10-K 1 amat10252015-10xkdoc.htm 10-K 10-K
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 25, 2015
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.    þ
 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, 2015, based upon the closing sale price reported by the NASDAQ Global Select Market on that date: $26,764,127,442
Number of shares outstanding of the registrant’s Common Stock, $.01 par value, as of December 3, 2015: 1,149,133,389
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of Part III will be provided in accordance with Instruction G(3) to Form 10-K no later than February 22, 2016.



Caution Regarding Forward-Looking Statements
This Annual Report on 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, contains forward-looking statements that involve risks and uncertainties.
Examples of forward-looking statements include those regarding Applied’s future financial or operating results, cash flows and cash deployment strategies, declaration of dividends, share repurchases, business strategies and priorities, costs and cost controls, products, competitive positions, management's plans and objectives for future operations, research and development, strategic acquisitions and investments, growth opportunities, restructuring activities, backlog, working capital, liquidity, investment portfolio and policies, taxes, supply chain, manufacturing, properties, legal proceedings and claims, customer demand and spending, end-use demand, market and industry trends and outlooks, general economic conditions, and other statements that are not historical facts, as well as their underlying assumptions. Forward-looking statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “potential” and “continue,” the negative of these terms, or other comparable terminology. All forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in Part 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. Forward-looking statements are based on management’s estimates, projections and expectations as of the date hereof, and Applied undertakes no obligation to revise or update any such statements.
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.

2


APPLIED MATERIALS, INC.
FORM 10-K FOR THE FISCAL YEAR ENDED OCTOBER 25, 2015
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:
 

3


PART I
Item 1:
Business
Incorporated in 1967, Applied is a Delaware corporation. A global company with a broad set of capabilities in materials engineering, Applied provides manufacturing equipment, services and software to the global semiconductor, display, solar photovoltaic (PV) and related industries. With its diverse technology capabilities, Applied delivers products and services that improve device performance, yield and cost. Applied’s customers include manufacturers of semiconductor chips, liquid crystal and other displays, solar PV cells, 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, 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 operations is set forth under “Risk Factors” in Item 1A, which is incorporated herein by reference.
Net sales by reportable segment for the past three fiscal years were as follows:
 
2015
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions, except percentages)
Silicon Systems
$
6,135

 
64%
 
$
5,978

 
66%
 
$
4,775

 
64%
Applied Global Services
2,531

 
26%
 
2,200

 
24%
 
2,023

 
27%
Display
780

 
8%
 
615

 
7%
 
538

 
7%
Energy and Environmental Solutions
213

 
2%
 
279

 
3%
 
173

 
2%
Total
$
9,659

 
100%
 
$
9,072

 
100%
 
$
7,509

 
100%

Silicon Systems
Applied’s Silicon Systems segment develops, manufactures and sells a wide range of manufacturing equipment used to fabricate semiconductor chips, also referred to as integrated circuits (ICs). The Silicon Systems segment includes semiconductor capital equipment for deposition, etch, ion implantation, rapid thermal processing, chemical mechanical planarization, metrology and inspection, and wafer packaging. The majority of Applied's new equipment sales are to leading integrated device manufacturers and foundries worldwide.
Transistor and Interconnect
Applied’s transistor and interconnect products and technologies have enabled multiple generations of device scaling from planar transistors to today’s 3D multi-gate FinFET transistors. Applied offers products and technologies for transistor and interconnect fabrication, including epitaxy, ion implantation, oxidation and nitridation, rapid thermal processing, chemical vapor deposition, physical vapor deposition, chemical mechanical planarization and electrochemical deposition. Many of these process steps are used multiple times throughout the semiconductor chip fabrication process.


4


Transistor and Interconnect Technologies
 
Product(s)
Epitaxy
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 circuity. Epi technology is used in an increasing number of IC devices in both the wafer surface and transistor areas of a chip to enhance speed.
 
Centura RP Epi
Ion Implant
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.
 
VIISta Systems
Oxidation/Nitridation
Applied’s systems provide critical oxidation steps - like memory gate oxide, shallow trench isolation and liner oxide - for advanced device scaling.
 
Vantage, Radiance and Centura Systems
Rapid Thermal Processing (RTP)
RTP is used primarily for annealing, which modifies the properties of deposited films. Applied’s single-wafer RTP systems are also used for growing high quality oxide and oxynitride films.
 
Vantage Systems
Physical Vapor Deposition (PVD)
PVD is used to deposit high quality metal films with low resistivity for contact and interconnect devices. Applications include metal gate, silicides, contact liner/barrier, interconnect copper barrier seed and metal hard mask.
 
Endura Systems
Chemical Vapor Deposition (CVD)
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.
 
Endura and Centura Systems
Chemical Mechanical Planarization (CMP)
CMP is used to planarize a wafer surface, a process that allows subsequent photolithography patterning and material deposition steps to occur with greater accuracy, resulting in more highly uniform film layers with minimal thickness variations.
 
Reflexion Systems
Electrochemical Deposition (ECD)
ECD is a process by which metal atoms from a chemical fluid (an electrolyte) are deposited on the surface of an immersed object.
 
Raider Platform

Patterning and Packaging
Applied offers patterning and packaging products and systems that enable the transfer of patterns onto device structures, making it possible to etch masks used for photolithography, and perform deposition, etching, and related processes. These systems and technologies address challenges resulting from shrinking pattern dimensions and the complexity in vertical stacking found in today’s most advanced semiconductor devices.
Patterning and Packaging Technologies
 
Product(s)
Atomic Layer Deposition (ALD)
ALD technology enables customers to fabricate thin films of either conducting or insulating material with uniform coverage in nanometer-sized structures.
 
Olympia System
Chemical Vapor Deposition (CVD)
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.
 
Producer Systems
Etch
Etching is used many times throughout the IC manufacturing process to selectively remove material from the surface of a wafer. Applied offers systems for etching dielectric, metal, and silicon films to meet the requirements of advanced processing.
 
Centris and Producer Systems

5


Imaging and Process Control
Applied offers a suite of metrology, inspection and review systems for front- and back-end-of-line applications. These systems’ imaging capabilities and algorithms employ optical and e-beam technologies to meet the most advanced technical demands, such as self-aligned double and quad patterning, extreme ultraviolet layers, measurement-intensive optimal proximity correction mask qualification, and emerging 3D architectures. Applied delivers leading-edge capabilities that enable chipmakers to establish accurate statistical process control, ramp up production runs rapidly, and achieve consistently high production yields.
Imaging and Process Control Technologies
 
Product(s)
Metrology and Inspection
Metrology and inspection tools are used to locate, measure, and analyze critical defects and features on the wafer during various stages of the fabrication processes. Applied enables customers to characterize and control critical dimension (CD) and defect issues, especially at advanced generation technology nodes.
 
SEMVision G6 Defect Analysis
UVision 7 Inspection
VeritySEM 5i Metrology
Aera4 Mask Inspection

Applied Global Services
The Applied Global Services (AGS) segment provides integrated solutions to optimize equipment and fab performance and productivity, including spares, upgrades, services, remanufactured earlier generation equipment and factory automation software for semiconductor, display and solar products. Customer demand for products and services is fulfilled through a global distribution system with trained service engineers located in close proximity to customer sites 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.

AGS Solutions and Technology
Certified Services
A comprehensive service product portfolio that combines service technology and tool specific performance commitments in order to optimize customer factory productivity.
Fab Consulting
Experts using advanced analytical tools to solve production problems that have the greatest impact on customer fab productivity.
Parts Programs
Spare parts portfolio targets key manufacturing challenges and balances inventory cost and risk to efficiently meet customer fab requirements. 
Subfab Equipment
Applied SubFab solutions lower costs, save energy, reduce environmental impact, and meet Environmental Protection Agency reporting regulations for greenhouse gas emissions.
Legacy Equipment
Comprehensive 200mm equipment and upgrades portfolio to address a full spectrum of production needs and extend tool lifetime. Applied legacy equipment supports new technology for a broad variety of devices including analog, power, and MEMS.
Automation Software
Automation software coordinates and streamlines every aspect of a factory-the processes, equipment and people-to provide competitive advantage to customers.


