XNAS:AMAT Applied Materials Inc Quarterly Report 10-Q Filing - 4/29/2012

Effective Date 4/29/2012

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

þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 29, 2012
or

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to                    
Commission File Number 000-06920
Applied Materials, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
94-1655526
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
3050 Bowers Avenue,
95052-8039
P.O. Box 58039
Santa Clara, California
(Address of principal executive offices)
(Zip Code)
(Registrant’s telephone number, including area code)
(408) 727-5555
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ        No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ        No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Accelerated filer ¨
 
Non-accelerated filer ¨
Smaller reporting company ¨
 
 
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨        No  þ
Number of shares outstanding of the issuer’s common stock as of April 29, 2012: 1,281,712,814




APPLIED MATERIALS, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED APRIL 29, 2012
TABLE OF CONTENTS
 
 
 
Page
 
PART I. FINANCIAL INFORMATION
 
Item 1:    
 
 
 
 
 
 
Item 2:    
Item 3:    
Item 4:    
 
 
 
 
PART II. OTHER INFORMATION
 
Item 1:    
Item 1A:
Item 2:    
Item 6:    
 


2


PART I. FINANCIAL INFORMATION
Item 1.    Financial Statements
APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
 
Three Months Ended
 
Six Months Ended
 
April 29,
2012
 
May 1,
2011
 
April 29,
2012
 
May 1,
2011
 
(Unaudited)
(In millions, except per share amounts)
Net sales
$
2,541

 
$
2,862

 
$
4,730

 
$
5,549

Cost of products sold
1,530

 
1,673

 
2,933

 
3,224

Gross margin
1,011

 
1,189

 
1,797

 
2,325

Operating expenses:
 
 
 
 
 
 
 
Research, development and engineering
321

 
297

 
625

 
567

Selling, general and administrative
281

 
219

 
584

 
440

Restructuring charges and asset impairments

 
(4
)
 

 
(33
)
Total operating expenses
602

 
512

 
1,209

 
974

Income from operations
409

 
677

 
588

 
1,351

Impairment of strategic investments (Notes 3 and 4)
3

 

 
3

 

Interest and other expenses
23

 
5

 
47

 
10

Interest and other income, net
4

 
14

 
8

 
25

Income before income taxes
387

 
686

 
546

 
1,366

Provision for income taxes
98

 
197

 
140

 
371

Net income
$
289

 
$
489

 
$
406

 
$
995

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic and diluted
$
0.22

 
$
0.37

 
$
0.31

 
$
0.75

Weighted average number of shares:
 
 
 
 
 
 
 
Basic
1,289

 
1,320

 
1,294

 
1,322

Diluted
1,301

 
1,333

 
1,305

 
1,333


See accompanying Notes to Consolidated Condensed Financial Statements.

3


APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months Ended
 
Six Months Ended
 
April 29,
2012
 
May 1,
2011
 
April 29,
2012
 
May 1,
2011
 
(Unaudited)
(In millions)
Net income
$
289

 
$
489

 
$
406

 
$
995

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Change in unrealized net gain on investments
2

 
(1
)
 
3

 
(2
)
Change in unrealized net gain on derivative investments

 
3

 

 
2

Change in defined benefit plan liability

 
(1
)
 

 
(1
)
Change in cumulative translation adjustments
(2
)
 

 
(2
)
 

Other comprehensive income (loss)

 
1

 
1

 
(1
)
Comprehensive income
$
289

 
$
490

 
$
407

 
$
994










































See accompanying Notes to Consolidated Condensed Financial Statements.

4


APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS*
 
 
April 29,
2012
 
October 30,
2011
 
(In millions)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents (Notes 3 and 4)
$
1,761

 
$
5,960

Short-term investments (Notes 3 and 4)
409

 
283

Accounts receivable, net (Note 6)
1,785

 
1,532

Inventories (Note 7)
1,594

 
1,701

Deferred income taxes, net
572

 
580

Other current assets
209

 
299

Total current assets
6,330

 
10,355

Long-term investments (Notes 3 and 4)
1,071

 
931

Property, plant and equipment, net (Note 7)
939

 
866

Goodwill (Notes 8 and 9)
3,939

 
1,335

Purchased technology and other intangible assets, net (Notes 8 and 9)
1,464

 
211

Deferred income taxes and other assets
134

 
163

Total assets
$
13,877

 
$
13,861

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Current portion of long-term debt
$
1

 
$

Accounts payable and accrued expenses (Note 7)
1,466

 
1,520

Customer deposits and deferred revenue (Note 7)
1,113

 
1,116

Income taxes payable
86

 
158

Total current liabilities
2,666

 
2,794

Long-term debt (Note 10)
1,946

 
1,947

Employee benefits and other liabilities
562

 
320

Total liabilities
5,174

 
5,061

Stockholders’ equity (Note 11):
 
 
 
Common stock
13

 
13

Additional paid-in capital
5,730

 
5,616

Retained earnings
13,217

 
13,029

Treasury stock
(10,264
)
 
(9,864
)
Accumulated other comprehensive income
7

 
6

Total stockholders’ equity
8,703

 
8,800

Total liabilities and stockholders’ equity
$
13,877

 
$
13,861


*
Amounts as of April 29, 2012 are unaudited. Amounts as of October 30, 2011 are derived from the October 30, 2011 audited consolidated financial statements.




See accompanying Notes to Consolidated Condensed Financial Statements.

5


APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY

 
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Income
 
Total
Shares
 
Amount
 
Shares
 
Amount
 
 
(Unaudited)
(In millions)
Balance at October 30, 2011
1,306

 
$
13

 
$
5,616

 
$
13,029

 
573

 
$
(9,864
)
 
$
6

 
$
8,800

Net income

 

 

 
406

 

 

 

 
406

Other comprehensive income

 

 

 

 

 

 
1

 
1

Dividends

 

 

 
(218
)
 

 

 

 
(218
)
Share-based compensation

 

 
96

 

 

 

 

 
96

Stock options assumed in connection with acquisition

 

 
11

 

 

 

 

 
11

Issuance under stock plans, net of tax detriment of $14 and other
10

 

 
7

 

 

 

 

 
7

Common stock repurchases
(34
)
 

 

 

 
34

 
(400
)
 

 
(400
)
Balance at April 29, 2012
1,282

 
$
13

 
$
5,730

 
$
13,217

 
607

 
$
(10,264
)
 
$
7

 
$
8,703




































See accompanying Notes to Consolidated Condensed Financial Statements.

