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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Applied Materials, Inc.    AMAT

APPLIED MATERIALS, INC.

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

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12/13/2019 | 04:11pm EST

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
•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
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 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 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. Spending
by semiconductor customers, which include companies that operate in the foundry,
logic and memory markets, is driven by demand for advanced electronic products,
including smartphones and other mobile devices, servers, personal computers,
automotive devices, storage, and other products. The growth of data and emerging
end-market drivers such as artificial intelligence, augmented and virtual
reality, the Internet of Things and smart vehicles are also creating new
opportunities for the industry. As a result, products within the Semiconductor
Systems segment are subject to significant changes in customer requirements,
including transitions to smaller dimensions, increasingly complex chip
architectures, new materials and an increasing number of applications. Demand
for display manufacturing equipment spending 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, and investments
in new types of display technologies. 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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Applied's strategic priorities 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. Applied's long-term growth strategy requires continued
development of new materials engineering capabilities, including products and
platforms that enable expansion into new and adjacent markets. Applied's
significant investments in research, development and engineering 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.
The following table presents certain significant measurements for the past three
fiscal years:

                                                                                                            Change
                                         2019              2018              2017            2019 over 2018         2018 over 2017

                                                         (In millions,

except per share amounts and percentages)

Net sales                             $ 14,608$ 16,705$ 14,698$      (2,097)$       2,007

Gross margin                              43.7  %           45.0  %           45.0  %        (1.3) points            - points
Operating income                      $  3,350$  4,491          $ 

3,936 $ (1,141) $ 555 Operating margin

                          22.9  %           26.9  %           26.8  %        (4.0) points           0.1 points
Net income                            $  2,706$  3,038          $ 

3,519 $ (332)$ (481) Earnings per diluted share

            $   2.86$   2.96          $ 

3.25 $ (0.10)$ (0.29)




Fiscal 2019, 2018 and 2017 each contained 52 weeks.
Fiscal 2018 included a one-time expense related to the enactment of U.S. income
tax law that reduced diluted earnings per share by $1.08.
Customer investments in semiconductor and display manufacturing equipment and
services continued to be the primary contributor of revenue during fiscal 2019.
Semiconductor equipment customers continued to make strategic investments in new
technology transitions. Spending by memory customers, compared to fiscal 2018,
was lower as they delayed new capacity additions and lowered their fab
utilization rates in response to excess industry supply and inventory levels.
Foundry and logic spending increased year-over-year led by customer investments
in both advanced and mature foundry-logic nodes. Overall semiconductor systems
revenue for fiscal 2019 decreased as compared to the prior year. Despite the
overall wafer fab equipment market being down in 2019, Applied saw modest growth
in its services business as compared to the prior year. This was driven by an
increase in the installed base of equipment and continued growth in revenues
from long-term service agreements, offset by a weaker demand for transactional
spares due to lower memory fab utilization. Applied's display and adjacent
markets revenue declined during fiscal 2019 due to weak demand for display
manufacturing equipment for mobile products and TVs.

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Results of Operations

Net Sales
Net sales for the periods indicated were as follows:
                                                                                                                                                              Change
                                         2019                                                   2018                                                           2017                       2019 over 2018       2018 over 2017

                                                                    (In millions, except percentages)
Semiconductor Systems        $  9,027            62%                  $ 10,577             63%                      9,544            65%                 (15) %           11  %
Applied Global Services         3,854            26%                     3,754             22%                      3,014            20%                   3  %           25  %
Display and Adjacent Markets    1,651            11%                     2,298             14%                      2,042            14%                 (28) %           13  %
Corporate and Other                76            1%                         76             1%                          98            1%                    -  %          (22) %
Total                        $ 14,608           100%                  $ 16,705            100%                   $ 14,698           100%                 (13) %           14  %