6


Display
The Display segment is comprised of products for manufacturing liquid crystal displays (LCDs), organic light-emitting diodes (OLEDs), and other display technologies for TVs, personal computers (PCs), tablets, smart phones, and other consumer-oriented devices. While similarities exist between the technologies utilized in semiconductor and display fabrication, the most significant differences are in the size and composition of the substrate. Substrates used to manufacture display panels are typically glass, although newer flexible materials are entering the market. Display industry growth depends primarily on consumer demand for increasingly larger and more advanced TVs and high resolution displays for mobile devices. The Display segment offers a variety of technologies and products, including:
Display Technologies
 
Product(s)
Array Test
LCD display substrates are inspected at many stages of production to maximize yield, minimize scrap, optimize equipment utilization, and monitor manufacturing processes. At the completion of the array stage, the performance of the millions of individual pixels on each display is tested.
 
Electron Beam Array Tester
Chemical Vapor Deposition (CVD)
During CVD processing, gases containing material atoms or molecules are introduced into the process chamber. The gases form reactive radicals or ions, which undergo chemical reactions to form thin films on the heated substrate.
 
AKT PECVD Systems
Physical Vapor Deposition (PVD)
PVD is used to deposit high quality films of metals, alloys, transparent conductors and semiconductors.  In Display, these films are used for contact, interconnect, transparent electrodes and transistor materials in display backplanes, as well as for transparent electrodes in color filters and touch panels.
 
AKT Aristo and PiVot Systems

Energy and Environmental Solutions
The Energy and Environmental Solutions segment includes products for fabricating crystalline-silicon (c-Si) solar PV cells, as well as high throughput roll-to-roll deposition equipment for flexible electronics, packaging and other applications. The technologies and products offered in the Energy and Environmental Solutions segment include:
Energy and Environmental Technologies
 
Product(s)
Solar:
 
 
Cell Manufacturing
C-Si cell manufacturing involves multiple steps, one of which is screen printing the solar cell contact structures. Applied’s printers are the industry-leading systems for this process step. Applied’s Fine Line Double Print process enables solar manufacturers to produce cells with less paste, better quality and higher cell efficiencies than conventional single print cells.
 
Baccini Systems
Roll-to-Roll WEB Coating:
 
 
The Roll-to-Roll coating systems provide production solutions for packaging, flexible electronics and security industries. WEB systems utilize physical vapor deposition, thermal evaporation, chemical vapor deposition, and e-beam technology to deposit tiny layers of metal onto flexible substrates.
 
TopBeam, TopMet and SmartWeb Systems

7


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 25, 2015 and October 26, 2014 was as follows:
 
2015
 
2014
 
 
 
 
 
 
 
 
 
(In millions, except percentages)
Silicon Systems
$
1,720

 
55%
 
$
1,400

 
48%
Applied Global Services
812

 
26%
 
775

 
27%
Display
525

 
16%
 
593

 
20%
Energy and Environmental Solutions
85

 
3%
 
149

 
5%
Total
$
3,142

 
100%
 
$
2,917

 
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 order cancellations. Customers may delay delivery of products or cancel orders prior to shipment, subject to possible cancellation penalties. Delays in delivery schedules 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 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 Germany, Israel, Italy, Singapore, Taiwan, the United States and other countries in Asia. Applied uses numerous vendors, including contract manufacturers, to supply parts and assembly services for the manufacture and support of its products, including some systems being completed at customer sites.
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 selecting and qualifying alternate suppliers for key parts; monitoring the financial condition of key suppliers; maintaining appropriate inventories of key parts; qualifying new parts on a timely basis; and ensuring quality and performance of parts.


8


Research, Development and Engineering
Applied’s long-term growth strategy requires continued development of new products, including products that enable expansion into new markets. Applied's significant investments in research, development and engineering (RD&E) must generally enable it to deliver new products and technologies before the emergence of strong demand, thus allowing customers to incorporate these products into their manufacturing plans during early-stage technology selection. Applied works closely with its global customers to design systems and processes that meet their planned technical and production requirements.
Applied’s product development and engineering organizations are located primarily in the United States, as well as in in Canada, China, Europe, India, Israel, Singapore and Taiwan. In addition, certain outsourced RD&E activities, process support and customer demonstrations are performed in the United States, India, China, Singapore and Taiwan.
Applied's investments in RD&E for product development and engineering programs over the last three fiscal years were as follows: $1.5 billion (15 percent of net sales) in fiscal 2015, $1.4 billion (16 percent of net sales) in fiscal 2014, and $1.3 billion (18 percent of net sales) in fiscal 2013. 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.
Marketing and Sales
Net sales by geographic region for the past three fiscal years, determined by the location of customers' facilities to which products were shipped, were as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
2015
 
2014
 
2013
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions, except percentages)
Taiwan
$
2,600

 
27%
 
$
2,702

 
30%
 
$
2,640

 
35%
China
1,623

 
17%
 
1,608

 
18%
 
787

 
11%
Korea
1,654

 
17%
 
965

 
10%
 
924

 
12%
Japan
1,078

 
11%
 
817

 
9%
 
685

 
9%
Southeast Asia
432

 
4%
 
356

 
4%
 
320

 
4%
Asia Pacific
7,387

 
76%
 
6,448

 
71%
 
5,356

 
71%
United States
1,630

 
17%
 
1,966

 
22%
 
1,473

 
20%
Europe
642

 
7%
 
658

 
7%
 
680

 
9%
Total
$
9,659

 
100%
 
$
9,072

 
100%
 
$
7,509

 
100%

Because of the highly technical nature of its products, Applied markets and sells products worldwide almost entirely through a direct sales force.
General economic conditions can impact the company’s business and financial results. Applied’s business is based on capital equipment investments by major semiconductor, display, solar PV and other manufacturers, and is subject to cyclical industry conditions. Customers’ expenditures depend on many factors, including: anticipated market demand and pricing for semiconductors, display technologies and solar cells, and other electronic devices; the development of new technologies; customers’ factory utilization; capital resources and financing; government policies and incentives; and global and regional economic conditions. In addition, a significant driver in the semiconductor and display industries is end-demand for mobile consumer products, which is characterized by seasonality that impacts the timing of customer investments in manufacturing equipment and, in turn, Applied’s business.
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 each fiscal year, which were for products in multiple reportable segments.
 
 
2015
 
2014
 
2013
Samsung Electronics Co., Ltd.
18%
 
12%
 
13%
Taiwan Semiconductor Manufacturing Company Limited
15%
 
21%
 
27%

9


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, cost-effectiveness and the ability to support a global customer base. 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.
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, particularly mobility devices such as smartphones and tablets. As a result, products within the Silicon Systems 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 in the marketplace. 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, which has experienced increasing consolidation. Some of these competitors offer a single product line and others offer multiple product lines, and range from suppliers serving a single region to global, diversified companies. The competitive environment for Silicon Systems in fiscal 2015 reflected steady demand for semiconductor equipment, with increased investment in technology upgrades and additional capacity by memory customers. Demand from foundry customers reflected investments in new technology at advanced nodes, driven by demand for advanced mobile chips.
Products and services within the Applied Global Services segment complement Silicon Systems, 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 2015 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 2015 was characterized by continued demand for manufacturing equipment for TVs and high-end mobile devices, although this sector remains susceptible to highly cyclical conditions. 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 the c-Si solar equipment market. The solar equipment market has been characterized by significant pressure to reduce customers' overall production costs and increase conversion efficiency. While end-market demand for solar PVs has been robust over the last several years, investment levels in capital equipment remained low in fiscal 2015. 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.


