APPLIED MATERIALS INC /DE - Quarter Report: 2015 April (Form 10-Q)

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 26, 2015


¨	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)

(408) 727-5555

(Registrant’s telephone number, including area code)

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.



Large accelerated filer þ		Accelerated filer ¨

Non-accelerated filer ¨ (Do not check if a smaller reporting company)		Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

Number of shares outstanding of the issuer’s common stock as of April 26, 2015: 1,231,598,278

Table of Contents

APPLIED MATERIALS, INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED APRIL 26, 2015

TABLE OF CONTENTS



		Page
	PART I. FINANCIAL INFORMATION
Item 1:	Financial Statements (Unaudited)	3
	Consolidated Condensed Statements of Operations for the Three and Six Months Ended April 26, 2015 and April 27, 2014	3
	Consolidated Condensed Statements of Comprehensive Income for the Three and Six Months Ended April 26, 2015 and April 27, 2014	4
	Consolidated Condensed Balance Sheets at April 26, 2015 and October 26, 2014	5
	Consolidated Condensed Statement of Stockholders’ Equity for the Six Months Ended April 26, 2015 and April 27, 2014	6
	Consolidated Condensed Statements of Cash Flows for the Six Months Ended April 26, 2015 and April 27, 2014	7
	Notes to Consolidated Condensed Financial Statements	8
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	57
Item 4:	Controls and Procedures	57

	PART II. OTHER INFORMATION
Item 1:	Legal Proceedings	58
Item 1A:	Risk Factors	58
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	69
Item 6:	Exhibits	70
	Signatures	71

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(In millions, except per share amounts)



	Three Months Ended					Six Months Ended
	April 26, 2015			April 27, 2014		April 26, 2015			April 27, 2014
	(Unaudited)
Net sales	$	2,442		$	2,353	$	4,801		$	4,543
Cost of products sold	1,426			1,352		2,826			2,651
Gross profit	1,016			1,001		1,975			1,892
Operating expenses:
Research, development and engineering	365			355		716			711
Marketing and selling	109			107		220			216
General and administrative	140			129		257			249
Loss (gain) on derivatives associated with announced business combination	(14		)	23		(92		)	(1		)
Total operating expenses	600			614		1,101			1,175
Income from operations	416			387		874			717
Interest expense	24			23		47			48
Interest and other income (loss), net	(3		)	1		(1		)	11
Income before income taxes	389			365		826			680
Provision for income taxes	25			103		114			165
Net income	$	364		$	262	$	712		$	515
Earnings per share:
Basic	$	0.30		$	0.22	$	0.58		$	0.43
Diluted	$	0.29		$	0.21	$	0.57		$	0.42
Weighted average number of shares:
Basic	1,230			1,216		1,227			1,211
Diluted	1,241			1,229		1,241			1,227

See accompanying Notes to Consolidated Condensed Financial Statements.

Table of Contents

APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)



	Three Months Ended						Six Months Ended
	April 26, 2015			April 27, 2014			April 26, 2015			April 27, 2014
	(Unaudited)
Net income	$	364		$	262		$	712		$	515
Other comprehensive income (loss), net of tax:
Change in unrealized net gain on investments	(3		)	3			(4		)	—
Change in unrealized net gain on derivative investments	(1		)	(1		)	—			(2		)
Change in defined and postretirement benefit plans	(43		)	—			(43		)	—
Change in cumulative translation adjustments	(1		)	1			(2		)	(1		)
Other comprehensive income (loss), net of tax	(48		)	3			(49		)	(3		)
Comprehensive income	$	316		$	265		$	663		$	512

See accompanying Notes to Consolidated Condensed Financial Statements.

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APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(In millions)



	April 26, 2015			October 26, 2014


ASSETS
Current assets:
Cash and cash equivalents	$	3,067		$	3,002
Short-term investments	163			160
Accounts receivable, net	1,798			1,670
Inventories	1,713			1,567
Other current assets	706			568
Total current assets	7,447			6,967
Long-term investments	936			935
Property, plant and equipment, net	887			861
Goodwill	3,304			3,304
Purchased technology and other intangible assets, net	860			951
Deferred income taxes and other assets	153			156
Total assets	$	13,587		$	13,174

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	1,822		$	1,883
Customer deposits and deferred revenue	874			940
Total current liabilities	2,696			2,823
Long-term debt	1,947			1,947
Other liabilities	593			536
Total liabilities	5,236			5,306
Stockholders’ equity:
Common stock	12			12
Additional paid-in capital	6,450			6,384
Retained earnings	13,538			13,072
Treasury stock	(11,524		)	(11,524		)
Accumulated other comprehensive loss	(125		)	(76		)
Total stockholders’ equity	8,351			7,868
Total liabilities and stockholders’ equity	$	13,587		$	13,174

Amounts as of April 26, 2015 are unaudited. Amounts as of October 26, 2014 are derived from the October 26, 2014 audited consolidated financial statements.

See accompanying Notes to Consolidated Condensed Financial Statements.

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APPLIED MATERIALS, INC

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In millions)



	Common Stock			Additional Paid-In Capital			Retained Earnings			Treasury Stock				Accumulated Other Comprehensive Income (Loss)			Total
Six Months Ended April 26, 2015	Shares	Amount		Additional Paid-In Capital			Retained Earnings			Shares	Amount			Accumulated Other Comprehensive Income (Loss)			Total

	(Unaudited)
Balance at October 26, 2014	1,221	$	12	$	6,384		$	13,072		717	$	(11,524	)	$	(76	)	$	7,868
Net income	—	—		—			712			—	—			—			712
Other comprehensive loss, net of tax	—	—		—			—			—	—			(49		)	(49		)
Dividends	—	—		—			(246		)	—	—			—			(246		)
Share-based compensation	—	—		95			—			—	—			—			95
Issuance under stock plans, net of a tax benefit of $51 and other	11	—		(29		)	—			—	—			—			(29		)
Balance at April 26, 2015	1,232	$	12	$	6,450		$	13,538		717	$	(11,524	)	$	(125	)	$	8,351



	Common Stock			Additional Paid-In Capital		Retained Earnings			Treasury Stock				Accumulated Other Comprehensive Income (Loss)			Total
Six Months Ended April 27, 2014	Shares	Amount		Additional Paid-In Capital		Retained Earnings			Shares	Amount			Accumulated Other Comprehensive Income (Loss)			Total

	(Unaudited)
Balance at October 27, 2013	1,204	$	12	$	6,151	$	12,487		717	$	(11,524	)	$	(38	)	$	7,088
Net income	—	—		—		515			—	—			—			515
Other comprehensive loss, net of tax	—	—		—		—			—	—			(3		)	(3		)
Dividends	—	—		—		(243		)	—	—			—			(243		)
Share-based compensation	—	—		88		—			—	—			—			88
Issuance under stock plans, net of a tax benefit of $25 and other	13	—		30		—			—	—			—			30
Balance at April 27, 2014	1,217	$	12	$	6,269	$	12,759		717	$	(11,524	)	$	(41	)	$	7,475

See accompanying Notes to Consolidated Condensed Financial Statements.

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APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In millions)



	Six Months Ended
	April 26, 2015			April 27, 2014

	(Unaudited)
Cash flows from operating activities:
Net income	$	712		$	515
Adjustments required to reconcile net income to cash provided by operating activities:
Depreciation and amortization	182			188
Share-based compensation	95			88
Excess tax benefits from share-based compensation	(51		)	(25		)
Deferred income taxes and other	28			21
Changes in operating assets and liabilities:
Accounts receivable	(128		)	18
Inventories	(146		)	(151		)
Other assets	(147		)	66
Accounts payable and accrued expenses	(95		)	(74		)
Customer deposits and deferred revenue	(66		)	205
Income taxes payable	(44		)	3
Other liabilities	18			(45		)
Cash provided by operating activities	358			809
Cash flows from investing activities:
Capital expenditures	(113		)	(113		)
Proceeds from sales and maturities of investments	317			521
Purchases of investments	(344		)	(324		)
Cash provided by (used in) investing activities	(140		)	84
Cash flows from financing activities:
Proceeds from common stock issuances and other	42			66
Excess tax benefits from share-based compensation	51			25
Payments of dividends to stockholders	(245		)	(242		)
Cash used in financing activities	(152		)	(151		)
Effect of exchange rate changes on cash and cash equivalents	(1		)	—
Increase in cash and cash equivalents	65			742
Cash and cash equivalents — beginning of period	3,002			1,711
Cash and cash equivalents — end of period	$	3,067		$	2,453
Supplemental cash flow information:
Cash payments for income taxes	$	207		$	59
Cash refunds from income taxes	$	5		$	12
Cash payments for interest	$	46		$	46

See accompanying Notes to Consolidated Condensed Financial Statements.

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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 26, 2014 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 26, 2014 (2014 Form 10-K). Applied’s results of operations for the three and six months ended April 26, 2015 are not necessarily indicative of future operating results. Applied’s fiscal year ends on the last Sunday in October of each year. Fiscal 2015 and 2014 each contain 52 weeks, and the first half of fiscal 2015 and 2014 each contained 26 weeks.

Certain prior year amounts have been reclassified to conform to current year presentation.

Out of Period Adjustment

During the second quarter of fiscal 2015, Applied recorded an adjustment primarily to correct an error in the recognition of cost of sales in the U.S. related to intercompany sales. While this error had no impact on Applied’s consolidated cost of sales, it resulted in overstating profitability in the U.S. and the provision for income taxes, income taxes payable and other tax balance sheet accounts in each year since fiscal 2010. The impact of the adjustment to the three months and six months ended April 26, 2015 was a decrease to the provision for income taxes of $39 million and $35 million, respectively, and a corresponding increase in net income, resulting in an increase in diluted earnings per share of $0.03. Applied determined that the impact of the error on the originating periods was immaterial, and accordingly, a restatement of prior period amounts was not considered necessary. Applied also believes that the impact of correcting the error in fiscal 2015 will not be material.

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 or delivery, Applied recognizes revenue upon passage of title 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 or delivery, 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. Spare parts revenue is generally recognized upon shipment, and services revenue is generally recognized over the period that the services are provided.

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.

Recent Accounting Pronouncements

In May 2015, the Financial Accounting Standards Board (FASB) issued authoritative guidance to remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The new guidance also removes the requirement of certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. The guidance becomes effective retrospectively for Applied in the first quarter of fiscal 2017. Early adoption is permitted. The adoption of this guidance will only impact disclosures in Applied's financial statements.

In April 2015, the FASB issued authoritative guidance for customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This guidance will not change accounting for service contracts. The guidance becomes effective for Applied in the first quarter of fiscal 2017 and may be adopted either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively. Early adoption is permitted. Applied is currently evaluating the effect of this new guidance on Applied's financial position, results of operations and its ongoing financial reporting, including the selection of a transition method.

In April 2015, the FASB issued authoritative guidance that requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts. The authoritative guidance is effective for Applied in the first quarter of fiscal 2017 and should be applied retrospectively. Early adoption is permitted. The adoption of this guidance is not expected to have a significant impact on Applied's consolidated financial statements.

In May 2014, the FASB issued authoritative guidance that requires revenue recognition to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This new standard will supersede most current revenue recognition guidance, including industry-specific guidance. The guidance becomes effective for Applied in the first quarter of fiscal 2018, and can be applied either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Early adoption is prohibited. Applied is currently evaluating the effect of this new guidance on Applied's financial position, results of operations and its ongoing financial reporting, including the selection of a transition method.

In April 2014, the FASB issued authoritative guidance that raises the threshold for a disposal transaction to qualify as a discontinued operation and requires additional disclosures about discontinued operations and disposals of individually significant components that do not qualify as discontinued operations. The authoritative guidance becomes effective prospectively for Applied in the first quarter of fiscal 2016. Early adoption is permitted, but only for disposals that have not been reported in financial statements previously issued.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


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 26, 2015		April 27, 2014		April 26, 2015		April 27, 2014

	(In millions, except per share amounts)
Numerator:
Net income	$	364	$	262	$	712	$	515
Denominator:
Weighted average common shares outstanding	1,230		1,216		1,227		1,211
Effect of dilutive stock options, restricted stock units and employee stock purchase plan shares	11		13		14		16
Denominator for diluted earnings per share	1,241		1,229		1,241		1,227
Basic earnings per share	$	0.30	$	0.22	$	0.58	$	0.43
Diluted earnings per share	$	0.29	$	0.21	$	0.57	$	0.42
Potentially dilutive securities	1		—		1		—

Potentially dilutive securities attributable to outstanding stock options and restricted stock units were excluded from the calculation of diluted earnings 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 Applied common stock, and therefore their inclusion would have been anti-dilutive.

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 26, 2015	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value

	(In millions)
Cash	$	496	$	—	$	—	$	496
Cash equivalents:
Money market funds	2,571		—		—		2,571
Total Cash equivalents	2,571		—		—		2,571
Total Cash and Cash equivalents	$	3,067	$	—	$	—	$	3,067
Short-term and long-term investments:
U.S. Treasury and agency securities	$	89	$	—	$	—	$	89
Non-U.S. government securities*	12		—		—		12
Municipal securities	375		1		—		376
Commercial paper, corporate bonds and medium-term notes	230		1		—		231
Asset-backed and mortgage-backed securities	280		1		2		279
Total fixed income securities	986		3		2		987
Publicly traded equity securities	19		27		—		46
Equity investments in privately-held companies	66		—		—		66
Total short-term and long-term investments	$	1,071	$	30	$	2	$	1,099
Total Cash, Cash equivalents and Investments	$	4,138	$	30	$	2	$	4,166

_________________________

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

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)



October 26, 2014	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value

	(In millions)
Cash	$	508	$	—	$	—	$	508
Cash equivalents:
Money market funds	2,494		—		—		2,494
Total Cash equivalents	2,494		—		—		2,494
Total Cash and Cash equivalents	$	3,002	$	—	$	—	$	3,002
Short-term and long-term investments:
U.S. Treasury and agency securities	$	62	$	—	$	—	$	62
Non-U.S. government securities	14		—		—		14
Municipal securities	391		2		—		393
Commercial paper, corporate bonds and medium-term notes	223		1		—		224
Asset-backed and mortgage-backed securities	287		1		2		286
Total fixed income securities	977		4		2		979
Publicly traded equity securities	19		31		—		50
Equity investments in privately-held companies	66		—		—		66
Total short-term and long-term investments	$	1,062	$	35	$	2	$	1,095
Total Cash, Cash equivalents and Investments	$	4,064	$	35	$	2	$	4,097

Maturities of Investments

The following table summarizes the contractual maturities of Applied’s investments at April 26, 2015:



	Cost		Estimated Fair Value

	(In millions)
Due in one year or less	$	150	$	150
Due after one through five years	553		555
Due after five years	3		3
No single maturity date**	365		391
	$	1,071	$	1,099

_________________________

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

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Gains and Losses on Investments

During the three and six months ended April 26, 2015 and during the three months ended April 27, 2014, gross realized gains and losses on investments were not material. During the six months ended April 27, 2014, gross realized gains on investments were $12 million and gross realized losses on investments were not material.

At April 26, 2015 and October 26, 2014, gross unrealized losses related to Applied's investment portfolio were not material. 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 is 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 26, 2015 and April 27, 2014 were temporary in nature and therefore it did not recognize any impairment of its marketable securities during the three and six months ended April 26, 2015 or April 27, 2014. Impairment charges on equity investments in privately-held companies during the three and six months ended April 26, 2015 and the three and six months ended April 27, 2014 were not material. These impairment charges are included in interest and other income (loss), net in the Consolidated Condensed Statement of Operations.

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.


Note 4	Fair Value Measurements

Applied’s financial assets are measured and recorded at fair value, except for equity investments 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 consist 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 26, 2015, 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.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Assets Measured at Fair Value on a Recurring Basis

Financial assets (excluding cash balances) measured at fair value on a recurring basis are summarized below:



	April 26, 2015						October 26, 2014
	Level 1		Level 2		Total		Level 1		Level 2		Total

	(In millions)
Assets:
Money market funds	$	2,571	$	—	$	2,571	$	2,494	$	—	$	2,494
U.S. Treasury and agency securities	64		25		89		43		19		62
Non-U.S. government securities	—		12		12		—		14		14
Municipal securities	—		376		376		—		393		393
Commercial paper, corporate bonds and medium-term notes	—		231		231		—		224		224
Asset-backed and mortgage-backed securities	—		279		279		—		286		286
Publicly traded equity securities	46		—		46		50		—		50
Foreign exchange derivative assets	—		144		144		—		52		52
Total	$	2,681	$	1,067	$	3,748	$	2,587	$	988	$	3,575

There were no transfers between Level 1 and Level 2 fair value measurements during the three and six months ended April 26, 2015 or April 27, 2014. Applied did not have any financial assets measured at fair value on a recurring basis within Level 3 fair value measurements as of April 26, 2015 or October 26, 2014.

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. At April 26, 2015, equity investments in privately-held companies totaled $66 million, of which $59 million of investments were accounted for under the cost method of accounting and $7 million of investments had been measured at fair value on a non-recurring basis within Level 3 fair value measurements due to an other-than-temporary decline in value. At October 26, 2014, equity investments in privately-held companies totaled $66 million, of which $57 million of investments were accounted for under the cost method of accounting and $9 million of investments had been measured at fair value on a non-recurring basis within Level 3 fair value measurements due to an other-than-temporary decline in value. Impairment charges on equity investments in privately-held companies during the three and six months ended April 26, 2015 and April 27, 2014 were not material.