Net sales in fiscal 2019 compared to fiscal 2018 decreased primarily due to
decreased customer investments in semiconductor and display manufacturing
equipment. Net sales in fiscal 2018 compared to fiscal 2017 increased due to
increased customer investments across all segments. The Semiconductor Systems
segment continued to represent the largest contributor of net sales.
Net sales by geographic region, determined by the location of customers'
facilities to which products were shipped, were as follows:
                                                                                                                                                               Change
                                          2019                                                   2018                                                           2017                       2019 over 2018       2018 over 2017

                                                                     (In millions, except percentages)
China                         $  4,277            29%                  $  5,047             30%                   $  2,758            19%                 (15) %           83  %
Korea                            1,929            13%                     3,539             21%                      4,087            28%                 (45) %          (13) %
Taiwan                           2,965            20%                     2,504             15%                      3,369            23%                  18  %          (26) %
Japan                            2,198            15%                     2,396             14%                      1,519            10%                  (8) %           58  %
Southeast Asia                     548            4%                        797             5%                         625            4%                  (31) %           28  %
Asia Pacific                    11,917            81%                    14,283             85%                     12,358            84%                 (17) %           16  %
United States                    1,871            13%                     1,413             9%                       1,512            10%                  32  %           (7) %
Europe                             820            6%                      1,009             6%                         828            6%                  (19) %           22  %
Total                         $ 14,608           100%                  $ 16,705            100%                   $ 14,698           100%                 (13) %           14  %


The changes in net sales in all regions in fiscal 2019 compared to fiscal 2018
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 fiscal 2019 compared 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 fiscal 2019 compared
to fiscal 2018 primarily reflected a decrease in investments in semiconductor
and display manufacturing equipment.
The changes in net sales in all regions other than Korea for fiscal 2018
compared to fiscal 2017 primarily reflected changes in semiconductor equipment
spending, including product and customer mix, and increased spending in
semiconductor spares and services. The increase in net sales to customers in
China also reflected increased investments in display manufacturing equipment.
The decrease in net sales to customers in Korea primarily reflected decreased
investments in display manufacturing equipment.

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Gross Margin
Gross margins for the periods indicated were as follows:

                                                                      Change
                 2019        2018        2017           2019 over 2018          2018 over 2017

Gross margin    43.7  %     45.0  %     45.0  %         (1.3) points             - points


Gross margin in fiscal 2019 decreased compared to fiscal 2018, primarily due to
the decrease in net sales and unfavorable changes in customer and product mix.
Gross margin in fiscal 2018 remained flat compared to fiscal 2017.
Gross margin during fiscal 2019, 2018 and 2017 included $89 million, $87 million
and $69 million, respectively, of share-based compensation expense.
Research, Development and Engineering
Research, Development and Engineering (RD&E) expenses for the periods indicated
were as follows:
                                                                                                             Change
                                            2019             2018             2017           2019 over 2018          2018 over 2017

                                                                           

(In millions) Research, development and engineering $ 2,054$ 2,022$ 1,781 $ 32

            $         241


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.
Applied continued its RD&E investments across Semiconductor Systems and Display
and Adjacent Markets on the development of new unit process systems and
integrated materials solutions. Areas of investment include etch, inspection,
patterning and other technologies to improve chip performance, power, area and
cost. In Display and Adjacent Markets, RD&E investments were focused on
expanding the company's market opportunity with new display technologies.
RD&E expenses increased slightly in fiscal 2019 compared to the prior year and
increased in fiscal 2018 compared to fiscal 2017, primarily due to additional
headcount and increased research and development spending in Semiconductor
Systems and Display and Adjacent Market segments. These increases reflect
Applied's ongoing investments in product development initiatives, consistent
with the Company's growth 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 expense during fiscal 2019, 2018 and 2017 included $99 million, $96 million
and $83 million, respectively, of share-based compensation expense.
Marketing and Selling
Marketing and selling expenses for the periods indicated were as follows:
                                                                            Change
                          2019        2018        2017       2019 over 2018       2018 over 2017