10


Patents and Licenses
Applied’s competitive position significantly depends upon its research, development, engineering, manufacturing and marketing capabilities, as well as its patent position. Protection of Applied's technology assets through enforcement of its intellectual property rights, including patents, is important. Applied’s practice is to file patent applications in the United States and other countries for inventions that it considers significant. Applied has approximately 10,200 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 its business. In addition to its patents, Applied possesses other intellectual property, including trademarks, know-how, trade secrets, and copyrights.
Applied enters into patent and technology licensing agreements with other companies when it is determined to be in its best interest. 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, 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 preventative 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 laws and regulations, including 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 Applied’s latest Citizenship Report on its website at http://www.appliedmaterials.com/company/corporate-responsibility/reports. 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 25, 2015, Applied employed approximately 14,600 regular employees and 900 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.

11


Executive Officers of the Registrant
The following table and notes set forth information about Applied’s executive officers:
Name of Individual
Position
Gary E. Dickerson(1)
President, Chief Executive Officer
Ginetto Addiego(2)
Senior Vice President, Engineering
Robert J. Halliday(3)
Senior Vice President, Chief Financial Officer
Thomas F. Larkins(4)
Senior Vice President, General Counsel and Corporate Secretary
Omkaram Nalamasu(5)
Senior Vice President, Chief Technology Officer
Ali Salehpour(6)
Senior Vice President, General Manager, New Markets and Service Group
Charles Read(7)
Corporate Vice President, Corporate Controller and Chief Accounting Officer
(1)
Mr. Dickerson, age 58, was named President of Applied in June 2012 and appointed Chief Executive Officer and a member of the Board of Directors in September 2013. Before joining Applied, he served as Chief Executive Officer and a director of Varian Semiconductor Equipment Associates, Inc. (Varian) from 2004 until its acquisition by Applied in November 2011. Prior to Varian, 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, including President and Chief Operating Officer. Mr. Dickerson started his semiconductor career in manufacturing and engineering management at General Motors' Delco Electronics Division and then AT&T Technologies.
(2)
Dr. Addiego, age 56, has been Senior Vice President, Engineering since rejoining Applied in March 2014. He previously was with Applied from 1996 to 2005, leading various product groups as well as global organizations, including Global Operations, Manufacturing, Foundation Engineering, and Information Technology. From March 2011 to March 2014, Dr. Addiego was President and Chief Operating Officer of Ultra Clean Technology Corp., a supplier of critical subsystems for the semiconductor capital equipment, medical device, energy, research, and flat panel industries. From February 2005 to March 2011, Dr. Addiego worked at Novellus Systems, Inc., a provider of advanced process equipment for the semiconductor industry, where he served as Executive Vice President and Chief Administrative Officer and Executive Vice President of Corporate Operations.
(3)
Mr. Halliday, age 61, has been Senior Vice President, Chief Financial Officer of Applied since February 2013. He previously served as a Group Vice President and General Manager in Applied’s Silicon Systems 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. He was Varian's Treasurer from November 2002 to October 2006 and from February 2009 to February 2010.
(4)
Mr. Larkins, age 54, has been Senior Vice President, General Counsel and Corporate Secretary of Applied since November 2012. Previously, Mr. Larkins was employed by Honeywell International Inc., a diversified global technology and manufacturing company, 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.
(5)
Dr. Nalamasu, age 57, has been Senior Vice President, Chief Technology Officer since June 2013, and President of Applied Ventures, LLC, Applied's venture capital arm, since November 2013. He 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. Prior to Rensselaer, Dr. Nalamasu served in several leadership roles at Bell Laboratories.
(6)
Mr. Salehpour, age 54, has been Senior Vice President, General Manager, New Markets and Service Group 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 as a Senior Vice President and General Manager.
(7)
Mr. Read, age 49, 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.

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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. The SEC’s website, www.sec.gov, contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. These website addresses are intended to be an inactive textual references only. None of the information on, or accessible through, these websites is part of this Form 10-K or is incorporated by reference herein.


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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, 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. In particular, the amount and mix of capital equipment spending between foundry, memory and logic customers can have a significant impact on the results of operations of our Silicon Systems segment, which is the largest contributor to Applied’s consolidated net sales and total new orders.
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. If Applied does not effectively manage its costs during periods of decreasing demand, its gross margins and earnings may be adversely impacted.
Applied is exposed to risks associated with the uncertain global economy.
Uncertain global economic conditions 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 displays in particular depend largely on consumer spending. 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.

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Applied is exposed to risks as a result of ongoing changes in the various industries in which it operates.
The global semiconductor, 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;
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 in the Silicon Systems segment 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;
semiconductor manufacturer's ability to reconfigure and re-use equipment, and the resulting effect on their need to purchase new equipment and services;
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;

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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;
consolidation in the semiconductor industry, including among semiconductor manufacturers and among manufacturing equipment suppliers;
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;
the potential increasing investment in semiconductor manufacturing capabilities in China, and its effect on the demand for semiconductor manufacturing equipment; 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 in order to enable opportunities for gains.
Applied is exposed to risks as a result of ongoing changes specific to the display industry.
The global 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, 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, which may be affected by changes in economic conditions in China;
the rate of transition to larger substrate sizes for TVs and to new display technologies for TVs and mobile applications, 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), flexible displays and metal oxide, and new touch panel films; and
uncertainty with respect to future display technology end-use applications and growth drivers.


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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. Recently, Applied implemented cost reduction measures in its solar business, and as a result incurred restructuring charges, asset impairments and inventory-related charges. 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 assessment of duties on solar cells and modules imported from China, Taiwan and other countries;
challenges associated with marketing and selling manufacturing equipment and services to a diverse and diffuse customer base;
the availability and condition of used solar equipment, which impacts demand for new equipment;
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 and 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;

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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 2015, two semiconductor manufacturers accounted for approximately 41 percent of the Silicon Systems segment's net sales and two customers accounted for 33 percent of Applied’s consolidated net sales. Applied’s display customer base is also highly concentrated. 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. As Applied’s products are configured to customer specifications, changing, rescheduling or canceling orders may result in significant, non-recoverable costs. If customers do not place orders, or they substantially reduce, delay or cancel orders, Applied may not be able to replace the business, which could have a material adverse effect on the Company’s results of operations. 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 2015, approximately 83 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;

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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;


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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.
Applied’s indebtedness and debt covenants could adversely affect its financial condition and business.
Applied has $3.35 billion in aggregate principal amount of senior unsecured notes outstanding. Under the indenture governing the senior unsecured notes, it may be required to offer to repurchase the notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest, upon a change of control of Applied and a contemporaneous downgrade of the notes below investment grade. Applied also has in place a $1.5 billion committed revolving credit agreement. While no amounts were outstanding under this credit agreement at October 25, 2015, Applied may borrow amounts in the future under the agreement. Applied may also enter into new financing arrangements. Applied’s ability to satisfy its debt obligations is dependent upon the results of its business operations and other risks discussed in this section. Significant changes in Applied’s credit rating or changes in the interest rate environment could have a material adverse consequence on Applied’s access to and cost of capital for future financings, and financial condition. If Applied fails to satisfy its debt obligations, or comply with financial and other debt covenants, it may be in default and any borrowings may become immediately due and payable, and such default may also constitute a default under other of Applied’s obligations. There can be no assurance that Applied would have sufficient financial resources or be able to arrange financing to repay any borrowings at such time.
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;

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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.