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 their short maturities. At April 26, 2015 and October 26, 2014, 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 primarily on quoted market prices for the same or similar issues.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


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 the 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 26, 2015 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 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 26, 2015 and April 27, 2014.

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 in earnings to offset the changes in the fair value of the assets or liabilities being hedged.

Following the announcement of the proposed business combination with Tokyo Electron Limited (TEL) in September 2013, Applied purchased foreign exchange option contracts to limit its foreign exchange risk associated with the proposed combination. The derivatives used to hedge currency exposure did not qualify for hedge accounting treatment. These derivatives were marked to market at the end of each reporting period with gains and losses recorded as part of operating expenses. At April 26, 2015 and October 26, 2014, the fair value of these foreign exchange option contracts was approximately $142 million and $52 million, respectively. During the three and six months ended April 26, 2015, Applied recorded gains of $14 million and $92 million, respectively, related to these contracts, of which $5 million was related to option contracts that remained outstanding at April 26, 2015. During the three and six months ended April 27, 2014, Applied recorded an unrealized loss of $23 million and an unrealized gain of $1 million, respectively, related to these contracts. The cash flow impact of these derivatives has been classified as operating cash flows in the Consolidated Condensed Statements of Cash Flows. To further mitigate credit exposure in connection with these foreign exchange option contracts, Applied entered into security arrangements with certain counterparties, which required the counterparties to post collateral amounting to the approximate fair value of the derivative contracts. The cash collateral is included in cash and cash equivalents in the Consolidated Condensed Balance Sheets, with the corresponding liability included in accounts payable and accrued expenses. Subsequent to April 26, 2015, due to the termination of the proposed business combination with TEL, these foreign exchange option contracts were sold.

Other than the foreign exchange option contracts discussed in the preceding paragraph, the fair values of other derivative instruments at April 26, 2015 and October 26, 2014 were not material.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

The effects of derivative instruments on the Consolidated Condensed Statements of Operations were as follows:



		Three Months Ended April 26, 2015								Three Months Ended April 27, 2014
		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		$	(1	)	$	(1	)	$	1	$	(2	)
Foreign exchange contracts	General and administrative	—		(4		)	(1		)	—			—		—
Total		$	—	$	1		$	(2	)	$	(1	)	$	1	$	(2	)



		Six Months Ended April 26, 2015								Six Months Ended April 27, 2014
		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	$	13		$	(2	)	$	4	$	4	$	(2	)
Foreign exchange contracts	General and administrative	—		(8		)	(1		)	—		3		(1		)
Total		$	5	$	5		$	(3	)	$	4	$	7	$	(3	)



		Amount of Gain or (Loss) Recognized in Income
		Three Months Ended					Six Months Ended
	Location of Gain or (Loss) Recognized in Income	April 26, 2015		April 27, 2014			April 26, 2015		April 27, 2014
		(In millions)
Derivatives Not Designated as Hedging Instruments
Foreign exchange contracts	General and administrative	$	13	$	(26	)	$	112	$	13
Total		$	13	$	(26	)	$	112	$	13

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 26, 2015.

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 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 did not factor any accounts receivable during the three and six months ended April 26, 2015 or the three months ended April 27, 2014. Applied factored accounts receivable of $45 million during the six months ended April 27, 2014. Applied did not discount letters of credit during the three and six months ended April 26, 2015, and discounted $29 million of letters of credit issued by customers during the three and six months ended April 27, 2014. Applied did not discount promissory notes during the three and six months ended April 26, 2015 and April 27, 2014. 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 all periods presented.

Accounts receivable are presented net of allowance for doubtful accounts of $58 million at both April 26, 2015 and October 26, 2014. Applied sells its products principally to manufacturers within the semiconductor, display and solar industries. While Applied believes that its allowance for doubtful accounts is adequate and represents its best estimate as of April 26, 2015, it continues to closely monitor customer liquidity and industry and economic conditions, which may result in changes to Applied’s estimates regarding collectability.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


Note 7	Balance Sheet Detail



	April 26, 2015		October 26, 2014

	(In millions)
Inventories
Customer service spares	$	331	$	316
Raw materials	434		405
Work-in-process	325		316
Finished goods	623		530
	$	1,713	$	1,567

Included in finished goods inventory are $129 million at April 26, 2015, and $104 million at October 26, 2014, 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. Finished goods inventory includes $190 million and $164 million of evaluation inventory at April 26, 2015 and October 26, 2014, respectively.



	April 26, 2015		October 26, 2014

	(In millions)
Other Current Assets
Deferred income taxes, net	$	220	$	232
Prepaid income taxes and income taxes receivable	157		79
Prepaid expenses and other	329		257
	$	706	$	568



	Useful Life	April 26, 2015			October 26, 2014

	(In years)	(In millions)
Property, Plant and Equipment, Net
Land and improvements		$	161		$	156
Buildings and improvements	3-30	1,271			1,227
Demonstration and manufacturing equipment	3-5	900			829
Furniture, fixtures and other equipment	3-15	601			575
Construction in progress		56			61
Gross property, plant and equipment		2,989			2,848
Accumulated depreciation		(2,102		)	(1,987		)
		$	887		$	861

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)



	April 26, 2015		October 26, 2014

	(In millions)
Accounts Payable and Accrued Expenses
Accounts payable	$	647	$	613
Compensation and employee benefits	412		524
Warranty	123		113
Dividends payable	123		122
Income taxes payable	48		142
Other accrued taxes	42		51
Interest payable	30		30
Other	397		288
	$	1,822	$	1,883



	April 26, 2015		October 26, 2014

	(In millions)
Customer Deposits and Deferred Revenue
Customer deposits	$	179	$	286
Deferred revenue	695		654
	$	874	$	940

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



	April 26, 2015		October 26, 2014

	(In millions)
Other Liabilities
Deferred income taxes	$	16	$	32
Income taxes payable	223		225
Defined and postretirement benefit plans	250		208
Other	104		71
	$	593	$	536


Note 8	Business Combination

On September 24, 2013, Applied and TEL entered into a Business Combination Agreement, which was intended to effect a strategic combination of their respective businesses into a new combined company, and was subject to regulatory approvals. On April 26, 2015, Applied and TEL announced that they had mutually agreed to terminate their previously announced Business Combination Agreement, which had been intended to effect a strategic combination of their respective businesses into a new combined company. No termination fee is payable by either Applied or TEL.

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 purchase price 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 considers 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.

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. Applied determines the fair value of each of its reporting units based on a weighting of income and market approaches. If the carrying value of a reporting unit exceeds its 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’s reporting units are consistent with the reportable segments identified in Note 15, Industry Segment Operations, which are based on the manner in which Applied operates its business and the nature of those operations.

The evaluation of goodwill and intangible assets for impairment requires the exercise of significant judgment. In the event of future changes in business conditions, Applied will be required to reassess and update its forecasts and estimates used in future impairment analyses. If the results of these future analyses are lower than current estimates, a material impairment charge may result at that time.

Details of goodwill and other indefinite-lived intangible assets as of April 26, 2015 and October 26, 2014 were as follows :



	April 26, 2015						October 26, 2014
	Goodwill		Other Intangible Assets		Total		Goodwill		Other Intangible Assets		Total

	(In millions)
Silicon Systems Group	$	2,151	$	103	$	2,254	$	2,151	$	103	$	2,254
Applied Global Services	1,027		6		1,033		1,027		6		1,033
Display	126		18		144		126		18		144
Energy and Environmental Solutions	—		2		2		—		—		—
Carrying amount	$	3,304	$	129	$	3,433	$	3,304	$	127	$	3,431

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 taking into account 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.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

A summary of Applied's purchased technology and intangible assets is set forth below:



	April 26, 2015		October 26, 2014

	(In millions)
Purchased technology, net	$	557	$	636
Intangible assets - finite-lived, net	174		188
Intangible assets - indefinite-lived	129		127
Total	$	860	$	951

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 environments, technological advances, and changes in cost structure.

Details of finite-lived intangible assets were as follows:



	April 26, 2015									October 26, 2014
	Purchased Technology			Other Intangible Assets			Total			Purchased Technology			Other Intangible Assets			Total

	(In millions)
Gross carrying amount:
Silicon Systems Group	$	1,346		$	252		$	1,598		$	1,346		$	252		$	1,598
Applied Global Services	29			44			73			28			44			72
Display	110			33			143			110			33			143
Energy and Environmental Solutions	5			15			20			5			17			22
Gross carrying amount	$	1,490		$	344		$	1,834		$	1,489		$	346		$	1,835
Accumulated amortization:
Silicon Systems Group	$	(794	)	$	(86	)	$	(880	)	$	(716	)	$	(77	)	$	(793	)
Applied Global Services	(25		)	(44		)	(69		)	(24		)	(44		)	(68		)
Display	(110		)	(33		)	(143		)	(110		)	(31		)	(141		)
Energy and Environmental Solutions	(4		)	(7		)	(11		)	(3		)	(6		)	(9		)
Accumulated amortization	$	(933	)	$	(170	)	$	(1,103	)	$	(853	)	$	(158	)	$	(1,011	)
Carrying amount	$	557		$	174		$	731		$	636		$	188		$	824

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Details of amortization expense by segment were as follows:



	Three Months Ended				Six Months Ended
	April 26, 2015		April 27, 2014		April 26, 2015		April 27, 2014

	(In millions)
Silicon Systems Group	$	44	$	42	$	87	$	84
Applied Global Services	—		2		1		3
Display	1		—		2		1
Energy and Environmental Solutions	1		1		2		3
Total	$	46	$	45	$	92	$	91

Amortization expense was charged to the following categories:



	Three Months Ended				Six Months Ended
	April 26, 2015		April 27, 2014		April 26, 2015		April 27, 2014

	(In millions)
Cost of products sold	$	40	$	39	$	80	$	79
Marketing and selling	5		6		10		11
General and administrative	1		—		2		1
Total	$	46	$	45	$	92	$	91

As of April 26, 2015, future estimated amortization expense is expected to be as follows:



	Amortization Expense
	(In millions)
2015 (remaining 6 months)	$	90
2016	175
2017	172
2018	171
2019	29
Thereafter	94
Total	$	731

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


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 revolving credit agreement with a group of banks that is scheduled to expire in May 2017. 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. Remaining credit facilities in the amount of approximately $67 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 these facilities at both April 26, 2015 and October 26, 2014, and Applied has not utilized these credit facilities.

Long-term debt outstanding as of April 26, 2015 and October 26, 2014 was as follows:



	Principal Amount			Effective Interest Rate	Interest Pay Dates
	(In millions)
2.650% Senior Notes Due 2016	$	400		2.666%	June 15, December 15
7.125% Senior Notes Due 2017	200			7.190%	April 15, October 15
4.300% Senior Notes Due 2021	750			4.326%	June 15, December 15
5.850% Senior Notes Due 2041	600			5.879%	June 15, December 15
	1,950
Total unamortized discount	(3		)
Total long-term debt	$	1,947

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


Note 11	Stockholders’ Equity, Comprehensive Income and Share-Based Compensation

Accumulated Other Comprehensive Income (Loss)

Changes in the components of AOCI, net of tax, were as follows:



	Unrealized Gain on Investments, Net			Unrealized Gain on Derivative Instruments Qualifying as Cash Flow Hedges			Defined and Postretirement Benefit Plans			Cumulative Translation Adjustments			Total
	(in millions)
Balance at October 26, 2014	$	24		$	—		$	(105	)	$	5		$	(76	)
Other comprehensive income (loss) before reclassifications	(4		)	3			(45		)	(2		)	(48		)
Amounts reclassified out of AOCI	—			(3		)	2			—			(1		)
Other comprehensive income (loss), net of tax	(4		)	—			(43		)	(2		)	(49		)
Balance at April 26, 2015	$	20		$	—		$	(148	)	$	3		$	(125	)



	Unrealized Gain on Investments, Net			Unrealized Gain on Derivative Instruments Qualifying as Cash Flow Hedges			Defined and Postretirement Benefit Plans			Cumulative Translation Adjustments			Total
	(in millions)
Balance at October 27, 2013	$	25		$	2		$	(72	)	$	7		$	(38	)
Other comprehensive income (loss) before reclassifications	5			3			—			(1		)	7
Amounts reclassified out of AOCI	(5		)	(5		)	—			—			(10		)
Other comprehensive income (loss), net of tax	—			(2		)	—			(1		)	(3		)
Balance at April 27, 2014	$	25		$	—		$	(72	)	$	6		$	(41	)

The increase in accumulated other comprehensive (loss) associated with pension liability during the six months ended April 26, 2015 amounted to $43 million, net of income tax effect and was primarily due to lower discount rates used to determine the benefit obligation, taking into account prevailing interest rates.

The effects on net income of amounts reclassified from AOCI for the three and six months ended April 26, 2015 and April 27, 2014 were not material.

Stock Repurchase Program

On March 5, 2012, Applied's Board of Directors approved a stock repurchase program authorizing up to $3.0 billion in repurchases over the three years through March 2015. During the three-year period of the program ended March 2015, Applied repurchased a total of $1.4 billion of its common stock. On April 26, 2015, the Board of Directors approved a new common stock repurchase program authorizing up to $3.0 billion in repurchases over the three years ending April 2018.

Applied did not purchase any shares of its common stock during the three and six months ended April 26, 2015 and April 27, 2014. At April 26, 2015, $3.0 billion remained available for future stock repurchases under the new repurchase program.

Applied records treasury stock purchases under the cost method using the first-in, first-out (FIFO) method. Upon reissuance of treasury stock, amounts in excess of the acquisition cost are credited to additional paid in capital. If Applied reissues treasury stock at an amount below its acquisition cost and additional paid in capital associated with prior treasury stock transactions is

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

insufficient to cover the difference between the acquisition cost and the reissue price, this difference is recorded against retained earnings.

Dividends

In March 2015 and December 2014, Applied's Board of Directors declared quarterly cash dividends in the amount of $0.10 per share. Dividends declared during the six months ended April 26, 2015 and April 27, 2014 totaled $246 million and $243 million, respectively. Applied currently anticipates that cash dividends will continue to be paid on a quarterly basis, although the declaration of any future cash dividend is at the discretion of the Board of Directors and will depend on Applied’s financial condition, results of operations, capital requirements, business conditions and other factors, as well as a determination by the Board of Directors that cash dividends are in the best interests of Applied’s stockholders.

Share-Based Compensation

Applied has a stockholder-approved equity plan, the Employee Stock Incentive Plan, which permits grants to employees of share-based awards, including stock options, restricted stock, restricted stock units, performance shares and performance units. In addition, the plan provides for the automatic grant of restricted stock units to non-employee directors and permits the grant of share-based awards to non-employee directors and consultants. Share-based awards made beginning in March 2012 under the plan may be subject to accelerated vesting under certain circumstances in the event of a change in control of Applied. Applied also has two Employee Stock Purchase Plans, one generally for United States employees and a second for employees of international subsidiaries (collectively, ESPP), which enable eligible employees to purchase Applied common stock.

During the three and six months ended April 26, 2015 and April 27, 2014, Applied recognized share-based compensation expense related to stock options, ESPP shares, restricted stock, restricted stock units, performance shares and performance units. The effect of share-based compensation on the results of operations was as follows:



	Three Months Ended				Six Months Ended
	April 26, 2015		April 27, 2014		April 26, 2015		April 27, 2014

	(In millions)
Cost of products sold	$	14	$	13	$	29	$	27
Research, development, and engineering	17		16		35		33
Marketing and selling	7		5		13		11
General and administrative	9		8		18		17
Total share-based compensation	$	47	$	42	$	95	$	88

The cost associated with share-based awards that are subject solely to time-based vesting requirements, less expected forfeitures, is recognized over the awards’ service period for the entire award on a straight-line basis. The cost associated with performance-based equity awards is recognized for each tranche over the service period, based on an assessment of the likelihood that the applicable performance goals will be achieved.

At April 26, 2015, Applied had $326 million in total unrecognized compensation expense, net of estimated forfeitures, related to grants of share-based awards and shares issued under Applied’s ESPP, which will be recognized over a weighted average period of 2.7 years. At April 26, 2015, there were 168 million shares available for grants of share-based awards under the Employee Stock Incentive Plan, and an additional 32 million shares available for issuance under the ESPP.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Restricted Stock Units, Restricted Stock, Performance Shares and Performance Units

A summary of the changes in restricted stock units, restricted stock, performance shares and performance units outstanding under Applied’s equity compensation plans during the six months ended April 26, 2015 is presented below:



	Shares		Weighted Average Grant Date Fair Value

	(In millions, except per share amounts)
Non-vested restricted stock units, restricted stock, performance shares and performance units at October 26, 2014	33		$	12.59
Granted	10		$	23.54
Vested	(13	)	$	11.85
Canceled	(1	)	$	14.43
Non-vested restricted stock units, restricted stock, performance shares and performance units at April 26, 2015	29		$	16.51

With respect to the performance-based awards granted in fiscal 2013 and 2012, as of October 26, 2014, all performance goals had been fully achieved, but such awards remained subject to time-based vesting.

During the first quarter of fiscal 2015, certain executive officers were granted awards that are subject to the achievement of specified performance goals (performance-based awards). These performance-based awards become eligible to vest only if performance goals are achieved and will vest only if the grantee remains employed by Applied through each applicable vesting date. These performance-based awards require the achievement of targeted levels of adjusted annual operating profit margin. Additional shares become eligible for time-based vesting if Applied achieves certain levels of total shareholder return (TSR) relative to a peer group, comprised of companies in the Standard & Poor's 500 Information Technology Index, measured at the end of a two-year period.

