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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Applied Materials    AMAT

APPLIED MATERIALS

(AMAT)
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APPLIED MATERIALS : DE Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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08/22/2019 | 03:58pm EDT
The following management's discussion and analysis is provided in addition to
the accompanying consolidated condensed financial statements and notes, and for
a full understanding of Applied's results of operations and financial condition
should be read in conjunction with the consolidated condensed financial
statements and notes included in this Form 10-Q and the financial statements and
notes for the fiscal year ended October 28, 2018 contained in the Company's Form
10-K filed December 13, 2018.
This report contains forward-looking statements that involve a number of risks
and uncertainties. Examples of forward-looking statements include those
regarding Applied's future financial or operating results, customer demand and
spending, end-use demand, market and industry trends and outlooks, 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, including the
proposed acquisition of Kokusai Electric Corporation (Kokusai Electric), growth
opportunities, restructuring activities, backlog, working capital, liquidity,
investment portfolio and policies, taxes, supply chain, manufacturing,
properties, legal proceedings and claims, 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," "intend," "potential" and
"continue," the negative of these terms, or other comparable terminology. All
forward-looking statements are subject to risks and uncertainties and other
important factors, including those discussed in Part II, Item 1A, "Risk
Factors," below and elsewhere in this report. These and many other factors could
affect Applied's future financial condition and operating results and could
cause actual results to differ materially from expectations based on
forward-looking statements made in this document or elsewhere by Applied or on
its behalf. Forward-looking statements are based on management's estimates,
projections and expectations as of the date hereof, and Applied undertakes no
obligation to revise or update any such statements.

Overview

Applied provides manufacturing equipment, services and software to the
semiconductor, display, and related industries. Applied's customers include
manufacturers of semiconductor wafers and chips, liquid crystal and organic
light-emitting diode (OLED) displays, 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. Each of
Applied's businesses is subject to variable industry conditions, as demand for
manufacturing equipment and services can change depending on supply and demand
for chips, display technologies, 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.
Applied operates in three reportable segments: Semiconductor Systems, Applied
Global Services, and Display and Adjacent Markets. A summary of financial
information for each reportable segment is found in Note 15 of Notes to
Consolidated Condensed Financial Statements. A discussion of factors that could
affect Applied's operations is set forth under "Risk Factors" in Part II,
Item 1A, which is incorporated herein by reference. Product development and
manufacturing activities occur primarily in the United States, Europe, Israel,
and Asia. Applied's broad range of equipment and service products are highly
technical and are sold primarily through a direct sales force.
Applied's results are driven primarily by customer spending on capital equipment
and services to support key technology transitions or to increase production
volume in response to worldwide demand for semiconductors and displays. While
certain existing technologies may be adapted to new requirements, some
applications create the need for an entirely different technological approach.
The timing of customer investment in manufacturing equipment is also affected by
the timing of next-generation process development, and the timing of capacity
expansion to meet end-market demand. In light of these conditions, Applied's
results can vary significantly year-over-year, as well as quarter-over-quarter.


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The following table presents certain significant measurements for the periods
indicated:

                                 Three Months Ended                               Nine Months Ended
                     July 28,         July 29,                         July 28,       July 29,
                       2019             2018            Change           2019           2018           Change

                                      (In millions, except per share amounts and percentages)
Net sales         $      3,562$     4,162$       (600 )$   10,854$   12,946$     (2,092 )
Gross margin              43.7 %           44.8 %    (1.1) points          43.8 %         45.3 %    (1.5) points
Operating income  $        802$     1,093$       (291 )$    2,486$    3,600$     (1,114 )
Operating margin          22.5 %           26.3 %    (3.8) points          22.9 %         27.8 %    (4.9) points
Net income        $        571$     1,016$       (445 )$    2,008$    2,281$       (273 )
Earnings per
diluted share     $       0.61$      1.01$      (0.40 )$     2.11$     2.20$      (0.09 )





Fiscal 2019 and 2018 contain 52 weeks each, and the first nine months of fiscal
2019 and 2018 each contained 39 weeks.
Investment in semiconductor and display manufacturing equipment and services
continued to be the main driver of revenue during the first nine months of
fiscal 2019.
Semiconductor and display manufacturing equipment customers' investments in new
capacity and technology transitions decreased compared to the same period in the
prior year. Applied continued to see growth in demand for services and continued
demand for spares from customers as compared to the same period in the prior
year.
While Applied anticipates major technology trends to drive long-term growth in
the semiconductor industry, the softening in demand that began during the second
half of 2018 is expected to continue through 2019, led primarily by lower
spending from memory customers. Foundry and logic spending is expected to
increase year-on-year; however, customers are prioritizing spending on longer
lead-time equipment not in Applied's product portfolio. Applied expects lower
spending for display manufacturing equipment in fiscal 2019, although long-term
demand drivers remain in place. Applied anticipates its global services business
to continue to grow in fiscal 2019.
The three and nine months ended July 29, 2018 included a one-time expense
related to the enactment of new U.S. tax legislation that reduced diluted
earnings per share by $0.01 and $1.05, respectively.
Applied adopted the authoritative guidance related to revenue recognition in the
first quarter of fiscal 2019 using the full retrospective method. Applied also
adopted authoritative guidance related to retirement benefits in the first
quarter of fiscal 2019 using the retrospective method. The adoption of these
guidance required restating each prior reporting period presented.
Results of Operations
Net Sales
Net sales for the periods indicated were as follows:
                                Three Months Ended                          

Nine Months Ended

                      July 28,             July 29,                       July 28,              July 29,
                        2019                 2018          Change           2019                  2018           Change

                                                    (In millions, except percentages)
Semiconductor
Systems          $ 2,273       64 %   $ 2,578       62 %    (12 )%   $  6,725       62 %   $  8,331       64 %    (19 )%
Applied Global
Services             931       26 %       952       23 %     (2 )%      2,877       27 %      2,778       21 %      4  %
Display and
Adjacent Markets     339       10 %       616       15 %    (45 )%      1,194       11 %      1,778       14 %    (33 )%
Corporate and
Other                 19        - %        16        - %     19  %         58        - %         59        1 %     (2 )%
Total            $ 3,562      100 %   $ 4,162      100 %    (14 )%   $ 

10,854 100 % $ 12,946 100 % (16 )%






For the three and nine months ended July 28, 2019 compared to the same periods
in the prior year, net sales decreased primarily due to decreased customer
investments in semiconductor and display manufacturing equipment. The
Semiconductor Systems segment continued to represent the largest contributor of
total net sales.