                                                      (In millions)
Marketing and selling   $ 521$ 521$ 457       $         -          $         64


Marketing and selling expenses remained flat in fiscal 2019 compared to fiscal
2018. Marketing and selling expenses increased in fiscal 2018 compared to fiscal
2017 primarily due to additional headcount.
Marketing and selling expenses for fiscal years 2019, 2018 and 2017 included $31
million, $31 million and $28 million, respectively, of share-based compensation
expense.
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General and Administrative
General and administrative (G&A) expenses for the periods indicated were as
follows:
                                                                                Change
                               2019        2018        2017       2019 over 2018      2018 over 2017

                                                           (In millions)
General and administrative   $ 461$ 483$ 438       $         (22)      $         45


General and administrative expenses in fiscal 2019 decreased slightly compared
to fiscal 2018 primarily due to lower variable compensation expenses. General
and administrative expenses in fiscal 2018 increased compared to fiscal 2017
primarily due to additional headcount and unfavorable impact from foreign
exchange fluctuation, partially offset by lower variable compensation expense.
G&A expenses during fiscal 2019, 2018 and 2017 included $44 million, $44 million
and $40 million, respectively, 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:
                                                                            

Change

                                   2019        2018        2017       2019 over 2018       2018 over 2017

                                                               (In millions)
Interest expense                 $ 237$ 234$ 198       $          3         $         36
Interest and other income, net   $ 156$ 139$  78       $      

17 $ 61



Interest expenses incurred were primarily associated with the senior unsecured
notes. Interest expense in fiscal 2019 remained relatively flat compared to the
prior year. Interest expense increased slightly in fiscal 2018 compared to
fiscal 2017 due to the issuance of senior unsecured notes in March 2017.
Interest and other income, net primarily includes interest earned on cash and
investments, realized gains or losses on sales of securities and impairment of
strategic investments. 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 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. Interest and other
income, net in fiscal 2019 increased compared to fiscal 2018 primarily driven by
unrealized gains on equity investment securities. Interest and other income, net
in fiscal 2018 increased compared to fiscal 2017 primarily driven by realized
gains on sales of securities and higher interest income from investments.
Income Taxes
Provision for income taxes and effective tax rates for the periods indicated
were as follows:
                                                                                  Change
                               2019         2018         2017       2019

over 2018 2018 over 2017

                                                 (In millions, except percentages)
Provision for income taxes   $ 563$ 1,358$ 297$   (795)$  1,061

Effective income tax rate 17.2 % 30.9 % 7.8 % (13.7) points 23.1 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.
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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 may be selected 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 rate for fiscal 2019 was lower than fiscal 2018
primarily due to tax expense of $1.1 billion in 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 fiscal
2019 was higher than fiscal 2018 primarily due to certain provisions in the Tax
Act becoming effective in fiscal 2019, tax expense of $87 million in fiscal 2019
related to changes in uncertain tax positions and the excess tax benefit from
share-based compensation in fiscal 2019 being $42 million less than the prior
fiscal year.
The effective tax rate for fiscal 2018 was higher than fiscal 2017 primarily due
to tax expense of $1.1 billion for the transition tax and remeasurement of
deferred tax assets as a result of the Tax Act, partially offset by changes in
the geographical composition of income, tax benefits from the lower U.S. federal
corporate tax rate, adoption of authoritative guidance for share-based
compensation, and the resolution of tax liabilities for uncertain tax positions.
In addition, fiscal 2017 included tax benefits from the recognition of
previously unrecognized foreign tax credits.