The fair value of these performance-based awards is estimated on the date of grant and assumes that the specified performance goals will be achieved. If the goals are achieved, these awards vest over a specified remaining service period of generally three or four years, provided that the grantee remains employed by Applied through each scheduled vesting date. If the performance goals are not met as of the end of the performance period, no compensation expense is recognized and any previously recognized compensation expense is reversed. The expected cost of each award is reflected over the service period and is reduced for estimated forfeitures.

Employee Stock Purchase Plan

Under the ESPP, substantially all employees may purchase Applied common stock through payroll deductions at a price equal to 85 percent of the lower of the fair market value of Applied common stock at the beginning or end of each 6-month purchase period, subject to certain limits. Applied issued 2 million shares during the three and six months ended April 26, 2015 and 3 million shares during the three and six months ended April 27, 2014. Compensation expense is calculated using the fair value of the employees’ purchase rights under the Black-Scholes model. Underlying assumptions used in the model and the weighted average estimated fair value of purchase rights under the ESPP are outlined in the following table:



	Three and Six Months Ended
	April 26, 2015	April 27, 2014
ESPP:
Dividend yield	1.56%	2.14%
Expected volatility	31.4%	25.3%
Risk-free interest rate	0.07%	0.08%
Expected life (in years)	0.5	0.5
Weighted average estimated fair value	$6.04	$4.07

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Note 12 Employee Benefit Plans

Applied sponsors a number of employee benefit plans, including defined benefit plans of certain foreign subsidiaries, and a plan that provides certain medical and vision benefits to eligible retirees. A summary of the components of net periodic benefit costs of these defined and postretirement benefit plans is presented below:



	Three Months Ended						Six Months Ended
	April 26, 2015			April 27, 2014			April 26, 2015			April 27, 2014
	(In millions)
Service cost	$	4		$	4		$	7		$	8
Interest cost	3			4			7			8
Expected return on plan assets	(4		)	(3		)	(8		)	(6		)
Amortization of actuarial loss	1			1			3			2
Settlement gain	—			—			(1		)	—
Net periodic benefit cost	$	4		$	6		$	8		$	12

Note 13 Income Taxes

Applied’s effective tax rates for the second quarters of fiscal 2015 and 2014 were 6.4 percent and 28.2 percent, respectively. The effective tax rate for the second quarter of fiscal 2015 was lower than in the same period in the prior year primarily due to resolutions and changes related to income tax liabilities for prior years, acquisition costs that became deductible in the second quarter of fiscal 2015 as a result of the termination of the proposed business combination with TEL, and changes in the geographical composition of income.

Applied's effective tax rates for the first six months of fiscal 2015 and 2014 were 13.8 percent and 24.3 percent, respectively. The effective tax rate for the first half of fiscal 2015 was lower than in the same period in the prior year primarily due to resolutions and changes related to income tax liabilities for prior years, reinstatement of the U.S. federal research and development tax credit during the first quarter of fiscal 2015 which was retroactive to its expiration in December 2013, acquisition costs that became deductible in the second quarter of fiscal 2015 as a result of the termination of the proposed business combination with TEL and changes in the geographical composition of income.

The effective tax rate for the three and six months ended April 26, 2015 also includes the effect of an adjustment primarily to correct an error in the recognition of cost of sales in the U.S. related to intercompany sales. While this error had no impact on Applied’s consolidated cost of sales, it resulted in overstating profitability in the U.S. and the provision for income taxes, income taxes payable and other tax balance sheet accounts in each year since fiscal 2010. The impact of the adjustment to the three months and six months ended April 26, 2015 was a decrease in provision for income taxes of $39 million and $35 million, respectively. See Note 1 of Notes to Condensed Consolidated Financial Statements.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


Note 14	Warranty, Guarantees and Contingencies

Warranty

Changes in the warranty reserves are presented below:



	Three Months Ended						Six Months Ended
	April 26, 2015			April 27, 2014			April 26, 2015			April 27, 2014

	(In millions)
Beginning balance	$	119		$	106		$	113		$	102
Provisions for warranty	31			29			67			56
Consumption of reserves	(27		)	(26		)	(57		)	(49		)
Ending balance	$	123		$	109		$	123		$	109

Applied products are generally sold with a warranty for a 12-month period following installation. The provision for the estimated cost of warranty is recorded when revenue is recognized. Parts and labor are covered under the terms of the warranty agreement. The warranty provision is based on historical experience by product, configuration and geographic region. Quarterly warranty consumption is generally associated with sales that occurred during the preceding four quarters, and quarterly warranty provisions are generally related to the current quarter’s sales.

Guarantees

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 April 26, 2015, the maximum potential amount of future payments that Applied could be required to make under these guarantee agreements was approximately $55 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 April 26, 2015, Applied has provided parent guarantees to banks for approximately $102 million to cover these arrangements.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Legal Matters

Korea Criminal Proceedings

In 2010, the Seoul Eastern District Court began hearings on indictments brought by the Seoul Prosecutor's Office for the Eastern District of Korea (the Prosecutor's Office) alleging that employees of several companies improperly received and used confidential information belonging to Samsung Electronics Co., Ltd. (Samsung), a major Applied customer based in Korea. The individuals charged included the former head of Applied Materials Korea (AMK), who at the time of the indictment was a vice president of Applied Materials, Inc., and certain other AMK employees. Neither Applied nor any of its subsidiaries was named as a party to the proceedings. Hearings on these matters concluded in November 2012 and the Court issued its decision on February 7, 2013. As part of the ruling, nine AMK employees (including the former head of AMK) were acquitted of all charges, while one AMK employee was found guilty on some of the charges and received a suspended jail sentence. The Prosecutor's Office and various individuals appealed the matter to the High Court. On June 20, 2014, the High Court rendered its decision, finding all defendants not guilty, including all ten AMK employees. The prosecutor has appealed the High Court decision to the Korean Supreme Court.

Other Matters

From time to time, Applied receives notification from third parties, including customers and suppliers, seeking indemnification, litigation support, payment of money or other actions by Applied in connection with claims made against them. In addition, from time to time, Applied receives notification from third parties claiming that Applied may be or is infringing or misusing their intellectual property or other rights. Applied also is subject to various other legal proceedings and claims, both asserted and unasserted, that arise in the ordinary course of business.

Although the outcome of the above-described matters, claims and proceedings cannot be predicted with certainty, Applied does not believe that any will have a material effect on its consolidated financial condition or results of operations.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


Note 15	Industry Segment Operations

Applied’s four reportable segments are: Silicon Systems Group, Applied Global Services, Display, and Energy and Environmental Solutions. As defined under the accounting literature, Applied’s chief operating decision-maker has been identified as the President and Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Segment information is presented based upon Applied’s management organization structure as of April 26, 2015 and the distinctive nature of each segment. Future changes to this internal financial structure may result in changes to Applied’s reportable segments.

Each reportable segment is separately managed and has separate financial results that are reviewed by Applied’s chief operating decision-maker. Each reportable segment contains closely related products that are unique to the particular segment. Segment operating income is determined based upon internal performance measures used by Applied’s chief operating decision-maker.

Applied derives the segment results directly from its internal management reporting system. The accounting policies Applied uses to derive reportable segment results are substantially the same as those used for external reporting purposes. Management measures the performance of each reportable segment based upon several metrics including orders, net sales and operating income. Management uses these results to evaluate the performance of, and to assign resources to, each of the reportable segments. Applied does not allocate to its reportable segments certain operating expenses that it manages separately at the corporate level, which include costs related to share-based compensation; certain management, finance, legal, human resources, and research, development and engineering 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. Segment operating income excludes interest income/expense and other financial charges and income taxes. Management does not consider the unallocated costs in measuring the performance of the reportable segments.

The Silicon Systems Group segment includes semiconductor capital equipment for etch, rapid thermal processing, deposition, chemical mechanical planarization, metrology and inspection, wafer packaging, and ion implantation.

The Applied Global Services segment includes technically differentiated products and services to improve operating efficiency, reduce operating costs and lessen the environmental impact of semiconductor, display and solar customers’ factories. Applied Global Services’ products consist of spares, services, certain earlier generation products, remanufactured equipment, and products that have reached a particular stage in the product lifecycle. Customer demand for these products and services is fulfilled through a global distribution system with trained service engineers located in close proximity to customer sites.

The Display segment includes products for manufacturing liquid crystal displays (LCDs), organic light-emitting diodes (OLEDs), and other display technologies for TVs, personal computers, tablets, smart phones, and other consumer-oriented devices.

The Energy and Environmental Solutions segment includes products for fabricating solar photovoltaic cells and modules, as well as high throughput roll-to-roll deposition equipment for flexible electronics and other applications.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Net sales and operating income (loss) for each reportable segment were as follows:



	Three Months Ended					Six Months Ended
	Net Sales		Operating Income (Loss)			Net Sales		Operating Income (Loss)

	(In millions)
April 26, 2015:
Silicon Systems Group	$	1,560	$	374		$	3,006	$	681
Applied Global Services	646		170			1,229		323
Display	163		40			438		112
Energy and Environmental Solutions	73		(5		)	128		(9		)
Total Segment	$	2,442	$	579		$	4,801	$	1,107
April 27, 2014:
Silicon Systems Group	$	1,584	$	391		$	3,068	$	705
Applied Global Services	534		148			1,041		273
Display	147		26			306		52
Energy and Environmental Solutions	88		5			128		(6		)
Total Segment	$	2,353	$	570		$	4,543	$	1,024

Reconciliations of total segment operating results to Applied consolidated totals were as follows:



	Three Months Ended						Six Months Ended
	April 26, 2015			April 27, 2014			April 26, 2015			April 27, 2014

	(In millions)
Total segment operating income	$	579		$	570		$	1,107		$	1,024
Corporate and unallocated costs	(148		)	(144		)	(276		)	(281		)
Certain items associated with announced business combination	(29		)	(16		)	(49		)	(27		)
(Loss) gain on derivatives associated with announced business combination	14			(23		)	92			1
Income from operations	$	416		$	387		$	874		$	717

The following customers accounted for at least 10 percent of Applied’s net sales for the six months ended April 26, 2015, which were for products in multiple reportable segments.



	Percentage of Net Sales
Samsung Electronics Co., Ltd.	20	%
Taiwan Semiconductor Manufacturing Company Limited	13	%

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following management's discussion and analysis is provided in addition to the accompanying consolidated condensed financial statements and notes to assist in understanding Applied's results of operations and financial condition. Financial information as of April 26, 2015 should be read in conjunction with the financial statements for the fiscal year ended October 26, 2014 contained in the Company's Form 10-K filed December 17, 2014.

This report contains forward-looking statements that involve a number of risks and uncertainties. Examples of forward-looking statements include those regarding Applied’s future financial or operating results, cash flows and cash deployment strategies, declaration of dividends, share repurchases, business strategies and priorities, costs and cost controls, products, competitive positions, management’s plans and objectives for future operations, research and development, strategic acquisitions and investments, growth opportunities, restructuring activities, backlog, working capital, liquidity, investment portfolio and policies, taxes, supply chain, manufacturing properties, legal proceedings and claims, customer demand and spending, end-use demand, market and industry trends and outlooks, general economic conditions and other statements that are not historical facts, as well as their underlying assumptions. Forward-looking statements include statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “potential” and “continue,” the negative of these terms, or other comparable terminology. All forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in Part II, Item 1A, “Risk Factors,” below and elsewhere in this report. These and many other factors could affect Applied’s future financial condition and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by Applied or on its behalf. Forward-looking statements are based on management's estimates, projections and expectations as of the date hereof, and Applied undertakes no obligation to revise or update any such statements.

Overview

Applied provides manufacturing equipment, services and software to the global semiconductor, flat panel display, solar photovoltaic (PV) and related industries. Applied’s customers include manufacturers of semiconductor wafers and chips, flat panel liquid crystal and other displays, solar PV cells and modules, and other electronic devices. These customers may use what they manufacture in their own end products or sell the items to other companies for use in advanced electronic components. Applied operates in four reportable segments: Silicon Systems Group, Applied Global Services, Display, and Energy and Environmental Solutions. A summary of financial information for each reportable segment is found in Note 15 of Notes to Consolidated Condensed Financial Statements. A discussion of factors that could affect Applied’s operations is set forth under “Risk Factors” in Part II, Item 1A, which is incorporated herein by reference. Product development and manufacturing activities occur primarily in the United States, Europe, Israel, and Asia. Applied’s broad range of equipment and service products are highly technical and are sold primarily through a direct sales force.

Applied’s results are driven primarily by worldwide demand for semiconductors, which in turn depends on end-user demand for electronic products. Each of Applied’s businesses is subject to cyclical industry conditions, as demand for manufacturing equipment and services can change depending on supply and demand for chips, display technologies, solar PVs and other electronic devices, as well as other factors, such as global economic and market conditions, and the nature and timing of technological advances in fabrication processes. In addition, a significant driver in the semiconductor and display industries is end-demand for mobile consumer products, which is characterized by seasonality that impacts the timing of customer investments in manufacturing equipment and, in turn, Applied's business. In light of these conditions, Applied's results can vary significantly year-over-year, as well as quarter-over-quarter.

Table of Contents

The following tables present certain significant measurements for the periods indicated:



	Three Months Ended									Change
	April 26, 2015			January 25, 2015			April 27, 2014			Q2 2015 over Q1 2015			Q2 2015 over Q2 2014

	(In millions, except per share amounts and percentages)
New orders	$	2,515		$	2,273		$	2,629		$	242		$	(114	)
Net sales	$	2,442		$	2,359		$	2,353		$	83		$	89
Gross profit	$	1,016		$	959		$	1,001		$	57		$	15
Gross margin	41.6		%	40.7		%	42.5		%	0.9 point			(0.9) point
Operating income	$	416		$	458		$	387		$	(42	)	$	29
Operating margin	17.0		%	19.4		%	16.4		%	(2.4) points			0.6 point
Net income	$	364		$	348		$	262		$	16		$	102
Earnings per diluted share	$	0.29		$	0.28		$	0.21		$	0.01		$	0.08
Non-GAAP Adjusted Results
Non-GAAP adjusted gross profit	$	1,055		$	999		$	1,041		$	56		$	14
Non-GAAP adjusted gross margin	43.2		%	42.3		%	44.2		%	0.9 point			(1.0) point
Non-GAAP adjusted operating income	$	476		$	447		$	482		$	29		$	(6	)
Non-GAAP adjusted operating margin	19.5		%	18.9		%	20.5		%	0.6 point			(1.0) point
Non-GAAP adjusted net income	$	362		$	338		$	348		$	24		$	14
Non-GAAP adjusted earnings per diluted share	$	0.29		$	0.27		$	0.28		$	0.02		$	0.01



	Six Months Ended						Change
	April 26, 2015			April 27, 2014			YTD Q2 2015 over YTD Q2 2014

	(In millions, except per share amounts and percentages)
New orders	$	4,788		$	4,914		$	(126	)
Net sales	$	4,801		$	4,543		$	258
Gross profit	$	1,975		$	1,892		$	83
Gross margin	41.1		%	41.6		%	(0.5) point
Operating income	$	874		$	717		$	157
Operating margin	18.2		%	15.8		%	2.4 points
Net income	$	712		$	515		$	197
Earnings per diluted share	$	0.57		$	0.42		$	0.15
Non-GAAP Adjusted Results
Non-GAAP adjusted gross profit	$	2,054		$	1,971		$	83
Non-GAAP adjusted gross margin	42.8		%	43.4		%	(0.6) point
Non-GAAP adjusted operating income	$	923		$	862		$	61
Non-GAAP adjusted operating margin	19.2		%	19.0		%	0.2 point
Non-GAAP adjusted net income	$	700		$	627		$	73
Non-GAAP adjusted earnings per diluted share	$	0.56		$	0.51		$	0.05

Reconciliations of non-GAAP adjusted measures are presented below under "Non-GAAP Adjusted Results." Fiscal 2015 and 2014 each contain 52 weeks, and the first six months of fiscal years 2015 and 2014 each contained 26 weeks.

Table of Contents

Mobility, and the increasing technological functionality of mobile devices, continues to be the largest drivers of semiconductor industry spending. The first six months of fiscal 2015 were characterized by improved demand for semiconductor equipment by memory customers as manufacturers invested in technology upgrades, and continued demand from foundry customers, driven by demand for advanced mobile chips. Mobility represents a significant driver of display industry spending, which has resulted in continued manufacturing capacity expansion for mobile applications. Demand for larger LCD TVs is also a factor for display industry investments, although demand for TV manufacturing equipment remains susceptible to highly cyclical conditions. Investment in solar equipment remained low due to ongoing excess manufacturing capacity in the industry.

On September 24, 2013, Applied and Tokyo Electron Limited (TEL) entered into a Business Combination Agreement, which was intended to effect a strategic combination of their respective businesses into a new combined company, and was subject to regulatory approvals. On April 26, 2015, Applied and TEL announced that they had mutually agreed to terminate their previously announced Business Combination Agreement, which had been intended to effect a strategic combination of their respective businesses into a new combined company. No termination fee is payable by either Applied or TEL.

