UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark one)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended October 28, 2012
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-06920
Applied Materials, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 94-1655526 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
3050 Bowers Avenue, P.O. Box 58039 Santa Clara, California | 95052-8039 (Zip Code) |
(Address of principal executive offices) | |
Registrant’s telephone number, including area code:
(408) 727-5555
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered |
Common Stock, par value $.01 per share | The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer ¨ | Non-accelerated filer ¨ | Smaller reporting company ¨ | |||
(Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ
Aggregate market value of the voting stock held by non-affiliates of the registrant as of April 29, 2012, based upon the closing sale price reported by the NASDAQ Global Select Market on that date: $15,382,534,908
Number of shares outstanding of the registrant’s Common Stock, $.01 par value, as of November 21, 2012: 1,197,659,704
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive Proxy Statement for Applied Materials, Inc.’s 2013 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.
Caution Regarding Forward-Looking Statements
Certain information in this Annual Report on Form 10-K (report or Form 10-K) of Applied Materials, Inc. and its subsidiaries (Applied or the Company), including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, is forward-looking in nature. All statements in this report, including those made by the management of Applied, other than statements of historical fact, are forward-looking statements.
Forward-looking statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “potential” and “continue,” the negative of these terms, or other comparable terminology. Examples of forward-looking statements include statements regarding Applied’s future financial or operating results, as well as its plans or expectations regarding cash flows and cash deployment strategies, declaration of dividends, share repurchases, business strategies and priorities, costs and cost controls, products, competitive positions, future operations, research and development, acquisitions and joint ventures, growth opportunities, the nature and impact of 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, and general economic conditions. These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in Part I, Item 1A, “Risk Factors,” below and elsewhere in this report. These and many other factors could affect Applied’s future financial condition and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by Applied or on its behalf. Applied undertakes no obligation to revise or update any forward-looking statements.
The following information should be read in conjunction with the Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included in this report.
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APPLIED MATERIALS, INC.
FORM 10-K FOR THE FISCAL YEAR ENDED OCTOBER 28, 2012
TABLE OF CONTENTS
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PART I | ||
Item 1: | ||
Item 1A: | ||
Item 1B: | ||
Item 2: | ||
Item 3: | ||
Item 4: | ||
PART II | ||
Item 5: | ||
Item 6: | ||
Item 7: | ||
Item 7A: | ||
Item 8: | ||
Item 9: | ||
Item 9A: | ||
Item 9B: | ||
PART III | ||
Item 10: | ||
Item 11: | ||
Item 12: | ||
Item 13: | ||
Item 14: | ||
PART IV | ||
Item 15: | ||
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PART I
Item 1: | Business |
Incorporated in 1967, Applied, a Delaware corporation, 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 displays (LCDs), 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’s fiscal year ends on the last Sunday in October.
Applied is one of the world’s largest semiconductor fabrication equipment suppliers based on revenue, with the capability to provide global deployment and support services. Applied also is a leading supplier of LCD fabrication equipment to the flat panel display industry, and a leading supplier of solar PV manufacturing systems to the solar industry, based on revenue.
Applied operates in four reportable segments: Silicon Systems Group, Applied Global Services, Display, and Energy and Environmental Solutions. Applied manages its business based upon these segments. A summary of financial information for each reportable segment is found in Note 16 of Notes to Consolidated Financial Statements. A discussion of factors that could affect operations is set forth under “Risk Factors” in Item 1A, which is incorporated herein by reference.
In November 2011, Applied completed the acquisition of Varian Semiconductor Equipment Associates, Inc. (Varian), the leading supplier of ion implantation equipment to the semiconductor and solar industries. The acquisition broadened Applied's extensive portfolio of technologies for chip and solar module manufacturing. The acquired business is included in consolidated results of operations and the results of the Silicon Systems Group and Applied Global Services segments.
Net sales by reportable segment for the past three fiscal years were as follows:
2012 | 2011 | 2010 | ||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||
Silicon Systems Group | $ | 5,536 | 64 | % | $ | 5,415 | 51 | % | $ | 5,304 | 56 | % | ||||||||
Applied Global Services | 2,285 | 26 | % | 2,413 | 23 | % | 1,865 | 20 | % | |||||||||||
Display | 473 | 5 | % | 699 | 7 | % | 899 | 9 | % | |||||||||||
Energy and Environmental Solutions | 425 | 5 | % | 1,990 | 19 | % | 1,481 | 15 | % | |||||||||||
Total | $ | 8,719 | 100 | % | $ | 10,517 | 100 | % | $ | 9,549 | 100 | % | ||||||||
Silicon Systems Group Segment
The Silicon Systems Group segment develops, manufactures and sells a wide range of manufacturing equipment used to fabricate semiconductor chips, also referred to as integrated circuits (ICs). Most chips are built on a silicon wafer base and include a variety of circuit components, such as transistors and other devices, that are connected by multiple layers of wiring (interconnects). Applied offers systems that perform most of the primary processes used in chip fabrication, including atomic layer deposition (ALD), chemical vapor deposition (CVD), physical vapor deposition (PVD), electrochemical deposition (ECD), rapid thermal processing (RTP), ion implantation, chemical mechanical planarization (CMP), wet cleaning, and wafer metrology and inspection, as well as systems that etch or inspect circuit patterns on masks used in the photolithography process. Applied’s semiconductor manufacturing systems are used by integrated device manufacturers and foundries to build and package memory, logic and other types of chips.