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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.

22


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 Germany, Israel, Italy, Singapore, Taiwan, the United States 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 its supply chain and improve back office and information technology infrastructure for more efficient transaction processing. The implementation of new processes and additional functionality to the existing systems 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, 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. 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.

23


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 jurisdictions. Significant judgment is required to determine and estimate worldwide tax liabilities. Applied’s future provision for income taxes and 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 jurisdictions with differing tax rates; (3) plans to indefinitely reinvest certain funds held outside of the U.S.; and (4) valuation of deferred tax assets and liabilities.
Consistent 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 incentives, Applied must meet requirements relating to various activities. Applied’s ability to realize benefits from these incentives could be materially affected if, among other things, applicable requirements are not met or 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 conflicting laws, rules and regulations that may be enacted by executive order, legislative bodies 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. 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 and ambiguities in laws, regulations and standards create uncertainty and challenges 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.


24


Item 2:
Properties
Information concerning Applied's properties at October 25, 2015 is set forth below:
 
(Square feet in thousands)
United States
 
Other Countries
 
Total
Owned
3,748
 
1,624
 
5,372
Leased
556
 
1,107
 
1,663
Total
4,304
 
2,731
 
7,035
Because of the interrelation of Applied's operations, properties within a country may be shared by the segments operating within that country. The Company's headquarters offices are in Santa Clara, California. Products in Silicon Systems are manufactured in Austin, Texas; Gloucester, Massachusetts; Rehovot, Israel; and Singapore. 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 and Santa Clara, California. Products in the Energy and Environmental Solutions segment are primarily manufactured in Alzenau, Germany and Treviso, Italy.
Applied also owns and leases offices, plants and warehouse locations in many locations throughout the world, including in Europe, Japan, North America (principally the United States), Israel, China, India, Korea, Southeast Asia and Taiwan. These facilities are principally used for manufacturing; research, development and engineering; and marketing, sales and 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.

25


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 2015
 
 
 
First quarter
$
25.40

 
$
21.04

Second quarter
$
25.63

 
$
21.49

Third quarter
$
20.38

 
$
17.37

Fourth quarter
$
17.62

 
$
14.37

Fiscal 2014
 
 
 
First quarter
$
18.01

 
$
16.50

Second quarter
$
20.84

 
$
16.72

Third quarter
$
23.27

 
$
18.67

Fourth quarter
$
23.11

 
$
18.92

Applied’s common stock is traded on the NASDAQ Global Select Market under the symbol AMAT. As of December 3, 2015, there were 3,247 registered holders of Applied common stock.

26


Performance Graph
The performance graph below shows the five-year cumulative total stockholder return on Applied common stock during the period from October 31, 2010 through October 25, 2015. 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 31, 2010 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 10/31/10 in stock or 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.
 
 
10/31/2010
 
10/30/2011
 
10/28/2012
 
10/27/2013
 
10/26/2014
 
10/25/2015
Applied Materials
100.00

 
104.54

 
90.88

 
155.43

 
188.13

 
150.26

S&P 500 Index
100.00

 
108.09

 
124.52

 
158.36

 
185.71

 
195.37

RDG Semiconductor Composite Index
100.00

 
110.04

 
104.07

 
136.15

 
172.41

 
170.40

Dividends
During each of fiscal 2015 and 2014, Applied's Board of Directors declared four quarterly cash dividends of $0.10 per share. During fiscal 2013, Applied’s Board of Directors declared three quarterly cash dividends of $0.10 per share and one quarterly cash dividend of $0.09 per share. Dividends paid during fiscal 2015, 2014 and 2013 amounted to $487 million, $485 million and $456 million, respectively. Applied currently anticipates that cash dividends will continue to be paid on a quarterly basis, although the declaration of any future cash dividend is at the discretion of the Board of Directors and will depend on Applied’s financial condition, results of operations, capital requirements, business conditions and other factors, as well as a determination by the Board of Directors that cash dividends are in the best interests of Applied’s stockholders.

27



Issuer Purchases of Equity Securities
The following table provides information as of October 25, 2015 with respect to the shares of common stock repurchased by Applied during the fourth quarter of fiscal 2015 pursuant to the publicly-announced stock repurchase program approved by the Board of Directors on April 26, 2015, which authorized up to $3.0 billion in repurchases over the next three years ending April 2018.
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 27, 2015 to August 23, 2015)
9.5

 
$
16.89

 
$
160

 
9.5

 
$
2,215

Month #2
 
 
 
 
 
 
 
 
 
(August 24, 2015 to September 20, 2015)
14.8

 
$
15.69

 
233

 
14.8

 
$
1,982

Month #3
 
 
 
 
 
 
 
 
 
(September 21, 2015 to October 25, 2015)
20.1

 
$
15.32

 
307

 
20.1

 
$
1,675

Total
44.4

 
$
15.78

 
$
700

 
44.4

 
 


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)
2015
 
2014
 
2013
 
2012
 
2011
 
 
 
 
 
 
 
 
 
 
 
(In millions, except percentages and per share amounts)
New orders
$
10,104

 
$
9,648

 
$
8,466

 
$
8,037

 
$
10,142

Net sales
$
9,659

 
$
9,072

 
$
7,509

 
$
8,719

 
$
10,517

Gross profit
$
3,952

 
$
3,843

 
$
2,991

 
$
3,313

 
$
4,360

Gross margin
40.9
%
 
42.4
%
 
39.8
%
 
38.0
%
 
41.5
%
Research, development and engineering
$
1,451

 
$
1,428

 
$
1,320

 
$
1,237

 
$
1,118

Operating income
$
1,693

 
$
1,520

 
$
432

 
$
411

 
$
2,398

Operating margin
17.5
%
 
16.8
%
 
5.8
%
 
4.7
%
 
22.8
%
Income before income taxes
$
1,598

 
$
1,448

 
$
350

 
$
316

 
$
2,378

Net income
$
1,377

 
$
1,072

 
$
256

 
$
109

 
$
1,926

Earnings per diluted share
$
1.12

 
$
0.87

 
$
0.21

 
$
0.09

 
$
1.45

Long-term debt
$
3,342

 
$
1,947

 
$
1,946

 
$
1,946

 
$
1,947

Cash dividends declared per common share
$
0.40

 
$
0.40

 
$
0.39

 
$
0.35

 
$
0.31

Total assets
$
15,308

 
$
13,174

 
$
12,043

 
$
12,102

 
$
13,861

 
(1)
Each fiscal year ended on the last Sunday in October. Fiscal 2015, 2014, 2013, 2012 and 2011 each contained 52 weeks.

28


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
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, display, solar photovoltaic (PV) and related industries. Applied’s customers include manufacturers of semiconductor wafers and chips, liquid crystal and other displays, solar PV cells and modules, and other electronic devices. These customers may use what they manufacture in their own end products or sell the items to other companies for use in advanced electronic components. Applied operates in four reportable segments: Silicon Systems, Applied Global Services, Display, and Energy and Environmental Solutions. A summary of financial information for each reportable segment is found in Note 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 the United States, Europe, Israel, and Asia. Applied’s broad range of equipment and service products are highly technical and are sold primarily through a direct sales force.
Applied’s results are driven primarily by worldwide demand for semiconductors, which in turn depends on end-user demand for electronic products. Each of Applied’s businesses is subject to cyclical industry conditions, as demand for manufacturing equipment and services can change depending on supply and demand for chips, display technologies, solar PVs and other electronic devices, as well as other factors, such as global economic and market conditions, and the nature and timing of technological advances in fabrication processes. In addition, a significant driver in the semiconductor and display industries is end-demand for mobile consumer products, which is characterized by seasonality that impacts the timing of customer investments in manufacturing equipment and, in turn, Applied's business. In light of these conditions, Applied's results can vary significantly year-over-year, as well as quarter-over-quarter.
Applied's strategic priorities for fiscal 2016 include developing products that help solve customers’ challenges at technology inflections; expanding its served market opportunities in the semiconductor and display industries; and growing its services business.
On April 26, 2015, Applied and Tokyo Electron Limited (TEL) announced that they had mutually agreed to terminate their previously announced Business Combination Agreement, which was entered into on September 24, 2013 and intended to effect a strategic combination of their respective business into a new combined company. No termination fee was payable by either Applied or TEL.