Results of Operations

New Orders

New orders by reportable segment for the periods indicated were as follows:



	Three Months Ended									Change
	April 26, 2015			January 25, 2015			April 27, 2014			Q2 2015 over Q1 2015	Q2 2015 over Q2 2014

	(In millions, except percentages)
Silicon Systems Group	$	1,704	68%	$	1,426	63%	$	1,664	63%	19%	2%
Applied Global Services	641		25%	690		30%	537		20%	(7)%	19%
Display	120		5%	107		5%	340		13%	12%	(65)%
Energy and Environmental Solutions	50		2%	50		2%	88		4%	—%	(43)%
Total	$	2,515	100%	$	2,273	100%	$	2,629	100%	11%	(4)%



	Six Months Ended						Change
	April 26, 2015			April 27, 2014			YTD Q2 2015 over YTD Q2 2014

	(In millions, except percentages)
Silicon Systems Group	$	3,130	65%	$	3,233	66%	(3)%
Applied Global Services	1,331		28%	1,134		23%	17%
Display	227		5%	419		8%	(46)%
Energy and Environmental Solutions	100		2%	128		3%	(22)%
Total	$	4,788	100%	$	4,914	100%	(3)%

New orders for the second quarter of fiscal 2015 increased compared to the prior quarter primarily due to higher orders for semiconductor and display equipment, partially offset by lower orders for semiconductor services. The Silicon Systems Group's proportion of total new orders relative to other segments increased compared to the prior quarter and continues to constitute the majority of total new orders.

New orders for the second quarter and first half of fiscal 2015 slightly decreased compared to the same periods in the prior year primarily due to lower demand for display and solar equipment, partially offset by higher demand for semiconductor spares and services.

Table of Contents

New orders by geographic region, determined by the product shipment destination specified by the customer, were as follows:



	Three Months Ended									Change
	April 26, 2015			January 25, 2015			April 27, 2014			Q2 2015 over Q1 2015	Q2 2015 over Q2 2014

	(In millions, except percentages)
Taiwan	$	589	23%	$	545	24%	$	660	25%	8%	(11)%
China	352		14%	296		13%	596		23%	19%	(41)%
Korea	607		24%	546		24%	378		14%	11%	61%
Japan	365		15%	242		11%	203		8%	51%	80%
Southeast Asia	103		4%	85		4%	72		3%	21%	43%
Asia Pacific	2,016		80%	1,714		76%	1,909		73%	18%	6%
United States	368		15%	411		18%	521		20%	(10)%	(29)%
Europe	131		5%	148		6%	199		7%	(11)%	(34)%
Total	$	2,515	100%	$	2,273	100%	$	2,629	100%	11%	(4)%



	Six Months Ended						Change
	April 26, 2015			April 27, 2014			YTD Q2 2015 over YTD Q2 2014

	(In millions, except percentages)
Taiwan	$	1,134	24%	$	1,644	34%	(31)%
China	648		13%	922		19%	(30)%
Korea	1,153		24%	618		13%	87%
Japan	607		13%	366		7%	66%
Southeast Asia	188		4%	122		2%	54%
Asia Pacific	3,730		78%	3,672		75%	2%
United States	779		16%	924		19%	(16)%
Europe	279		6%	318		6%	(12)%
Total	$	4,788	100%	$	4,914	100%	(3)%

The changes in new orders from customers in Japan, Korea, Taiwan and the United Sates in the second quarter of fiscal 2015 compared to the prior quarter primarily reflected changes in customer mix for semiconductor equipment and services. The increase in new orders from customers in China in the second quarter of fiscal 2015 compared to the prior quarter primarily reflected higher orders for display equipment, partially offset by lower orders of semiconductor equipment.

The changes in new orders from customers in Korea, Japan, the United States and Taiwan in the second quarter and first half of fiscal 2015 compared to the same periods in the prior year primarily reflected changes in customer mix for semiconductor equipment, while the decrease in new orders from customers in China primarily reflected lower demand for TV manufacturing equipment than in the prior year.

Table of Contents

Changes in backlog during the six months ended April 26, 2015 were as follows:



	April 26, 2015
	(In millions)
Beginning balance	$	2,917
New orders	4,788
Net sales	(4,801		)
Net adjustments	(122		)
Ending balance	$	2,782

Backlog consists of: (1) orders for which written authorizations have been accepted and assigned shipment dates are within the next 12 months, or shipment has occurred but revenue has not been recognized; and (2) contractual service revenue and maintenance fees to be earned within the next 12 months. Applied’s backlog at any particular time is not necessarily indicative of actual sales for any future periods due to the potential for customer changes in delivery schedules or cancellation of orders. Approximately 85 percent of backlog as of the end of the second quarter of fiscal 2015 is anticipated to be shipped within the next two quarters. Backlog adjustments were negative during the first half of fiscal 2015 and totaled $122 million, primarily consisting of unfavorable foreign currency impacts, order cancellations and other adjustments.

Backlog by reportable segment as of the end of the most recent three fiscal quarters was as follows:



	April 26, 2015			January 25, 2015			October 26, 2014			Q2 2015 over Q1 2015	Q2 2015 over Q4 2014

	(In millions, except percentages)
Silicon Systems Group	$	1,468	53%	$	1,369	49%	$	1,400	48%	7%	5%
Applied Global Services	813		29%	837		30%	775		27%	(3)%	5%
Display	371		13%	418		15%	593		20%	(11)%	(37)%
Energy and Environmental Solutions	130		5%	154		6%	149		5%	(16)%	(13)%
Total	$	2,782	100%	$	2,778	100%	$	2,917	100%	—%	(5)%

Total backlog in the second quarter of fiscal 2015 compared to the prior quarter was flat primarily due to new orders and net sales being approximately the same level during the second quarter. In the second quarter of fiscal 2015, approximately 65 percent of net sales in the Silicon Systems Group, Applied’s largest business segment, were for orders received and shipped within the quarter, slightly down from 66 percent in the prior quarter.

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Net Sales

Net sales by reportable segment for the periods indicated were as follows:



	Three Months Ended									Change
	April 26, 2015			January 25, 2015			April 27, 2014			Q2 2015 over Q1 2015	Q2 2015 over Q2 2014

	(In millions, except percentages)
Silicon Systems Group	$	1,560	64%	$	1,446	61%	$	1,584	67%	8%	(2)%
Applied Global Services	646		26%	583		25%	534		23%	11%	21%
Display	163		7%	275		12%	147		6%	(41)%	11%
Energy and Environmental Solutions	73		3%	55		2%	88		4%	33%	(17)%
Total	$	2,442	100%	$	2,359	100%	$	2,353	100%	4%	4%



	Six Months Ended						Change
	April 26, 2015			April 27, 2014			YTD Q2 2015 over YTD Q2 2014

	(In millions, except percentages)
Silicon Systems Group	$	3,006	63%	$	3,068	67%	(2)%
Applied Global Services	1,229		25%	1,041		23%	18%
Display	438		9%	306		7%	43%
Energy and Environmental Solutions	128		3%	128		3%	—%
Total	$	4,801	100%	$	4,543	100%	6%

Net sales for the second quarter of fiscal 2015 increased compared to the prior quarter led by higher customer spending on semiconductor equipment, spares and services, partially offset by lower customer spending on display equipment. The Silicon Systems Group’s relative share of total net sales increased compared to the prior quarter and still remains the largest contributor of net sales.

For the second quarter and first half of fiscal 2015 compared to the same periods in the prior year, net sales increased primarily due to greater customer investments in semiconductor spares and services, 200mm and display equipment.

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



	Three Months Ended									Change
	April 26, 2015			January 25, 2015			April 27, 2014			Q2 2015 over Q1 2015	Q2 2015 over Q2 2014

	(In millions, except percentages)
Taiwan	$	455	19%	$	519	22%	$	781	33%	(12)%	(42)%
China	412		17%	388		16%	428		18%	6%	(4)%
Korea	449		18%	464		20%	351		15%	(3)%	28%
Japan	257		10%	231		10%	215		9%	11%	20%
Southeast Asia	87		4%	85		4%	52		2%	2%	67%
Asia Pacific	1,660		68%	1,687		72%	1,827		77%	(2)%	(9)%
United States	632		26%	529		22%	370		16%	19%	71%
Europe	150		6%	143		6%	156		7%	5%	(4)%
Total	$	2,442	100%	$	2,359	100%	$	2,353	100%	4%	4%

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	Six Months Ended						Change
	April 26, 2015			April 27, 2014			YTD Q2 2015 over YTD Q2 2014

	(In millions, except percentages)
Taiwan	$	974	20%	$	1,486	33%	(34)%
China	800		17%	1,017		23%	(21)%
Korea	913		19%	552		12%	65%
Japan	488		10%	379		8%	29%
Southeast Asia	172		4%	139		3%	24%
Asia Pacific	3,347		70%	3,573		79%	(6)%
United States	1,161		24%	650		14%	79%
Europe	293		6%	320		7%	(8)%
Total	$	4,801	100%	$	4,543	100%	6%

The changes in net sales from customers in the United States, Taiwan and China in the second quarter of fiscal 2015 compared to the prior quarter primarily reflected changes in customer mix for semiconductor equipment. Lower customer spending on display equipment also contributed to the change in net sales from customers in China in the second quarter of fiscal 2015 compared to the prior quarter.

The changes in net sales from customers in the United States, Taiwan and Korea in the second quarter of fiscal 2015 compared to the same period in the prior year primarily reflected changes in customer mix for semiconductor equipment. The changes in net sales from customers in the United States, Korea, Taiwan and China in the first half of fiscal 2015 compared to the same period in fiscal 2014 primarily reflected changes in customer mix for semiconductor equipment. Higher customer spending on display equipment also contributed to the change in net sales from customers in China in the first half of fiscal 2015 compared to the prior year.

Gross Margin

Gross margins for the periods indicated were as follows:



	Three Months Ended									Change				Six Months Ended						Change
	April 26, 2015			January 25, 2015			April 27, 2014			Q2 2015 over Q1 2015		Q2 2015 over Q2 2014		April 26, 2015			April 27, 2014			YTD Q2 2015 over YTD Q2 2014

	(In millions, except percentages)
Gross profit	$	1,016		$	959		$	1,001		$	57	$	15	$	1,975		$	1,892		$	83
Gross margin	41.6		%	40.7		%	42.5		%	0.9 point		(0.9) point		41.1		%	41.6		%	(0.5) point
Non-GAAP Adjusted Results
Non-GAAP adjusted gross profit	$	1,055		$	999		$	1,041		$	56	$	14	$	2,054		$	1,971		$	83
Non-GAAP adjusted gross margin	43.2		%	42.3		%	44.2		%	0.9 point		(1.0) point		42.8		%	43.4		%	(0.6) point

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

Gross profit, non-GAAP adjusted gross profit, gross margin and non-GAAP adjusted gross margin in the second quarter of fiscal 2015 increased compared to the prior quarter, primarily due to higher net sales and favorable changes in product and customer mix. Gross profit and non-GAAP adjusted gross profit for the second quarter and first half of fiscal 2015 increased compared to the same periods in the prior year, primarily reflecting higher net sales, but decreased as a percentage of net sales primarily due to unfavorable changes in product mix. Gross profit and non-GAAP adjusted gross profit during each of the three months ended April 26, 2015, January 25, 2015 and April 27, 2014 included $14 million, $15 million and $13 million, respectively, of share-based compensation expense. Gross profit and non-GAAP adjusted gross profit during the six months ended April 26, 2015 and April 27, 2014 included $29 million and $27 million, respectively, of share-based compensation expense.

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Research, Development and Engineering

Research, Development and Engineering (RD&E) expenses for the periods indicated were as follows:



	Three Months Ended						Change				Six Months Ended				Change
	April 26, 2015		January 25, 2015		April 27, 2014		Q2 2015 over Q1 2015		Q2 2015 over Q2 2014		April 26, 2015		April 27, 2014		YTD Q2 2015 over YTD Q2 2014

	(In millions)
Research, development and engineering	$	365	$	351	$	355	$	14	$	10	$	716	$	711	$	5

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. RD&E expenses increased slightly during the second quarter and first half of fiscal 2015 compared to the prior quarter and the same periods in the prior year, reflecting ongoing investment in product development initiatives. RD&E expenses during the three months ended April 26, 2015, January 25, 2015 and April 27, 2014 included $17 million, $18 million and $16 million, respectively, of share-based compensation expense. RD&E expense during the six months ended April 26, 2015 and April 27, 2014 included $35 million and $33 million, respectively, of share-based compensation expense.

Marketing and Selling

Marketing and selling expenses for the periods indicated were as follows:



	Three Months Ended						Change					Six Months Ended				Change
	April 26, 2015		January 25, 2015		April 27, 2014		Q2 2015 over Q1 2015			Q2 2015 over Q2 2014		April 26, 2015		April 27, 2014		YTD Q2 2015 over YTD Q2 2014

	(In millions)
Marketing and selling	$	109	$	111	$	107	$	(2	)	$	2	$	220	$	216	$	4

There were no significant changes in marketing and selling expenses for the second quarter and first half of fiscal 2015 compared to the prior quarter and the same periods in fiscal 2014. Marketing and selling expenses during the three months ended April 26, 2015, January 25, 2015 and April 27, 2014 included $7 million, $6 million and $5 million, respectively, of share-based compensation expense. Marketing and selling expenses during the six months ended April 26, 2015 and April 27, 2014 included $13 million and $11 million, respectively, of share-based compensation.

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General and Administrative

General and administrative (G&A) expenses for the periods indicated were as follows:



	Three Months Ended						Change				Six Months Ended				Change
	April 26, 2015		January 25, 2015		April 27, 2014		Q2 2015 over Q1 2015		Q2 2015 over Q2 2014		April 26, 2015		April 27, 2014		YTD Q2 2015 over YTD Q2 2014

	(In millions)
General and administrative	$	140	$	117	$	129	$	23	$	11	$	257	$	249	$	8

G&A expenses for the second quarter of fiscal 2015 increased compared to the prior quarter primarily due to the absence of temporary holiday shutdown savings that were included in the prior quarter. G&A expenses for the second quarter and first half of fiscal 2015 increased compared to the same periods of the prior year primarily attributable to higher acquisition-related and integration costs related to the proposed business combination with TEL. G&A expenses during the three months ended April 26, 2015, January 25, 2015 and April 27, 2014 included $9 million, $9 million and $8 million, respectively, of share-based compensation expense. G&A expenses during the six months ended April 26, 2015 and April 27, 2014 included $18 million and $17 million, respectively, of share-based compensation.

Gain (Loss) on Derivatives Associated with Announced Business Combination

Gain on derivatives associated with announced business combination amounted to $14 million and $78 million during the three months ended April 26, 2015 and January 25, 2015, respectively, and loss on derivatives associated with announced business combination amounted to $23 million during the three months ended April 27, 2014. Gain on derivatives associated with announced business combination amounted to $92 million and $1 million during the six months ended April 26, 2015 and April 27, 2014. Changes in gain (loss) on derivatives result from sale of derivative contracts and exchange rate fluctuations. For further details, see Note 5 of Notes to Consolidated Condensed Financial Statements.

Interest Expense and Interest and Other Income (Loss), net

Interest expense and interest and other income, net for the periods indicated were as follows:



	Three Months Ended							Change						Six Months Ended					Change
	April 26, 2015			January 25, 2015		April 27, 2014		Q2 2015 over Q1 2015			Q2 2015 over Q2 2014			April 26, 2015			April 27, 2014		YTD Q2 2015 over YTD Q2 2014

	(In millions)
Interest expense	$	24		$	23	$	23	$	1		$	1		$	47		$	48	$	(1	)
Interest and other income (loss), net	$	(3	)	$	2	$	1	$	(5	)	$	(4	)	$	(1	)	$	11	$	(12	)

Interest expense remained flat in the second quarter and first half of fiscal 2015 compared to the prior quarter and to the same periods in fiscal 2014. Interest expenses incurred were primarily associated with the senior unsecured notes issued in June 2011.

The changes in interest and other income (loss), net in the second quarter and first half of fiscal 2015 compared to the prior quarter and to the same periods in fiscal 2014 were primarily due to higher impairment of strategic investments recorded during the quarter. In addition, there were lower realized gains on sales of securities during the first half of fiscal 2015 compared to the same period in fiscal 2014.

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Income Taxes

Provision for income taxes and effective tax rates for the periods indicated were as follows:



	Three Months Ended									Change						Six Months Ended						Change
	April 26, 2015			January 25, 2015			April 27, 2014			Q2 2015 over Q1 2015			Q2 2015 over Q2 2014			April 26, 2015			April 27, 2014			YTD Q2 2015 over YTD Q2 2014

	(In millions, except percentages)
Provision for income taxes	$	25		$	89		$	103		$	(64	)	$	(78	)	$	114		$	165		$	(51	)
Effective tax rate	6.4		%	20.4		%	28.2		%	(14.0) points			(21.8) points			13.8		%	24.3		%	(10.5) points

Applied’s effective tax rate is affected by the geographical composition of income, which includes jurisdictions with income tax incentives and differing tax rates. It is also affected by discrete events that are not consistent from period to period, such as changes in income tax laws and regulations and the resolution of income tax filings.

Applied’s effective tax rate for the second quarter of fiscal 2015 was lower than the rate for the prior quarter due primarily to resolutions and changes related to income tax liabilities for prior years, acquisition costs that became deductible in the second quarter of fiscal 2015 as a result of the termination of the proposed business combination with TEL, and changes in the geographical composition of income, offset by reinstatement of the U.S. federal research and development tax credit during the first quarter of fiscal 2015 which was retroactive to its expiration in December 2013.