Most chips are currently fabricated using 32 nanometer (nm) and larger linewidth dimensions, although Applied is also working with customers on leading-edge technology for advanced nodes using 28nm and smaller dimensions. To build a chip, the transistors, capacitors and other circuit components are first created on the surface of the wafer by performing a series of processes to deposit and selectively remove portions of successive film layers. Similar processes are then used to build the layers of wiring structures on the wafer. As the density of the circuit components increases to enable greater computing capability in the same or smaller physical area, the complexity of building the chip also increases, necessitating more process steps to form smaller structures and more intricate wiring schemes. A typical, simplified process sequence for building the wiring or interconnect portion of a chip involves initially depositing a dielectric film layer onto the base layer of circuit components using a CVD system. An etch system is then used to create openings and patterns in the dielectric layer. To form the metal interconnects, these openings and patterns are filled with conducting material using PVD and ECD technologies. A CMP step then polishes the wafer to achieve a flat surface. Additional deposition, etch and CMP steps are then performed to build up the layers needed to complete the interconnection of the circuit elements. Advanced chip designs require more than 500 steps involving these and other processes to complete the manufacturing cycle.
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Today's advanced interconnects are made using copper as the main wiring material. Copper has low resistance and can carry a large amount of current in a small area, which allows signals to travel quickly. Applied is the leading supplier of systems for manufacturing copper-based interconnects, including equipment for depositing, etching and planarizing these multi-layer structures. In 2012, the Company introduced the Applied Endura Amber™ PVD system, which uses innovative copper reflow technology to achieve rapid, void-free fill of interconnect structures at virtually any device node.
To increase the speed of interconnect signals even further, low dielectric constant (low k) films are used to insulate the copper wiring. Applied also leads the industry in providing systems for depositing low k dielectric films. In 2012, the Company launched the Applied Producer® Onyx™ process, an innovative film treatment that optimizes the molecular structure of low k films to enable higher device performance and longer battery life.
The transistor is another key area of the chip where semiconductor manufacturers are improving their device designs to enhance performance. Applied has the industry’s largest portfolio of technically advanced products for building smaller and faster transistors. One method of enhancing chip performance is strain engineering, a technique that stretches or compresses the space between atoms, allowing electrical current to flow more quickly. Multiple strain films are typically used in advanced devices since they have an additive effect on increasing transistor speed. Applied has a comprehensive portfolio of systems to enable these applications using CVD and epitaxial deposition technologies.
Major chipmakers are integrating new high dielectric constant (high-k) and metal materials and processes in their transistor gate structures to increase chip performance and reduce power consumption. Applied has a comprehensive portfolio of fully characterized processes for building these high-k/metal gates. These solutions include an integrated dielectric gate stack tool that combines four critical processes in a single system, a portfolio of metallization technologies using ALD and PVD, and an innovative high temperature etch system.
To address the need for higher performance in a smaller space driven by new consumer products, a new type of chip packaging is emerging, known as three-dimensional (3D) ICs. Providing greater functionality in a smaller footprint, 3D ICs stack multiple chips together and electrically connect them using deep holes, called through-silicon via (TSV) structures. Applied has the industry’s most comprehensive line of production-proven systems and processes required for the majority of advanced packaging manufacturing steps, including etch, CVD, PVD, ECD, wafer cleaning and CMP systems. In 2012, the Company introduced the Applied Producer Optiva™ CVD system, which employs ultra-low process temperatures to deposit conformal insulating liner films for TSVs. The Optiva system is also used to manufacture advanced image sensors used in smartphones, tablet PCs and high-end cameras, covering the microlens with a tough, thin, transparent film layer that boosts the low-light performance of the sensor while improving its durability.
Some chip manufacturers have announced that they will be employing new manufacturing methods to enhance chip performance, one of which is based on new transistor designs that replace the traditional two-dimensional gate with a thin 3D gate. This new structure, targeted for the 22nm technology node and below, improves the performance and energy efficiency of the chip. The Applied Centura Conforma™ system uses conformal plasma doping technology to modify the electrical properties of 3D and planar transistor structures. Chip manufacturers are also beginning to employ 3D architectures in advanced memory chips to provide higher-density storage capability. These structures require the precise etching of exceptionally deep and narrow structures. In 2012, the Company launched its Applied Centura® Avatar™ dielectric etch system that can etch holes and trenches with up to 80:1 depth-to-width aspect ratios.
Most of Applied’s semiconductor equipment products are single-wafer systems with multiple process chambers attached to a base platform. This enables each wafer to be processed separately in its own environment, allowing precise process control, while the system’s multiple chambers enable simultaneous, high productivity manufacturing. Applied sells most of its single-wafer, multi-chamber systems on six basic platforms: the Endura®,, Centura®, Producer®, Raider®, VIISta® and Vantage® platforms. These platforms support ALD, CVD, ECD, PVD, etch, ion implantation, and RTP technologies.
Over time, the semiconductor industry has migrated to increasingly larger wafers to build chips. The predominant or common wafer size used today for volume production of advanced chips is 300 millimeter (mm), or 12-inch, wafers. Applied offers a comprehensive range of 300mm systems through its Silicon Systems Group segment. Applied also offers earlier-generation 200mm systems, as well as products and services to support all of its systems, which are reported under its Applied Global Services segment.