6


APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 
Six Months Ended
 
April 29,
2012
 
May 1,
2011
 
(Unaudited)
(In millions)
Cash flows from operating activities:
 
 
 
Net income
$
406

 
$
995

Adjustments required to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
220

 
128

Net loss on dispositions and fixed asset retirements
3

 
1

Provision for bad debts
9

 

Restructuring charges and asset impairments

 
(33
)
Deferred income taxes
28

 
(17
)
Net recognized loss on investments
10

 
5

Impairment of strategic investments
3

 

Share-based compensation
96

 
72

Changes in operating assets and liabilities, net of amounts acquired:
 
 
 
Accounts receivable
(67
)
 
(85
)
Inventories
357

 
(246
)
Prepaid income taxes
18

 
(110
)
Other current assets
114

 
20

Other assets

 
(2
)
Accounts payable and accrued expenses
(268
)
 
25

Customer deposits and deferred revenue
(55
)
 
432

Income taxes payable
(93
)
 
(64
)
Employee benefits and other liabilities
3

 
8

Cash provided by operating activities
784

 
1,129

Cash flows from investing activities:
 
 
 
Capital expenditures
(76
)
 
(81
)
Cash paid for acquisition, net of cash acquired
(4,186
)
 

Proceeds from sale of facility

 
39

Proceeds from sales and maturities of investments
560

 
904

Purchases of investments
(714
)
 
(896
)
Cash used in investing activities
(4,416
)
 
(34
)
Cash flows from financing activities:
 
 
 
Debt repayments

 
(1
)
Proceeds from common stock issuances
45

 
59

Common stock repurchases
(400
)
 
(268
)
Payment of dividends to stockholders
(208
)
 
(186
)
Cash used in financing activities
(563
)
 
(396
)
Effect of exchange rate changes on cash and cash equivalents
(4
)
 
1

Increase (decrease) in cash and cash equivalents
(4,199
)
 
700

Cash and cash equivalents — beginning of period
5,960

 
1,858

Cash and cash equivalents — end of period
$
1,761

 
$
2,558

Supplemental cash flow information:
 
 
 
Cash payments for income taxes
$
179

 
$
556

Cash refunds from income taxes
$
4

 
$
2

Cash payments for interest
$
48

 
$
7

See accompanying Notes to Consolidated Condensed Financial Statements.

7


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

Note 1    Basis of Presentation
Basis of Presentation
In the opinion of management, the unaudited interim consolidated condensed financial statements of Applied Materials, Inc. and its subsidiaries (Applied or the Company) included herein have been prepared on a basis consistent with the October 30, 2011 audited consolidated financial statements and include all material adjustments, consisting of normal recurring adjustments, necessary to fairly present the information set forth therein. These unaudited interim consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Applied’s Annual Report on Form 10-K for the fiscal year ended October 30, 2011 (2011 Form 10-K). Applied’s results of operations for the three and six months ended April 29, 2012 are not necessarily indicative of future operating results. Applied’s fiscal year ends on the last Sunday in October of each year. Fiscal 2012 and 2011 each contain 52 weeks, and the first half of fiscal 2012 and 2011 each contained 26 weeks.
In November 2011, Applied completed its acquisition of Varian Semiconductor Equipment Associates, Inc. (Varian). Beginning in the first quarter of fiscal 2012, the acquired business is included in Applied’s consolidated results of operations and the results of the Silicon Systems Group and Applied Global Services segments.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, Applied evaluates its estimates, including those related to accounts receivable and sales allowances, fair values of financial instruments, inventories, intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair values of share-based awards, and income taxes, among others. Applied bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Revenue Recognition
Applied recognizes revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; seller’s price to buyer is fixed or determinable; and collectability is probable. Applied’s shipping terms are customarily FOB Applied shipping point or equivalent terms. Applied’s revenue recognition policy generally results in revenue recognition at the following points: (1) for all transactions where legal title passes to the customer upon shipment, Applied recognizes revenue upon shipment for all products that have been demonstrated to meet product specifications prior to shipment; the portion of revenue associated with certain installation-related tasks is deferred, and that revenue is recognized upon completion of the installation-related tasks; (2) for products that have not been demonstrated to meet product specifications prior to shipment, revenue is recognized at customer technical acceptance; (3) for transactions where legal title does not pass at shipment, revenue is recognized when legal title passes to the customer, which is generally at customer technical acceptance; and (4) for arrangements containing multiple elements, the revenue relating to the undelivered elements is deferred using the relative selling price method utilizing estimated sales prices until delivery of the deferred elements. Applied limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or adjustment. In cases where Applied has sold products that have been demonstrated to meet product specifications prior to shipment, Applied believes that at the time of delivery, it has an enforceable claim to amounts recognized as revenue. The completed contract method is used for thin film solar lines. Spare parts revenue is generally recognized upon shipment, and services revenue is generally recognized over the period that the services are provided.

8

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



When a sales arrangement contains multiple elements, such as hardware and services and/or software products, Applied allocates revenue to each element based on a selling price hierarchy. The selling price for a deliverable is based on its vendor specific objective evidence (VSOE) if available, third party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. Applied generally utilizes the ESP due to the nature of its products. In multiple element arrangements where more-than-incidental software deliverables are included, revenue is allocated to each separate unit of accounting for each of the non-software deliverables and to the software deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is then allocated to each software deliverable using the guidance for recognizing software revenue, as amended.

Note 2    Earnings Per Share
Basic earnings per share is determined using the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined using the weighted average number of common shares and potential common shares (representing the dilutive effect of stock options, restricted stock units, and employee stock purchase plan shares) outstanding during the period. Applied’s net income has not been adjusted for any period presented for purposes of computing basic or diluted earnings per share due to the Company’s non-complex capital structure.
 
Three Months Ended
 
Six Months Ended
 
April 29,
2012
 
May 1,
2011
 
April 29,
2012
 
May 1,
2011
 
(In millions, except per share amounts)
Numerator:
 
 
 
 
 
 
 
Net income
$
289

 
$
489

 
$
406

 
$
995

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
1,289

 
1,320

 
1,294

 
1,322

Effect of dilutive stock options, restricted stock units and employee stock purchase plan shares
12

 
13

 
11

 
11

Denominator for diluted earnings per share
1,301

 
1,333

 
1,305

 
1,333

Basic and diluted earnings per share
$
0.22

 
$
0.37

 
$
0.31

 
$
0.75

Potentially dilutive securities
8

 
18

 
13

 
18

 

Potentially dilutive securities attributable to outstanding stock options and restricted stock units were excluded from the calculation of diluted net income per share because the combined exercise price, average unamortized fair value and assumed tax benefits upon the exercise of options and the vesting of restricted stock units were greater than the average market price of the Company’s shares, and therefore their inclusion would have been anti-dilutive.