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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 16 of Notes to Consolidated 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.
Customer investments in semiconductor manufacturing equipment continued to be
the primary contributor of Applied's revenue during fiscal 2019. Semiconductor
equipment customers continued to make strategic investments in new technology
transitions. Spending by memory customers, compared to fiscal 2018, was lower as
they delayed new capacity additions and lowered their fab utilization rates in
response to excess industry supply and inventory levels. Foundry and logic
spending increased year-over-year led by customer investments in both advanced
and mature foundry-logic nodes. Overall semiconductor systems revenue for fiscal
2019 decreased as compared to the prior year.
Certain significant measures for the periods indicated were as follows:
                                                                                                                     Change
                                 2019             2018              2017                     2019 over 2018                                       2018 over 2017

                                                                        (In

millions, except percentages and ratios)

Net sales                     $ 9,027$ 10,577$ 9,544$     (1,550)                  (15) %       $ 1,033                    11  %

Operating income              $ 2,464$  3,441$ 3,177$       (977)                  (28) %       $   264                     8  %
Operating margin                 27.3  %           32.5  %          33.3  %                             (5.2) points                           (0.8) points




Net sales for Semiconductor Systems by end use application for the periods indicated were as follows:

                                       2019       2018       2017

Foundry, logic and other                52  %      36  %      51  %
Dynamic random-access memory (DRAM)     22  %      27  %      15  %
Flash memory                            26  %      37  %      34  %

                                       100  %     100  %     100  %


Net sales for fiscal 2019 decreased compared to fiscal 2018 primarily due to
lower spending from memory customers, partially offset by increased spending
from foundry, logic and other customers. Operating margin for fiscal 2019
decreased compared to the prior year, primarily reflecting lower net sales,
unfavorable changes in customer and product mix. Five customers each accounted
for at least 10 percent of this segment's net sales, and together they accounted
for approximately 65 percent of this segment's net sales for fiscal 2019.
Net sales for fiscal 2018 increased compared to fiscal 2017 primarily due to
higher spending from memory customers, partially offset by lower spending from
foundry, logic and other customers. Although operating margin remained flat,
operating income for fiscal 2018 increased compared to fiscal 2017 primarily due
to favorable changes in product mix and higher net sales, partially offset by
higher RD&E expenses.
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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 past three fiscal years:
                                                                                                                    Change
                     2019                              2018                               2017                           2019 over 2018                        2018 over 2017

                                                                (In millions, except percentages)

Korea         $ 1,435      16  %       $ 2,883       27  %       $ 2,955      31  %       $ (1,448)            (50) %       $ (72)             (2) %


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:
                                                                                                                  Change
                                 2019             2018             2017                     2019 over 2018                                     2018 over 2017

                                                                      (In

millions, except percentages and ratios)

Net sales                     $ 3,854$ 3,754$ 3,014$      100                      3  %       $  740                   25  %

Operating income              $ 1,101$ 1,102$   817$       (1)                     -  %       $  285                   35  %
Operating margin                 28.6  %          29.4  %          27.1  %                            (0.8) points                          2.3 points


Net sales increased slightly in fiscal 2019 compared to 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.
Net sales increased in fiscal 2018 compared to fiscal 2017 primarily due to
higher customer spending for spares and services. In fiscal 2019, two customers
each accounted for at least 10 percent of this segment's net sales.
Operating income for fiscal 2019 remained flat compared to the prior year
primarily due to higher net sales, partially offset by higher expenses related
to an increase in headcount. Operating margin for fiscal 2019 decreased slightly
compared to fiscal 2018 primarily due to an increase in headcount to support
revenue growth. Operating income and operating margin for fiscal 2018 increased
compared to the fiscal 2017, reflecting higher net sales partially offset by
increased headcount to support business growth.
There was no single region 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.
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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 in
fiscal 2019 was characterized by weak demand for display manufacturing equipment
for mobile products and TVs, compared to fiscal 2018. In addition, uneven demand
patterns 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:

                                                                                                                   Change
                                 2019             2018             2017                     2019 over 2018                                     2018 over 2017

                                                                      (In

millions, except percentages and ratios)

Net sales                     $ 1,651$ 2,298$ 2,042$      (647)                   (28) %       $ 256                    13  %

Operating income              $   294$   574$   585$      (280)                   (49) %       $ (11)                   (2) %
Operating margin                 17.8  %          25.0  %          28.6  %                             (7.2) points                         (3.6) points