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Net sales by geographic region, determined by the location of customers' facilities to which products were shipped, were as follows:

                            Three Months Ended                                Nine Months Ended
                   July 28,           July 29,                     July 28,            July 29,
                     2019               2018         Change          2019                2018          Change

                                              (In millions, except

percentages)

China          $ 1,117     31 %   $ 1,647     39 %    (32 )%   $  3,078     28 %   $  3,911     30 %    (21 )%
Korea              445     12 %       572     14 %    (22 )%      1,458     13 %      3,007     23 %    (52 )%
Taiwan             596     17 %       506     12 %     18  %      2,046     19 %      1,913     15 %      7  %
Japan              556     16 %       700     17 %    (21 )%      1,727     16 %      1,684     13 %      3  %
Southeast Asia     134      4 %       165      4 %    (19 )%        413      4 %        600      5 %    (31 )%
Asia Pacific     2,848     80 %     3,590     86 %    (21 )%      8,722     80 %     11,115     86 %    (22 )%
United States      552     15 %       348      9 %     59  %      1,459     14 %      1,063      8 %     37  %
Europe             162      5 %       224      5 %    (28 )%        673    

6 % 768 6 % (12 )% Total $ 3,562 100 % $ 4,162 100 % (14 )% $ 10,854 100 % $ 12,946 100 % (16 )%






The changes in net sales in all regions in the three and nine months ended
July 28, 2019 compared to the same periods in the prior year primarily reflected
changes in semiconductor and display manufacturing equipment spending and
customer and product mix. The increase in net sales to customers in Taiwan and
United States for the three and nine months ended July 28, 2019 compared to the
same periods in the prior year was primarily due to increased investments in
semiconductor manufacturing equipment. The decrease in net sales to customers in
all other regions for the three and nine months ended July 28, 2019 compared to
the same periods in the prior year primarily reflected a decrease in investments
in semiconductor and display manufacturing equipment.
Gross Margin
Gross margins for the periods indicated were as follows:
                      Three Months Ended                     Nine Months Ended
             July 28,    July 29,                   July 28,    July 29,
               2019        2018         Change        2019        2018         Change


Gross margin    43.7 %      44.8 %   (1.1) points      43.8 %      45.3 %   (1.5) points


Gross margin in the three and nine months ended July 28, 2019 decreased compared
to the same periods in the prior year primarily due to the decrease in net sales
and unfavorable changes in customer and product mix. Gross margin during the
three months ended July 28, 2019 and July 29, 2018 included $23 million and $22
million of share-based compensation expense, respectively. Gross margin during
the nine months ended July 28, 2019 and July 29, 2018 included $67 million and
$65 million of share-based compensation expense, respectively.
Research, Development and Engineering
Research, Development and Engineering (RD&E) expenses for the periods indicated
were as follows:
                                        Three Months Ended                             Nine Months Ended
                              July 28,         July 29,                      July 28,       July 29,
                                2019             2018          Change          2019           2018         Change

                                                                (In millions)
Research, development and
engineering               $      515$      505$       10$    1,539$    1,503$      36


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.

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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.
The increase in RD&E expenses during the three and nine months ended July 28,
2019 compared to the same periods in the prior year was primarily due to
additional headcount and increased research and development program spending in
Semiconductor Systems segment. This increase reflects Applied's ongoing
investment in product development initiatives, consistent with the Company's
strategy. Applied continued to prioritize existing RD&E investments in technical
capabilities and critical research and development programs in current and new
markets, with a focus on semiconductor technologies. RD&E expenses during the
three months ended July 28, 2019 and July 29, 2018 included $25 million and $24
million of share-based compensation expense, respectively. RD&E expenses during
the nine months ended July 28, 2019 and July 29, 2018 included $74 million and
$72 million of share-based compensation expense, respectively.
Marketing and Selling
Marketing and selling expenses for the periods indicated were as follows:

                              Three Months Ended                     Nine Months Ended
                       July 28,      July 29,                July 28,      July 29,
                         2019          2018       Change       2019          2018       Change

                                                    (In millions)
Marketing and selling $   128$     138$  (10 )$   392$     394$   (2 )


Marketing and selling expenses decreased slightly in the three and nine months
ended July 28, 2019 compared to the same periods in fiscal 2018 primarily due to
lower variable compensation expenses. Marketing and selling expenses during the
three months ended July 28, 2019 and July 29, 2018 included $8 million and $7
million of share-based compensation expense, respectively. Marketing and selling
expenses during the nine months ended July 28, 2019 and July 29, 2018 each
included $23 million of share-based compensation expense.
General and Administrative
General and administrative (G&A) expenses for the periods indicated were as
follows:
                                   Three Months Ended                     Nine Months Ended
                            July 28,      July 29,                July 28,      July 29,
                              2019          2018       Change       2019          2018       Change

                                                         (In millions)

General and administrative $ 112$ 128$ (16 )$ 335

$ 363$ (28 )



G&A expenses in the three and nine months ended July 28, 2019 decreased compared
to the same periods in the prior year primarily due to lower variable
compensation expenses and favorable impact from foreign exchange. G&A expenses
during the three months ended July 28, 2019 and July 29, 2018 each included $11
million of share-based compensation expense. G&A expenses during the nine months
ended July 28, 2019 and July 29, 2018 each included $33 million of share-based
compensation expense.
Interest Expense and Interest and Other Income (Loss), net
Interest expense and interest and other income (loss), net for the periods
indicated were as follows:
                                   Three Months Ended                                   Nine Months Ended
                       July 28,            July 29,                          July 28,         July 29,
                         2019                2018           Change             2019             2018           Change