The effective tax rate for the second quarter of fiscal 2015 was lower than in the same period in the prior year due primarily to resolutions and changes related to income tax liabilities for prior years, acquisition costs that became deductible in the second quarter of fiscal 2015 as a result of the termination of the proposed business combination with TEL, and changes in the geographical composition of income. The effective tax rate for the first half of fiscal 2015 was lower than in the same period in the prior year primarily due to resolutions and changes related to income tax liabilities for prior years, reinstatement of the U.S. federal research and development tax credit during the first quarter of fiscal 2015 which was retroactive to its expiration in December 2013, acquisition costs that became deductible in the second quarter of fiscal 2015 as a result of the termination of the proposed business combination with TEL and changes in the geographical composition of income.

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Segment Information

Applied reports financial results in four segments: Silicon Systems Group, Applied Global Services, Display, and Energy and Environmental Solutions. A description of the products and services, as well as financial data, for each reportable segment can be found in Note 15 of Notes to Consolidated Condensed Financial Statements. Applied does not allocate to its reportable segments certain operating expenses that it manages separately at the corporate level. These unallocated costs include costs for share-based compensation; certain management, finance, legal, human resource, and RD&E functions provided at the corporate level; and unabsorbed information technology and occupancy. In addition, Applied does not allocate to its reportable segments restructuring and asset impairment charges and any associated adjustments related to restructuring actions, unless these actions pertain to a specific reportable segment.

The results for each reportable segment are discussed below.

Silicon Systems Group Segment

The Silicon Systems Group segment includes semiconductor capital equipment for deposition, etch, ion implantation, rapid thermal processing, chemical mechanical planarization, metrology and inspection, and wafer packaging. Development efforts are focused on solving customers' key technical challenges in transistor, patterning, interconnect and packaging performance as devices scale to advanced technology nodes. The mobility trend remains the largest influence on industry spending, as it drives device manufacturers to continually improve their ability to deliver high-performance, low-power processors and affordable solid-state storage in a small form factor.

The competitive environment for the Silicon Systems Group in the first half of fiscal 2015 reflected continued investment by semiconductor manufacturers, with net sales to memory customers improving during this period as manufacturers of DRAM and NAND products invest in technology upgrades. Foundry investments were also a key driver of the segment’s net sales as customers ramp wafer starts at advanced nodes to meet demand for advanced mobile chips.

Certain significant measures for the periods indicated were as follows:



	Three Months Ended									Change
	April 26, 2015			January 25, 2015			April 27, 2014			Q2 2015 over Q1 2015			Q2 2015 over Q2 2014

	(In millions, except percentages and ratios)
New orders	$	1,704		$	1,426		$	1,664		$	278	19%	$	40		2%
Net sales	1,560			1,446			1,584			114		8%	(24		)	(2)%
Book to bill ratio	1.1			1.0			1.1
Operating income	374			307			391			67		22%	(17		)	(4)%
Operating margin	24.0		%	21.2		%	24.7		%			2.8 points				(0.7) point
Non-GAAP Adjusted Results
Non-GAAP adjusted operating income	$	418		$	350		$	433		68		19%	(15		)	(3)%
Non-GAAP adjusted operating margin	26.8		%	24.2		%	27.3		%			2.6 points				(0.5) point

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	Six Months Ended						Change
	April 26, 2015			April 27, 2014			YTD Q2 2015 over YTD Q2 2014

	(In millions, except percentages and ratios)
New orders	$	3,130		$	3,233		$	(103	)	(3)%
Net sales	3,006			3,068			(62		)	(2)%
Book to bill ratio	1.0			1.1
Operating income	681			705			(24		)	(3)%
Operating margin	22.7		%	23.0		%				(0.3) point
Non-GAAP Adjusted Results
Non-GAAP adjusted operating income	$	768		$	790		(22		)	(3)%
Non-GAAP adjusted operating margin	25.5		%	25.7		%				(0.2) point

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

New orders for the Silicon Systems Group by end use application for the periods indicated were as follows:



	Three Months Ended			Six Months Ended
	April 26, 2015	January 25, 2015	April 27, 2014	April 26, 2015	April 27, 2014
Foundry	36%	34%	50%	35%	55%
Memory	52%	52%	38%	52%	35%
Logic and other	12%	14%	12%	13%	10%
	100%	100%	100%	100%	100%

New orders for the second quarter of fiscal 2015 increased compared to the prior quarter primarily due to higher demand from memory and foundry customers. Net sales for the second quarter of fiscal 2015 increased sequentially primarily due to higher spending from memory customers. Approximately 65 percent of net sales in the second quarter of fiscal 2015 were for orders received and shipped within the quarter. Operating margin and non-GAAP adjusted operating margin increased primarily due to higher net sales and favorable changes in product mix. In the second quarter of fiscal 2015, four customers accounted for approximately 70 percent of this segment's total new orders and three customers accounted for approximately 55 percent of this segment's total net sales.

New orders for the second quarter of fiscal 2015 increased compared to the same period in fiscal 2014 primarily due to increased demand from memory customers, partially offset by lower demand from foundry customers. Net sales for the second quarter and first half of fiscal 2015 and new orders for the first half of fiscal 2015 decreased compared to the same periods in fiscal 2014 mainly due to decreased demand and spending from foundry customers, partially offset by higher demand and investments from memory customers. Operating income and non-GAAP adjusted operating income slightly decreased in the second quarter and first half of fiscal 2015 compared to the same periods in the prior year, reflecting the decrease in net sales.

The following region accounted for at least 30 percent of total net sales for the Silicon Systems Group segment for one or more of the periods indicated:



	Three Months Ended									Change
	April 26, 2015			January 25, 2015			April 27, 2014			Q2 2015 over Q1 2015	Q2 2015 over Q2 2014

	(In millions, except percentages)
Taiwan	$	306	20%	$	382	26%	$	652	41%	(20)%	(53)%

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	Six Months Ended						Change
	April 26, 2015			April 27, 2014			YTD Q2 2015 over YTD Q2 2014

	(In millions, except percentages)
Taiwan	$	689	23%	$	1,245	41%	(45)%

Applied Global Services Segment

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

Industry conditions that affected Applied Global Services' sales of spares and services during the first six months of fiscal 2015 were principally semiconductor manufacturers' wafer starts, as well as utilization rates.

Certain significant measures for the periods indicated were as follows:



	Three Months Ended									Change
	April 26, 2015			January 25, 2015			April 27, 2014			Q2 2015 over Q1 2015				Q2 2015 over Q2 2014

	(In millions, except percentages and ratios)
New orders	$	641		$	690		$	537		$	(49	)	(7)%	$	104	19%
Net sales	646			583			534			63			11%	112		21%
Book to bill ratio	1.0			1.2			1.0
Operating income	170			153			148			17			11%	22		15%
Operating margin	26.3		%	26.2		%	27.7		%				0.1 point			(1.4) points
Non-GAAP Adjusted Results
Non-GAAP adjusted operating income	170			154			150			16			10%	20		13%
Non-GAAP adjusted operating margin	26.3		%	26.4		%	28.1		%				(0.1) point			(1.8) points



	Six Months Ended						Change
	April 26, 2015			April 27, 2014			YTD Q2 2015 over YTD Q2 2014

	(In millions, except percentages and ratios)
New orders	$	1,331		$	1,134		$	197	17%
Net sales	1,229			1,041			188		18%
Book to bill ratio	1.1			1.1
Operating income	323			273			50		18%
Operating margin	26.3		%	26.2		%			0.1 point
Non-GAAP Adjusted Results
Non-GAAP adjusted operating income	$	324		$	276		48		17%
Non-GAAP adjusted operating margin	26.4		%	26.5		%			(0.1) point

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

New orders for the second quarter of fiscal 2015 decreased compared to the prior quarter primarily due to service contract renewals being seasonally higher in the first quarter, partially offset by higher demand for semiconductor spares. Net sales for the second quarter of fiscal 2015 increased from the prior quarter primarily due to higher investment in semiconductor spares and services as well as in 200mm equipment systems and mask equipment upgrades. Operating income and non-GAAP adjusted

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operating income increased compared to the prior quarter, primarily due to higher net sales, partially offset by unfavorable changes in product mix.

New orders and net sales for the second quarter of fiscal 2015 increased compared to the same period in fiscal 2014 mainly due to higher demand for semiconductor spares and services and 200mm equipment systems. Operating income and non-GAAP adjusted operating income increased in the second quarter and first half of fiscal 2015 compared to the same period in the prior year, reflecting the increase in net sales. Operating margin and non-GAAP adjusted operating margin in the second quarter of fiscal 2015 decreased compared to the comparable period in fiscal 2014, despite the increase in net sales, primarily due to unfavorable changes in product mix.

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 periods presented.

Display Segment

The Display segment encompasses products for manufacturing liquid crystal displays (LCDs), organic light-emitting diodes (OLEDs), and other display technologies for TVs, personal computers (PCs), tablets, smart phones, and other consumer-oriented devices. The segment is focused on expanding its presence through technologically-differentiated equipment for manufacturing large-scale TVs; new markets such as low temperature polysilicon (LTPS), metal oxide, and touch panel sectors; and development of products that enable cost reductions through productivity and uniformity. Display industry growth depends primarily on consumer demand for increasingly larger and more advanced LCD TVs and high resolution displays for next generation mobile devices.

The market environment for Applied's Display segment in the first half of fiscal 2015 has been characterized by continued demand for manufacturing equipment for TV and high-end mobile devices, although this sector remains susceptible to highly cyclical conditions. Uneven order and revenue patterns in the Display segment can cause significant fluctuations quarter-over-quarter, as well as year-over year.

Certain significant measures for the periods indicated were as follows:



	Three Months Ended									Change
	April 26, 2015			January 25, 2015			April 27, 2014			Q2 2015 over Q1 2015				Q2 2015 over Q2 2014

	(In millions, except percentages and ratios)
New orders	$	120		$	107		$	340		$	13		12%	$	(220	)	(65)%
Net sales	163			275			147			(112		)	(41)%	16			11%
Book to bill ratio	0.7			0.4			2.3
Operating income	40			72			26			(32		)	(44)%	14			54%
Operating margin	24.5		%	26.2		%	17.7		%				(1.7) points				6.8 points
Non-GAAP Adjusted Results
Non-GAAP adjusted operating income	$	40		$	73		$	26		(33		)	(45)%	14			54%
Non-GAAP adjusted operating margin	24.5		%	26.5		%	17.7		%				(2.0) points				6.8 points

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	Six Months Ended						Change
	April 26, 2015			April 27, 2014			YTD Q2 2015 over YTD Q2 2014

	(In millions, except percentages and ratios)
New orders	$	227		$	419		$	(192	)	(46)%
Net sales	438			306			132			43%
Book to bill ratio	0.5			1.4
Operating income	112			52			60			115%
Operating margin	25.6		%	17.0		%				8.6 points
Non-GAAP Adjusted Results
Non-GAAP adjusted operating income	$	113		$	53		60			113%
Non-GAAP adjusted operating margin	25.8		%	17.3		%				8.5 points

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

New orders for the second quarter of fiscal 2015 increased compared to the prior quarter primarily due to a increase in TV manufacturing equipment orders, while net sales were lower compared to the prior quarter due to timing of shipments of TV manufacturing equipment. Operating income, operating margin, non-GAAP adjusted operating income and non-GAAP adjusted operating margin decreased compared to the prior quarter, reflecting decreased net sales, partially offset by changes in product mix. Four customers accounted for approximately 82 percent of new orders for this segment during the second quarter of fiscal 2015. Three customers accounted for approximately 81 percent of net sales for the Display segment in the second quarter of fiscal 2015, with one customer accounting for more than 30 percent of net sales.

New orders for the second quarter and first half of fiscal 2015 decreased compared to the same periods in the prior year primarily due to lower TV manufacturing equipment orders. Net sales for the second quarter and first half of fiscal 2015 were higher compared to the same periods in the prior year mainly due to shipments of TV equipment during fiscal 2015. Operating income and non-GAAP adjusted operating income increased for the second quarter and first half of fiscal 2015 from the comparable period in fiscal 2014, reflecting higher net sales and favorable product mix.

The following region accounted for at least 30 percent of total net sales for the Display segment for one or more of the periods indicated:



	Three Months Ended									Change
	April 26, 2015			January 25, 2015			April 27, 2014			Q2 2015 over Q1 2015	Q2 2015 over Q2 2014

	(In millions, except percentages)
China	$	138	85%	$	239	87%	$	135	92%	(42)%	2%



	Six Months Ended						Change
	April 26, 2015			April 27, 2014			YTD Q2 2015 over YTD Q2 2014

	(In millions, except percentages)
China	$	377	86%	$	290	95%	30%

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Energy and Environmental Solutions Segment

The Energy and Environmental Solutions segment includes products for fabricating crystalline-silicon (c-Si) solar PV wafers and cells, as well as high throughput roll-to-roll deposition equipment for flexible electronics, packaging and other applications. This business is focused on delivering solutions to generate and conserve energy, with an emphasis on lowering the cost to produce solar modules and increasing conversion efficiency. While end-demand for solar PVs has been robust over the last several years, investment in capital equipment has remained low as global PV production capacity exceeds anticipated demand.

Certain significant measures for the periods indicated were as follows:



	Three Months Ended									Change
	April 26, 2015			January 25, 2015			April 27, 2014			Q2 2015 over Q1 2015				Q2 2015 over Q2 2014

	(In millions, except percentages and ratios)
New orders	$	50		$	50		$	88		$	—		—%	$	(38	)	(43)%
Net sales	73			55			88			18			33%	(15		)	(17)%
Book to bill ratio	0.7			0.9			1.0
Operating income (loss)	(5		)	(4		)	5			(1		)	(25)%	(10		)	(200)%
Operating margin	(6.8		)%	(7.3		)%	5.7		%				0.5 point				(12.5) points
Non-GAAP Adjusted Results
Non-GAAP adjusted operating income (loss)	(4		)	(3		)	7			(1		)	(33)%	(11		)	(157)%
Non-GAAP adjusted operating margin	(5.5		)%	(5.5		)%	8.0		%				—				(13.5) points



	Six Months Ended						Change
	April 26, 2015			April 27, 2014			YTD Q2 2015 over YTD Q2 2014

	(In millions, except percentages and ratios)
New orders	$	100		$	128		$	(28	)	(22)%
Net sales	128			128			—			—%
Book to bill ratio	0.8			1.0
Operating loss	(9		)	(6		)	(3		)	(50)%
Operating margin	(7.0		)%	(4.7		)%				(2.3) points
Non-GAAP Adjusted Results
Non-GAAP adjusted operating loss	$	(7	)	$	(3	)	(4		)	(133)%
Non-GAAP adjusted operating margin	(5.5		)%	(2.3		)%				(3.2) points

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

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New orders and net sales during the periods presented remained at low levels due to continued excess manufacturing capacity in the solar industry. Three customers accounted for approximately 50 percent of new orders and three customers accounted for approximately 58 percent of net sales for this segment during the second quarter of fiscal 2015. Operating loss and non-GAAP adjusted operating loss increased for the second quarter and first half of fiscal 2015 compared to the prior quarter and the same periods in the prior year primarily due to unfavorable product mix.

The following region accounted for at least 30 percent of total net sales for the Energy and Environmental Solutions segment for one or more of the periods presented:



	Three Months Ended									Change
	April 26, 2015			January 25, 2015			April 27, 2014			Q2 2015 over Q1 2015	Q2 2015 over Q2 2014

	(In millions, except percentages)
China	$	24	33%	$	30	55%	$	65	74%	(20)%	(63)%



	Six Months Ended						Change
	April 26, 2015			April 27, 2014			YTD Q2 2015 over YTD Q2 2014

	(In millions, except percentages)
China	$	54	42%	$	76	59%	(29)%

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Financial Condition, Liquidity and Capital Resources

Applied's cash, cash equivalents and investments consist of the following:



	April 26, 2015		October 26, 2014

	(In millions)
Cash and cash equivalents	$	3,067	$	3,002
Short-term investments	163		160
Long-term investments	936		935
Total cash, cash-equivalents and investments	$	4,166	$	4,097

Sources and Uses of Cash

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



	Six Months Ended
	April 26, 2015			April 27, 2014

	(In millions)
Cash provided by operating activities	$	358		$	809
Cash provided by (used in) investing activities	$	(140	)	$	84
Cash used in financing activities	$	(152	)	$	(151	)

Operating Activities

Cash from operating activities for the six months ended April 26, 2015 was $358 million, 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 from operating activities reflected increases in accounts receivable and inventories, and decreases in accounts payable, accrued expenses and customer deposits.

Applied did not discount promissory notes or utilize programs to discount letters of credit issued by customers during the three and six months ended April 26, 2015. Applied discounted $29 million of letters of credit issued by customers during the three and six months ended April 27, 2014. 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 did not factor any accounts receivable during the three and six months ended April 26, 2015 or the three months ended April 27, 2014, and factored accounts receivable of $45 million during the six months ended April 27, 2014.

Applied’s working capital was $4.8 billion at April 26, 2015 and $4.1 billion at October 26, 2014.

Days sales, inventory and payable outstanding at the end of each of the periods indicated were:



	April 26, 2015	January 25, 2015	April 27, 2014

Days sales outstanding	67	61	62
Days inventory outstanding	109	107	105
Days payable outstanding	41	42	41

Days sales outstanding varies due to the timing of shipments and payment terms. Days sales outstanding increased in the second quarter of fiscal 2015 compared to the prior quarter primarily due to unfavorable revenue linearity. Days inventory outstanding increased during the second quarter of fiscal 2015 compared to the prior quarter reflecting higher inventories at quarter end partially offset by higher business volumes. Days payable outstanding decreased slightly during the second quarter of fiscal 2015 compared to the prior quarter due to increased business volumes.