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The following summarizes the portfolio of products and their associated process technology areas reported under the Silicon Systems Group segment.
Deposition
Deposition is a fundamental step in fabricating a chip. During deposition, layers of dielectric (an insulator), barrier, or electrically conductive (typically metal) films are deposited or grown on a wafer. Applied provides equipment to perform four types of deposition: ALD, CVD, ECD and PVD. In addition, Applied’s RTP systems can be used to perform certain types of dielectric deposition.
Atomic Layer Deposition
ALD is an advanced technology in which atoms are deposited one layer at a time to build chip structures. This technology enables customers to fabricate thin films of either conducting or insulating material with uniform coverage in nanometer-sized structures. One of the most critical areas of the transistor is its gate, which is built by depositing layers of dielectric films. At the 22nm node and below, these film layers are so thin that they must be atomically engineered. The Applied Centura Integrated Gate Stack system features advanced ALD technology that builds ultrathin high-k film layers less than 2nm in thickness — about one hundred thousandth the width of a human hair.
Chemical Vapor Deposition
CVD is used to deposit dielectric and metal films on a wafer. During the CVD process, gases that contain atoms of the material to be deposited react on the wafer surface, forming a thin film of solid material. Films deposited by CVD may be silicon oxide, single-crystal epitaxial silicon, amorphous silicon, silicon nitride, dielectric anti-reflective coatings, low k dielectric (for highly-efficient insulating materials), aluminum, titanium, titanium nitride, polysilicon, tungsten, refractory metals or silicides. Applied offers the following CVD products and technologies:
The Applied Producer CVD platform — This high-throughput platform features Twin-Chamber® modules that have two single-wafer process chambers per unit. Up to three Twin-Chamber modules can be mounted on each Producer platform, giving it a simultaneous processing capacity of six wafers. Many dielectric CVD processes can be performed on this platform. The highest productivity model of this system is the Applied Producer GT, which features fast wafer handling performance and compact design.
Low k Dielectric Films — Low k dielectric materials are used in copper-based chip designs to further improve interconnect speed. Using conventional CVD equipment, the Applied Producer Black Diamond® family of low k systems provides customers with a proven, cost-effective way to integrate a variety of low k films into advanced interconnect structures. The Company's latest third-generation low k technologies are featured on the Applied Producer Black Diamond 3 system and Applied Producer Nanocure 3 system. Together, these products are designed to enable smaller, higher performance and more power-efficient devices at 22nm and below.
Lithography-Enabling Solutions — Applied offers several technologies on the Producer system to help chipmakers extend their current 193nm lithography tools, including a line of Applied APF® (advanced patterning film) films and Applied DARC® (dielectric anti-reflective coating) films. Together, they provide a film stack with the precise dimensional control and compatibility needed to cost-effectively pattern nano-scale features without additional integration complexity.
Gap Fill Films — There are many steps during the chipmaking process in which very small and deep, or high aspect ratio (HAR), structures must be filled void-free with a dielectric film. Many of these applications include the deposition of silicon oxides in substrate isolation structures, contacts, and interconnects. Applied's most advanced gap fill system is its Applied Producer Eterna™ FCVD system. Targeted for 20nm and below chips, the Eterna system delivers a liquid-like film that flows freely into virtually any structure to provide void-free dielectric fill.
Strain Engineering Solutions — The Applied Producer HARP™ system plays a key role in enhancing transistor performance, enabling chipmakers to boost chip speed by depositing strain-inducing dielectric films. Offering the industry’s first integrated stress nitride deposition and ultraviolet (UV) cure solution, the Applied Producer Celera CVD delivers benchmark levels of high-stress tensile silicon nitride films. The Company also offers the Applied Centura SiNgenPlus low pressure CVD system for low temperature silicon nitride films. Used together, and in conjunction with silicon germanium (SiGe) films using Applied’s epitaxial deposition technologies, these systems can provide additive strain engineering benefits.
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Through-Silicon Via Films — Applied has a comprehensive portfolio of products for TSV fabrication, including the Applied Producer InVia™ system. This product uses a unique process to deposit the critical oxide liner film layer in HAR TSV structures, enabling robust electrical isolation of the TSV, which is vital for reliable device performance. For applications where higher temperatures can damage the manufacturing process, the Applied Producer Avila™ CVD system and Applied Producer Optiva CVD system allow high quality dielectric film deposition at stable substrate temperatures at a low cost of ownership.
Epitaxial Deposition — Epitaxial silicon (epitaxy or epi) is a layer of pure silicon grown in a uniform crystalline structure on the wafer to form a high quality base for the device circuitry. Epi technology is used in an increasing number of integrated circuit devices in both the wafer substrate and transistor areas of a chip to enhance speed. The Applied Centura Epi system integrates pre- and post-epi processes on the same system to improve film quality and reduce production costs. This system is also used for SiGe epi technology, which reduces power usage and increases speed in certain types of advanced chips. For emerging transistor designs, the Applied Centura RP Epi system offers selective epi processes to enable faster transistor switching through strain engineering techniques.
Polysilicon Deposition — Polysilicon is a type of silicon used to form portions of the transistor structure within the integrated circuit device. The Applied Centura Polygen™ LPCVD system is a single-wafer, multi-chamber product that deposits thin polysilicon films at high temperatures to create transistor gate structures. To address the challenging requirements of shrinking gate dimensions, the Applied Centura DPN Gate Stack system integrates chambers for decoupled plasma nitridation (DPN), RTP anneal, and polysilicon deposition on one platform to enable superior film quality and material properties.