29


Results of Operations
The following table presents certain significant measurements for the past three fiscal years:
 
 
 
 
 
 
 
 
Change
 
2015
 
2014
 
2013
 
2015 over 2014
 
2014 over 2013
 
 
 
 
 
 
 
 
 
 
 
(In millions, except per share amounts and percentages)
New orders
$
10,104

 
$
9,648

 
$
8,466

 
$
456

 
$
1,182

Net sales
$
9,659

 
$
9,072

 
$
7,509

 
$
587

 
$
1,563

Gross profit
$
3,952

 
$
3,843

 
$
2,991

 
$
109

 
$
852

Gross margin
40.9
%
 
42.4
%
 
39.8
%
 
(1.5) points
 
2.6 points
Operating income
$
1,693

 
$
1,520

 
$
432

 
$
173

 
$
1,088

Operating margin
17.5
%
 
16.8
%
 
5.8
%
 
0.7 points
 
11.0 points
Net income
$
1,377

 
$
1,072

 
$
256

 
$
305

 
$
816

Earnings per diluted share
$
1.12

 
$
0.87

 
$
0.21

 
$
0.25

 
$
0.66

Non-GAAP Adjusted Results
 
 
 
 
 
 
 
 
 
Non-GAAP adjusted gross profit
$
4,147

 
$
4,002

 
$
3,160

 
$
145

 
$
842

Non-GAAP adjusted gross margin
42.9
%
 
44.1
%
 
42.1
%
 
(1.2) points
 
2.0 points
Non-GAAP adjusted operating income
$
1,896

 
$
1,781

 
$
1,032

 
$
115

 
$
749

Non-GAAP adjusted operating margin
19.6
%
 
19.6
%
 
13.7
%
 
 
5.9 points
Non-GAAP adjusted net income
$
1,457

 
$
1,314

 
$
718

 
$
143

 
$
596

Non-GAAP adjusted earnings per diluted share
$
1.19

 
$
1.07

 
$
0.59

 
$
0.12

 
$
0.48


Reconciliations of non-GAAP adjusted measures are presented under "Non-GAAP Adjusted Results" below. Fiscal 2015, 2014 and 2013 each contained 52 weeks.

30


Mobility, and the increasing technological functionality of mobile devices, continues to be the largest drivers of semiconductor industry spending. Fiscal 2015 was characterized by steady demand for semiconductor equipment, with increased investment in technology upgrades and additional capacity by memory customers. Demand from foundry customers reflected investments in new technology at advanced nodes, driven by demand for advanced mobile chips. Mobility represented a significant driver of display industry spending during fiscal 2015, which resulted in continued manufacturing capacity expansion for mobile applications. Demand for larger TVs was also a factor for display industry investments, although demand for TV manufacturing equipment remains susceptible to highly cyclical conditions. Investment in solar equipment remained low during fiscal 2015 due to ongoing excess manufacturing capacity in the industry. Gross margin challenges are expected in the first half of fiscal 2016 primarily due to higher demand for semiconductor equipment from memory customers and mobility display equipment.
Applied expects the mobility trend to remain the main growth driver for the semiconductor industry, and in turn for Silicon Systems, in fiscal 2016. Demand in the semiconductor manufacturing equipment industry is expected to be driven by foundry and memory spending. Applied also expects semiconductor spares and services, and display equipment investment to remain healthy in fiscal 2016.
During fiscal 2014, demand for advanced mobile chips drove demand for semiconductor equipment by foundry customers. In addition, demand for semiconductor equipment from memory customers improved as manufacturers invested in technology upgrades. Mobility and demand for larger TVs drove investment in display equipment during fiscal 2014. Investment in solar equipment remained low during fiscal 2014, despite continued end-market growth, due to excess manufacturing capacity in the industry.
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 fiscal 2013, demand from foundry customers softened, while demand from memory and logic customers improved. Display industry spending during fiscal 2013 reflected strong demand for mobile display equipment, as well as a recovery in demand for TV manufacturing equipment compared to weak industry levels in fiscal 2012. Investment in solar equipment remained low during fiscal 2013 due to continued excess manufacturing capacity in the industry.



31


New Orders
New orders by reportable segment for each fiscal year were as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change
 
2015
 
2014
 
2013
 
2015 over 2014
 
2014 over 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions, except percentages)
Silicon Systems
$
6,581

 
65%
 
$
6,132

 
64%
 
$
5,507

 
65%
 
7%
 
11%
Applied Global Services
2,653

 
26%
 
2,433

 
25%
 
2,090

 
25%
 
9%
 
16%
Display
717

 
7%
 
845

 
9%
 
703

 
8%
 
(15)%
 
20%
Energy and Environmental Solutions
153

 
2%
 
238

 
2%
 
166

 
2%
 
(36)%
 
43%
Total
$
10,104

 
100%
 
$
9,648

 
100%
 
$
8,466

 
100%
 
5%
 
14%
New orders for fiscal 2015 slightly increased from fiscal 2014 due to higher demand for semiconductor equipment, and semiconductor spares and services, partially offset by lower demand for display and solar equipment. New orders for Silicon Systems and Applied Global Services continued to comprise the majority of Applied's consolidated total new orders.
New orders increased in fiscal 2014 from fiscal 2013 across all segments, primarily due to higher demand for semiconductor equipment, semiconductor spares and services, and display equipment.
New orders by geographic region for each fiscal year, determined by the product shipment destination specified by the customer, were as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
Change
 
2015
 
2014
 
2013
 
2015 over 2014
 
2014 over 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions, except percentages)
Taiwan
$
2,808

 
28%
 
$
2,740

 
28%
 
$
2,885

 
34%
 
2%
 
(5)%
China
1,472

 
14%
 
1,517

 
16%
 
1,339

 
16%
 
(3)%
 
13%
Korea
1,709

 
17%
 
1,086

 
11%
 
915

 
11%
 
57%
 
19%
Japan
1,786

 
18%
 
1,031

 
11%
 
822

 
10%
 
73%
 
25%
Southeast Asia
430

 
4%
 
412

 
4%
 
351

 
4%
 
4%
 
17%
Asia Pacific
8,205

 
81%
 
6,786

 
70%
 
6,312

 
75%
 
21%
 
8%
United States
1,323

 
13%
 
2,200

 
23%
 
1,419

 
17%
 
(40)%
 
55%
Europe
576

 
6%
 
662

 
7%
 
735

 
8%
 
(13)%
 
(10)%
Total
$
10,104

 
100%
 
$
9,648

 
100%
 
$
8,466

 
100%
 
5%
 
14%
The changes in new orders from customers in Korea, Japan, the United States and Europe in fiscal 2015 compared to fiscal 2014, and changes in new orders from customers in the United States, Japan, Taiwan and Korea for fiscal 2014 compared to fiscal 2013, primarily reflected changes in customer mix for the Silicon Systems segment. The increase in new orders in fiscal 2014 compared to fiscal 2013 from China resulted from increased demand from display manufacturing equipment.