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Investing Activities

Applied used $140 million of cash in investing activities during the six months ended April 26, 2015. Purchases of investments, net of proceeds from sales and maturities of investments, totaled $27 million and capital expenditures were $113 million during the six months ended April 26, 2015.

Financing Activities

Applied used cash for financing activities in the amount of $152 million during the six months ended April 26, 2015, consisting primarily of $245 million in payment of cash dividends to stockholders, offset by excess tax benefits from share-based compensation of $51 million and proceeds from common stock issuances and other of $42 million.

In March 2015 and December 2014, Applied's Board of Directors declared 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 comprised of a committed revolving credit agreement with a group of banks that is scheduled to expire in May 2017. 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 26, 2015. Remaining credit facilities in the amount of approximately $67 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 these facilities at both April 26, 2015 and October 26, 2014, 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 April 26, 2015 and October 26, 2014, Applied did not have any commercial paper outstanding, but may issue commercial paper notes under this program from time to time in the future.

Applied had senior unsecured notes in the aggregate principal amount of $1.95 billion outstanding as of April 26, 2015. The indentures governing these notes include covenants with which Applied was in compliance at April 26, 2015. See Note 10 of Notes to Consolidated Condensed Financial Statements for additional discussion of long-term debt. Applied may seek to refinance its existing long-term debt and may incur additional indebtedness depending on Applied's capital requirements and the availability of financing.

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 April 26, 2015, Applied Materials, Inc. has provided parent guarantees to banks for approximately $102 million to cover these arrangements.

Others

During the fourth quarter of fiscal 2014 and 2013, Applied purchased foreign exchange option contracts to limit its foreign exchange risk associated with the announced business combination with TEL. At April 26, 2015, the fair value of these foreign exchange option contracts was approximately $142 million. To further mitigate credit exposure in connection with these foreign exchange option contracts, Applied entered into security arrangements with certain counterparties, which require the counterparties to post collateral amounting to the approximate fair value of the derivative contracts. The cash collateral is included in cash and cash equivalents in the Consolidated Condensed Balance Sheets, with the corresponding liability included in accounts payable and accrued expenses. Subsequent to April 26, 2015, due to the termination of the proposed business combination with TEL, these foreign exchange option contracts were sold. See Note 5 of Notes to Consolidated Condensed Financial Statements for additional discussion of derivative instruments.

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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. During the three and six months ended April 26, 2015, Applied did not recognize any impairment of its fixed income or publicly traded equity securities. At April 26, 2015, gross unrealized losses due to a decrease in the fair value of certain fixed income securities were not material.

During the three and six months ended April 26, 2015, Applied did not record a bad debt provision. While Applied believes that its allowance for doubtful accounts at April 26, 2015 is adequate, it will continue to closely monitor customer liquidity and economic conditions.

As of April 26, 2015, approximately $2.8 billion of cash, cash equivalents, and marketable securities held by foreign subsidiaries may be subject to U.S. taxes if repatriated for U.S. operations. Of this amount, Applied intends to permanently reinvest approximately $2.3 billion of these funds outside of the U.S. and does not plan to repatriate these funds. For the remaining cash, cash equivalents and marketable securities held by foreign subsidiaries, U.S. taxes have been provided for in the financial statements.

Although cash requirements will fluctuate based on the timing and extent of factors such as those discussed above, Applied’s management believes that cash generated from operations, together with the liquidity provided by existing cash balances and borrowing capability, will be sufficient to satisfy Applied’s liquidity requirements for the next 12 months. For further details regarding Applied’s operating, investing and financing activities, see the Consolidated Condensed Statements of Cash Flows in this report.

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Critical Accounting Policies and Estimates

The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported. Note 1 of Notes to Consolidated Financial Statements in Applied's Annual Report on Form 10-K and Note 1 of Notes to Consolidated Condensed Financial Statements in this report describe the significant accounting policies used in the preparation of the consolidated financial statements. Certain of these significant accounting policies are considered to be critical accounting policies.

A critical accounting policy is defined as one that is both material to the presentation of Applied's consolidated financial statements and that requires management to make difficult, subjective or complex judgments that could have a material effect on Applied's financial condition or results of operations. Specifically, these policies have the following attributes: (1) Applied is required to make assumptions about matters that are highly uncertain at the time of the estimate; and (2) different estimates Applied could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on Applied's financial condition or results of operations.

Estimates and assumptions about future events and their effects cannot be determined with certainty. Applied bases its estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as Applied's operating environment changes. These changes have historically been minor and have been included in the consolidated financial statements as soon as they became known. In addition, management is periodically faced with uncertainties, the outcomes of which are not within its control and will not be known for prolonged periods of time. These uncertainties include those discussed in Part II, Item 1A, “Risk Factors.” Based on a critical assessment of its accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that Applied's consolidated financial statements are fairly stated in accordance with accounting principles generally accepted in the United States of America, and provide a meaningful presentation of Applied's financial condition and results of operations.

Management believes that the following are critical accounting policies and estimates:

Revenue Recognition

Applied recognizes revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; sales price is fixed or determinable; and collectability is probable. Each sale arrangement may contain commercial terms that differ from other arrangements. In addition, Applied frequently enters into contracts that contain multiple deliverables. Judgment is required to properly identify the accounting units of the multiple deliverable transactions and to determine the manner in which revenue should be allocated among the accounting units. Moreover, judgment is used in interpreting the commercial terms and determining when all criteria of revenue recognition have been met in order for revenue recognition to occur in the appropriate accounting period. While changes in the allocation of the estimated sales price between the units of accounting will not affect the amount of total revenue recognized for a particular sales arrangement, any material changes in these allocations could impact the timing 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.

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.

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Inventory Valuation

Inventories are generally stated at the lower of cost or market, 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 market 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. The fair value of a reporting unit is estimated using both the income approach and the market approach taking into account such factors as future anticipated operating results and estimated cost of capital. Management uses significant judgment when assessing goodwill for potential impairment, especially in emerging markets. A severe decline in market conditions could result in an unexpected impairment charge for impaired goodwill, which could have a material adverse effect on Applied's business, financial condition and results of operations.

Income Taxes

The effective tax rate is highly dependent upon the geographic composition of worldwide earnings, income tax laws and regulations governing each region, nondeductible expenses incurred in connection with acquisitions and availability of tax credits. Management carefully monitors the changes in many factors and adjusts the effective tax rate as required. If actual results differ from these estimates, Applied could be required to record a valuation allowance on deferred tax assets or adjust its effective tax rate, which could have a material adverse effect on Applied's business, financial condition and results of operations.

Applied accounts for income taxes by recognizing deferred tax assets and liabilities using statutory tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities, net operating losses and tax credit carryovers. Deferred tax assets are also reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized. Management has determined that it is more likely than not that Applied's future taxable income will be sufficient to realize its deferred tax assets, net of existing valuation allowance.

The calculation of tax liabilities 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 a material impact on Applied's results of operations and financial condition.

Non-GAAP Adjusted Results

Management uses non-GAAP adjusted results to evaluate operating and financial performance in light of business objectives and for planning purposes. Applied believes these measures enhance investors’ ability to review the Company’s business from the same perspective as management and facilitate comparisons of this period’s results with prior periods. The non-GAAP adjusted results presented below exclude the impact of the following, where applicable: certain acquisition-related costs; restructuring charges and any associated adjustments; impairments of assets, goodwill, or investments; gain or loss on sale of facilities and investments; and certain tax items. These non-GAAP adjusted measures are not in accordance with GAAP and may differ from non-GAAP methods of accounting and reporting used by other companies. The presentation of this additional information should not be considered a substitute for results prepared in accordance with GAAP.

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

APPLIED MATERIALS, INC.

UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS



	Three Months Ended									Six Months Ended
(In millions, except percentages)	April 26, 2015			January 25, 2015			April 27, 2014			April 26, 2015			April 27, 2014

Non-GAAP Adjusted Gross Profit
Reported gross profit - GAAP basis	$	1,016		$	959		$	1,001		$	1,975		$	1,892
Certain items associated with acquisitions¹	39			40			39			79			78
Acquisition integration costs	—			—			1			—			1
Non-GAAP adjusted gross profit	$	1,055		$	999		$	1,041		$	2,054		$	1,971
Non-GAAP adjusted gross margin	43.2		%	42.3		%	44.2		%	42.8		%	43.4		%
Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis	$	416		$	458		$	387		$	874		$	717
Certain items associated with acquisitions¹	45			46			46			91			91
Acquisition integration costs	—			1			10			1			21
Loss (gain) on derivatives associated with announced business combination, net	(14		)	(78		)	23			(92		)	(1		)
Certain items associated with announced business combination²	29			20			16			49			27
Restructuring charges and asset impairments³	—			—			—			—			7
Non-GAAP adjusted operating income	$	476		$	447		$	482		$	923		$	862
Non-GAAP adjusted operating margin	19.5		%	18.9		%	20.5		%	19.2		%	19.0		%
Non-GAAP Adjusted Net Income
Reported net income - GAAP basis⁴	$	364		$	348		$	262		$	712		$	515
Certain items associated with acquisitions¹	45			46			46			91			91
Acquisition integration costs	—			1			10			1			21
Loss (gain) on derivatives associated with announced business combination, net	(14		)	(78		)	23			(92		)	(1		)
Certain items associated with announced business combination²	29			20			16			49			27
Restructuring charges and asset impairments³	—			—			—			—			7
Impairment (gain on sale) of strategic investments, net	6			1			2			7			(3		)
Reinstatement of federal R&D tax credit, resolution of prior years’ income tax filings and other tax items⁴	(54		)	(17		)	12			(71		)	(3		)
Income tax effect of non-GAAP adjustments	(14		)	17			(23		)	3			(27		)
Non-GAAP adjusted net income	$	362		$	338		$	348		$	700		$	627



1	These items are incremental charges attributable to completed acquisitions, consisting of amortization of purchased intangible assets.

2	These items are incremental charges related to the announced business combination agreement with Tokyo Electron Limited, consisting of acquisition-related and integration planning costs.

3	Results for the six months ended April 27, 2014 included a $7 million of employee-related costs related to the restructuring program announced on October 3, 2012.

4	Amounts for the three and six months ended April 26, 2015 included an adjustment to decrease the provision for income taxes by $39 million and $35 million, respectively, with a corresponding increase in net income, resulting in an increase in diluted earnings per share of $0.03. The adjustment was excluded in Applied's non-GAAP adjusted results and was made primarily to correct an error in the recognition of cost of sales in the U.S. related to intercompany sales, which resulted in overstating profitability in the U.S. and the provision for income taxes in immaterial amounts in each year since fiscal 2010.

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APPLIED MATERIALS, INC.

UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS



	Three Months Ended								Six Months Ended
(In millions, except per share amounts)	April 26, 2015			January 25, 2015			April 27, 2014		April 26, 2015			April 27, 2014

Non-GAAP Adjusted Earnings Per Diluted Share
Reported earnings per diluted share - GAAP basis¹	$	0.29		$	0.28		$	0.21	$	0.57		$	0.42
Certain items associated with acquisitions	0.03			0.03			0.03		0.07			0.06
Acquisition integration costs	—			—			0.01		—			0.01
Loss (gain) on derivatives associated with announced business combination, net	(0.01		)	(0.04		)	0.01		(0.05		)	—
Certain items associated with announced business combination	0.02			0.01			0.01		0.03			0.02
Reinstatement of federal R&D tax credit, resolution of prior years’ income tax filings and other tax items¹	(0.04		)	(0.01		)	0.01		(0.06		)	—
Non-GAAP adjusted earnings per diluted share	$	0.29		$	0.27		$	0.28	$	0.56		$	0.51
Weighted average number of diluted shares	1,241			1,240			1,229		1,241			1,227



1	Amounts for the three and six months ended April 26, 2015 included an adjustment to decrease the provision for income taxes by $39 million and $35 million, respectively, with a corresponding increase in net income, resulting in an increase in diluted earnings per share of $0.03. The adjustment was excluded in Applied's non-GAAP adjusted results and was made primarily to correct an error in the recognition of cost of sales in the U.S. related to intercompany sales, which resulted in overstating profitability in the U.S. and the provision for income taxes in immaterial amounts in each year since fiscal 2010.

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

APPLIED MATERIALS, INC.

UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS



	Three Months Ended									Six Months Ended
(In millions, except percentages)	April 26, 2015			January 25, 2015			April 27, 2014			April 26, 2015			April 27, 2014

SSG Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis	$	374		$	307		$	391		$	681		$	705
Certain items associated with acquisitions¹	44			43			42			87			84
Acquisition integration costs	—			—			—			—			1
Non-GAAP adjusted operating income	$	418		$	350		$	433		$	768		$	790
Non-GAAP adjusted operating margin	26.8		%	24.2		%	27.3		%	25.5		%	25.7		%
AGS Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis	$	170		$	153		$	148		$	323		$	273
Certain items associated with acquisitions¹	—			1			2			1			3
Non-GAAP adjusted operating income	$	170		$	154		$	150		$	324		$	276
Non-GAAP adjusted operating margin	26.3		%	26.4		%	28.1		%	26.4		%	26.5		%
Display Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis	$	40		$	72		$	26		$	112		$	52
Certain items associated with acquisitions¹	—			1			—			1			1
Non-GAAP adjusted operating income	$	40		$	73		$	26		$	113		$	53
Non-GAAP adjusted operating margin	24.5		%	26.5		%	17.7		%	25.8		%	17.3		%
EES Non-GAAP Adjusted Operating Income (Loss)
Reported operating income (loss) - GAAP basis	$	(5	)	$	(4	)	$	5		$	(9	)	$	(6	)
Certain items associated with acquisitions¹	1			1			2			2			3
Non-GAAP adjusted operating income (loss)	$	(4	)	$	(3	)	$	7		$	(7	)	$	(3	)
Non-GAAP adjusted operating margin	(5.5		)%	(5.5		)%	8.0		%	(5.5		)%	(2.3		)%



1	These items are incremental charges attributable to completed acquisitions, consisting of amortization of purchased intangible assets.

Note: The reconciliation of GAAP and non-GAAP adjusted segment results above does not include certain operating expenses that are managed separately at the corporate level and certain expenses that are not absorbed by the segments, which are reported within corporate and unallocated costs and included in consolidated operating income.

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Item 3:	Quantitative and Qualitative Disclosures About Market Risk

Applied is exposed to interest rate risk related to its investment portfolio and debt issuances. Applied’s investment portfolio includes fixed-income securities with a fair value of approximately $1.0 billion at April 26, 2015. These securities are subject to interest rate risk and will decline in value if interest rates increase. Based on Applied’s investment portfolio at April 26, 2015, an immediate 100 basis point increase in interest rates would result in a decrease in the fair value of the portfolio of approximately $15 million. While an increase in interest rates reduces the fair value of the investment portfolio, Applied will not realize the losses in the consolidated statement of operations unless the individual fixed-income securities are sold prior to recovery or the loss is determined to be other-than-temporary. At April 26, 2015, the carrying amount of debt issued by Applied was $1.9 billion with an estimated fair value of $2.2 billion. A hypothetical decrease in interest rates of 100 basis points would result in an increase in the fair value of Applied’s debt issuances of approximately $172 million at April 26, 2015.

Certain operations of Applied are conducted in foreign currencies, such as Japanese yen, euro, Israeli shekel, Taiwanese dollar and Swiss franc. Applied enters into currency forward exchange and option contracts to hedge a portion of, but not all, existing and anticipated foreign currency denominated transactions generally expected to occur within the next 24 months. Gains and losses on these contracts are generally recognized in income at the time that the related transactions being hedged are recognized. Because the effect of movements in currency exchange rates on currency forward exchange and option contracts generally offsets the related effect on the underlying items being hedged, these financial instruments are not expected to subject Applied to risks that would otherwise result from changes in currency exchange rates. Applied does not use derivative financial instruments for trading or speculative purposes.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

As of the end of the period covered by this report, management of Applied conducted an evaluation, under the supervision and with the participation of Applied’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of Applied’s disclosure controls and procedures, as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the Exchange Act). Based upon that evaluation, Applied’s Chief Executive Officer and Chief Financial Officer concluded that Applied’s disclosure controls and procedures were effective as of the end of the period covered by this report in ensuring that information required to be disclosed was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed by Applied in such reports is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

During the second quarter of fiscal 2015, there were no changes in the internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act, that materially affected, or are reasonably likely to materially affect, Applied’s internal control over financial reporting.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information set forth under “Legal Matters” in Note 14 in Notes to Consolidated Condensed Financial Statements is incorporated herein by reference.


Item 1A:	Risk Factors

The risk factors set forth below include any material changes to, and supersede the description of, the risk factors disclosed in Part I, Item 1A of Applied’s 2014 Form 10-K. These factors could materially and adversely affect Applied’s business, financial condition or results of operations and cause reputational harm, and they should be carefully considered in evaluating the Company and its business, in addition to other information presented elsewhere in this report.

The industries that Applied serves are volatile and difficult to predict.

As a supplier to the global semiconductor, flat panel display, and solar industries, Applied is subject to business cycles, the timing, length and volatility of which can be difficult to predict and which vary by reportable segment. These industries historically have been cyclical due to sudden changes in customers’ requirements for new manufacturing capacity and advanced technology, which depend in part on customers’ capacity utilization, production volumes, access to affordable capital, end-use demand, consumer buying patterns, and inventory levels relative to demand, as well as the rate of technology transitions and general economic conditions. These changes have affected the timing and amounts of customers’ purchases and investments in technology, and continue to affect Applied’s orders, net sales, operating expenses and net income.