                                                               (In millions)
Interest expense  $         58          $         59     $        (1 )$       178$       174     $         4
Interest and
other income, net $         38          $         43     $        (5 )$       121$        95$        26



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Interest expenses incurred were primarily associated with issued senior
unsecured notes. Interest expense in the three and nine months ended July 28,
2019 remained relatively flat compared to the same periods in the prior year.
Interest and other income, net in the three months ended July 28, 2019 remained
relative flat compared to the same period in the prior year. Interest and other
income, net in the nine months ended July 28, 2019 increased compared to the
same period in fiscal 2018, primarily driven by unrealized gains on equity
investment securities. Effective the first quarter of fiscal 2019, unrealized
gains and losses on investments classified as equity investments are recognized
in other income (expense), net in the Consolidated Condensed Statement of
Operations. Prior to the adoption of Accounting Standards Update (ASU) 2016-01
Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of
Financial Assets and Financial Liabilities in the first quarter of fiscal 2019,
these unrealized gains and temporary losses were included within accumulated
other comprehensive income (loss), net of any related tax effect.
Income Taxes
Provision for income taxes and effective tax rates for the periods indicated
were as follows:
                                 Three Months Ended                         

Nine Months Ended

                     July 28,         July 29,                          July 28,        July 29,
                       2019             2018            Change            2019            2018            Change

                                                   (In millions, except percentages)
Provision for
income taxes      $       211$        61      $         150     $       421$     1,240$        (819 )
Effective tax
rate                     27.0 %            5.7 %      21.3 points            17.3 %          35.2 %    (17.9) points


Applied's provision for income taxes and effective tax rate are affected by the
geographical composition of pre-tax income which includes jurisdictions with
differing tax rates, conditional reduced tax rates and other income tax
incentives. It is also affected by events that are not consistent from period to
period, such as changes in income tax laws and the resolution of prior years'
income tax filings.
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (Tax
Act). The Tax Act requires a one-time transition tax on certain unrepatriated
earnings of foreign subsidiaries payable over eight years. U.S. deferred tax
assets and liabilities were subject to remeasurement due to the reduction of the
U.S. federal corporate tax rate. The U.S. Securities and Exchange Commission
issued Staff Accounting Bulletin No. 118, which provided guidance on accounting
for the income tax effects of the Tax Act and a measurement period for companies
to complete this accounting. Applied completed the accounting for the Tax Act
during the measurement period, which ended one year after the enactment date of
the Tax Act. Accounting for the remeasurement of deferred tax assets was
completed in the fourth quarter of fiscal 2018, and the accounting for the
transition tax was completed in the first quarter of fiscal 2019.
The Tax Act also includes provisions that impact Applied starting in fiscal
2019, including a provision designed to tax global intangible low-taxed income
(GILTI). On June 14, 2019, the U.S. government released regulations that
significantly affect how the GILTI provision of the Tax Act is interpreted. As a
result, Applied reversed a tax benefit of $96 million in the third quarter of
fiscal 2019 that had been realized in the first half of fiscal 2019. An
accounting policy choice is allowed to treat GILTI temporary differences in
taxable income either as a current-period expense when incurred (period cost
method) or factor such amounts into the measurement of deferred taxes (deferred
method). Applied has chosen the period cost method.
Applied's effective tax rates for the third quarter of fiscal 2019 and 2018 were
27.0 percent and 5.7 percent, respectively. The effective tax rate for the third
quarter of fiscal 2019 was higher than the same period in the prior fiscal year
primarily due to the regulations released on June 14, 2019.
Applied's effective tax rates for the first nine months of fiscal 2019 and 2018
were 17.3 percent and 35.2 percent, respectively. The effective tax rate was
lower than the same period in the prior fiscal year primarily due to tax expense
of $1.1 billion in the first nine months of fiscal 2018 for the transition tax
and remeasurement of deferred tax assets as a result of the Tax Act. Excluding
the tax expense of $1.1 billion, the effective tax rate for the first nine
months of fiscal 2019 was higher than the rate in the same period of the prior
fiscal year primarily due to certain provisions in the Tax Act becoming
effective in fiscal 2019, $79 million in the first nine months of fiscal 2019
related to changes in uncertain tax positions and the excess tax benefit from
share-based compensation in the first nine months of fiscal 2019 being $42
million less than in the same period in the prior fiscal year.

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Segment Information
Applied reports financial results in three segments: Semiconductor Systems,
Applied Global Services, and Display and Adjacent Markets. A description of the
products and services, as well as financial data, for each reportable segment
can be found in Note 15 of Notes to Consolidated Condensed Financial Statements.
The Corporate and Other category includes revenues from products, as well as
costs of products sold, for fabricating solar photovoltaic cells and modules and
certain operating expenses that are not allocated to its reportable segments and
are managed separately at the corporate level. These operating expenses 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.
Semiconductor Systems Segment
The Semiconductor Systems segment is comprised primarily of capital equipment
used to fabricate semiconductor chips. Semiconductor industry spending on
capital equipment is driven by demand for advanced electronic products,
including smartphones and other mobile devices, servers, personal computers,
automotive devices, storage, and other products, and the nature and timing of
technological advances in fabrication processes, and as a result is subject to
variable industry conditions. Development efforts are focused on solving
customers' key technical challenges in transistor, interconnect, patterning and
packaging performance as devices scale to advanced technology nodes.
Semiconductor manufacturing equipment customers made investments in new capacity
and technology transitions, although overall spending decreased compared to the
same periods in the prior year. Applied continues to see customers optimize
existing capacity and focus their capital spending plans on longer lead-time
equipment not in Applied's product portfolio.
Certain significant measures for the periods indicated were as follows:
                                  Three Months Ended                                        Nine Months Ended
                  July 28,      July 29,                                  July 28,      July 29,
                    2019          2018                Change                2019          2018                 Change

                                                  (In millions, except percentages and ratios)
Net sales        $   2,273$   2,578$ (305 )        (12 )%      $   6,725$   8,331$ (1,606 )        (19 )%
Operating income $     613$     831$ (218 )        (26 )%      $   1,823$   2,847$ (1,024 )        (36 )%
Operating margin      27.0 %        32.2 %               (5.2) points         27.1 %        34.2 %                 (7.1) points