32


Changes in backlog during each fiscal year were as follows:
 
2015
 
2014
 
 
 
 
 
(In millions)
Beginning balance
$
2,917

 
$
2,372

New orders
10,104

 
9,648

Net sales
(9,659
)
 
(9,072
)
Net adjustments
(220
)
 
(31
)
Ending balance
$
3,142

 
$
2,917

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 70 percent of the backlog as of the end of fiscal 2015 is anticipated to be shipped within the first two quarters of fiscal 2016.
Applied’s backlog was $3.1 billion at October 25, 2015 compared to $2.9 billion at October 26, 2014. Backlog adjustments were negative for fiscal 2015 and totaled $220 million, primarily consisting of order cancellations, unfavorable foreign currency impacts and other adjustments.
Backlog by reportable segment as of the end of each fiscal year was as follows:
 
2015
 
2014
 
Change
2015 over 2014
 
 
 
 
 
 
 
 
 
 
 
(In millions, except percentages)
Silicon Systems
$
1,720

 
55%
 
$
1,400

 
48%
 
23%
Applied Global Services
812

 
26%
 
775

 
27%
 
5%
Display
525

 
16%
 
593

 
20%
 
(11)%
Energy and Environmental Solutions
85

 
3%
 
149

 
5%
 
(43)%
Total
$
3,142

 
100%
 
$
2,917

 
100%
 
8%
Total backlog increased in fiscal 2015 from fiscal 2014 primarily due to increases in demand from memory customers and for semiconductor spares and services, which was partially offset by lower demand for display and solar manufacturing equipment. In the fourth quarter of fiscal 2015 approximately 55 percent of net sales in Silicon Systems, Applied’s largest business segment, were for orders received and shipped within the quarter, up from 44 percent in the fourth quarter of fiscal 2014.

33


Net Sales
Net sales by reportable segment for each fiscal year were as follows: 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change
 
2015
 
2014
 
2013
 
2015 over 2014
 
2014 over 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions, except percentages)
Silicon Systems
$
6,135

 
64%
 
$
5,978

 
66%
 
$
4,775

 
64%
 
3%
 
25%
Applied Global Services
2,531

 
26%
 
2,200

 
24%
 
2,023

 
27%
 
15%
 
9%
Display
780

 
8%
 
615

 
7%
 
538

 
7%
 
27%
 
14%
Energy and Environmental Solutions
213

 
2%
 
279

 
3%
 
173

 
2%
 
(24)%
 
61%
Total
$
9,659

 
100%
 
$
9,072

 
100%
 
$
7,509

 
100%
 
6%
 
21%
Net sales increased in fiscal 2015 compared to fiscal 2014 primarily due to greater customer investments in semiconductor equipment, semiconductor spares and services, 200mm equipment systems and display equipment. The Silicon Systems segment remains the largest contributor of net sales.
Net sales for all segments increased in fiscal 2014 compared to fiscal 2013. The increase primarily reflected increased customer investments in semiconductor and display equipment, as well as semiconductor spares and services.
Net sales by geographic region for each fiscal year, determined by the location of customers' facilities to which products were shipped, were as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
Change
 
2015(1)
 
2014
 
2013
 
2015 over 2014
 
2014 over 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions, except percentages)
Taiwan
$
2,600

 
27%
 
$
2,702

 
30%
 
$
2,640

 
35%
 
(4)%
 
2%
China
1,623

 
17%
 
1,608

 
18%
 
787

 
11%
 
1%
 
104%
Korea
1,654

 
17%
 
965

 
10%
 
924

 
12%
 
71%
 
4%
Japan
1,078

 
11%
 
817

 
9%
 
685

 
9%
 
32%
 
19%
Southeast Asia
432

 
4%
 
356

 
4%
 
320

 
4%
 
21%
 
11%
Asia Pacific
7,387

 
76%
 
6,448

 
71%
 
5,356

 
71%
 
15%
 
20%
United States
1,630

 
17%
 
1,966

 
22%
 
1,473

 
20%
 
(17)%
 
33%
Europe
642

 
7%
 
658

 
7%
 
680

 
9%
 
(2)%
 
(3)%
Total
$
9,659

 
100%
 
$
9,072

 
100%
 
$
7,509

 
100%
 
6%
 
21%
(1)
Amount of net sales attributed to each geographic region differ from those included in Applied’s press release issued on November 12, 2015. These reclassifications did not affect Applied’s previously announced financial results as total net sales remain unchanged.
The changes in net sales from customers in Korea, Japan and Taiwan in fiscal 2015 compared to fiscal 2014 primarily reflected changes in customer mix for semiconductor equipment. The decrease in net sales from customers in the United States was due to lower customer spending on semiconductor equipment, partially offset by increased spending on semiconductor spares and services, and 200mm equipment.
Net sales from customers in China increased for fiscal 2014 compared to fiscal 2013 primarily due to greater investments in semiconductor, display and solar manufacturing equipment, while net sales from customers in the United States increased due to higher investments in semiconductor equipment.

34


Gross Margin
Gross profit and gross margin for each fiscal year were as follows:
 
 
 
 
 
 
 
 
Change
 
2015
 
2014
 
2013
 
2015 over 2014
 
2014 over 2013
 
 
 
 
 
 
 
 
 
 
 
(In millions, except percentages)
Gross profit
$
3,952

 
$
3,843

 
$
2,991

 
$
109

 
$
852

Gross margin
40.9
%
 
42.4
%
 
39.8
%
 
(1.5) points
 
2.6 points
Non-GAAP Adjusted Results
 
 
 
 
 
 
 
 
 
Non-GAAP adjusted gross profit
$
4,147

 
$
4,002

 
$
3,160

 
$
145

 
$
842

Non-GAAP adjusted gross margin
42.9
%
 
44.1
%
 
42.1
%
 
(1.2) points
 
2.0 points
Reconciliations of non-GAAP adjusted measures are presented under "Non-GAAP Adjusted Results" below.
Gross profit and non-GAAP adjusted gross profit in fiscal 2015 increased compared to fiscal 2014, primarily due to higher net sales, while gross margin and non-GAAP adjusted gross margin decreased primarily due to unfavorable changes in product mix and the absence of a recovery of a regional customs duty assessment charge recorded in fiscal 2014.
Gross profit and gross margin and non-GAAP adjusted gross profit and non-GAAP adjusted gross margin increased in fiscal 2014 compared to fiscal 2013 primarily reflecting higher net sales, the recovery of a regional customs duty assessment charge recorded in fiscal 2013, sales of display and solar tools that had been previously written down, lower manufacturing costs and change in product mix. Gross profit and non-GAAP adjusted gross profit during fiscal 2015, 2014 and 2013 included $57 million, $53 million and $50 million, respectively, of share-based compensation expense.
Research, Development and Engineering 
Research, development and engineering (RD&E) expenses for each fiscal year were as follows:
 
 
 
 
 
 
 
Change
 
2015
 
2014
 
2013
 
2015 over 2014
 
2014 over 2013
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Research, development and engineering
$
1,451

 
$
1,428

 
$
1,320

 
$
23

 
$
108

Applied’s future operating results depend to a considerable extent on its ability to maintain a competitive advantage in the equipment and service products it provides. Development cycles range from 12 to 36 months depending on whether the product is an enhancement of an existing product, which typically has a shorter development cycle, or a new product, which typically has a longer development cycle. Most of Applied’s existing products resulted from internal development activities and innovations involving new technologies, materials and processes. In certain instances, Applied acquires technologies, either in existing or new product areas, to complement its existing technology capabilities and to reduce time to market.
Management believes that it is critical to continue to make substantial investments in RD&E to assure the availability of innovative technology that meets the current and projected requirements of its customers’ most advanced designs. Applied has maintained and intends to continue its commitment to investing in RD&E in order to continue to offer new products and technologies.
In fiscal 2015, Applied increased its investments in new product growth in etch, chemical vapor deposition, high throughput atomic layer deposition, and next generation inspection technology. Applied’s investments in etch and chemical vapor deposition were focused on supporting the adoption of the etch Centris Sym 3 product and customer ramps of 3D NAND technology.  Applied's investment in atomic layer deposition is yielding products to address customer needs for future nodes, and investments in inspection include a new e-beam inspection platform and improved brightfield capabilities.
RD&E expenses increased in fiscal 2015 compared to the prior year and also in fiscal 2014 compared to fiscal 2013, reflecting the impact of ongoing product development initiatives. As part of its growth strategy, Applied continued to reprioritize existing spend, to enable increased funding for investments in technical capabilities and critical RD&E programs in current and new markets, with a focus on semiconductor technologies. RD&E expense during fiscal 2015, 2014 and 2013 included $69 million, $66 million and $53 million, respectively, of share-based compensation expense.