Tungsten Deposition — Tungsten is used in the contact area of a chip that connects the transistors to the wiring circuitry. In aluminum-based devices, tungsten is also used in the structures that connect the multiple layers of aluminum wiring. Applied has two products for depositing tungsten: the Applied Centura Sprint® Tungsten CVD system for 90nm and below devices and the Applied Centura iSprint ALD/CVD system for more advanced applications. The latter product combines ALD technology and CVD chambers on the same platform.
Electrochemical Deposition
Electrochemical deposition is a process by which metal atoms from a chemical fluid (an electrolyte) are deposited on the surface of an immersed object. Its main application in the semiconductor industry is to deposit copper in interconnect wiring structures. This process step follows the deposition of barrier and seed layers which prevent the copper from contaminating other areas of the device, improve the adhesion of the copper film and enable electrodeposition to occur. Applied offers two ECD systems: the Applied Raider GT ECD system for electroplating advanced chip interconnect structures, and the Applied Raider S ECD system for advanced TSV packaging applications.
Physical Vapor Deposition
PVD is a physical process in which atoms of a gas, such as argon, are accelerated toward a metal target. The metal atoms chip off, or sputter away, and are then deposited on the wafer. The Applied Endura PVD system offers a broad range of advanced metal deposition processes, including aluminum, aluminum alloys, cobalt, titanium/titanium nitride, tantalum/tantalum nitride, tungsten/tungsten nitride, nickel, vanadium and copper. Introduced 22 years ago, the Company's Applied Endura platform is the most successful metal deposition system in the history of the semiconductor industry.
The Applied Endura CuBS (copper barrier/seed) PVD system is widely used by customers for fabricating copper-based chips. Using PVD technology, the system deposits a tantalum-based barrier film that prevents copper material from entering other areas of the device and then a copper seed layer that primes the structure for the subsequent deposition of bulk copper. The Applied Endura CuBS RFX PVD system extends cost-effective CuBS technology to the 22nm node. The Applied Endura Avenir™ RF PVD system sequentially deposits the multiple metal film layers that form the heart of the industry’s new, faster, metal gate transistors. The Applied Endura iLB PVD/ALD system advances the state-of-the-art in ALD technology, enabling customers to shrink their speed-critical contact structures for 20nm and below devices.
Applied’s Endura system has also been used for many years in back-end applications to deposit metal layers before final bump or wire bonding packaging steps are performed. Additionally, the Applied Charger™ UBM PVD system, which is specifically designed for under-bump metallization (UBM) and other back-end processes, features linear architecture for reliable performance and very high productivity at a low cost per wafer.
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Etch
Etching is used many times throughout the integrated circuit manufacturing process to selectively remove material from the surface of a wafer. Before etching begins, the wafer is coated with a light-sensitive film, called photoresist. A photolithography process then projects the circuit pattern onto the wafer. Etching removes material only from areas dictated by the photoresist pattern. Applied offers a wide range of systems for etching dielectric, metal, and silicon films to meet the requirements of advanced processing.
Applied’s Producer Etch system utilizes the Twin-Chamber Producer platform to target cost-sensitive dielectric etch applications. To address advanced dielectric etch applications, the Applied Centura Enabler® E5 Etch system enables customers to create the 40:1 HAR contact features that are critical to the yield and performance of 32nm and below DRAM and Flash memory chips. The Applied Centura Carina™ system uses innovative, high-temperature technology to deliver the etch capability essential for scaling logic and memory devices with high-k/metal gates at 45nm and below.
For etching silicon, the Applied Centris AdvantEdge™ Mesa™ system features eight process chambers for high wafer output and proprietary system intelligence software to assure every process on every chamber precisely matches. The system also saves on power, water and gas consumption, helping customers to lower operating costs and support their sustainable manufacturing initiatives. The Applied Centura Mariana™ Trench Etch system provides customers with the capability to scale DRAM capacitors by enabling the etching of 80:1 aspect ratio structures. The Applied Centura Silvia™ system is specifically designed for etching small, deep holes for TSV applications in 3D-ICs. For etching metals, the Applied Opus™ AdvantEdge Metal Etch system uses an optimized 5-chamber platform configuration that enables customers to extend aluminum interconnect technology and productivity for flash and DRAM memory applications.
Rapid Thermal Processing
RTP is a process in which a wafer is subjected to rapid bursts of intense heat that can take the wafer from room temperature to more than 1,000 degrees Celsius in less than 10 seconds. A rapid thermal process is used mainly for annealing, which modifies the properties of deposited films. The Applied Centura Radiance®Plus and Applied Vantage RadOx™ RTP systems feature advanced RTP technology with differing platform designs. While the multi-chamber Centura platform offers exceptional process flexibility, the streamlined two-chamber Vantage platform is designed for dedicated high-volume manufacturing. These single-wafer RTP systems are also used for growing high quality oxide and oxynitride films, deposition steps that traditional large batch furnaces can no longer achieve with the necessary precision and control.
Applied’s latest RTP systems address the critical need for controlling wafer temperature to increase chip performance and yield. The laser-based Applied Vantage Astra™ millisecond anneal system abruptly raises the surface temperature of the wafer locally to modify material properties at the atomic level. The Applied Vantage Vulcan system, the first RTP system to heat the wafer entirely from the backside, brings a new level of precision and control to the anneal process, allowing chipmakers to produce more high performance devices per wafer.