To meet rapidly changing demand in the industries it serves, Applied must accurately forecast demand and effectively manage its resources and production capacity for each of its segments as well as across multiple segments, and may incur unexpected or additional costs to align its business operations. During periods of increasing demand for its products, Applied must have sufficient manufacturing capacity and inventory to meet customer demand; effectively manage its supply chain; attract, retain and motivate a sufficient number of qualified employees; and continue to control costs. During periods of decreasing demand, Applied must reduce costs and align its cost structure with prevailing market conditions; effectively manage its supply chain; and motivate and retain key employees.

Applied is exposed to risks associated with the uncertain global economy.

Uncertain global economic conditions along with uncertainties in the financial markets, national debt and fiscal concerns in various regions, and government austerity measures, are posing challenges to the industries in which Applied operates. The markets for semiconductors and flat panel displays in particular depend largely on consumer spending, while the solar market depends in part on government incentives and the availability of financing for PV installations. Economic uncertainty and related factors exacerbate negative trends in business and consumer spending and may cause certain Applied customers to push out, cancel, or refrain from placing orders for equipment or services, which may in turn reduce Applied's net sales, reduce backlog, and affect Applied’s ability to convert backlog to sales. Uncertain market conditions, difficulties in obtaining capital, or reduced profitability may also cause some customers to scale back operations, exit businesses, merge with other manufacturers, or file for bankruptcy protection and potentially cease operations, which can also result in lower sales and/or additional inventory or bad debt expense for Applied. These conditions may similarly affect key suppliers, which could impair their ability to deliver parts and result in delays for Applied’s products or added costs. In addition, these conditions may lead to strategic alliances by, or consolidation of, other equipment manufacturers, which could adversely affect Applied’s ability to compete effectively.

Uncertainty about future economic and industry conditions also makes it more challenging for Applied to forecast its operating results, make business decisions, and identify and prioritize the risks that may affect its businesses, sources and uses of cash, financial condition and results of operations. Applied may be required to implement additional cost reduction efforts, including restructuring activities, which may adversely affect Applied’s ability to capitalize on opportunities. In addition, Applied maintains an investment portfolio that is subject to general credit, liquidity, foreign exchange, market and interest rate risks. The risks to Applied’s investment portfolio may be exacerbated if financial market conditions deteriorate and, as a result, the value and liquidity of the investment portfolio, as well as returns on pension assets, could be negatively impacted and lead to impairment charges. Applied also maintains cash balances in various bank accounts globally in order to fund normal operations. If any of these financial institutions becomes insolvent, it could limit Applied’s ability to access cash in the affected accounts.

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Applied is exposed to risks as a result of ongoing changes in the various industries in which it operates.

The global semiconductor, flat panel display, solar and related industries in which Applied operates are characterized by ongoing changes affecting some or all of these industries that impact demand for and/or the profitability of Applied's products, including:


•	the nature, timing and degree of visibility of changes in end demand for electronic products, including those related to fluctuations in consumer buying patterns tied to seasonality or the introduction of new products, and the effects of these changes on foundry and other customers’ businesses and, in turn, on demand for Applied’s products;


•	increasing capital requirements for building and operating new fabrication plants and customers’ ability to raise the necessary capital;


•	differences in growth rates among the semiconductor, display and solar industries;


•	the increasing importance of establishing, improving and maintaining strong relationships with customers;


•	the increasing cost and complexity for customers to move from product design to volume manufacturing, which may slow the adoption rate of new manufacturing technology;


•	the need to continually reduce the total cost of manufacturing system ownership, due in part to greater demand for lower-cost consumer electronics compared to business information technology spending;


•	the heightened importance to customers of system reliability and productivity and the effect on demand for fabrication systems as a result of their increasing productivity, device yield and reliability;


•	manufacturers’ ability to reconfigure and re-use fabrication systems;


•	the increasing importance of, and difficulties in, developing products with sufficient differentiation to influence customers’ purchasing decisions;


•	requirements for shorter cycle times for the development, manufacture and installation of manufacturing equipment;


•	price and performance trends for semiconductor devices, displays and solar PVs, and the corresponding effect on demand for such products;


•	the increasing importance of the availability of spare parts to maximize the time that customers’ systems are available for production;


•	the increasing role for and complexity of software in Applied products; and


•	the increasing focus on reducing energy usage and improving the environmental impact and sustainability associated with manufacturing operations.

Applied is exposed to risks as a result of ongoing changes specific to the semiconductor industry.

The largest proportion of Applied’s consolidated net sales and profitability has been and continues to be derived from sales of manufacturing equipment by the Silicon Systems Group to the global semiconductor industry. In addition, a majority of the revenues of Applied Global Services is from sales of service products to semiconductor manufacturers. The semiconductor industry is characterized by ongoing changes particular to this industry that impact demand for and/or the profitability of Applied's semiconductor equipment and service products, including:


•	the increasing cost of research and development due to many factors, including: decreasing linewidths on a chip, the use of new materials, new and more complex device structures, more applications and process steps, increasing chip design costs, and the increasing cost and complexity of integrated manufacturing processes;


•	the need to reduce product development time, despite the increasing difficulty of technical challenges;


•	the growing number of types and varieties of semiconductors and number of applications across multiple substrate sizes;


•	the increasing cost and complexity for semiconductor manufacturers to move more technically advanced capability and smaller linewidths to volume manufacturing, and the resulting impact on the rates of technology transition and investment in capital equipment;


•	challenges in generating organic growth given semiconductor manufacturers’ levels of capital expenditures and the allocation of capital investment to market segments that Applied does not serve, such as lithography, or segments where Applied's products have lower relative market presence;


•	the importance of increasing market positions in under-penetrated segments, such as etch and inspection;

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•	the growing demand for mobility products, such as tablets and smartphones, and corresponding industry investment in devices that require fewer Applied products to manufacture, such as NAND flash memory, than are needed to make devices used in other applications, such as DRAM for personal computers;


•	the adoption of cloud-based memory storage particularly for mobility products, and the associated inhibiting effect on NAND bit growth rates;


•	the increasing frequency and complexity of technology transitions and inflections, such as 3-D transistors and advanced interconnects, and Applied’s ability to timely and effectively anticipate and adapt to these changes;


•	shorter cycle times between order placements by customers (particularly foundries) and product shipment, which may lead to inventory write-offs and manufacturing inefficiencies that decrease gross margin;


•	competitive factors that make it difficult to enhance position, including challenges in securing development-tool-of-record (DTOR) and production-tool-of-record (PTOR) positions with customers;


•	shifts in sourcing strategies by computer and electronics companies that impact the equipment requirements of Applied's foundry customers;


•	the concentration of new wafer starts in Korea and Taiwan, where Applied’s service penetration and service-revenue-per-wafer-start have been lower than in other regions; and


•	the increasing fragmentation of semiconductor markets, leading certain markets to become too small to support the cost of a new fabrication plant, while others require less technologically advanced products.

Applied must accurately forecast, and allocate appropriate resources and investment towards addressing, key technology changes and inflections in order to enable opportunities for gains.

Applied is exposed to risks as a result of ongoing changes specific to the flat panel display industry.

The global flat panel display industry historically has experienced considerable volatility in capital equipment investment levels, due in part to the limited number of display manufacturers, the concentrated nature of end-use applications, excess production capacity relative to end-use demand, and panel manufacturer profitability. Industry growth has depended primarily on consumer demand for increasingly larger and more advanced TVs and, more recently, on demand for smartphones and other mobile devices, which demand is highly sensitive to cost and improvements in technologies and features. The display industry is characterized by ongoing changes particular to this industry that impact demand for and/or the profitability of Applied's display products, including:


•	the timing and extent of an expansion of manufacturing facilities in China by Chinese display manufacturers and manufacturers from other countries, and the ability of non-Chinese manufacturers to obtain government approvals on a timely basis;


•	the rate of transition to larger substrate sizes for TVs and the resulting effect on capital intensity in the industry and on Applied’s product differentiation, gross margin and return on investment;


•	the importance of new types of display technologies, such as low temperature polysilicon (LTPS), organic light-emitting diode (OLED) and metal oxide, and new touch panel films, such as anti-reflective and anti-fingerprint; and


•	uncertainty with respect to future display technology end-use applications and growth drivers.

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Applied is exposed to risks as a result of ongoing changes specific to the solar industry.

Investment levels in capital equipment for the global solar industry have experienced considerable volatility. In recent years, global solar PV production capacity has exceeded end-use demand, causing customers to significantly reduce or delay investments in manufacturing capacity and new technology, or to cease operations. The global solar market is characterized by ongoing changes specific to this industry that impact demand for and/or the profitability of Applied’s solar products, including:


•	the need to continually decrease the cost-per-watt of electricity produced by solar PV products to at or below grid parity in more global regions by, among other things, reducing operating costs and increasing throughputs for solar PV manufacturing, and improving the conversion efficiency of solar PVs;

•

the variability and uncertainty of government energy policies and their effect in influencing the rate of growth of the solar PV market, including the availability and amount of incentives for solar power such as tax credits, feed-in tariffs, rebates, renewable portfolio standards that require electricity providers to sell a targeted amount of energy from renewable sources, and goals for solar installations on government facilities;


•	the number of solar PV manufacturers and amount of global production capacity for solar PVs, primarily in China;


•	the filing of regulatory unfair trade proceedings against solar PVs from China, where most of Applied’s solar equipment sales are concentrated, which has resulted in the assessment of duties on solar cells and modules imported from China and led to other trade-related conflicts and outcomes;


•	the varying levels of operating and industry experience among solar PV manufacturers and the resulting differences in the nature and extent of customer support services requested from Applied;


•	challenges associated with marketing and selling manufacturing equipment and services to a diverse and diffuse customer base;


•	the growth of market segments in which Applied does not participate, such as passivation and furnaces;


•	the availability and condition of used solar equipment, which impacts demand for new equipment;


•	complexities associated with government-affiliated entities as customers, for example in China;


•	the financial condition of solar PV customers and their access to affordable financing and capital; and


•	solar panel manufacturing overcapacity, which has led to weak industry operating performance and outlooks, deterioration of the solar equipment market, and a worsening of the financial condition of certain customers.

Applied must continually innovate, commercialize its products, and adapt its business and product offerings to respond to competition and rapid technological changes.

As Applied operates in a highly competitive environment in which innovation is critical, its future success depends on many factors, including the effective commercialization and customer acceptance of its equipment, services and related products. In addition, Applied must successfully execute its growth strategy, including enhancing its presence in existing markets, expanding into related markets, cultivating new markets and exceeding industry growth rates, while constantly improving its operational performance. The development, introduction and support of a broadening set of products in more collaborative, geographically diverse, open and varied competitive environments have grown more complex and expensive over time. Furthermore, new or improved products may entail higher costs and reduced profits. Applied’s performance may be adversely affected if it does not timely, cost-effectively and successfully:


•	identify and address technology inflections, market changes, new applications, customer requirements and end-use demand;


•	develop new products (including disruptive technologies), improve and/or develop new applications for existing products, and adapt similar products for use by customers in different applications and/or markets with varying technical requirements;


•	differentiate its products from those of competitors and any disruptive technologies, meet customers’ performance specifications, appropriately price products, and achieve market acceptance;


•	maintain operating flexibility to enable different responses to different markets, customers and applications;


•	enhance its worldwide operations across all business segments to reduce cycle time, enable continuous quality improvement, reduce costs, and enhance design for manufacturability and serviceability;


•	focus on product development and sales and marketing strategies that address customers' high value problems and foster strong customer relationships;

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•	allocate resources, including people and R&D funding, among Applied’s products and between the development of new products and the enhancement of existing products, as most appropriate and effective for future growth;


•	reduce the cost and improve the productivity of capital invested in R&D activities;


•	accurately forecast demand, work with suppliers and meet production schedules for its products;


•	improve its manufacturing processes and achieve cost efficiencies across product offerings;


•	adapt to changes in value offered by companies in different parts of the supply chain;


•	qualify products for evaluation and, in turn, volume manufacturing with its customers; and


•	implement changes in its design engineering methodology, including those that enable reduction of material costs and cycle time, greater commonality of platforms and types of parts used in different systems, greater effectiveness of product life cycle management, and reduced energy usage and environmental impact.

Applied is exposed to risks associated with a highly concentrated customer base.

Applied’s semiconductor customer base historically has been, and is becoming even more, highly concentrated as a result of economic and industry conditions. In the first six months of fiscal 2015, three semiconductor manufacturers accounted for approximately 56 percent of Silicon Systems Group net sales and two customers accounted for 33 percent of Applied’s consolidated net sales. Applied’s display customer base is also highly concentrated, while concentration within Applied’s solar customer base varies depending on the product line but is increasing due to challenging industry conditions. Applied’s customer base is also geographically-concentrated. See Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for tabular presentations of net sales by geographic region.

In addition, certain customers have experienced significant ownership or management changes, consolidated with other manufacturers, outsourced manufacturing activities, or engaged in collaboration or cooperation arrangements with other manufacturers. Customers have entered into strategic alliances or industry consortia that have increased the influence of key industry participants in technology decisions made by their partners. Also, certain customers are making an increasingly greater percentage of their respective industry’s capital equipment investments. Further, claims or litigation involving key industry participants have resulted and may continue to result in changes in their sourcing strategies and other outcomes.

In this environment, contracts or orders from a relatively limited number of manufacturers have accounted for, and are expected to continue to account for, a substantial portion of Applied’s business. The mix and type of customers, and sales to any single customer, may vary significantly from quarter to quarter and from year to year. As Applied’s products are configured to customer specifications, changing, rescheduling or canceling orders may result in significant, non-recoverable costs. If customers do not place orders, or they substantially reduce, delay or cancel orders, Applied may not be able to replace the business, which could have a material adverse effect on the Company’s results of operations. Major customers may also seek, and on occasion receive, pricing, payment, intellectual property-related, or other commercial terms that are less favorable to Applied.

Applied is exposed to the risks of operating a global business.

In the second quarter of fiscal 2015, approximately 74 percent of Applied’s net sales were to customers in regions outside the United States. Moreover, China now represents the largest market for various electronic products, such as TVs, PCs, and smartphones. Certain of Applied’s R&D and manufacturing facilities, as well as suppliers to Applied, are also located outside the United States, including in Singapore, Taiwan, China, Korea, Israel, Germany and Italy. Applied is also expanding its business and operations in new countries. The global nature of Applied’s business and operations, combined with the need to continually improve the Company’s operating cost structure, presents challenges, including but not limited to those arising from:


•	varying regional and geopolitical business conditions and demands;


•	political and social attitudes, laws, rules, regulations and policies within countries that favor domestic companies over non-domestic companies, including customer- or government-supported efforts to promote the development and growth of local competitors;


•	customer- or government-supported efforts to influence Applied to conduct more of its operations and sourcing in a particular country, such as Korea and China;


•	variations among, and changes in, local, regional, national or international laws and regulations (including intellectual property, labor, tax, and import/export laws), as well as the interpretation and application of such laws and regulations;


•	global trade issues, including those related to the interpretation and application of import and export licenses, as well as international trade disputes;

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•	positions taken by governmental agencies regarding possible national commercial and/or security issues posed by international business operations;


•	fluctuating raw material, commodity, energy and shipping costs or shipping delays;


•	challenges associated with managing more geographically diverse operations and projects, which require an effective organizational structure and appropriate business processes, procedures and controls;


•	a more diverse workforce with different experience levels, cultures, customs, business practices and worker expectations;


•	variations in the ability to develop relationships with local customers, suppliers and governments;


•	fluctuations in interest rates and currency exchange rates, including the relative strength or weakness of the U.S. dollar against the Japanese yen, euro, Taiwanese dollar, Israeli shekel or Chinese yuan;


•	the need to provide sufficient levels of technical support in different locations around the world;


•	political instability, natural disasters (such as earthquakes, floods or storms), pandemics, social unrest, terrorism or acts of war in locations where Applied has operations, suppliers or sales, or that may influence the value chain of the industries that Applied serves;


•	the need for an effective business continuity plan if a disaster or other event occurs that could disrupt business operations;


•	the need to regularly reassess the size, capability and location of global infrastructure and make appropriate changes;


•	cultural and language differences;


•	difficulties and uncertainties associated with the entry into new countries;


•	hiring and integration of an increasing number of new workers, including in countries such as India and China;


•	the increasing need for the workforce to be more mobile and work in or travel to different regions;


•	uncertainties with respect to economic growth rates in various countries; and


•	uncertainties with respect to growth rates for the manufacture and sale of semiconductors, displays and solar PVs in the developing economies of certain countries.

Many of these challenges are present in China and Korea, which are experiencing significant growth of customers, suppliers and competitors to Applied. Applied further believes that China and Korea present large potential markets for its products and opportunity for growth over the long term, although at lower projected levels of profitability and margins for certain products than historically have been achieved in other regions.

Applied is exposed to risks associated with business combinations, acquisitions and strategic investments.