9

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



Note 3    Cash, Cash Equivalents and Investments
Summary of Cash, Cash Equivalents and Investments
The following tables summarize Applied’s cash, cash equivalents and investments by security type:
April 29, 2012
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In millions)
Cash
$
620

 
$

 
$

 
$
620

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
1,141

 

 

 
1,141

Total Cash equivalents
1,141

 

 

 
1,141

Total Cash and Cash equivalents
$
1,761

 
$

 
$

 
$
1,761

Short-term and long-term investments:
 
 
 
 
 
 
 
U.S. Treasury and agency securities
$
302

 
$
1

 
$

 
$
303

Non-U.S. government securities*
22

 

 

 
22

Municipal securities
395

 
2

 

 
397

Commercial paper, corporate bonds and medium-term notes
314

 
3

 

 
317

Asset-backed and mortgage-backed securities
301

 
3

 
1

 
303

Total fixed income securities
1,334

 
9

 
1

 
1,342

Publicly traded equity securities
45

 
30

 
6

 
69

Equity investments in privately-held companies
69

 

 

 
69

Total short-term and long-term investments
$
1,448

 
$
39

 
$
7

 
$
1,480

Total Cash, Cash equivalents and Investments
$
3,209

 
$
39

 
$
7

 
$
3,241

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


10

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



October 30, 2011
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair  Value
 
(In millions)
Cash
$
297

 
$

 
$

 
$
297

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
5,663

 

 

 
5,663

Total Cash equivalents
5,663

 

 

 
5,663

Total Cash and Cash equivalents
$
5,960

 
$

 
$

 
$
5,960

Short-term and long-term investments:
 
 
 
 
 
 
 
U.S. Treasury and agency securities
$
184

 
$
1

 
$

 
$
185

Non-U.S. government securities
40

 

 

 
40

Municipal securities
371

 
2

 

 
373

Commercial paper, corporate bonds and medium-term notes
216

 
3

 
1

 
218

Asset-backed and mortgage-backed securities
307

 
3

 
1

 
309

Total fixed income securities
1,118

 
9

 
2

 
1,125

Publicly traded equity securities
8

 
19

 

 
27

Equity investments in privately-held companies
62

 

 

 
62

Total short-term and long-term investments
$
1,188

 
$
28

 
$
2

 
$
1,214

Total Cash, Cash equivalents and Investments
$
7,148

 
$
28

 
$
2

 
$
7,174


Maturities of Investments
The following table summarizes the contractual maturities of Applied’s investments at April 29, 2012:
 
Cost
 
Estimated
Fair  Value
 
(In millions)
Due in one year or less
$
365

 
$
365

Due after one through five years
667

 
672

Due after five years
1

 
2

No single maturity date**
415

 
441

 
$
1,448

 
$
1,480

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


11

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



Gains and Losses on Investments
Gross realized gains and losses on sales of investments during the three and six months ended April 29, 2012 and May 1, 2011 were as follows:
 
Three Months Ended
 
Six Months Ended
April 29,
2012
 
May 1,
2011
 
April 29,
2012
 
May 1,
2011
(In millions)
Gross realized gains
$
1

 
$
8

 
$
2

 
$
13

Gross realized losses
$
1

 
$
1

 
$
2

 
$
1

At April 29, 2012, Applied had a gross unrealized loss of $1 million due to a decrease in the fair value of certain fixed income securities. Applied regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether an unrealized loss was considered to be temporary, or other-than-temporary and therefore impaired, include: the length of time and extent to which fair value has been lower than the cost basis; the financial condition, credit quality and near-term prospects of the investee; and whether it is more likely than not that Applied will be required to sell the security prior to recovery. Generally, the contractual terms of investments in marketable securities do not permit settlement at prices less than the amortized cost of the investments. Applied determined that the gross unrealized losses on its marketable securities at April 29, 2012 and May 1, 2011 were temporary in nature and therefore it did not recognize any impairment of its marketable securities for the three and six months ended April 29, 2012 and May 1, 2011. During the first half of fiscal 2012, Applied determined that certain of its equity investments held in privately held companies were other-than-temporarily impaired and, accordingly, recognized impairment charges of $3 million for the three and six months ended April 29, 2012. Applied did not recognize any impairment on its equity investments in privately-held companies for the three and six months ended May 1, 2011.
The following table provides the fair market value of Applied’s investments with unrealized losses that were not deemed to be other-than-temporarily impaired as of April 29, 2012.
 
In Loss Position for
Less Than 12 Months
 
Total
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
(In millions)
Asset-backed and mortgage-backed securities
$
42

 
$
1

 
$
42

 
$
1

Publicly traded equity securities
$
19

 
$
6

 
$
19

 
$
6

Total
$
61

 
$
7

 
$
61

 
$
7

The following table provides the fair market value of Applied’s investments with unrealized losses that were not deemed to be other-than-temporarily impaired as of October 30, 2011.
 
In Loss Position for
Less Than 12 Months
 
Total
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross
Unrealized
Losses
 
(In millions)
Commercial paper, corporate bonds and medium-term notes
$
32

 
$
1

 
$
32

 
$
1

Asset-backed and mortgage-backed securities
77

 
1

 
77

 
1

Total
$
109

 
$
2

 
$
109

 
$
2

Unrealized gains and temporary losses on investments classified as available-for-sale are included within accumulated other comprehensive income (loss), net of any related tax effect. Upon realization, those amounts are reclassified from accumulated other comprehensive income (loss) to results of operations.


12

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



Note 4    Fair Value Measurements
Applied’s financial assets are measured and recorded at fair value, except for equity investments held in privately-held companies. These equity investments are generally accounted for under the cost method of accounting and are periodically assessed for other-than-temporary impairment when events or circumstances indicate that an other-than-temporary decline in value may have occurred. Applied’s nonfinancial assets, such as goodwill, intangible assets, and property, plant and equipment, are recorded at cost and are assessed for impairment when events or circumstances indicate that an other-than-temporary decline in value may have occurred.
Fair Value Hierarchy
Applied uses the following fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1 — Quoted prices in active markets for identical assets or liabilities;
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Applied’s investments are comprised primarily of debt securities that are classified as available-for-sale and recorded at their fair values. In determining the fair value of investments, Applied uses pricing information from pricing services that value securities based on quoted market prices and models that utilize observable market inputs. In the event a fair value estimate is unavailable from a pricing service, Applied generally obtains non-binding price quotes from brokers. Applied then reviews the information provided by the pricing services or brokers to determine the fair value of its short-term and long-term investments. In addition, to validate pricing information obtained from pricing services, Applied periodically performs supplemental analysis on a sample of securities. Applied reviews any significant unanticipated differences identified through this analysis to determine the appropriate fair value.
Investments with remaining effective maturities of 12 months or less from the balance sheet date are classified as short-term investments. Investments with remaining effective maturities of more than 12 months from the balance sheet date are classified as long-term investments. As of April 29, 2012, substantially all of Applied’s available-for-sale, short-term and long-term investments were recognized at fair value that was determined based upon observable inputs.
 