Ion Implantation
Ion implantation is a key technology for forming transistors and is used many times during chip fabrication. During ion implantation, wafers are bombarded by a beam of electrically-charged ions, called dopants, which change the electrical properties of the exposed surface films. These dopants are accelerated to an energy that permits them to penetrate the substrate at a precise quantity and depth. Dopant concentration is determined by controlling the number of ions in the beam and the number of times the wafer passes through the beam; the depth of the dopants is determined by the energy of beam. Ion implantation systems may also be used in other areas of IC manufacturing to modify the material properties of the semiconductor devices, as well as in manufacturing crystalline-silicon solar cells.
As a result of Applied's acquisition of Varian, Applied now offers a comprehensive line of single-wafer ion implantation equipment that covers the entire energy and current range required to manufacture advanced devices. The VIISta 3000XP implanter delivers the angle precision required for advanced high-energy applications, while the VIISta 900XP implanter provides medium current doping and the industry's highest implant productivity. The VIISta PLAD implanter enables manufacturers to rapidly implant high dopant concentrations over the entire wafer using a low-energy process that preserves sensitive circuit features in next-generation devices. In 2012, Applied introduced the VIISta Trident high current ion implanter that provides the precise dose and angle control needed for advanced transistor structures.
With the acquisition of Varian, Applied also acquired ion implantation technology for c-Si cell manufacturing. The Applied SolionTM ion implanter provides unique advantages over traditional thermal diffusion doping to create higher efficiency p-n junctions, which are the electronic pathways of the cell. The Solion system is based on the successful VIISta ribbon beam architecture and provides the precision and process control needed to support advanced solar cell structures.
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Chemical Mechanical Planarization
The CMP process removes material from a wafer to create a flat (planarized) surface. This process allows subsequent photolithography patterning steps to occur with greater accuracy and enables film layers to build with minimal height variations. Applied has led the industry with its 300mm Applied Reflexion® LK system, with features such as integrated cleaning, film measurement and process control capabilities. Applied’s latest CMP product, the Applied Reflexion GT system, has an innovative dual-wafer design that increases performance while lowering system cost of ownership in fabricating copper interconnects and tungsten contacts.
Surface Preparation
Cleaning the surface of the wafer is critical to the adhesion and quality of films that are subsequently deposited in the chip fabrication process. Applied offers several surface preparation systems. The Applied Raider SP tool can incorporate several types of cleaning methods, including spray, vapor, immersion, megasonics, and anneal technologies, with automated single or dual-side wafer processing for high volume manufacturing.
Metrology and Wafer Inspection
Applied offers several products for measuring features and inspecting defects on the wafer during various stages of the fabrication process. These systems enable customers to characterize and control critical dimension (CD) and defect issues, especially at advanced generation technology nodes.
Critical Dimension and Defect Review Scanning Electron Microscopes (CD-SEMs and DR-SEMs)
Scanning electron microscopes (SEMs) use an electron beam to form images of microscopic features of a patterned wafer at extremely high magnification. Applied’s SEM products provide customers with full automation, along with the high accuracy and sensitivity needed for measuring very small CDs. The Applied VeritySEM® 4i metrology system uses proprietary SEM imaging technology to enable precise control of the lithography and etching processes, measuring CDs at a precision of less than 0.3nm. Applied’s OPC Check™ software for the VeritySEM system performs automated qualification of OPC-based (optical proximity correction) chip designs, significantly reducing mask (see Mask Making section below) verification time over conventional manual methods.
DR-SEMs review defects on the wafer (such as particles, scratches or residues) that are first located by a defect detection system and then classify the defects to identify their source. The high-throughput, fully automatic Applied SEMVision™ Defect Analysis products enable customers to use this technology as an integral part of their production lines to analyze defects as small as 30nm with industry-leading throughput.
Wafer Inspection
Using deep ultraviolet (DUV) laser-based technology, defects can be detected on patterned wafers (wafers with printed circuit images) as they move between processing steps. Defects include particles, open circuit lines, and shorts between lines. The Applied UVision® 5 wafer inspection system detects yield-limiting defects in the critical patterning layers of 22nm and below logic and memory devices. Applied also offers the Applied DFinder system, the first darkfield wafer inspection system to use DUV laser scanning to detect particles as small as 40nm in interconnect layers.
Mask Making
Masks are used by photolithography systems to transfer microscopic circuit designs onto wafers. Since an imperfection in a mask may be replicated on the wafer, the mask must be virtually defect-free. Applied provides systems for etching and inspecting masks.
Applied's Tetra™ line of systems has been used by mask makers worldwide to etch the majority of high-end masks over the last five years. The Applied Centura Tetra EUV (extreme ultraviolet) Advanced Reticle Etch system is an advanced etch tool for fabricating leading-edge masks at 22nm and below. The Applied Aera3™ Mask inspection system also addresses the challenges of detecting defects on 22nm masks, using sophisticated aerial imaging technology that allows users to immediately see how the pattern on the mask will appear on the wafer, revealing only the defects most likely to print and significantly reducing inspection time. These systems also address the challenge of fabricating emerging EUV lithography masks.