Net sales for fiscal 2019 decreased compared to fiscal 2018 primarily due to
lower customer investments in mobile and TV display manufacturing equipment.
Operating income and operating margin for fiscal 2019 decreased compared to
fiscal 2018, reflecting lower net sales and unfavorable changes in customer and
product mix. Four customers each accounted for at least 10 percent of this
segment's net sales, and together they accounted for approximately 68 percent of
net sales for this segment in fiscal 2019.
Net sales for fiscal 2018 increased compared to fiscal 2017 primarily due to
higher customer investments in TV display manufacturing equipment. Operating
income and operating margin for fiscal 2018 decreased slightly compared fiscal
2017, primarily due to higher RD&E spending and unfavorable product mix, offset
by higher net sales.
The following regions 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:
                                                                                                                  Change
                     2019                              2018                             2017                          2019 over 2018                         2018 over 2017

                                                               (In millions, except percentages)

China         $ 1,469      89  %       $ 1,957       85  %       $  978      48  %       $ (488)            (25) %       $  979             100  %
Korea         $    55       3  %       $   151        7  %       $  791      39  %       $  (96)            (64) %       $ (640)            (81) %




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Recent Accounting Pronouncements
For a description of recent accounting pronouncements, including the expected
dates of adoption and estimated effects, if any, on Applied's consolidated
financial statements, see Note 1, "Summary of Significant Accounting Policies,"
of the Notes to Consolidated Financial Statements.
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Financial Condition, Liquidity and Capital Resources Applied's cash, cash equivalents and investments consist of the following:

                                                October 27,       October 28,
                                                    2019              2018

                                                        (In millions)
Cash and cash equivalents                      $     3,129$     3,440
Short-term investments                                 489               590
Long-term investments                                1,703             1,568

Total cash, cash-equivalents and investments $ 5,321$ 5,598



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

                                                     2019           2018           2017

                                                                (In millions)
Cash provided by operating activities             $  3,247$  3,787$  3,789
Cash provided by (used in) investing activities   $   (443)$    571$ (2,526)
Cash provided by (used in) financing activities   $ (3,115)$ (5,928)