13

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



Assets and Liabilities Measured at Fair Value on a Recurring Basis
Financial assets and liabilities (excluding cash balances) measured at fair value on a recurring basis are summarized below as of April 29, 2012 and October 30, 2011:
 
April 29, 2012
 
October 30, 2011
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
 
Total
(In millions)
Assets:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
1,141

 
$

 
$
1,141

 
$
5,663

 
$

 
$
5,663

U.S. Treasury and agency securities
93

 
210

 
303

 
109

 
76

 
185

Non-U.S. government securities

 
22

 
22

 

 
40

 
40

Municipal securities

 
397

 
397

 

 
373

 
373

Commercial paper, corporate bonds and medium-term notes

 
317

 
317

 

 
218

 
218

Asset-backed and mortgage-backed securities

 
303

 
303

 

 
309

 
309

Publicly traded equity securities
69

 

 
69

 
27

 

 
27

Total
$
1,303

 
$
1,249

 
$
2,552

 
$
5,799

 
$
1,016

 
$
6,815

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Deferred compensation
$
7

 
$

 
$
7

 
$

 
$

 
$

Total
$
7

 
$

 
$
7

 
$

 
$

 
$

The deferred compensation liability represents our obligation to pay benefits under a non-qualified deferred compensation plan. The related investments, held in a rabbi trust, consist of equity securities, primarily mutual funds, and are classified as Level 1 in the valuation hierarchy.
There were no transfers in and out of Level 1 and Level 2 fair value measurements during either the three or six months ended April 29, 2012 and May 1, 2011. Applied did not have any financial assets or liabilities measured at fair value on a recurring basis within Level 3 fair value measurements as of April 29, 2012 or October 30, 2011.
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
Equity investments in privately-held companies are generally accounted for under the cost method of accounting and are periodically assessed for other-than-temporary impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred. If Applied determines that an other-than-temporary impairment has occurred, the investment will be written down to its estimated fair value based on available information, such as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operational performance and any other readily available market data. Equity investments in privately-held companies totaled $69 million at April 29, 2012, of which $52 million of investments were accounted for under the cost method of accounting and $17 million of Level 3 investments had been measured at fair value on a non-recurring basis due to an other-than-temporary decline in value. At October 30, 2011, equity investments in privately-held companies totaled $62 million, of which $40 million of investments were accounted for under the cost method of accounting and $22 million of Level 3 investments had been measured at fair value on a non-recurring basis due to an other-than-temporary decline in value. During the three and six months ended April 29, 2012, Level 3 equity investments in privately-held companies of $5 million were transferred to Level 1 assets measured at fair value on a recurring basis due to change in investee structure which improved price transparency.

14

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



During the first half of fiscal 2012, Applied determined that certain of its equity investments held in privately held companies were other-than-temporarily impaired and, accordingly, recognized impairment charges of $3 million for the three and six months ended April 29, 2012. Applied did not recognize any impairment on its equity method investments in privately-held companies for the three and six months ended May 1, 2011.
Other
The carrying amounts of Applied’s financial instruments, including cash and cash equivalents, accounts receivable, notes payable, and accounts payable and accrued expenses, approximate fair value due to the short maturities of these financial instruments. At April 29, 2012, the carrying amount of long-term debt was $1.9 billion and the estimated fair value was $2.2 billion. The estimated fair value of long-term debt is determined by Level 2 inputs and is based on quoted market prices for the same or similar issues.

Note 5    Derivative Instruments and Hedging Activities
Derivative Financial Instruments
Applied conducts business in a number of foreign countries, with certain transactions denominated in local currencies, such as Japanese yen, euro, Israeli shekel, Taiwanese dollar and Swiss franc. Applied uses derivative financial instruments, such as forward exchange contracts and currency option contracts, to hedge certain forecasted foreign currency denominated transactions expected to occur typically within the next 24 months. The purpose of Applied’s foreign currency management is to mitigate the effect of exchange rate fluctuations on certain foreign currency denominated revenues, costs and eventual cash flows. The terms of currency instruments used for hedging purposes are generally consistent with the timing of the transactions being hedged. Applied does not use derivative financial instruments for trading or speculative purposes.
Derivative instruments and hedging activities, including foreign currency exchange contracts, are recognized on the balance sheet at fair value. Changes in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of any hedges, are recognized currently in earnings. All of Applied’s derivative financial instruments are recorded at their fair value in other current assets or in accounts payable and accrued expenses.
Hedges related to anticipated transactions are designated and documented at the inception of the hedge as cash flow hedges and are typically entered into once per month. Cash flow hedges are evaluated for effectiveness quarterly. The effective portion of the gain or loss on these hedges is reported as a component of accumulated other comprehensive income or loss (AOCI) in stockholders’ equity and is reclassified into earnings when the hedged transaction affects earnings. The majority of the after-tax net income or loss related to derivative instruments included in AOCI at April 29, 2012 is expected to be reclassified into earnings within 12 months. Changes in the fair value of currency forward exchange and option contracts due to changes in time value are excluded from the assessment of effectiveness. Both ineffective hedge amounts and hedge components excluded from the assessment of effectiveness are recognized promptly in earnings. If the transaction being hedged is no longer probable to occur, or if a portion of any derivative is deemed to be ineffective, Applied promptly recognizes the gain or loss on the associated financial instrument in general and administrative expenses. The amount recognized due to discontinuance of cash flow hedges that were probable not to occur by the end of the originally specified time period was not significant for the three and six months ended April 29, 2012 and May 1, 2011.
Additionally, forward exchange contracts are generally used to hedge certain foreign currency denominated assets or liabilities. These derivatives are typically entered into once per month and are not designated for hedge accounting treatment. Accordingly, changes in the fair value of these hedges are recorded promptly in earnings to offset the changes in the fair value of the assets or liabilities being hedged.
The fair values of derivative instruments at April 29, 2012 and October 30, 2011 were not material.
 