Net sales for Semiconductor Systems by end use application for the periods
indicated were as follows:
                                      Three Months Ended       Nine Months Ended
                                    July 28,     July 29,    July 28,     July 29,
                                      2019         2018        2019         2018
Foundry, logic and other                49 %         36 %        50 %          34 %
Dynamic random-access memory (DRAM)     27 %         25 %        22 %          28 %
Flash memory                            24 %         39 %        28 %          38 %
                                       100 %        100 %       100 %         100 %


Net sales for the three and nine months ended July 28, 2019 decreased compared
to the same periods in the prior year primarily due to lower spending from
memory customers, partially offset by increased spending from foundry, logic and
other customers. Operating margin for the three and nine months ended July 28,
2019 decreased compared to the same periods in the prior year, primarily
reflecting lower net sales, unfavorable changes in customer and product mix, as
well as increased RD&E expenses. Four customers each accounted for at least 10
percent of this segment's net sales, and together they accounted for
approximately 52 percent of this segment's total net sales, in the three months
ended July 28, 2019.

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The following region accounted for at least 30 percent of total net sales for the Semiconductor Systems segment for one or more of the periods presented.


               Three Months Ended                         Nine Months Ended
        July 28,       July 29,                  July 28,         July 29,
          2019           2018       Change         2019             2018        Change

                              (In millions, except percentages)
China $ 655    29%   $ 900    35%    (27 )%   $ 1,464    22%   $ 1,901    23%    (23 )%





Applied Global Services Segment
The Applied Global Services segment provides integrated solutions to optimize
equipment and fab performance and productivity, including spares, upgrades,
services, certain remanufactured earlier generation equipment and factory
automation software for semiconductor, display and solar products.
Demand for Applied Global Services' service solutions are driven by Applied's
large and growing installed base of manufacturing systems, and customers' needs
to shorten ramp times, improve device performance and yield, and optimize
factory output and operating costs. Industry conditions that affect Applied
Global Services' sales of spares and services are primarily characterized by
increases in semiconductor manufacturers' wafer starts and continued strong
utilization rates, growth of the installed base of equipment, growing service
intensity of newer tools, and the Company's ability to sell more comprehensive
service agreements.
Certain significant measures for the periods indicated were as follows:
                             Three Months Ended                                        Nine Months Ended
            July 28,      July 29,                                    July 28,       July 29,
              2019          2018                 Change                 2019           2018                 Change

                                             (In millions, except

percentages and ratios) Net sales $ 931$ 952$ (21 ) (2 )% $ 2,877$ 2,778$ 99

            4 %

Operating

income $ 259$ 280$ (21 ) (8 )% $ 827$ 814$ 13

            2 %
Operating
margin          27.8 %        29.4 %               (1.6) points           28.7 %         29.3 %               (0.6) points





Net sales for the three months ended July 28, 2019 decreased compared to the
same period in the prior year primarily due to lower customer spending on
semiconductor spares, partially offset by higher customer spending for
comprehensive service agreements. Net sales for the nine months ended July 28,
2019 increased compared to the same period in the prior year primarily due to
higher customer spending for comprehensive service agreements and legacy
systems, partially offset by lower customer spending on semiconductor spares.
Operating income and operating margin for the three months ended July 28, 2019
compared to the same period in the prior year decreased due to lower net sales
and higher expenses related to an increase in headcount. Operating income for
the nine months ended July 28, 2019 increased compared to the same period in the
prior year primarily due to higher net sales, partially offset by higher
expenses related to an increase in headcount. Operating margin for the nine
months ended July 28, 2019 decreased slightly compared to the same period in the
prior year primarily due to an increase in headcount to support revenue growth.
In the three months ended July 28, 2019, two customers each accounted for more
than 10 percent of this segment's total net sales.
There was no region that accounted for at least 30 percent of total net sales
for the Applied Global Services segment for any of the periods presented.



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Display and Adjacent Markets Segment
The Display and Adjacent Markets segment encompasses products for manufacturing
liquid crystal and OLED displays, and other display technologies for TVs,
monitors, laptops, personal computers, electronic tablets, smart phones, and
other consumer-oriented devices, equipment upgrades and flexible coating
systems. The segment is focused on expanding its presence through
technologically-differentiated equipment for manufacturing large-scale LCD TVs,
OLEDs, low temperature polysilicon (LTPS), metal oxide, and touch panel sectors;
and development of products that provide customers with improved performance and
yields. Display industry growth depends primarily on consumer demand for
increasingly larger and more advanced TVs as well as larger and higher
resolution displays for next generation mobile devices.
The market environment for Applied's Display and Adjacent Markets segment was
characterized by weak demand for manufacturing equipment for mobile products and
TVs, compared to the same periods in the prior year. In addition, uneven
spending patterns by customers in the Display and Adjacent Markets segment can
cause significant fluctuations quarter-over-quarter, as well as year-over-year.
Certain significant measures for the periods presented were as follows:
                                  Three Months Ended                                       Nine Months Ended
                  July 28,     July 29,                                   July 28,      July 29,
                    2019         2018                Change                 2019          2018                Change

                                                 (In millions, except percentages and ratios)
Net sales        $    339$    616$ (277 )         (45 )%       $   1,194$   1,778$ (584 )        (33 )%
Operating income $     41$    156$ (115 )         (74 )%       $     198$     456$ (258 )        (57 )%
Operating margin     12.1 %       25.3 %               (13.2) points          16.6 %        25.6 %               (9.0) points





Net sales for the three and nine months ended July 28, 2019 decreased compared
to the same periods in the prior year primarily due to lower customer
investments in mobile and TV display manufacturing equipment. Operating income
and operating margin for the three and nine months ended July 28, 2019 decreased
compared to the same periods in the prior year, reflecting lower net sales and
unfavorable changes in customer and product mix. In the three months ended
July 28, 2019, three customers each accounted for at least 10 percent of this
segment's net sales, and together they accounted for approximately 86 percent of
this segment's total net sales.
The following region accounted for at least 30 percent of total net sales for
the Display and Adjacent Markets segment for one or more of the periods
presented:

               Three Months Ended                       Nine Months Ended
        July 28,       July 29,                 July 28,         July 29,
          2019           2018       Change        2019             2018        Change

                             (In millions, except percentages)
China $ 273    81%   $ 562    91%   (51)%    $ 1,078    90%   $ 1,473    83%   (27)%











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Financial Condition, Liquidity and Capital Resources Applied's cash, cash equivalents and investments consist of the following:

                                              July 28,      October 28,
                                                2019            2018

                                                    (In millions)
Cash and cash equivalents                    $    3,014$       3,440
Short-term investments                              547              590
Long-term investments                             1,650            1,568

Total cash, cash-equivalents and investments $ 5,211$ 5,598



Sources and Uses of Cash
A summary of cash provided by (used in) operating, investing, and financing
activities is as follows:

                                                        Nine Months Ended
                                                 July 28, 2019     July 29, 2018

                                                          (In millions)
Cash provided by operating activities           $       2,421     $       

2,710

Cash provided by (used in) investing activities $ (357 ) $ 700 Cash used in financing activities

               $      (2,490 )   $      

(5,046 )



Operating Activities
Cash from operating activities for the nine months ended July 28, 2019 was $2.4
billion, which reflects net income adjusted for the effect of non-cash charges
and changes in working capital components. Non-cash charges included
depreciation, amortization, share-based compensation and deferred income taxes.
Cash provided by operating activities decreased in the first nine months of
fiscal 2019 compared to the same period in the prior year primarily due to lower
cash collections and higher payments to suppliers and for income taxes, offset
by a lower change in inventory during the nine months ended July 28, 2019,
compared to the same period in the prior year.
Applied has agreements with various financial institutions to sell accounts
receivable and discount promissory notes from selected customers. Applied sells
its accounts receivable without recourse. Applied, from time to time, also
discounts letters of credit issued by customers through various financial
institutions. The discounting of letters of credit depends on many factors,
including the willingness of financial institutions to discount the letters of
credit and the cost of such arrangements. Applied sold $1.3 billion and $1.0
billion of accounts receivable during the nine months ended July 28, 2019 and
July 29, 2018, respectively. Applied discounted letters of credit issued by
customers of $40 million during the nine months ended July 28, 2019. Applied did
not discount letters of credit issued by customers or discount promissory notes
during the nine months ended July 29, 2018.
Applied's working capital was $6.3 billion as of July 28, 2019 and $6.7 billion
as of October 28, 2018.



Days sales outstanding for the three months ended July 28, 2019 was 61 days, an
increase compared to 59 days sales outstanding for the same period in the prior
year. Days sales outstanding varies due to the timing of shipments and payment
terms, and the increase was primarily due to higher revenue and favorable
collection performance for the same period in the prior year.
Investing Activities
Applied used $357 million of cash in investing activities during the nine months
ended July 28, 2019. Capital expenditures totaled $344 million and were
partially offset by the proceeds from sales and maturities of investments, net
of purchases of investments of $15 million during the nine months ended July 28,
2019.
Applied's investment portfolio consists principally of investment grade money
market mutual funds, U.S.Treasury and agency securities, municipal bonds,
corporate bonds and mortgage-backed and asset-backed securities, as well as
equity securities. Applied regularly monitors the credit risk in its investment
portfolio and takes appropriate measures, which may include the sale of certain
securities, to manage such risks prudently in accordance with its investment
policies.

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Financing Activities
Applied used $2.5 billion of cash in financing activities during the nine months
ended July 28, 2019, consisting primarily of repurchases of common stock of $1.9
billion, cash dividends to stockholders of $577 million and tax withholding
payments for vested equity awards of $83 million.
In June 2019, March 2019 and December 2018, Applied's Board of Directors
declared quarterly cash dividends in the amount of $0.21, $0.21 and $0.20 per
share, respectively. The dividend declared in June 2019 is payable in September
2019. Applied currently anticipates that cash dividends will continue to be paid
on a quarterly basis, although the declaration of any future cash dividend is at
the discretion of the Board of Directors and will depend on Applied's financial
condition, results of operations, capital requirements, business conditions and
other factors, as well as a determination by the Board of Directors that cash
dividends are in the best interests of Applied's stockholders.
Applied has credit facilities for unsecured borrowings in various currencies of
up to $1.6 billion, of which $1.5 billion is comprised of a committed revolving
credit agreement with a group of banks that is scheduled to expire in September
2021. This agreement provides for borrowings in United States dollars at
interest rates keyed to one of the two rates selected by Applied for each
advance and includes financial and other covenants with which Applied was in
compliance as of July 28, 2019. Remaining credit facilities in the amount of
approximately $74 million are with Japanese banks. Applied's ability to borrow
under these facilities is subject to bank approval at the time of the borrowing
request, and any advances will be at rates indexed to the banks' prime reference
rate denominated in Japanese yen. Applied has not utilized these credit
facilities and no amounts were outstanding under any of these facilities as of
both July 28, 2019 and October 28, 2018.
Subsequent to the end of the third quarter of fiscal 2019, Applied entered into
a term loan credit agreement with a group of lenders. Under the agreement, the
lenders have committed to make an unsecured term loan to Applied of up to $2.0
billion to finance in part Applied's planned acquisition of all outstanding
shares of Kokusai Electric, to pay related transaction fees and expenses and for
general corporate purposes. The commitments of the lenders to make the term loan
will terminate if the transactions contemplated by the Share Purchase Agreement
(SPA) are not consummated on or before June 30, 2020, which date may be extended
by three months on two separate occasions if, on the applicable date, the only
remaining conditions to closing relate to required regulatory approvals. The
term loan, if advanced, will bear interest at one of two rates selected by
Applied, plus an applicable margin, which varies according to Applied's public
debt credit ratings, and must be repaid in full on the third anniversary of the
funding date of the term loan.
In fiscal 2011, Applied established a short-term commercial paper program of up
to $1.5 billion. As of July 28, 2019, Applied did not have any commercial paper
outstanding but may issue commercial paper notes under this program from time to
time in the future.
In the ordinary course of business, Applied provides standby letters of credit
or other guarantee instruments to third parties as required for certain
transactions initiated by either Applied or its subsidiaries. As of July 28,
2019, the maximum potential amount of future payments that Applied could be
required to make under these guarantee agreements was approximately $74 million.
Applied has not recorded any liability in connection with these guarantee
agreements beyond that required to appropriately account for the underlying
transaction being guaranteed. Applied does not believe, based on historical
experience and information currently available, that it is probable that any
amounts will be required to be paid under these guarantee agreements.
Applied also has agreements with various banks to facilitate subsidiary banking
operations worldwide, including overdraft arrangements, issuance of bank
guarantees, and letters of credit. As of July 28, 2019, Applied has provided
parent guarantees to banks for approximately $151 million to cover these
arrangements.
Others
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act. The
Tax Act requires a one-time transition tax on certain unrepatriated earnings of
foreign subsidiaries. The transition tax expense is payable in installments over
eight years, with eight percent due in each of the first five years starting
with fiscal 2018. As of July 28, 2019, Applied has $961 million of total
payments remaining, payable in installments in the next seven years. Before the
Tax Act, U.S. income tax had not been provided for certain unrepatriated
earnings that were considered indefinitely reinvested. Income tax is now
provided for all unrepatriated earnings.
Although cash requirements will fluctuate based on the timing and extent of
factors such as those discussed above, Applied's management believes that cash
generated from operations, together with the liquidity provided by existing cash
balances and borrowing capability, will be sufficient to satisfy Applied's
liquidity requirements for the next 12 months. For further details regarding
Applied's operating, investing and financing activities, see the Consolidated
Condensed Statements of Cash Flows in this report.