Applied has made, and in the future may make, acquisitions of or investments in companies, technologies or products in existing, related or new markets for Applied. Business combinations, acquisitions and investments involve numerous risks that vary depending on their scale and nature, including but not limited to:


•	diversion of management’s attention from other operational matters;


•	contractual restrictions on the conduct of Applied’s business during the pendency of a proposed transaction;


•	inability to complete proposed transactions as anticipated or at all and any ensuing obligation to pay a termination fee;


•	the failure of acquired businesses to meet or exceed expected returns;


•	requirements imposed by government regulators in connection with their review of a transaction, which may include, among other things, divestitures and/or restrictions on the conduct of Applied’s existing business or the acquired business;


•	ineffective integration of operations, systems, technologies, products or employees, which can impact the ability to realize anticipated synergies or other benefits;

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•	failure to commercialize purchased technologies;


•	initial dependence on unfamiliar supply chains or relatively small supply partners;


•	inability to capitalize on characteristics of new markets that may be significantly different from Applied’s existing markets and where competitors may have stronger market positions and customer relationships;


•	failure to attract, retain and motivate key employees;


•	the potential impact of the announcement or consummation of a proposed transaction on relationships with third parties;


•	potential changes in Applied’s credit rating, which could adversely impact the Company’s access to and cost of capital;


•	reductions in cash balances and/or increases in debt obligations to finance activities associated with a transaction, which reduce the availability of cash flow for general corporate or other purposes;


•	exposure to new operational risks, rules, regulations, worker expectations, customs and practices to the extent acquired businesses are located in regions where Applied has not historically conducted business;


•	challenges associated with managing new, more diverse and more widespread operations, projects and people;


•	inability to obtain and protect intellectual property rights in key technologies;


•	inadequacy or ineffectiveness of an acquired company’s internal financial controls, disclosure controls and procedures, and/or environmental, health and safety, anti-corruption, human resource, or other policies or practices;


•	impairment of acquired intangible assets and goodwill as a result of changing business conditions, technological advancements or worse-than-expected performance of the segment;


•	the risk of litigation or claims associated with a proposed or completed transaction;


•	unknown, underestimated and/or undisclosed commitments or liabilities; and


•	the inappropriate scale of acquired entities’ critical resources or facilities for business needs.

Applied also makes strategic investments in other companies, including companies formed as joint ventures, which may decline in value and/or not meet desired objectives. The success of these investments depends on various factors over which Applied may have limited or no control and, particularly with respect to joint ventures, requires ongoing and effective cooperation with strategic partners. The risks to Applied’s strategic investment portfolio may be exacerbated by unfavorable financial market and macroeconomic conditions and, as a result, the value of the investment portfolio could be negatively impacted and lead to impairment charges.

Operating in multiple industries, and the entry into new markets and industries, entail additional challenges and obligations.

As part of its growth strategy, Applied must successfully expand into related or new markets and industries, either with its existing products or with new products developed internally or obtained through acquisitions. The entry into different markets involves additional challenges, including those arising from:


•	the need to devote additional resources to develop new products for, and operate in, new markets;


•	the need to develop new sales and technical marketing strategies, cultivate relationships with new customers and meet different customer service requirements;


•	differing rates of profitability and growth among multiple businesses;


•	Applied’s ability to anticipate demand, capitalize on opportunities, and avoid or minimize risks;


•	the complexity of managing multiple businesses with variations in production planning, execution, supply chain management and logistics;


•	the adoption of new business models, business processes and systems;


•	Applied’s ability to rapidly expand or reduce its operations to meet increased or decreased demand, respectively, and the associated effect on working capital;

•new materials, processes and technologies;


•	the need to attract, motivate and retain employees with skills and expertise in these new areas;


•	new and more diverse customers and suppliers, including some with limited operating histories, uncertain and/or limited funding, evolving business models and/or locations in regions where Applied does not have, or has limited, operations;


•	new or different competitors with potentially more financial or other resources, industry experience and/or established customer relationships;

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•	entry into new industries and countries, with differing levels of government involvement, laws and regulations, and business, employment and safety practices;


•	third parties’ intellectual property rights; and


•	the need to comply with, or work to establish, industry standards and practices.

In addition, Applied from time to time receives funding from United States and other government agencies for certain strategic development programs to increase its research and development resources and address new market opportunities. As a condition to this government funding, Applied may be subject to certain record-keeping, audit, intellectual property rights-sharing and/or other obligations.

Manufacturing interruptions or delays could affect Applied’s ability to meet customer demand and lead to higher costs, while the failure to estimate customer demand accurately could result in excess or obsolete inventory.

Applied’s business depends on its timely supply of equipment, services and related products that meet the rapidly changing technical and volume requirements of its customers, which depends in part on the timely delivery of parts, components and subassemblies (collectively, parts) from suppliers, including contract manufacturers. Some key parts are subject to long lead-times and/or obtainable only from a single supplier or limited group of suppliers, and some sourcing or subassembly is provided by suppliers located in countries other than the countries where Applied conducts its manufacturing, including China and Korea. Cyclical industry conditions and the volatility of demand for manufacturing equipment increase capital, technical, operational and other risks for Applied and for companies throughout its supply chain. Further, these conditions may cause some suppliers to scale back operations, exit businesses, merge with other companies, or file for bankruptcy protection and possibly cease operations. Applied may also experience significant interruptions of its manufacturing operations, delays in its ability to deliver products or services, increased costs or customer order cancellations as a result of:


•	the failure or inability of suppliers to timely deliver sufficient quantities of quality parts on a cost-effective basis;


•	volatility in the availability and cost of materials, including rare earth elements;


•	difficulties or delays in obtaining required import or export approvals;


•	information technology or infrastructure failures; and


•	natural disasters or other events beyond Applied's control (such as earthquakes, floods or storms, regional economic downturns, pandemics, social unrest, political instability, terrorism, or acts of war), particularly where it conducts manufacturing.

If a supplier fails to meet Applied’s requirements concerning quality, cost, socially-responsible business practices, or other performance factors, Applied may transfer its business to alternative sources, which could entail manufacturing delays, additional costs, or other difficulties. In addition, if Applied needs to rapidly increase its business and manufacturing capacity to meet increases in demand or expedited shipment schedules, this may exacerbate any interruptions in Applied’s manufacturing operations and supply chain and the associated effect on Applied’s working capital. Moreover, if actual demand for Applied’s products is different than expected, Applied may purchase more/fewer parts than necessary or incur costs for canceling, postponing or expediting delivery of parts. If Applied purchases inventory in anticipation of customer demand that does not materialize, or if customers reduce or delay orders, Applied may incur excess inventory charges.

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The ability to attract, retain and motivate key employees is vital to Applied’s success.

Applied’s success, competitiveness and ability to execute on its global strategies and maintain a culture of innovation depend in large part on its ability to attract, retain and motivate key employees, especially in critical positions. Achieving this objective may be difficult due to many factors, including fluctuations in global economic and industry conditions, management changes, Applied’s organizational structure, hiring practices of competitors and other companies, cost reduction activities (including workforce reductions and unpaid shutdowns), availability of career development opportunities, the ability to obtain necessary authorizations for workers to provide services outside their home countries, and the effectiveness of Applied’s compensation and benefit programs, including its share-based programs. Restructuring programs present particular challenges to the extent they involve the departure of knowledgeable and experienced employees and the resulting need to identify and train existing or new workers to perform necessary functions, which may result in unexpected costs, reduced productivity, and/or difficulties with respect to internal processes and controls.

Applied is exposed to various risks related to protection and enforcement of intellectual property rights.

Applied’s success depends in significant part on the protection of its intellectual property and other rights. Infringement of Applied’s rights by a third party, such as the unauthorized manufacture or sale of equipment or spare parts, could result in uncompensated lost market and revenue opportunities for Applied. Policing any unauthorized use of intellectual property is difficult and costly and Applied cannot be certain that the measures it has implemented will prevent misuse. Applied’s intellectual property rights may not provide significant competitive advantages if they are circumvented, invalidated, rendered obsolete by the rapid pace of technological change, or if Applied does not adequately protect or assert these rights or obtain necessary licenses on commercially reasonable terms. Furthermore, the laws and practices of other countries, including China, India, Taiwan and Korea, permit the protection and enforcement of Applied’s rights to varying extents, which may not be sufficient to adequately protect Applied’s rights. In addition, changes in intellectual property laws or their interpretation, such as recent changes in U.S. patent laws, may impact Applied's ability to protect and assert its intellectual property rights, increase costs and uncertainties in the prosecution of patent applications and enforcement or defense of issued patents, and diminish the value of Applied's intellectual property.

Applied is exposed to risks related to cybersecurity threats and incidents.

In the conduct of its business, Applied collects, uses, transmits and stores data on information technology systems. This data includes confidential information belonging to Applied or its customers or other business partners, as well as personally-identifiable information of individuals. Applied has experienced, and expects to continue to be subject to, cybersecurity threats and incidents, ranging from employee error or misuse to individual attempts to gain unauthorized access to information systems to sophisticated and targeted measures known as advanced persistent threats, none of which have been material to the Company to date. Applied devotes significant resources to network security, data encryption and other measures to protect its systems and data from unauthorized access or misuse. However, depending on their nature and scope, cybersecurity incidents could result in business disruption; the misappropriation, corruption or loss of confidential information and critical data (Applied's and that of third parties); reputational damage; litigation with third parties; diminution in the value of Applied's investment in research, development and engineering; data privacy issues; and increased cybersecurity protection and remediation costs.

Applied is exposed to various risks related to legal proceedings.

Applied from time to time is, and in the future may be, involved in legal proceedings or claims regarding patent infringement, intellectual property rights, antitrust, environmental regulations, securities, contracts, product performance, product liability, unfair competition, misappropriation of trade secrets, employment, workplace safety, and other matters. Applied also on occasion receives notification from customers who believe that Applied owes them indemnification or other obligations related to claims made against such customers by third parties.

Legal proceedings and claims, whether with or without merit, and associated internal investigations, may (1) be time-consuming and expensive to prosecute, defend or conduct; (2) divert management’s attention and other Applied resources; (3) inhibit Applied’s ability to sell its products; (4) result in adverse judgments for damages, injunctive relief, penalties and fines; and/or (5) negatively affect Applied’s business. There can be no assurance regarding the outcome of current or future legal proceedings, claims or investigations.

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The failure to successfully implement and conduct outsourcing activities and other operational initiatives could adversely affect results of operations.

To better align its costs with market conditions, locate closer to customers, enhance productivity, and improve efficiencies, Applied conducts certain engineering, software development, manufacturing, sourcing and other operations in regions outside the United States, including India, Taiwan, China, and Korea. Applied has implemented a distributed manufacturing model, under which certain manufacturing and supply chain activities are conducted in various countries, including the United States, Europe, Israel, Singapore, Taiwan and other countries in Asia, and assembly of some systems is completed at customer sites. In addition, Applied outsources certain functions to third parties, including companies in the United States, India, China, Korea, Malaysia and other countries. Outsourced functions include contract manufacturing, engineering, customer support, software development, information technology support, finance and administrative activities. The expanding role of third party providers has required changes to Applied’s existing operations and the adoption of new procedures and processes for retaining and managing these providers, as well as redistributing responsibilities as warranted, in order to realize the potential productivity and operational efficiencies, assure quality and continuity of supply, and protect the intellectual property of Applied and its customers, suppliers and other partners. If Applied does not accurately forecast the amount, timing and mix of demand for products, or if contract manufacturers or other outsource providers fail to perform in a timely manner or at satisfactory quality levels, Applied’s ability to meet customer requirements could suffer, particularly during a market upturn.

In addition, Applied must regularly implement or update comprehensive programs and processes to better align its global organizations, including initiatives to enhance its supply chain and improve back office and information technology infrastructure for more efficient transaction processing. The implementation of new processes and additional functionality to the existing systems entails certain risks, including difficulties with changes in business processes that could disrupt Applied’s operations, such as its ability to track orders and timely ship products, project inventory requirements, manage its supply chain and aggregate financial and operational data. During transitions Applied must continue to rely on legacy information systems, which may be costly or inefficient, while the implementation of new initiatives may not achieve the anticipated benefits and may divert management’s attention from other operational activities, or have other unintended consequences.

If Applied does not effectively develop and implement its outsourcing and relocation strategies, if required export and other governmental approvals are not timely obtained, if Applied’s third party providers do not perform as anticipated, or if there are delays or difficulties in enhancing business processes, Applied may not realize anticipated productivity improvements or cost efficiencies, and may experience operational difficulties, increased costs (including energy and transportation), manufacturing interruptions or delays, inefficiencies in the structure and/or operation of its supply chain, loss of its intellectual property rights, quality issues, reputational harm, increased product time-to-market, and/or inefficient allocation of human resources.

Applied may incur impairment charges to goodwill or long-lived assets.

Applied has a significant amount of goodwill and other acquired intangible assets related to acquisitions. Goodwill and purchased intangible assets with indefinite useful lives are not amortized, but are reviewed for impairment annually during the fourth quarter of each fiscal year, and more frequently when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The review compares the fair value for each of Applied’s reporting units to its associated carrying value, including goodwill. Factors that could lead to impairment of goodwill and intangible assets include adverse industry or economic trends, reduced estimates of future cash flows, declines in the market price of Applied common stock, changes in Applied’s strategies or product portfolio, and restructuring activities. Applied’s valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and projections of future operating performance. Applied may be required to record future charges to earnings during the period in which an impairment of goodwill or intangible assets is determined to exist.

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Changes in tax rates or tax assets and liabilities could affect results of operations.

As a global company, Applied is subject to taxation in the United States and various other countries. Significant judgment is required to determine and estimate worldwide tax liabilities. Applied’s future annual and quarterly tax rates could be affected by numerous factors, including changes in the: (1) applicable tax laws; (2) amount and composition of pre-tax income in countries with differing tax rates; (3) plans of the Company to permanently reinvest certain funds held outside of the U.S.; and (4) valuation of Applied’s deferred tax assets and liabilities. As of April 26, 2015, Applied intends to permanently reinvest approximately $2.3 billion of these funds outside of the U.S. and does not plan to repatriate these funds.

To better align with the international nature of its business, Applied conducts certain manufacturing, supply chain, and other operations in Asia, bringing these activities closer to customers and reducing operating costs. Applied has received authorization to use tax incentives that provide that income earned in certain countries outside the U.S. will be subject to tax holidays or reduced income tax rates. To obtain the benefit of these tax incentives, Applied must meet requirements relating to various activities. Applied’s ability to realize benefits from these incentives could be materially affected if, among other things, applicable requirements are not met or Applied incurs net losses for which it cannot claim a deduction.

In addition, Applied is subject to regular examination by the Internal Revenue Service and other tax authorities, and from time to time initiates amendments to previously filed tax returns. Applied regularly assesses the likelihood of favorable or unfavorable outcomes resulting from these examinations and amendments to determine the adequacy of its provision for income taxes, which requires estimates and judgments. Although Applied believes its tax estimates are reasonable, there can be no assurance that the tax authorities will agree with such estimates. Applied may have to engage in litigation to achieve the results reflected in the estimates, which may be time-consuming and expensive. There can be no assurance that Applied will be successful or that any final determination will not be materially different from the treatment reflected in Applied’s historical income tax provisions and accruals.

Applied is subject to risks of non-compliance with environmental and safety regulations.

Applied is subject to environmental and safety regulations in connection with its global business operations, including but not limited to: regulations related to the development, manufacture and use of its products; recycling and disposal of materials used in its products or in producing its products; the operation of its facilities; and the use of its real property. The failure or inability to comply with existing or future environmental and safety regulations, such as those related to climate change, could result in: (1) significant remediation liabilities; (2) the imposition of fines; (3) the suspension or termination of the development, manufacture, sale or use of certain of its products; (4) limitations on the operation of its facilities or ability to use its real property; and/or (5) a decrease in the value of its real property.

Applied is exposed to various risks related to the regulatory environment.

Applied is subject to various risks related to: (1) new, different, inconsistent or conflicting laws, rules and regulations that may be enacted by executive order, legislative bodies or regulatory agencies in the countries in which Applied operates; (2) disagreements or disputes between national or regional regulatory agencies related to international trade; and (3) the interpretation and application of laws, rules and regulations. As a public company with global operations, Applied is subject to the laws of multiple jurisdictions and the rules and regulations of various governing bodies, including those related to financial and other disclosures, corporate governance, privacy, and anti-corruption. Changes and ambiguities in laws, regulations and standards create uncertainty and challenges regarding compliance matters. Efforts to comply with new and changing regulations have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the second quarter of fiscal 2015, there were no shares of common stock repurchased by Applied. On March 5, 2012, Applied's Board of Directors approved a stock repurchase program authorizing up to $3.0 billion in repurchases over the three years through March 2015. During the three-year period of the program ended March 2015, Applied repurchased a total of $1.4 billion of its common stock. On April 26, 2015, the Board of Directors approved a new common stock repurchase program authorizing up to $3.0 billion in repurchases over the three years ending April 2018.

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Item 6. Exhibits

Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K:



		Incorporated by Reference
Exhibit No.	Description	Form	File No.	Exhibit No.	Filing Date
10.1	Mutual Termination Agreement, dated as of April 26, 2015 (U.S.) and April 27, 2015 (Japan), by and among Applied Materials, Inc., Tokyo Electron Limited and Eteris B.V.	8-K	000-06920	2.1	4/27/2015
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002†
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002†
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002‡
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002‡
101.INS	XBRL Instance Document‡
101.SCH	XBRL Taxonomy Extension Schema Document‡
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document‡
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document‡
101.LAB	XBRL Taxonomy Extension Label Linkbase Document‡
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document‡


†	Filed herewith.


‡	Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



APPLIED MATERIALS, INC.

By:	/s/ ROBERT J. HALLIDAY
	Robert J. Halliday Senior Vice President, Chief Financial Officer (Principal Financial Officer)

May 21, 2015



By:	/s/ CHARLES W. READ
	Charles W. Read Corporate Vice President, Corporate Controller and Chief Accounting Officer (Principal Accounting Officer)

May 21, 2015