15

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



The effect of derivative instruments on the Consolidated Condensed Statement of Operations for the three and six months ended April 29, 2012 and May 1, 2011 was as follows:
 
 
 
Three Months Ended April 29, 2012
 
Three Months Ended May 1, 2011
Effective Portion
 
Ineffective Portion and Amount
Excluded from
Effectiveness
Testing
 
Effective Portion
 
Ineffective Portion and Amount
Excluded from
Effectiveness
Testing
 
Location of Gain or
(Loss) Reclassified
from AOCI into
Income
 
Gain or
(Loss)
Recognized
in AOCI
 
Gain or (Loss)
Reclassified
from AOCI into
Income
 
Gain or (Loss)
Recognized in
Income
 
Gain or
(Loss)
Recognized
in AOCI
 
Gain or (Loss)
Reclassified
from AOCI into
Income
 
Gain or (Loss)
Recognized in
Income
 
 
 
(In millions)
Derivatives in Cash Flow Hedging Relationships
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Cost of products sold
 
$
6

 
$
4

 
$
(1
)
 
$
8

 
$
1

 
$
(1
)
Foreign exchange contracts
General and administrative
 

 
1

 

 

 
2

 
(1
)
Total
 
 
$
6

 
$
5

 
$
(1
)
 
$
8

 
$
3

 
$
(2
)

 
 
 
Six Months Ended April 29, 2012
 
Six Months Ended May 1, 2011
Effective Portion
 
Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing
 
Effective Portion
 
Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing
 
Location of Gain or
(Loss) Reclassified
from AOCI into
Income
 
Gain or
(Loss)
Recognized
in AOCI
 
Gain or (Loss)
Reclassified
from AOCI into
Income
 
Gain or (Loss)
Recognized in
Income
 
Gain or
(Loss)
Recognized
in AOCI
 
Gain or (Loss)
Reclassified
from AOCI into
Income
 
Gain or (Loss)
Recognized in
Income
 
 
 
(In millions)
Derivatives in Cash Flow Hedging Relationships
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Cost of products sold
 
$
5

 
$
6

 
$

 
$
12

 
$
5

 
$
(3
)
Foreign exchange contracts
General and administrative
 

 
(2
)
 
(1
)
 

 
3

 
(1
)
Total
 
 
$
5

 
$
4

 
$
(1
)
 
$
12

 
$
8

 
$
(4
)

 
 
 
 
Amount of Gain or (Loss) Recognized in Income
 
 
Three Months Ended
 
Six Months Ended
Location of Gain or
(Loss) Recognized
in Income
 
April 29, 2012
 
May 1, 2011
 
April 29, 2012
 
May 1, 2011
 
 
 
(In millions)
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
General and
administrative
 
$
8

 
$
1

 
$
14

 
$
3

Total
 
 
$
8

 
$
1

 
$
14

 
$
3


16

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



Credit Risk Contingent Features
If Applied’s credit rating were to fall below investment grade, it would be in violation of credit risk contingent provisions of the derivative instruments discussed above, and certain counterparties to the derivative instruments could request immediate payment on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit risk-related contingent features that were in a net liability position was immaterial as of April 29, 2012.
Entering into foreign exchange contracts with banks exposes Applied to credit-related losses in the event of the banks’ nonperformance. However, Applied’s exposure is not considered significant.


Note 6    Accounts Receivable, Net
Applied has agreements with various financial institutions to sell accounts receivable and discount promissory notes from selected customers. Applied also discounts letters of credit through various financial institutions. Applied sells its accounts receivable without recourse. Details of discounted letters of credit, factored accounts receivable and discounted promissory notes for the three and six months ended April 29, 2012 and May 1, 2011 were as follows:
 
Three Months Ended
 
Six Months Ended
April 29,
2012
 
May 1,
2011
 
April 29,
2012
 
May 1,
2011
 
(In millions)
Discounted letters of credit
$

 
$
50

 
$

 
$
173

Factored accounts receivable and discounted promissory notes

 
19

 
70

 
55

Total
$

 
$
69

 
$
70

 
$
228

Financing charges on the sale of receivables and discounting of letters of credit are included in interest expense in the accompanying Consolidated Condensed Statements of Operations and were not material for both periods presented.
Accounts receivable are presented net of allowance for doubtful accounts of $82 million at April 29, 2012 and $73 million at October 30, 2011. Applied sells principally to manufacturers within the semiconductor, display and solar industries. As a result of challenging economic and industry conditions, certain of these manufacturers may experience difficulties in meeting their obligations in a timely manner. While Applied believes that its allowance for doubtful accounts is adequate and represents Applied’s best estimate as of April 29, 2012, Applied will continue to closely monitor customer liquidity and other economic conditions, which may result in changes to Applied’s estimates regarding collectability.


17

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



Note 7    Balance Sheet Detail
 
April 29,
2012
 
October 30,
2011
 
(In millions)
Inventories
 
 
 
Customer service spares
$
306

 
$
328

Raw materials
383

 
407

Work-in-process
338

 
336

Finished goods*
567

 
630

 
$
1,594

 
$
1,701

 _______________
*
Included in finished goods inventory is $186 million at April 29, 2012, and $224 million at October 30, 2011, of newly-introduced systems at customer locations where the sales transaction did not meet Applied’s revenue recognition criteria as set forth in Note 1, Basis of Presentation. Finished goods inventory also includes $195 million and $140 million of evaluation inventory at April 29, 2012 and October 30, 2011, respectively.

 
Useful Life
 
April 29,
2012
 
October 30,
2011
 
(In years)
 
(In millions)
Property, Plant and Equipment, Net
 
 
 
 
 
Land and improvements
 
 
$
169

 
$
163

Buildings and improvements
3-30
 
1,190

 
1,155

Demonstration and manufacturing equipment
3-5
 
753

 
686

Furniture, fixtures and other equipment
3-15
 
735

 
722

Construction in progress
 
 
31

 
12

Gross property, plant and equipment
 
 
2,878

 
2,738

Accumulated depreciation
 
 
(1,939
)
 
(1,872
)
 
 
 
$
939

 
$
866


In the first quarter of fiscal 2011, Applied received $39 million in proceeds from the sale of a property located in North America and incurred a loss of $1 million on the transaction.
 
April 29,
2012
 
October 30,
2011
 
(In millions)
Accounts Payable and Accrued Expenses
 
 
 
Accounts payable
$
507

 
$
484

Compensation and employee benefits
355

 
455

Warranty
152

 
168

Dividends payable
115

 
104

Other accrued taxes
70

 
81

Interest payable
30

 
31

Restructuring reserve
6

 
11

Other
231

 
186

 
$
1,466

 
$
1,520

As of April 29, 2012, other accrued expenses included a $16 million acquisition obligation for untendered Varian shares.



18

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



 
April 29,
2012
 
October 30,
2011
 
(In millions)
Customer Deposits and Deferred Revenue
 
 
 
Customer deposits
$
191

 
$
249

Deferred revenue
922

 
867

 
$
1,113

 
$
1,116

Applied typically receives deposits on future deliverables from customers in its Energy and Environmental Solutions and Display segments. In certain instances, customer deposits may be received from customers in the Applied Global Services segment.