35


Marketing and Selling
Marketing and selling expenses for each fiscal year were as follows:
 
 
 
 
 
 
 
Change
 
2015
 
2014
 
2013
 
2015 over 2014
 
2014 over 2013
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Marketing and selling
$
428

 
$
423

 
$
433

 
$
5

 
$
(10
)
Marketing and selling expenses remained relatively flat in fiscal 2015 compared to fiscal 2014 due to continued cost management efforts. The decrease in marketing and selling expenses for fiscal 2014 compared to fiscal 2013 was mainly due to headcount reductions. Marketing and selling expenses during fiscal 2015, 2014 and 2013 included $26 million, $23 million and $20 million, respectively, of share-based compensation expense.
General and Administrative 
General and administrative expenses for each fiscal year were as follows:
 
 
 
 
 
 
 
Change
 
2015
 
2014
 
2013
 
2015 over 2014
 
2014 over 2013
 
 
 
 
 
 
 
 
 
 
 
(In millions)
General and administrative
$
455

 
$
497

 
$
458

 
$
(42
)
 
$
39

General and administrative (G&A) expenses for fiscal 2015 decreased compared to fiscal 2014 primarily due to lower acquisition-related and integration costs related to the terminated business combination with TEL, which was terminated in April 2015, and continued cost management efforts. G&A expenses for fiscal 2014 increased compared to fiscal 2013 primarily due to integration planning costs associated with the terminated business combination with TEL, partially offset by proceeds from a favorable litigation outcome. G&A expenses during fiscal 2015, 2014 and 2013 included $35 million, $35 million and $34 million, respectively, of share-based compensation expense.
Loss (Gain) on Derivatives Associated with Terminated Business Combination
 
 
 
 
 
 
 
Change
 
2015
 
2014
 
2013
 
2015 over 2014
 
2014 over 2013
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Loss (gain) on derivatives associated with terminated business combination
$
(89
)
 
$
(30
)
 
$
7

 
$
(59
)
 
$
(37
)
Changes in gain or loss on derivatives associated with the terminated business combination with TEL resulted from the sale of derivative contracts and exchange rate fluctuations. Due to the termination of the proposed business combination, the derivatives were sold during the third quarter of fiscal 2015. For further details, see Note 5 of Notes to Consolidated Financial Statements.
Impairment of Goodwill and Intangible Assets
In the fourth quarter of fiscal 2015 and 2014, Applied performed a qualitative assessment to test goodwill for all of its reporting units for impairment. Applied determined that it was more likely than not that each of its reporting units' fair values exceeded its respective carrying values and that it was not necessary to perform the two-step goodwill impairment test for any of its reporting units.
During fiscal 2013, the solar industry faced continued deterioration in market conditions associated with manufacturing overcapacity and weak operating performance and outlook, resulting in uncertainties regarding the timing and nature of a recovery in solar capital equipment expenditures. Applied performed a two-step goodwill impairment test and, as a result, recorded $224 million of goodwill impairment charges in its Energy and Environmental Solutions segment in fiscal 2013. Applied also recorded a $54 million impairment charge related to intangible assets in the Energy and Environmental Solutions segment in fiscal 2013.
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 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.

36


Restructuring and Asset Impairments
Restructuring and asset impairment expenses for each fiscal year were as follows:
 
 
 
 
 
 
 
Change
 
2015
 
2014
 
2013
 
2015 over 2014
 
2014 over 2013
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Restructuring and asset impairments, net
$
14

 
$
5

 
$
63

 
$
9

 
$
(58
)
The increase in restructuring and asset impairments, net for fiscal 2015 compared to fiscal 2014 was primarily due to the cost reduction measures in the solar business taken during fiscal 2015 to achieve a lower break-even level and improve business performance. The decrease in restructuring and asset impairments, net for fiscal 2014 compared to fiscal 2013 was due to completion of the principal activities for the previously announced restructuring plans. Also in fiscal 2013, Applied incurred $2 million of severance and other employee-related costs in connection with the integration of Varian Semiconductor Equipment Associates, Inc.
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 affected approximately 1,300 positions. As of January 26, 2014, principal activities related to this plan were complete. During fiscal 2014 and 2013, Applied recognized $5 million and $39 million, respectively, of employee-related costs in connection with the 2012 Global Restructuring Plan. Total costs incurred in implementing this plan were $150 million, none of which were allocated to the operating segments.
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. Total costs incurred in implementing this plan were $87 million, of which $13 million were inventory-related charges. During fiscal 2015, Applied recorded a favorable adjustment of $2 million associated with restructuring reserves under this program. During fiscal 2013, Applied recognized $26 million, of restructuring and asset impairment charges in connection with the 2012 EES Restructuring Plan. These costs were reported in the Energy and Environmental Solutions and Applied Global Services segments.
For further details, see Note 11 of Notes to Consolidated Financial Statements.
Interest Expense and Interest and Other Income, net
Interest expense and interest and other income, net for each fiscal year were as follows:
 
 
 
 
 
 
 
Change
 
2015
 
2014
 
2013
 
2015 over 2014
 
2014 over 2013
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Interest expense
$
103

 
$
95

 
$
95

 
$
8

 
$

Interest and other income, net
$
8

 
$
23

 
$
13

 
$
(15
)
 
$
10

Interest expenses incurred during the past three fiscal years were primarily associated with senior unsecured notes that were issued in June 2011 to fund a portion of the consideration and certain costs associated with the acquisition of Varian. Interest expense for fiscal 2015 increased compared to fiscal 2014 due to the issuance of senior unsecured notes in the aggregate principal amount of $1.8 billion in September 2015. Interest expense remained flat during fiscal 2014 compared to fiscal 2013.
Interest income primarily includes interest earned on cash and investments and realized gains on sale of securities. Interest and other income, net, decreased in fiscal 2015 compared to fiscal 2014 primarily due to lower realized gains on sales of strategic investments in fiscal 2015. Interest and other income, net, increased in fiscal 2014 compared to fiscal 2013 primarily due to an increase in realized gains on sales of securities recorded during fiscal 2014, partially offset by increased impairments of strategic investments.