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Applied Global Services Segment
The Applied Global Services segment encompasses products and services designed to improve the performance and productivity, and reduce the environmental impact, of the fab operations of semiconductor, LCD, and solar PV manufacturers. The in-depth expertise and best known methods of Applied’s extensive global support infrastructure enable Applied to continuously support customers’ production requirements. Trained customer engineers and process support engineers are deployed in more than a dozen countries. These engineers are usually located at or near customers’ fab sites and service over 33,000 installed Applied systems, as well as non-Applied systems. Applied offers the following general types of services and products under the Applied Global Services segment:
Fab and Equipment Services — Applied offers a portfolio of fab-wide operations services to maintain and optimize customers’ fabrication facilities. Applied Performance Services offers customers comprehensive equipment support with performance-based pricing and predictable costs to enable improved cost of ownership. Included in this program is Applied’s ExpertConnect remote diagnostic capability, providing expert support around the clock. In addition to these value-added services, Applied offers its FabVantage™ team of technology, equipment and engineering experts who provide key insights to helping customers solve some of their most difficult manufacturing challenges.
Applied also offers its Total Parts Management program with spare parts manufactured to Applied’s strict technical specifications and quality standards.
In addition, Applied offers a wide range of products and services to extend the productive life of 200mm semiconductor fabs, including new and remanufactured 200mm equipment, system enhancements and fab transition services. Designed to maximize productivity and lower cost of ownership, these products also assist customers in implementing green manufacturing solutions. Applied’s 200mm systems are available in a broad range of production-proven technologies, including CVD, PVD, etch, implant, RTP, CMP, epitaxy, metrology, and inspection tools.
Automation Systems — Applied offers automated factory-level and tool-level control software systems for semiconductor, LCD, and solar PV manufacturing facilities. These enterprise solutions include manufacturing execution systems (MES) to automate the production of wafers and LCD and solar substrates, advanced process control systems, and scheduling and materials handling control systems. The Applied SmartFactory™ MES software is a factory automation solution designed to help accelerate the production ramp of emerging technologies for solar PV, chip-packaging, and light-emitting diode (LED) applications.
Applied also offers computerized maintenance management systems, performance tracking, and modeling and simulation tools for improving asset utilization. Applied’s E3™ equipment engineering system solution, for example, integrates all critical equipment automation and process control components. The Applied SmartSched™ system is the semiconductor industry’s first predictive scheduling solution for optimizing the movement of wafers during the lithography process to reduce cycle time and increase tool utilization.
Thin Film Solar - As a result of Applied's restructuring of its Energy and Environmental Solutions segment in fiscal 2010, the Company discontinued sales to new customers of its fully-integrated SunFab™ thin film solar production lines, but continues to support existing SunFab customers with services, upgrades and capacity increases through the Applied Global Services segment. Thin film solar technologies are suitable for large-scale applications, such as utility scale solar farms and commercial rooftops, where space is not a constraint.
Display Segment
Applied’s products for manufacturing thin film transistor liquid crystal displays (TFT- LCDs) for televisions, personal computers (PCs), tablet PCs, smartphones, and other consumer-oriented electronic applications are reported under its Display segment. While similarities exist between the technologies utilized in chipmaking and LCD fabrication, the most significant differences are in the size and composition of the substrate. Substrates used to manufacture LCD panels can be more than 120 times larger in area than 300mm wafers and are made of glass, while wafers used in semiconductor fabrication are made of silicon.
Applied supplies a wide range of systems that process and test different glass substrate sizes. To meet consumer demand for larger, more cost-effective LCD TVs, Applied’s latest generation (Gen) 10 systems can process substrates sized at approximately 2.85 x 3.05 meters, with each substrate enabling the production of up to six 65-inch LCD TV screens.
Applied is also extending its core LCD technology to enable ultra-high resolution displays for next-generation smartphones, tablet PCs, and organic LED (OLED) TVs. These higher-performance displays are fabricated using newer materials such as low-temperature polysilicon (LTPS) and metal oxide films in the transistor layer of the panel to gain significantly faster switching speeds. In 2012, Applied added to its line of plasma-enhanced CVD (PECVD) systems for depositing LTPS films with the AKT-15K PX, AKT-25K PX, and AKT-55K PX systems. These CVD systems are offered for a range of display substrate sizes to enable manufacturers to achieve economies of scale.
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In 2012, Applied also introduced technology for fabricating advanced metal oxide-based transistors in displays. The AKT-PiVot™ PVD system, which features rotary cathode array technology, deposits indium gallium zinc oxide (IZGO) film to form the transistor channel. The AKT-PECVD system is used to deposit the dielectric film needed to insulate the transistor gate. Together, these systems offer a cost-effective solution for producing smaller, faster switching pixels to create higher resolution screens.
For manufacturing the color filter of LCD panels, Applied offers the AKT-NEW ARISTO™ system for transparent conductive oxide film deposition. Providing customers with new levels of productivity and flexibility, the Applied AKT-AristoTwin system is used for manufacturing touch-enabled displays. The system features two independent processing tracks on a single system, enabling customers to achieve 50% more capacity using half the manufacturing space.
To complement these systems, Applied also offers a line of electron beam array test (EBT) systems for testing substrates during production for defective pixels and other imperfections, including the Gen-10 AKT-90K EBT product. Featuring one of the industry’s fastest and most accurate pixel test technologies with the lowest operating cost, the EBT systems’ non-contact test technology enables the safe testing of high-value LCD TV panels without damaging or scratching the display.