Note 8    Business Combination
On November 10, 2011, Applied completed the acquisition of Varian, a public company manufacturer of semiconductor processing equipment and the leading supplier of ion implantation equipment used by chip makers around the world, for an aggregate purchase price of $4.2 billion in cash, net of cash acquired and assumed earned equity awards of $27 million, pursuant to an Agreement and Plan of Merger (the Merger Agreement) dated as of May 3, 2011. Applied’s primary reasons for this acquisition were to complement existing product offerings and to provide opportunities for future growth. Varian designs, markets, manufactures and services ion implantation systems. These systems are primarily used in the manufacture of transistors, which are a basic building block of integrated circuits (ICs) or microchips. Ion implantation systems create a beam of electrically charged particles called ions, which are implanted into transistor structures at precise locations and depths, changing the electrical properties of the semiconductor device. These implantation systems may also be used in other areas of IC manufacture for modifying the material properties of the semiconductor devices, as well as in manufacturing crystalline-silicon solar cells.
Applied allocated the purchase price of this acquisition to tangible and identifiable intangible assets acquired and liabilities assumed, based on their estimated fair values. Applied preliminarily recorded $2.6 billion in goodwill, which represented the excess of the purchase price over the aggregate estimated fair values of the assets acquired and liabilities assumed in the acquisition. Of this amount, $1.8 billion of goodwill was allocated to the Silicon Systems Group segment, and the remainder was allocated to the Applied Global Services segment. Goodwill associated with the acquisition is primarily attributable to the opportunities from the addition of Varian's product portfolio which complement Applied's Silicon Systems Group's suite of products, including providing integrated process solutions to customers. Goodwill is not deductible for tax purposes. A discussion of the subsequent revision made during the second quarter of fiscal 2012 to the initial preliminary purchase price allocation is included in Note 9, Goodwill, Purchased Technology and Other Intangible Assets. The estimated fair value assigned to identifiable assets acquired and liabilities assumed was based upon preliminary estimates. Valuations and assumptions pertaining to income taxes are subject to change as additional information is obtained during the measurement period.

19

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



The following table summarizes the preliminary allocation of the assets acquired and liabilities assumed at the acquisition date:
Estimated Fair Values
Acquisition
2012
 
(In millions)
Cash and cash equivalents
$
632

Short-term investments
56

Accounts receivable, net
194

Inventories
250

Deferred income taxes and other current assets
66

Long-term investments
62

Property and equipment, net
104

Goodwill
2,604

Purchased intangible assets
1,365

Other assets
10

Total assets acquired
5,343

Accounts payable and accrued expenses
(134
)
Customer deposits and deferred revenue
(52
)
Income taxes payable
(60
)
Deferred income taxes
(211
)
Other liabilities
(25
)
Total liabilities assumed
(482
)
Purchase price allocated
$
4,861

 
The following table presents detail of the purchase price allocated to purchased intangible assets of Varian at the acquisition date:
 
Useful
Life
 
Purchased
Intangible  Assets
2012
 
(In years)
 
(In millions)
Developed technology
1-7
 
$
987

Customer relationships
15
 
150

In-process technology
 
 
142

Patents and trademarks
10
 
69

Backlog
1
 
7

Covenant not to compete
2
 
10

Total purchased intangible assets
 
 
$
1,365


20

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



The results of operations of Varian are included in Applied’s consolidated results of operations, primarily in the results for the Silicon Systems Group and Applied Global Services segments, beginning in the first quarter of fiscal 2012. For the three months ended April 29, 2012, net sales of Varian products of approximately $333 million and an operating loss of approximately $1 million were included in the consolidated results of operations. For the six months ended April 29, 2012, net sales of Varian products of approximately $535 million and an operating loss of approximately $131 million were included in the consolidated results of operations. For the three and six months ended April 29, 2012, results of operations included charges of $69 million and $222 million, respectively, attributable to inventory fair value adjustments on products sold, amortization of purchased intangible assets, share-based compensation associated with accelerated vesting, deal costs and other integration costs associated with the acquisition. Of these amounts, deal costs and other acquisition-related costs of $1 million and $37 million were not allocated to the segments for the three and six months ended April 29, 2012, respectively. Deal costs are included in selling, general and administrative expenses in Applied's consolidated results of operations.
The following unaudited pro forma consolidated results of operations assume the acquisition was completed as of the beginning of the fiscal reporting periods presented. The pro forma consolidated results of operations for the three and six months ended May 1, 2011 combine the results of Applied for the three and six months ended May 1, 2011, with the results of Varian for the three and six months ended April 1, 2011.
 
Three Months Ended
 
Six Months Ended
 
April 29,
2012
 
May 1,
2011
 
April 29,
2012
 
May 1,
2011
 
(In millions, except per share amounts)
Net sales
$
2,541

 
$
3,192

 
$
4,730

 
$
6,161

Net income
$
308

 
$
508

 
$
503

 
$
957

Basic and diluted earnings per share
$
0.24

 
$
0.38

 
$
0.39

 
$
0.72

The pro forma results above include adjustments related to the purchase price allocation and financing of the acquisition, primarily to increase depreciation and amortization with the higher values of property, plant and equipment and identifiable intangible assets, to increase interest expense for the additional debt incurred to complete the acquisition, and to reflect the related income tax effect. The pro forma results for the three and six months ended May 1, 2011 include costs of $15 million and $117 million, respectively, which reduced net income due to inventory fair value adjustments on products sold, share-based compensation associated with accelerated vesting and acquisition-related costs, which are not expected to occur in future quarters. The pro forma information does not necessarily reflect the actual results of operations had the acquisition been consummated at the beginning of the fiscal reporting period indicated nor is it necessarily indicative of future operating results. The pro forma information does not include any (i) potential revenue enhancements, cost synergies or other operating efficiencies that could result from the acquisition or (ii) transaction or integration costs relating to the acquisition.