37


Income Taxes
The provision for income taxes and effective tax rates for each fiscal year were as follows:
 
 
 
 
 
 
 
Change
 
2015
 
2014
 
2013
 
2015 over 2014
 
2014 over 2013
 
 
 
 
 
 
 
 
 
 
 
(In millions, except percentages)
Provision for income taxes
$
221

 
$
376

 
$
94

 
$
(155
)
 
$
282

Effective income tax rate
13.8
%
 
26.0
%
 
26.9
%
 
(12.2) points
 
(0.9) points
Applied’s effective tax rate is affected by the geographical composition of income, which includes jurisdictions with income tax incentives and differing tax rates. It is also affected by events that are not consistent from period to period, such as changes in income tax laws and regulations and the resolution of income tax filings.
The effective tax rate for fiscal 2015 was lower than the rate for fiscal 2014 primarily due to acquisition costs that became deductible in the second quarter of fiscal 2015 as a result of the termination of the proposed business combination with TEL, an adjustment in the second quarter of fiscal 2015 to correct an error in the recognition of cost of sales in the U.S. related to intercompany sales, reinstatement of the U.S. federal research and development tax credit during the first quarter of fiscal 2015 which was retroactive to its expiration in December 2013, resolutions and changes related to income tax liabilities for prior years, and changes in the geographical composition of income.
The effective tax rate for fiscal 2014 was lower than the rate for fiscal 2013 due primarily to nondeductible goodwill impairment charges in fiscal 2013, offset by resolutions and changes related to prior years and expiration of the U.S. federal research and development tax credit.


38


Segment Information
Applied reports financial results in four segments: Silicon Systems, Applied Global Services, Display, and Energy and Environmental Solutions. A description of the products and services, as well as financial data, for each reportable segment can be found in Note 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 resource, and RD&E functions provided at the corporate level; and unabsorbed information technology and occupancy. In addition, Applied does not allocate to its reportable segments restructuring and asset impairment charges and any associated adjustments related to restructuring actions, unless these actions pertain to a specific reportable segment.
The results for each reportable segment are discussed below.
Silicon Systems Segment
The Silicon Systems segment includes semiconductor capital equipment for deposition, etch, ion implantation, rapid thermal processing, chemical mechanical planarization, metrology and inspection, and wafer packaging. Development efforts are focused on solving customers' key technical challenges in transistor, 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 continually improve their ability to deliver high-performance, low-power processors and affordable solid-state storage in a small form factor.
The competitive environment for Silicon Systems in fiscal 2015 reflected continued investment by semiconductor manufacturers. Memory manufacturers increased investments in technology upgrades and additional capacity. Foundry investments reflected demand for new technology as customers ramp wafer starts at advanced nodes to meet demand for advanced mobile chips, but decreased primarily due to customers managing excess inventory, improving yields and re-using equipment.
Certain significant measures for each fiscal year were as follows: 
 
 
 
 
 
 
 
Change
 
2015
 
2014
 
2013
 
2015 over 2014
 
2014 over 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions, except percentages and ratios)
New orders
$
6,581

 
$
6,132

 
$
5,507

 
$
449

 
7%
 
$
625

 
11%
Net sales
6,135

 
5,978

 
4,775

 
157

 
3%
 
1,203

 
25%
Book to bill ratio
1.1

 
1.0

 
1.2

 
 
 
 
 
 
 
 
Operating income
1,410

 
1,391

 
876

 
19

 
1%
 
515

 
59%
Operating margin
23.0
%
 
23.3
%
 
18.3
%
 
 
 
(0.3) points
 
 
 
5.0 points
Non-GAAP Adjusted Results
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP adjusted operating income
1,588

 
1,565

 
$
1,050

 
23

 
1%
 
515

 
49%
Non-GAAP adjusted operating margin
25.9
%
 
26.2
%
 
22.0
%
 
 
 
(0.3) points
 
 
 
4.2 points

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

The composition of new orders for Silicon Systems by end use application for the past three fiscal years was as follows:
 
 
2015
 
2014
 
2013
Foundry
34%
 
52%
 
58%
Memory
53%
 
35%
 
27%
Logic and other
13%
 
13%
 
15%
 
100%
 
100%
 
100%

39


One region accounted for at least 30 percent of total net sales for the Silicon Systems segment for one or more of the past three fiscal years: 
 
 
 
 
 
 
 
Change
 
2015
 
2014
 
2013
 
2015 over 2014
 
2014 over 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions, except percentages)
Taiwan
$
1,982

 
$
2,186

 
$
2,171

 
$
(204
)
 
(9)%
 
$
15

 
1%
Customers in Taiwan accounted for 32 percent, 37 percent and 45 percent of total net sales for Silicon Systems in fiscal 2015, 2014 and 2013, respectively. Customers in the United States, China and Korea together contributed 47 percent, 47 percent and 37 percent of the total net sales for this segment in fiscal 2015, 2014 and 2013, respectively.
Financial results in the Silicon Systems segment for fiscal 2015 reflected continued wafer fabrication equipment spending in the semiconductor industry. The increase in new orders and net sales in fiscal 2015 compared to fiscal 2014 primarily reflected increased demand and spending from memory customers, partially offset by lower demand and spending from foundry customers. Two customers accounted for approximately 41 percent of net sales and three customers accounted for 53 percent of new orders in this segment in fiscal 2015. Operating income and non-GAAP adjusted operating income for fiscal 2015 increased compared to fiscal 2014, reflecting the increase in net sales, partially offset by changes in product mix and higher research and development expenses.
The increase in new orders and net sales in fiscal 2014 compared to fiscal 2013 primarily reflected increased demand and spending from memory customers, as well as continued demand from foundry customers. Three customers accounted for approximately 54 percent of net sales and three customers accounted for 75 percent of new orders in this segment in fiscal 2014. Operating income and non-GAAP adjusted operating income for fiscal 2014 increased compared to fiscal 2013, reflecting the increase in net sales, partially offset by changes in product mix and higher research and development expenses.
Applied Global Services Segment
The Applied Global Services segment encompasses integrated solutions to optimize equipment and fab performance and productivity, including spares, upgrades, services, remanufactured earlier generation equipment and factory automation software for semiconductor, display and solar products. Customer demand for products and services is fulfilled through a global distribution system with trained service engineers located in close proximity to customer sites.
Industry conditions that affected Applied Global Services' sales of spares and services during fiscal 2015 were principally semiconductor manufacturers' wafer starts, as well as utilization rates.
Certain significant measures for each fiscal year were as follows: 
 
 
 
 
 
 
 
Change
 
2015
 
2014
 
2013
 
2015 over 2014
 
2014 over 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions, except percentages and ratios)
New orders
$
2,653

 
$
2,433

 
$
2,090

 
$
220

 
9%
 
$
343

 
16
%
Net sales
2,531

 
2,200

 
2,023

 
331

 
15%
 
177

 
9
%
Book to bill ratio
1.0

 
1.1

 
1.0

 
 
 
 
 
 
 
 
Operating income
664

 
573

 
436

 
91

 
16%
 
137

 
31
%
Operating margin
26.2
%
 
26.0
%
 
21.6
%
 
 
 
0.2 points
 
 
 
4.4 points
Non-GAAP Adjusted Results
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-GAAP adjusted operating income
667

 
576

 
443

 
91

 
16%
 
133

 
30
%
Non-GAAP adjusted operating margin
26.4
%
 
26.2
%
 
21.9
%
 
 
 
0.2 points
 
 
 
4.3 points
Reconciliations of non-GAAP adjusted measures are presented under "Non-GAAP Adjusted Results" below.
There were no individual regions that accounted for at least 30 percent of total net sales for the Applied Global Services segment for any of the past three fiscal years.

40


New orders and net sales for fiscal 2015 increased compared to fiscal 2014 mainly due to higher demand for semiconductor spares and services, and 200mm equipment systems. Operating income, operating margin, non-GAAP adjusted operating income, and non-GAAP adjusted operating margin increased in fiscal 2015 compared fiscal 2014, reflecting the increase in net sales, which was partially offset by unfavorable product mix and the absence of a recovery of a regional customs duty assessment charge recorded in fiscal 2014.
New orders and net sales for fiscal 2014 increased compared to fiscal 2013 mainly due to increased demand for semiconductor spares and services, as well as 200mm equipment systems and equipment upgrades. Operating income and non-GAAP adjusted operating income increased in fiscal 2014 compared to the prior year, refle