Energy and Environmental Solutions Segment
The Energy and Environmental Solutions segment includes manufacturing systems to produce products for the generation and conservation of energy. To increase the conversion efficiency and yields of solar PV devices and help reduce the cost per watt of solar-generated electricity, Applied offers manufacturing solutions for wafer-based crystalline silicon (c-Si) applications.
Applied’s portfolio of solar PV wafer and cell fabrication technologies has made it one of the leading suppliers of c-Si equipment worldwide in terms of revenue. In addition to innovative technology, these systems offer key manufacturing benefits to customers in high productivity, advanced ultra-thin wafer handling, and extensive automation.
Wafer manufacturing — Applied’s precision wafering systems crop and square silicon ingots into bricks and slice silicon bricks into thin wafers. These wafers are subsequently processed by cell manufacturing systems to create the PV cells used in making c-Si solar panels. The Applied HCT wire saw cropper and squarer systems cut silicon ingots into bricks with high productivity and minimal silicon loss. The Applied HCT B5 wire saw was designed for large load capacity in volume manufacturing and has a unique four-position architecture that provides load flexibility for optimizing yield and productivity.
Cell manufacturing — Applied offers a comprehensive line of automated metallization and test systems for c-Si cell manufacturing with its Applied Baccini products. These systems include high-precision printing capability for increasing the efficiency of c-Si solar cells. The latest metallization system is the Applied Baccini Pegaso™ platform for next-generation solar cell manufacturing. In addition to increased yield and output, a key feature of the Pegaso system is its proprietary “smart” capabilities that bring a new level of precision and control to the cell manufacturing process. The system’s modular architecture allows customers to rapidly add modules for additional processing capability, while reducing the time, cost, and risk of implementing new cell designs.
Other products offered under the Energy and Environmental Solutions segment include roll-to-roll, vacuum web coating systems for high-performance deposition of a range of films on flexible substrates for functional, aesthetic, or optical properties. The Applied TopMet™ 4450 system is the world’s largest and fastest roll-to-roll machine for depositing ultra-thin aluminum films for flexible packaging applications. The Applied SmartWeb™ system uses PVD technology to deposit critical multi-layer films required for fabricating advanced touch panels in mobile devices and other flexible electronic substrates. The system’s modular design allows up to 12 different thin film layers to be deposited simultaneously on flexible material, enabling complex structures to be created in a single pass.
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Backlog
Applied manufactures systems to meet demand represented by order backlog and customer commitments. Backlog consists of: (1) orders for which written authorizations have been accepted and assigned shipment dates are within the next 12 months, or shipment has occurred but revenue has not been recognized; and (2) contractual service revenue and maintenance fees to be earned within the next 12 months.
Backlog by reportable segment as of October 28, 2012 and October 30, 2011 was as follows:
2012 | 2011 | ||||||||||||
(In millions, except percentages) | |||||||||||||
Silicon Systems Group | $ | 705 | 44 | % | $ | 913 | 38 | % | |||||
Applied Global Services | 580 | 36 | % | 662 | 28 | % | |||||||
Display | 206 | 13 | % | 337 | 14 | % | |||||||
Energy and Environmental Solutions | 115 | 7 | % | 480 | 20 | % | |||||||
Total | $ | 1,606 | 100 | % | $ | 2,392 | 100 | % | |||||
Applied’s backlog on any particular date is not necessarily indicative of actual sales for any future periods, due to the potential for customer changes in delivery schedules or cancellation of orders. Customers may delay delivery of products or cancel orders prior to shipment, subject to possible cancellation penalties. Delays in delivery schedules and/or a reduction of backlog during any particular period could have a material adverse effect on Applied’s business and results of operations.
Manufacturing, Raw Materials and Supplies
Applied’s manufacturing activities consist primarily of assembly, test and integration of various proprietary and commercial parts, components and subassemblies (collectively, parts) that are used to manufacture systems. Applied has implemented a distributed manufacturing model under which manufacturing and supply chain activities are conducted in various countries, including the United States, Europe, Israel, Singapore, Taiwan, and other countries in Asia, and assembly of some systems is completed at customer sites. Applied uses numerous vendors, including contract manufacturers, to supply parts and assembly services for the manufacture and support of its products. Although Applied makes reasonable efforts to assure that parts are available from multiple qualified suppliers, this is not always possible. Accordingly, some key parts may be obtained from only a single supplier or a limited group of suppliers. Applied seeks to reduce costs and to lower the risks of manufacturing and service interruptions by: (1) selecting and qualifying alternate suppliers for key parts; (2) monitoring the financial condition of key suppliers; (3) maintaining appropriate inventories of key parts; (4) qualifying new parts on a timely basis; and (5) locating certain manufacturing operations in close proximity to suppliers and customers.
Research, Development and Engineering
Applied’s long-term growth strategy requires continued development of new products. The Company’s significant investment in research, development and engineering (RD&E) has generally enabled it to deliver new products and technologies before the emergence of strong demand, thus allowing customers to incorporate these products into their manufacturing plans at an early stage in the technology selection cycle. Applied works closely with its global customers to design systems and processes that meet their planned technical and production requirements. Product development and engineering organizations are located primarily in the United States, as well as in Europe, Israel, Taiwan, and China. In addition, Applied outsources certain RD&E activities, some of which are performed outside the United States, primarily in India. Process support and customer demonstration laboratories are located in the United States, China, Taiwan, Europe, and Israel.