21

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



Note 9    Goodwill, Purchased Technology and Other Intangible Assets
Goodwill and Purchased Intangible Assets
Applied’s methodology for allocating the purchase price relating to purchase acquisitions is determined through established and generally accepted valuation techniques. Goodwill is measured as the excess of the cost of the acquisition over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. Applied assigns assets acquired (including goodwill) and liabilities assumed to one or more reporting units as of the date of acquisition. Typically, acquisitions relate to a single reporting unit and thus do not require the allocation of goodwill to multiple reporting units. If the products obtained in an acquisition are assigned to multiple reporting units, the goodwill is distributed to the respective reporting units as part of the purchase price allocation process.
Goodwill and purchased intangible assets with indefinite useful lives are not amortized, but are reviewed for impairment annually during the fourth quarter of each fiscal year and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The process of evaluating the potential impairment of goodwill and intangible assets requires significant judgment, especially in emerging markets. Applied regularly monitors current business conditions and other factors including, but not limited to, adverse industry or economic trends, restructuring actions and lower projections of profitability that may impact future operating results.
In fiscal 2011, Applied adopted authoritative guidance which allows entities to use a qualitative approach to test goodwill for impairment. This authoritative guidance permits an entity to first perform 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, it is necessary to perform the two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. In the first step of the two-step goodwill impairment test, Applied would compare the estimated fair value of each reporting unit to its carrying value. Applied’s reporting units are consistent with the reportable segments identified in Note 15, Industry Segment Operations, based on the manner in which Applied operates its business and the nature of those operations. Applied determines the fair value of each of its reporting units based on a weighting of income and market approaches. Under the income approach, Applied calculates the fair value of a reporting unit based on the present value of estimated future cash flows. Estimated future cash flows will be impacted by a number of factors including anticipated future operating results, estimated cost of capital and/or discount rates. Under the market approach, Applied estimates the fair value based on market multiples of revenue or earnings for comparable companies, as appropriate. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then Applied would perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. Applied would then allocate the fair value of the reporting unit to all of the assets and liabilities of that unit, as if Applied had acquired the reporting unit in a business combination, with the fair value of the reporting unit being the “purchase price.” The excess of the “purchase price” over the carrying amounts assigned to assets and liabilities represents the implied fair value of goodwill. If Applied determined that the carrying value of a reporting unit’s goodwill exceeded its implied fair value, Applied would record an impairment charge equal to the difference.
In the second quarter of fiscal 2011, Applied negotiated the divestiture of certain assets held in the Applied Global Services segment and determined the trade name included in assets held for sale to be impaired and recorded $18 million of impairment charges. Applied performed a qualitative assessment to test goodwill for impairment in the fourth quarter of fiscal 2011, and determined that it was more likely than not that each of its reporting units’ fair value exceeded its carrying value and that it was not necessary to perform the two-step goodwill impairment test. Applied tested goodwill of the Energy and Environmental Solutions reporting unit for potential impairment during the second quarter of fiscal 2012 in light of second quarter developments that included current industry trends, financial performance, weaker short-term outlooks, and other adverse operating conditions within the solar industry. The results of the first step of the impairment test indicated that goodwill of the Energy and Environmental Solutions reporting unit was not impaired.

 


22

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



Applied utilized an equal weighting of both the discounted cash flow method of the income approach and the guideline company method of the market approach to estimate the fair value of the Energy and Environmental Solutions reporting unit. The results of the first step of the impairment test indicated that goodwill within the Energy and Environmental Solutions reporting unit was not impaired, as the estimated fair value in excess of carrying value was approximately $700 million (or 73 percent over the carrying value of the reporting unit) at April 1, 2012. The evaluation of goodwill for impairment requires the exercise of significant judgment. The estimates used in the impairment testing were consistent with the discrete forecasts that Applied uses to manage its business, and considered the significant developments that occurred during the quarter. Under the discounted cash flow method, cash flows beyond the discrete forecasts were estimated using a terminal growth rate, which considered the long-term earnings growth rate specific to the Energy and Environmental Solutions reporting unit. The estimated future cash flows were discounted to present value using a discount rate that was the value-weighted average of the reporting unit's estimated cost of equity and debt derived using both known and estimated market metrics, and was adjusted to reflect risk factors that considered both the timing and risks associated with the estimated cash flows. The tax rate used in the discounted cash flow method reflected the international structure currently in place, which is consistent with the market participant perspective. Under the guideline company method, market multiples were applied to forecasted revenues and earnings before interest, taxes, depreciation and amortization. The market multiples used were consistent with the median multiples based on comparable publicly-traded companies. While there are inherent uncertainties related to the significant assumptions used and management's application of these assumptions in conducting the goodwill impairment analysis, Applied believes that the assumptions used provide a reasonable estimate of the fair value of the Energy and Environmental Solutions reporting unit.

Applied also tested goodwill of the Display reporting unit for potential impairment during the second quarter of fiscal 2012 in light of second quarter developments that included current industry trends, the Display reporting unit's financial performance and short-term outlook. The results of the first step of the impairment test indicated that goodwill of the Display reporting unit was not impaired and the estimated fair value of the reporting unit was more than 100 percent over the carrying value of the reporting unit.

In the event of future changes in business conditions in the markets in which the Display and Energy and Environmental Solutions reporting units operate, Applied will be required to reassess and update its forecasts and estimates used in future impairment analyses. If the results of these analyses are lower than current estimates, a material impairment charge may result at that time. As discussed in Note 16, Subsequent Event, on May 10, 2012, Applied announced that a committee of the Board of Directors approved a plan to restructure the Energy and Environmental Solutions segment. The restructuring plan is not expected to have a significant impact on the fair value of the Energy and Environmental Solutions reporting unit.
During the first half of fiscal 2012, goodwill and other indefinite-lived intangible assets increased by $2.7 billion due to the acquisition of Varian as discussed in Note 8, Business Combination. Of this amount, an adjustment of $64 million to increase goodwill was recorded in the second quarter of fiscal 2012 related to the changes in net assets acquired from the Varian acquisition during the measurement period as Applied obtained the necessary information to compute the U.S. tax liability on undistributed earnings of non-U.S. subsidiaries as of the acquisition date. Of the total adjustment in the second quarter of fiscal 2012, $44 million was allocated to the Silicon Systems Group segment and the remainder was allocated to Applied Global Services segment.

23

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



Details of indefinite-lived intangible assets were as follows:
 
April 29, 2012
 
October 30, 2011
Goodwill
 
Other
Intangible
Assets
 
Total
 
Goodwill
 
Other
Intangible
Assets
 
Total
 
(In millions)
Silicon Systems Group
$
2,151

 
$
142

 
$
2,293

 
$
381

 
$

 
$
381

Applied Global Services
1,027

 

 
1,027

 
193

 

 
193

Display
116

 

 
116

 
116

 

 
116

Energy and Environmental Solutions
645

 

 
645

 
645

 

 
645

Carrying amount
$
3,939

 
$
142

 
$
4,081

 
$
1,335

 
$

 
$
1,335

Other intangible assets that are not subject to amortization consist primarily of in-process technology, which will be subject to amortization upon commercialization. The fair value assigned to in-process technology was determined using the income approach based on estimates and judgments regarding risks inherent in the development process, including the likelihood of achieving technological success and market acceptance. If an in-process technology project is abandoned, the acquired technology attributable to the project will be written-off.
Finite-Lived Purchased Intangible Assets
Applied amortizes purchased intangible assets with finite lives using the straight-line method over the estimated economic lives of the assets, ranging from 1 to 15 years.
Applied evaluates long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset group may not be recoverable. Applied assesses the fair value of the assets based on the amount of the undiscounted future cash flow that the assets are expected to generate and recognizes an impairment loss when estimated undiscounted future cash flow expected to result from the use of the asset, plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When Applied identifies an impairment, Applied reduces the carrying value of the group of assets to comparable market values, when available and appropriate, or to its estimated fair value based on a discounted cash flow approach.
Intangible assets, such as purchased technology, are generally recorded in connection with a business acquisition. The value assigned to intangible assets is usually based on estimates and judgments regarding expectations for the success and life cycle of products and technology acquired. Applied evaluates the useful lives of its intangible assets each reporting period to determine whether events and circumstances require revising the remaining period of amortization. In addition, Applied reviews intangible assets for impairment when events or changes in circumstances indicate their carrying value may not be recoverable. Management considers such indicators as significant differences in actual product acceptance from the estimates, changes in the competitive and economic environment, technological advances, and changes in cost structure.
 