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Critical Accounting Policies and Estimates
The preparation of consolidated financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires management to make judgments, assumptions and estimates that
affect the amounts reported. Note 1 of Notes to Consolidated Financial
Statements in Applied's Annual Report on Form 10-K and Note 1 of Notes to
Consolidated Condensed Financial Statements in this report describe the
significant accounting policies used in the preparation of the consolidated
financial statements. Certain of these significant accounting policies are
considered to be critical accounting policies.
A critical accounting policy is defined as one that is both material to the
presentation of Applied's consolidated financial statements and that requires
management to make difficult, subjective or complex judgments that could have a
material effect on Applied's financial condition or results of operations.
Specifically, these policies have the following attributes: (1) Applied is
required to make assumptions about matters that are highly uncertain at the time
of the estimate; and (2) different estimates Applied could reasonably have used,
or changes in the estimate that are reasonably likely to occur, would have a
material effect on Applied's financial condition or results of operations.
Estimates and assumptions about future events and their effects cannot be
determined with certainty. Applied bases its estimates on historical experience
and on various other assumptions believed to be applicable and reasonable under
the circumstances. These estimates may change as new events occur, as additional
information is obtained and as Applied's operating environment changes. These
changes have historically been minor and have been included in the consolidated
financial statements as soon as they became known. In addition, management is
periodically faced with uncertainties, the outcomes of which are not within its
control and will not be known for prolonged periods of time. These uncertainties
include those discussed in Part II, Item 1A, "Risk Factors." Based on a critical
assessment of its accounting policies and the underlying judgments and
uncertainties affecting the application of those policies, management believes
that Applied's consolidated financial statements are fairly stated in accordance
with accounting principles generally accepted in the United States of America,
and provide a meaningful presentation of Applied's financial condition and
results of operations.
Management believes that the following are critical accounting policies and
estimates:
Revenue Recognition
Applied recognizes revenue when promised goods or services (performance
obligations) are transferred to a customer in an amount that reflects the
consideration to which Applied expects to be entitled in exchange for those
goods or services. Applied performs the following five steps to determine when
to recognize revenue: (1) identification of the contract(s) with customers, (2)
identification of the performance obligations in the contract, (3) determination
of the transaction price, (4) allocation of the transaction price to the
performance obligations in the contract, and (5) recognition of revenue when, or
as, a performance obligation is satisfied. Management uses judgment to identify
performance obligations within a contract and to determine whether multiple
promised goods or services in a contract should be accounted for separately or
as a group. Judgment is also used in interpreting commercial terms and
determining when transfer of control occurs. Moreover, judgment is used to
estimate the contract's transaction price and allocate it to each performance
obligation. Any material changes in the identification of performance
obligations, determination and allocation of the transaction price to
performance obligations, and determination of when transfer of control occurs to
the customer, could impact the timing and amount of revenue recognition, which
could have a material effect on Applied's financial condition and results of
operations.
Warranty Costs
Applied provides for the estimated cost of warranty when revenue is recognized.
Estimated warranty costs are determined by analyzing specific product, current
and historical configuration statistics and regional warranty support costs.
Applied's warranty obligation is affected by product and component failure
rates, material usage and labor costs incurred in correcting product failures
during the warranty period. As Applied's customer engineers and process support
engineers are highly trained and deployed globally, labor availability is a
significant factor in determining labor costs. The quantity and availability of
critical replacement parts is another significant factor in estimating warranty
costs. Unforeseen component failures or exceptional component performance can
also result in changes to warranty costs. If actual warranty costs differ
substantially from Applied's estimates, revisions to the estimated warranty
liability would be required, which could have a material adverse effect on
Applied's business, financial condition and results of operations.

