adjusted operating income
$
1,050

 
$
1,537

 
$
1,779

 
(487
)
 
(32)%
 
(242
)
 
(14)%
Non-GAAP adjusted operating margin
22.0
%
 
27.8
%
 
32.9
%
 
 
 
(5.8) points
 
 
 
(5.1) points

Reconciliations of non-GAAP adjusted measures are presented under "Non-GAAP Adjusted Results" below.

New orders for the Silicon Systems Group by end use application for the past three fiscal years were as follows:
 
 
2013
 
2012
 
2011
Foundry
58%
 
62%
 
47%
Memory
27%
 
22%
 
28%
Logic and other
15%
 
16%
 
25%
 
100%
 
100%
 
100%
The following region accounted for at least 30 percent of total net sales for the Silicon Systems Group segment for one or more of the past three fiscal years:
 
 
 
 
 
 
 
 
Change
 
2013
 
2012
 
2011
2013 over 2012
 
2012 over 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions, except percentages)
Taiwan
$
2,171

 
$
1,744

 
$
1,309

 
$
427

 
24%
 
$
435

 
33%
Customers in Taiwan accounted for 45 percent, 32 percent and 24 percent of the total net sales of the Silicon Systems Group in fiscal 2013, 2012 and 2011, respectively. Customers in Korea and United States together contributed 31 percent, 49 percent and 43 percent of the total net sales for this segment in fiscal 2013, 2012 and 2011, respectively.
The increase in new orders in fiscal 2013 compared to fiscal 2012 primarily reflected increased demand from memory customers. In the fourth quarter of fiscal 2013, new orders were $1.4 billion, an increase of 16 percent compared to the prior quarter. Net sales decreased in fiscal 2013 from the prior year due to overall decreased wafer fab equipment spending in the semiconductor industry. Three customers accounted for approximately 65 percent of new orders and net sales in this segment in fiscal 2013. Approximately 49 percent of net sales in the fourth quarter of fiscal 2013 were for orders received and shipped within the quarter, which increased from 45 percent in the third quarter of fiscal 2013. Operating income and non-GAAP adjusted operating income for fiscal 2013 decreased compared to fiscal 2012, reflecting the decrease in net sales, changes in product mix and higher RD&E spend.

44


Fiscal 2012 financial results reflected continued uncertain global economic conditions that led to decreased demand for semiconductor manufacturing equipment compared to fiscal 2011, particularly in the second half of fiscal 2012. In the fourth quarter of fiscal 2012, new orders were $741 million, a decrease of 36 percent compared to the third quarter of fiscal 2012. The decrease in new orders in fiscal 2012 from the prior year was primarily due to reduced demand from memory and logic customers, partially offset by the addition of Varian. Net sales increased slightly in fiscal 2012 from the prior year due to the addition of net sales attributable to Varian, partially offset by decreased investment from memory and logic customers. Three customers accounted for 60 percent of net sales in this segment in fiscal 2012. Approximately 53 percent of net sales in the fourth quarter of fiscal 2012 were for orders received and shipped within the quarter, which remained flat from the third quarter of fiscal 2012. Operating income and non-GAAP adjusted operating income for fiscal 2012 decreased compared to fiscal 2011, due to changes in customer and product mix with the inclusion of Varian, costs associated with Varian operations, and additional inventory charges. Operating income for fiscal 2012 also included Varian acquisition-related costs of $290 million.
Applied Global Services Segment
The Applied Global Services segment encompasses spares, upgrades, services, remanufactured earlier generation equipment and factory automation software for semiconductor, display and solar manufacturing. These products are designed to improve customers' operating efficiency, optimize their operating costs, and lessen the environmental impact of their factories. Customer demand for products and services is fulfilled through a global distribution system with trained service engineers located in close proximity to customer sites.
Certain significant measures for the past three fiscal years were as follows:
 
 
 
 
 
 
 
 
Change
2013
 
2012
 
2011
2013 over 2012
 
2012 over 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions, except percentages and ratios)
New orders
$
2,090

 
$
2,274

 
$
2,333

 
$
(184
)
 
(8)%
 
$
(59
)
 
(3
)%
Net sales
2,023

 
2,285

 
2,413

 
(262
)
 
(11)%
 
(128
)
 
(5
)%
Book to bill ratio
1.0

 
1.0

 
1.0

 
 
 
 
 
 
 
 
Operating income
436

 
502

 
482

 
(66
)
 
(13)%
 
20

 
4
 %
Operating margin