$ 341



In March 2016, the Financial Accounting Standards Board issued authoritative
guidance that simplifies several aspects of the accounting for share-based
payment transactions, including forfeitures, income tax, and classification on
the statement of cash flows. Applied adopted this guidance in the first quarter
of fiscal 2018. Upon adoption, Applied elected to apply the presentation
requirements for cash flows related to excess tax benefits and employee taxes
paid for withheld shares retrospectively. Adopting this guidance increased cash
provided by operating activities by $180 million with corresponding net
decreases in cash provided by financing activities for fiscal 2017.
Operating Activities
Cash from operating activities for fiscal 2019 was $3.2 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 from operating
activities in fiscal 2019 decreased compared to fiscal 2018 due to lower net
income, cash collections, change in income taxes payable and higher payments to
suppliers, offset by a decrease in inventories. Cash provided from operating
activities remained flat from fiscal 2017 to fiscal 2018 due to the increase in
income taxes payable, offset by lower deferred revenue and higher increase in
accounts receivable.
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 $1.5 billion, $1.6
billion and $746 million of accounts receivable during fiscal 2019, 2018 and
2017, respectively. Applied discounted letters of credit issued by customers of
$48 million and $37 million in fiscal 2019 and 2018, respectively. There was no
discounting of promissory notes in each of fiscal 2019 and 2018. Applied did not
discount letters of credit issued by customers or discount promissory notes
during fiscal 2017.
Applied's working capital was $5.8 billion at October 27, 2019 and $6.7 billion
at October 28, 2018.
Days sales outstanding at the end of fiscal 2019, 2018 and 2017 was 61 days, 58
days, and 54 days, respectively. Days sales outstanding varies due to the timing
of shipments and payment terms. The increase in days sales outstanding at the
end of fiscal 2019 compared to the end of fiscal 2018 was primarily due to lower
factoring of accounts receivable. The increase in days sales outstanding at the
end of fiscal 2018 compared to the end of fiscal 2017 was primarily due to less
favorable revenue linearity in fiscal 2018.
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Investing Activities
Applied used $443 million and $2.5 billion of cash in investing activities in
fiscal 2019 and 2017, respectively. Applied generated $571 million in cash from
investing activities in fiscal 2018. Capital expenditures in fiscal 2019, 2018
and 2017 were $441 million, $622 million and $345 million, respectively. Capital
expenditures in fiscal 2019 and 2018 were primarily for real property
acquisitions and improvements in North America and Taiwan, as well as
investments in demonstration, testing and laboratory tools. Capital expenditures
in fiscal 2017 were primarily for demonstration and test equipment and
laboratory tools in North America. Proceeds from sales and maturities of
investments, net of purchase of investments were $26 million and $1.2 billion
for fiscal 2019 and 2018, respectively. Purchases of investments, net of
proceeds from sales and maturities of investments was $2.1 billion for fiscal
2017. Investing activities also included investments in technology to allow
Applied to access new market opportunities or emerging technologies.
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.
Financing Activities
Applied used $3.1 billion of cash in financing activities in fiscal 2019,
consisting primarily of repurchases of common stock of $2.4 billion, cash
dividends to stockholders of $771 million and tax withholding payments for
vested equity awards of $86 million, offset by proceeds from common stock
issuances of $145 million.
Applied used $5.9 billion of cash in financing activities in fiscal 2018,
consisting primarily of repurchases of common stock of $5.3 billion, cash
dividends to stockholders of $605 million and tax withholding payments for
vested equity awards of $164 million, offset by proceeds from common stock
issuances of $124 million.
Applied generated $341 million of cash from financing activities in fiscal 2017,
consisting primarily of net proceeds received from the issuance of senior
unsecured notes of $2.2 billion, proceeds from common stock issuance of $97
million, partially offset by cash used for repurchases of common stock of $1.2
billion, cash dividends to stockholders of $430 million and debt repayments of
$205 million.
In September 2017, Applied's Board of Directors approved a common stock
repurchase program authorizing up to $3.0 billion in repurchases. In February
2018, the Board of Directors approved a new common stock repurchase program
authorizing up to an additional $6.0 billion in repurchases. At October 27,
2019, $1.9 billion remained available for future stock repurchases under this
repurchase program.
During fiscal 2019, Applied's Board of Directors declared one quarterly cash
dividend of $0.20 per share and three quarterly cash dividends of $0.21 per
share. During fiscal 2018, Applied's Board of Directors declared one quarterly
cash dividend of $0.10 per share and three quarterly cash dividends of $0.20 per
share. During fiscal 2017, Applied's Board of Directors declared four quarterly
cash dividends in the amount of $0.10 per share. 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 two rates selected by Applied for each advance
and includes financial and other covenants with which Applied was in compliance
at October 27, 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.
In August 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.
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No amounts were outstanding under any of these facilities at both October 27,
2019 and October 28, 2018, and Applied has not utilized these credit facilities.
In fiscal 2011, Applied established a short-term commercial paper program of up
to $1.5 billion. At October 27, 2019 and October 28, 2018, 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 March 2017, Applied issued senior unsecured notes in the aggregate principal
amount of $2.2 billion. Applied had senior unsecured notes in the aggregate
principal amount of $5.4 billion outstanding as of October 27, 2019. The
indentures governing these notes include covenants with which Applied was in
compliance at October 27, 2019. In May 2017, Applied completed the redemption of
the entire outstanding $200 million in principal amount of senior notes due in
October 2017. See Note 11 of Notes to Consolidated Financial Statements for
additional discussion of existing debt. Applied may seek to refinance its
existing debt and may incur additional indebtedness depending on Applied's
capital requirements and the availability of financing.
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. For fiscal 2018, Applied realized tax expense of $1.1
billion associated with the Tax Act, primarily due to the transition tax. 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
October 27, 2019, Applied has $938 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
Statements of Cash Flows in this report.
For details on standby letters of credit and other agreements with banks, see
Off-Balance Sheet Arrangements below.
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Off-Balance Sheet Arrangements
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 October 27,
2019, the maximum potential amount of future payments that Applied could be
required to make under these guarantee agreements was approximately $76 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 October 27, 2019, Applied has provided
parent guarantees to banks for approximately $151 million to cover these
arrangements.
Applied also has operating leases for various facilities. Total rent expense for
fiscal 2019, 2018 and 2017 was $51 million, $50 million and $34 million,
respectively.
Contractual Obligations
The following table summarizes Applied's contractual obligations as of
October 27, 2019:

                                                                            Payments Due by Period
                                                                  Less Than           1-3              3-5            More Than
Contractual Obligations                           Total            1 Year            Years            Years            5 Years

                                                                                 (In millions)
Debt obligations                               $  5,350$    600$   750          $     -          $  4,000
Interest expense associated with debt
obligations                                       2,918               219              374              342             1,983
Operating lease obligations                         171                45               58               38                30
Income tax from change in U.S. tax laws1            938                82              163              234               459
Purchase obligations2                             2,020             1,888              117               15                 -
Other long-term liabilities3,4                       20                 -                2                2                16
Total                                          $ 11,417$  2,834$ 1,464$   631$  6,488


______________________
1Represents the transition tax liability associated with the deemed repatriation
of accumulated foreign earnings as a result of the enactment of the Tax Cuts and
Jobs Act into law on December 22, 2017.
2Represents Applied's agreements to purchase goods and services consisting of
Applied's outstanding purchase orders for goods and services.
3Other long-term liabilities in the table do not include pension,
post-retirement and deferred compensation plans due to the uncertainty in the
timing of future payments. Applied evaluates the need to make contributions to
its pension and post-retirement benefit plans after considering the funded
status of the plans, movements in the discount rate, performance of the plan
assets and related tax consequences. Payments to the plans would be dependent on
these factors and could vary across a wide range of amounts and time periods.
Payments for deferred compensation plans are dependent on activity by
participants, making the timing of payments uncertain. Information on Applied's
pension, post-retirement benefit and deferred compensation plans is presented in
Note 13, Employee Benefit Plans, of the consolidated financial statements.
4Applied's other long-term liabilities in the Consolidated Balance Sheets
include deferred income tax liabilities, gross unrecognized tax benefits and
related gross interest and penalties. As of October 27, 2019, the gross
liability for unrecognized tax benefits that was not expected to result in
payment of cash within one year was $489 million. Interest and penalties related
to uncertain tax positions that were not expected to result in payment of cash
within one year of October 27, 2019 was $50 million. At this time, Applied is
unable to make a reasonably reliable estimate of the timing of payments due to
uncertainties in the timing of tax audit outcomes; therefore, such amounts are
not included in the above contractual obligation table.
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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 describes 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 I, 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; certain income tax items and other discrete adjustments.
Additionally, fiscal 2019 and 2018 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 for the past three fiscal years:

                            APPLIED MATERIALS, INC.

UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS (In millions, except percentages)

                                                       2019             2018             2017

Non-GAAP Adjusted Gross Profit
Reported gross profit - GAAP basis                                          

$ 6,386$ 7,517$ 6,612 Certain items associated with acquisitions1

                                               37              179              172

Non-GAAP adjusted gross profit                                              

$ 6,423$ 7,696$ 6,784 Non-GAAP adjusted gross margin

                                                          44.0  %          46.1  %          46.2  %
Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis                                      

$ 3,350$ 4,491$ 3,936 Certain items associated with acquisitions1

                                               55              197              191
Acquisition integration and deal costs                                                    22                5                3