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Allowance for Doubtful Accounts
Applied maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. This
allowance is based on historical experience, credit evaluations, specific
customer collection history and any customer-specific issues Applied has
identified. Changes in circumstances, such as an unexpected material adverse
change in a major customer's ability to meet its financial obligation to Applied
or its payment trends, may require Applied to further adjust its estimates of
the recoverability of amounts due to Applied, which could have a material
adverse effect on Applied's business, financial condition and results of
operations.
Inventory Valuation
Inventories are generally stated at the lower of cost or net realizable value,
with cost determined on a first-in, first-out basis. The carrying value of
inventory is reduced for estimated obsolescence by the difference between its
cost and the estimated net realizable value based upon assumptions about future
demand. Applied evaluates the inventory carrying value for potential excess and
obsolete inventory exposures by analyzing historical and anticipated demand. In
addition, inventories are evaluated for potential obsolescence due to the effect
of known and anticipated engineering change orders and new products. If actual
demand were to be substantially lower than estimated, additional adjustments for
excess or obsolete inventory may be required, which could have a material
adverse effect on Applied's business, financial condition and results of
operations.
Goodwill and Intangible Assets
Applied reviews goodwill and intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of these assets may
not be recoverable, and also annually reviews goodwill and intangibles with
indefinite lives for impairment. Intangible assets, such as purchased
technology, are generally recorded in connection with a business acquisition.
The value assigned to intangible assets is usually based on estimates and
judgments regarding expectations for the success and life cycle of products and
technology acquired. If actual product acceptance differs significantly from the
estimates, Applied may be required to record an impairment charge to reduce the
carrying value of the reporting unit to its estimated fair value.
To test goodwill for impairment, Applied first performs a qualitative assessment
to determine whether it is more likely than not that the fair value of a
reporting unit is less than its carrying value. If it is concluded that this is
the case, Applied then performs the two-step goodwill impairment test.
Otherwise, the two-step goodwill impairment test is not required. Under the
two-step goodwill impairment test, Applied would in the first step compare the
estimated fair value of each reporting unit to its carrying value. If the
carrying value of a reporting unit exceeds its estimated fair value, Applied
would then perform the second step of the impairment test in order to determine
the implied fair value of the reporting unit's goodwill. If Applied determines
that the carrying value of a reporting unit's goodwill exceeds its implied fair
value, Applied would record an impairment charge equal to the difference.
Applied determines the fair value of each reporting unit based on a weighting of
an income and a market approach. Applied bases the fair value estimates on
assumptions that it believes to be reasonable but that are unpredictable and
inherently uncertain. Under the income approach, Applied estimates the fair
value based on discounted cash flow method.
The estimates used in the impairment testing are consistent with the discrete
forecasts that Applied uses to manage its business, and considers any
significant developments during the period. Under the discounted cash flow
method, cash flows beyond the discrete forecasts are estimated using a terminal
growth rate, which considers the long-term earnings growth rate specific to the
reporting units. The estimated future cash flows are discounted to present value
using each reporting unit's weighted average cost of capital. The weighted
average cost of capital measures a reporting unit's cost of debt and equity
financing weighted by the percentage of debt and equity in a reporting unit's
target capital structure. In addition, the weighted average cost of capital is
derived using both known and estimated market metrics, and is adjusted to
reflect both the timing and risks associated with the estimated cash flows. The
tax rate used in the discounted cash flow method is the median tax rate of
comparable companies and reflects Applied's current international structure,
which is consistent with the market participant perspective. Under the market
approach, Applied uses the guideline company method which applies market
multiples to forecasted revenues and earnings before interest, taxes,
depreciation and amortization. Applied uses market multiples that are consistent
with comparable publicly-traded companies and considers each reporting unit's
size, growth and profitability relative to its comparable companies.
Management uses significant judgment when assessing goodwill for potential
impairment, especially in emerging markets. Indicators of potential impairment
include, but are not limited to, challenging economic conditions, an unfavorable
industry or economic environment or other severe decline in market conditions.
Such conditions could have the effect of changing one of the critical
assumptions or estimates used for the fair value calculation, resulting in an
unexpected goodwill impairment charge, which could have a material adverse
effect on Applied's business, financial condition and results of operations. See
Note 10 of Notes to Consolidated Financial Statements for additional discussion
of goodwill impairment.

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Income Taxes
Applied's provision for income taxes and effective tax rate are affected by the
geographical composition of pre-tax income which includes jurisdictions with
differing tax rates, conditional reduced tax rates and other income tax
incentives. It is also affected by events that are not consistent from period to
period, such as changes to income tax laws and the resolution of prior years'
income tax filings. Applied recognizes a current tax liability for the estimated
amount of income tax payable on tax returns for the current fiscal year.
Deferred tax assets and liabilities are recognized for the estimated future tax
effects of temporary differences between the book and tax bases of assets and
liabilities. Deferred tax assets are also recognized for net operating loss and
tax credit carryforwards. Deferred tax assets are offset by a valuation
allowance to the extent it is more likely than not that they are not expected to
be realized.
Applied recognizes tax benefits from uncertain tax positions only if it is more
likely than not that the tax position will be sustained upon examination by the
taxing authorities based on the technical merits of the position. The tax
benefits recognized from such positions are estimated based on the largest
benefit that has a greater than 50% likelihood of being realized upon ultimate
settlement. Any changes in judgment related to uncertain tax positions are
recognized in Applied's provision for income taxes in the quarter in which such
change occurs. Interest and penalties related to uncertain tax positions are
recognized in Applied's provision for income taxes.
The calculation of Applied's provision for income taxes and effective tax rate
involves significant judgment in estimating the impact of uncertainties in the
application of complex tax laws. Resolution of these uncertainties in a manner
inconsistent with Applied's expectations could have an adverse material impact
on Applied's results of operations and financial condition.


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Non-GAAP Adjusted Financial Results
Management uses non-GAAP adjusted financial measures to evaluate the Company's
operating and financial performance and for planning purposes, and as
performance measures in its executive compensation program. Applied believes
these measures enhance an overall understanding of its performance and
investors' ability to review the Company's business from the same perspective as
the Company's management and facilitate comparisons of this period's results
with prior periods on a consistent basis by excluding items that management does
not believe are indicative of Applied's ongoing operating performance.
The non-GAAP adjusted financial measures presented below are adjusted to exclude
the impact of certain costs, expenses, gains and losses, including certain items
related to mergers and acquisitions; restructuring charges and any associated
adjustments; impairments of assets, or investments; gain or loss on sale of
strategic investments; tax effect of share-based compensation; certain income
tax items and other discrete adjustments. Additionally, non-GAAP results exclude
estimated discrete income tax expense items associated with recent U.S. tax
legislation. Reconciliations of these non-GAAP measures to the most directly
comparable financial measures calculated and presented in accordance with GAAP
are provided in the financial tables presented below. There are limitations in
using non-GAAP financial measures because the non-GAAP financial measures are
not prepared in accordance with generally accepted accounting principles, may be
different from non-GAAP financial measures used by other companies, and may
exclude certain items that may have a material impact upon our reported
financial results. The presentation of this additional information is not meant
to be considered in isolation or as a substitute for the directly comparable
financial measures prepared in accordance with GAAP.