24

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



Details of finite-lived intangible assets were as follows:
 
April 29, 2012
 
October 30, 2011
Purchased
Technology
 
Other
Intangible
Assets
 
Total
 
Purchased
Technology
 
Other
Intangible
Assets
 
Total
 
(In millions)
Gross carrying amount:
 
 
 
 
 
 
 
 
 
 
 
Silicon Systems Group
$
1,300

 
$
252

 
$
1,552

 
$
310

 
$
20

 
$
330

Applied Global Services
28

 
44

 
72

 
28

 
40

 
68

Display
110

 
33

 
143

 
110

 
33

 
143

Energy and Environmental Solutions
106

 
232

 
338

 
105

 
232

 
337

Gross carrying amount
$
1,544

 
$
561

 
$
2,105

 
$
553

 
$
325

 
$
878

Accumulated amortization:
 
 
 
 
 
 
 
 
 
 
 
Silicon Systems Group
$
(334
)
 
$
(23
)
 
$
(357
)
 
$
(256
)
 
$
(8
)
 
$
(264
)
Applied Global Services
(21
)
 
(37
)
 
(58
)
 
(20
)
 
(31
)
 
(51
)
Display
(104
)
 
(26
)
 
(130
)
 
(102
)
 
(25
)
 
(127
)
Energy and Environmental Solutions
(54
)
 
(184
)
 
(238
)
 
(48
)
 
(177
)
 
(225
)
Accumulated amortization
$
(513
)
 
$
(270
)
 
$
(783
)
 
$
(426
)
 
$
(241
)
 
$
(667
)
Carrying amount
$
1,031

 
$
291

 
$
1,322

 
$
127

 
$
84

 
$
211

During the first half of fiscal 2012, the change in gross carrying amount of the amortized intangible assets was approximately $1.2 billion, due to the acquisition of Varian as discussed in Note 8, Business Combination.
In the second quarter of fiscal 2011, Applied negotiated the divestiture of certain assets held in the Applied Global Services segment and determined identified purchased technology and finite-lived intangible assets included in assets held for sale to be impaired and recorded $6 million of impairment charges.
Details of amortization expense were as follows:
 
Three Months Ended
 
Six Months Ended
April 29,
2012
 
May 1,
2011
 
April 29,
2012
 
May 1,
2011
(In millions)
Silicon Systems Group
$
45

 
$
3

 
$
93

 
$
7

Applied Global Services
2

 
2

 
7

 
4

Display
2

 
2

 
3

 
4

Energy and Environmental Solutions
6

 
6

 
13

 
12

Total
$
55

 
$
13

 
$
116

 
$
27


25

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



For the three and six months ended April 29, 2012 and May 1, 2011, amortization expense was charged to the following categories:
 
Three Months Ended
 
Six Months Ended
April 29,
2012
 
May 1,
2011
 
April 29,
2012
 
May 1,
2011
(In millions)
Cost of products sold
$
45

 
$
9

 
$
97

 
$
18

Research, development and engineering
1

 

 
1

 

Selling, general and administrative
9

 
4

 
18

 
9

Total amortization expense
$
55

 
$
13

 
$
116

 
$
27

 

As of April 29, 2012, future estimated amortization expense is expected to be as follows:
 
Amortization Expense
 
(In millions)
2012
$
109

2013
209

2014
199

2015
183

2016
174

Thereafter
448

 
$
1,322


Note 10    Borrowing Facilities and Long-Term Debt
Applied has credit facilities for unsecured borrowings in various currencies of up to $1.6 billion, of which $1.5 billion is comprised of a committed four-year revolving credit agreement with a group of banks that is scheduled to expire in May 2015. This agreement provides for borrowings in United States dollars at interest rates keyed to one of the two rates selected by Applied for each advance and includes financial and other covenants with which Applied was in compliance at April 29, 2012. Remaining credit facilities in the amount of approximately $99 million are with Japanese banks. Applied’s ability to borrow under these facilities is subject to bank approval at the time of the borrowing request, and any advances will be at rates indexed to the banks’ prime reference rate denominated in Japanese yen. No amounts were outstanding under any of the credit facilities at April 29, 2012 or October 30, 2011.
Long-term debt outstanding was as follows:
 
Principal Amount
 
 
 
 
 
 
Due Date
April 29, 2012
 
October 30, 2011
 
Stated
Interest Rate
 
Effective
Interest Rate
 
Interest Payment Dates
 
(In millions)
 
 
 
 
 
 
June 15, 2016
$
400

 
$
400

 
2.650%
 
2.666%
 
June 15, December 15
October 15, 2017
200

 
200

 
7.125%
 
7.190%
 
April 15, October 15
June 15, 2021
750

 
750

 
4.300%
 
4.326%
 
June 15, December 15
June 15, 2041
600

 
600

 
5.850%
 
5.879%
 
June 15, December 15
Other debt

 
1

 
 
 
 
 
 
 
1,950

 
1,951

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

 
$
1,947

 
 
 
 
 
 
Applied has debt agreements that contain financial and other covenants. These covenants require Applied to maintain certain minimum financial ratios. At April 29, 2012, Applied was in compliance with all such covenants.

26

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



Note 11    Stockholders’ Equity, Comprehensive Income and Share-Based Compensation
Accumulated Other Comprehensive Income
Components of accumulated other comprehensive income, on an after-tax basis where applicable, were as follows:
 
April 29,
2012
 
October 30,
2011
 
(In millions)
Pension liability
$
(25
)
 
$
(25
)
Unrealized gain on investments, net
20

 
17

Cumulative translation adjustments
12

 
14

 
$
7

 
$
6

Stock Repurchase Program
On March 5, 2012, Applied's Board of Directors approved a new stock repurchase program authorizing up to $3.0 billion in repurchases over the next three years ending in March 2015. Under this authorization, Applied purchased shares of its common stock under a systematic stock repurchase program and may also make supplemental stock repurchases from time to time, depending on market conditions, stock price and other factors. Applied's stock repurchase program authorized on March 8, 2010 was terminated concurrent with the start of the new repurchase program.

The following table summarizes Applied’s stock repurchases for the three and six months ended April 29, 2012 and May 1, 2011:
 
Three Months Ended
 
Six Months Ended
 
April 29,
2012
 
May 1,
2011
 
April 29,
2012
 
May 1,
2011
 
(In millions, except per share amounts)
Shares of common stock repurchased
16

 
8

 
34

 
19

Cost of stock repurchased
$
200

 
$
118

 
$
400

 
$
268

Average price paid per share
$
12.33

 
$
15.54

 
$
11.60

 
$