Other gains, losses or charges, net                                                        -                -              (12)
Non-GAAP adjusted operating income                                          

$ 3,427$ 4,693$ 4,118 Non-GAAP adjusted operating margin

                                                      23.5  %          28.1  %          28.0  %
Non-GAAP Adjusted Net Income
Reported net income - GAAP basis2                                           

$ 2,706$ 3,038$ 3,519 Certain items associated with acquisitions1

                                               55              197              191
Acquisition integration and deal costs                                                    22                5                3

Impairment (gain on sale) of strategic investments, net                                   (6)             (25)              (3)
Loss (gain) on strategic investments, net                                                (30)               -                -
Loss on early extinguishment of debt                                                       -                -                5
Other gains, losses or charges, net                                                        -                -              (12)

Income tax effect of changes in applicable U.S. tax laws3                                (24)           1,112                -

Income tax effects related to amortization of intra-entity intangible asset transfers

                                                                62                -                -

Resolution of prior years' income tax filings and other tax items

                                                                                     95              (26)             (79)

Income tax effect of non-GAAP adjustments4                                                (5)              (7)             (14)
Non-GAAP adjusted net income                                                         $ 2,875$ 4,294$ 3,610

1 These items are incremental charges attributable to completed acquisitions, consisting

of amortization of purchased intangible assets.

2 Amounts for fiscal 2017 included the recognition of the previously unrecognized foreign

tax credits. 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

(In millions, except per share amounts)                                                2019             2018            2017

Non-GAAP Adjusted Earnings Per Diluted Share
Reported earnings per diluted share - GAAP basis                                    $  2.86$  2.96$ 3.25
Certain items associated with acquisitions                                             0.05             0.18            0.16
Acquisition integration and deal costs                                                 0.02                -               -

Impairment (gain on sale) of strategic investments, net                                   -            (0.02)              -

Loss (gain) on strategic investments, net                                             (0.03)               -               -
Income tax effect of change in applicable U.S. tax laws                               (0.03)            1.08               -

Income tax effects related to amortization of intra-entity intangible asset transfers

                                                             0.07                -               -

Other gains, losses or charges, net                                                       -                -           (0.01)

Resolution of prior years' income tax filings and other tax items

                                                                                  0.10            (0.02)          (0.07)

Non-GAAP adjusted earnings per diluted share                                        $  3.04$  4.18$ 3.33
Weighted average number of diluted shares                                                  945            1,026           1,084






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The following table presents a reconciliation of the GAAP and non-GAAP adjusted segment results for the past three fiscal years:

                            APPLIED MATERIALS, INC.

UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS (In millions, except percentages)

                                                      2019             2018             2017

Semiconductor Systems Non-GAAP Adjusted Operating Income Reported operating income - GAAP basis

                                              $ 2,464$ 3,441$ 3,177
Certain items associated with acquisitions1                                              43              183              184

Non-GAAP adjusted operating income                                                  $ 2,507$ 3,624$ 3,361
Non-GAAP adjusted operating margin                                                     27.8  %          34.3  %          35.2  %

AGS Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis                                              $ 1,101$ 1,102$   817
Certain items associated with acquisitions1                                               -                -                1
Acquisition integration costs                                                             -                2                3

Non-GAAP adjusted operating income                                                  $ 1,101$ 1,104$   821
Non-GAAP adjusted operating margin                                                     28.6  %          29.4  %          27.2  %

Display and Adjacent Markets Non-GAAP Adjusted Operating Income Reported operating income - GAAP basis

                                              $   294$   574$   585
Certain items associated with acquisitions1                                              12               14                5
Acquisition integration costs                                                             1                1                -
Non-GAAP adjusted operating income                                                  $   307$   589$   590
Non-GAAP adjusted operating margin                                                     18.6  %          25.6  %          28.9  %


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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02/12APPLIED MATERIALS : Announces First Quarter 2020 Results
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02/12Applied Materials Announces First Quarter 2020 Results
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