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The following tables present a reconciliation of the GAAP and non-GAAP adjusted consolidated results:

                            APPLIED MATERIALS, INC.
         UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS
                                                   Three Months Ended           Nine Months Ended
                                                 July 28,      July 29,      July 28,      July 29,
(In millions, except percentages)                  2019          2018          2019          2018
Non-GAAP Adjusted Gross Profit
Reported gross profit - GAAP basis             $   1,557$   1,864$   4,752$   5,860
Certain items associated with acquisitions1            9             45            28           134
Non-GAAP adjusted gross profit                 $   1,566$   1,909$   4,780$   5,994
Non-GAAP adjusted gross margin                      44.0 %         45.9 %        44.0 %        46.3 %
Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis         $     802$   1,093$   2,486$   3,600
Certain items associated with acquisitions1           13             49            41           147
Acquisition integration and deal costs                 5              -            12             2
Non-GAAP adjusted operating income             $     820$   1,142$   2,539$   3,749
Non-GAAP adjusted operating margin                  23.0 %         27.4 %        23.4 %        29.0 %
Non-GAAP Adjusted Net Income
Reported net income - GAAP basis               $     571$   1,016$   2,008$   2,281
Certain items associated with acquisitions1           13             49            41           147
Acquisition integration and deal costs                 5              -            12             2
Impairment (gain on sale) of strategic
investments, net                                       -            (14 )           -           (10 )
Loss (gain) on strategic investments, net             (8 )            -           (31 )           -
Income tax effect of share-based
compensation2                                          -             13            (4 )         (13 )
Income tax effect of changes in applicable
U.S. tax laws3                                         -             12           (24 )       1,089
Income tax effects related to amortization
of intra-entity intangible asset transfers           115              -            56             -
Resolution of prior years' income tax
filings and other tax items                           (1 )          (29 )          75           (32 )
Income tax effect of non-GAAP adjustments4            (3 )            1            (2 )          (7 )
Non-GAAP adjusted net income                   $     692$   1,048

$ 2,131$ 3,457

1 These items are incremental charges attributable to completed acquisitions,

consisting of amortization of purchased intangible assets. 2 GAAP basis tax benefit related to share-based compensation is being

recognized ratably over the fiscal year on a non-GAAP basis. 3 Charges to income tax provision related to a one-time transition tax and a

decrease in U.S. deferred tax assets as a result of the recent U.S. tax

legislation.

4 Adjustment to provision for income taxes related to non-GAAP adjustments

    reflected in income before income taxes.



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                            APPLIED MATERIALS, INC.
         UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS


                                                       Three Months Ended            Nine Months Ended
                                                     July 28,       July 29,       July 28,      July 29,
(In millions, except per share amounts)                2019           2018  

2019 2018


Non-GAAP Adjusted Earnings Per Diluted Share
Reported earnings per diluted share - GAAP basis   $    0.61$    1.01$    2.11$    2.20
Certain items associated with acquisitions              0.01            0.05          0.04           0.13
Acquisition integration and deal costs                  0.01               -          0.01              -
Impairment (gain on sale) of strategic
investments, net                                           -           (0.01 )           -          (0.01 )
Loss (gain) on strategic investments, net              (0.01 )             -         (0.03 )            -
Income tax effect of share-based compensation              -            0.01             -          (0.01 )
Income tax effect of changes in applicable U.S.
tax laws                                                   -            0.01         (0.03 )         1.05
Income tax effects related to amortization of
intra-entity intangible asset transfers                 0.12               -          0.06              -
Resolution of prior years' income tax filings
and other tax items                                        -           (0.03 )        0.08          (0.03 )
Non-GAAP adjusted earnings per diluted share       $    0.74$    1.04$    2.24$    3.33
Weighted average number of diluted shares                937           1,005           950          1,039



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The following table presents a reconciliation of the GAAP and non-GAAP adjusted segment results:

                            APPLIED MATERIALS, INC.
         UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS

                                                   Three Months Ended            Nine Months Ended
                                                 July 28,       July 29,      July 28,      July 29,
(In millions, except percentages)                  2019           2018      

2019 2018


Semiconductor Systems Non-GAAP Adjusted
Operating Income
Reported operating income - GAAP basis         $     613$     831$   1,823$   2,847
Certain items associated with acquisitions1           11              45            32           137
Non-GAAP adjusted operating income             $     624$     876$   1,855$   2,984
Non-GAAP adjusted operating margin                  27.5 %          34.0 %        27.6 %        35.8 %
AGS Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis         $     259$     280$     827$     814
Acquisition integration costs                          -               -             -             1
Non-GAAP adjusted operating income             $     259$     280$     827$     815
Non-GAAP adjusted operating margin                  27.8 %          29.4 %        28.7 %        29.3 %
Display and Adjacent Markets Non-GAAP
Adjusted Operating Income
Reported operating income - GAAP basis         $      41$     156$     198$     456
Certain items associated with acquisitions1            2               4             9            10
Acquisition integration costs                          1               -             1             1
Non-GAAP adjusted operating income             $      44$     160$     208$     467
Non-GAAP adjusted operating margin                  13.0 %          26.0 %  

17.4 % 26.3 %

1 These items are incremental charges attributable to completed acquisitions,

consisting of amortization of purchased intangible assets.




Note: The reconciliation of GAAP and non-GAAP adjusted segment results above
does not include certain revenues, costs of products sold and operating expenses
that are reported within corporate and other and included in consolidated
operating income.



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