Applied’s investments in RD&E for product development and engineering programs to create or improve products and technologies over the last three years were as follows: $1.2 billion (14 percent of net sales) in fiscal 2012, $1.1 billion (11 percent of net sales) in fiscal 2011, and $1.1 billion (12 percent of net sales) in fiscal 2010. Applied has spent an average of 13 percent of net sales in RD&E over the last five years. In addition to RD&E for specific product technologies, Applied maintains ongoing programs for automation control systems, materials research and environmental control that are applicable to its products.
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Marketing and Sales
Net sales by geographic region, determined by the location of customers' facilities to which products were shipped, were as follows:
2012 | 2011 | 2010 | ||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||
Taiwan | 2,411 | 28 | % | 2,093 | 20 | % | 2,750 | 29 | % | |||||||||||
China | 783 | 9 | % | 2,574 | 24 | % | 1,557 | 16 | % | |||||||||||
Korea | 1,897 | 22 | % | 1,263 | 12 | % | 1,768 | 19 | % | |||||||||||
Japan | 704 | 8 | % | 912 | 9 | % | 768 | 8 | % | |||||||||||
Southeast Asia | 312 | 3 | % | 592 | 5 | % | 578 | 6 | % | |||||||||||
Asia Pacific | 6,107 | 70 | % | 7,434 | 70 | % | 7,421 | 78 | % | |||||||||||
United States | 1,749 | 20 | % | 1,963 | 19 | % | 1,147 | 12 | % | |||||||||||
Europe | 863 | 10 | % | 1,120 | 11 | % | 981 | 10 | % | |||||||||||
Total | $ | 8,719 | 100 | % | $ | 10,517 | 100 | % | $ | 9,549 | 100 | % | ||||||||
Because of the highly technical nature of its products, Applied markets and sells products worldwide almost entirely through a direct sales force. Approximately 80 percent of Applied’s fiscal 2012 net sales were to regions outside of the United States.
General economic conditions impact Applied’s business and financial results. From time to time, the markets in which products are sold experience weak economic conditions that may negatively impact sales. Applied’s business is usually not seasonal in nature, but it is highly cyclical, based on capital equipment investment by major semiconductor, flat panel display, solar PV and other manufacturers. Customers’ expenditures depend on many factors, including: anticipated market demand and pricing for semiconductors, LCDs, solar cells and modules, and other substrates; the development of new technologies; customers’ factory utilization; capital resources and financing; government policies and incentives; and global and regional economic conditions.
Information on net sales to unaffiliated customers and long-lived assets attributable to Applied’s geographic regions is included in Note 16 of Notes to Consolidated Financial Statements. The following companies accounted for at least 10 percent of Applied’s net sales in 2012, 2011, and/or 2010, which were for products in multiple reportable segments.
2012 | 2011 | 2010 | |||
Samsung Electronics Co., Ltd. | 20% | 12% | 14% | ||
Taiwan Semiconductor Manufacturing Company Limited | 16% | 10% | 11% | ||
Intel Corporation | * | 10% | * | ||
________________________
* | Less than 10%. |
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Competition
The industries in which Applied operates are highly competitive and characterized by rapid technological change. Applied’s ability to compete generally depends on its ability to timely commercialize its technology, continually improve its products and develop new products that meet constantly evolving customer requirements. Significant competitive factors include technical capability and differentiation, productivity and cost-effectiveness. The importance of these factors varies according to customers’ needs, including product mix and respective product requirements, applications, and the timing and circumstances of purchasing decisions. Substantial competition exists in all areas of Applied’s business. Competitors range from small companies that compete with a single product and/or in a single region, to global, diversified companies with a range of products. Applied’s ability to compete requires a high level of investment in RD&E, marketing and sales and global customer support activities. Management believes that many of Applied’s products have strong competitive positions.
The competitive environment for each segment is described below.
The semiconductor industry has been increasingly driven by consumer demand for lower-cost electronic products with increased capability. As a result, products within the Silicon Systems Group segment are subject to significant changes in customer requirements, including transitions to smaller dimensions, new materials and an increasing number of applications. While certain existing technologies may be adapted to new requirements, some applications create the need for an entirely different technological approach. The rapid pace of technological change can quickly diminish the value of current technologies and products and create opportunities for existing and new competitors. Applied offers a broad portfolio of technologically differentiated products that must continuously evolve to satisfy customers’ requirements in order to compete effectively. Applied allocates resources among its numerous product offerings and therefore may decide not to invest in an individual product to the same degree as competitors who specialize in fewer products. There are a number of competitors serving the semiconductor manufacturing equipment industry, with some offering a single product line and others offering multiple product lines. These competitors range from suppliers serving a single region to global, diversified companies. The competitive environment for the Silicon Systems Group in fiscal 2012 reflected continued investment in the semiconductor industry driven by capacity demand for mobile computing. Foundry customers led capacity additions for advanced technology nodes and were the primary drivers for net sales of the Silicon Systems Group.
Products and services within the Applied Global Services segment complement the Silicon Systems Group, Display, and Energy and Environmental Solutions segments’ products, in markets that are characterized by demanding worldwide service requirements and a diverse group of numerous competitors. To compete effectively, Applied offers products and services to improve tool performance, lower overall cost of ownership, and increase the productivity and energy efficiency of customers’ fab operations. Significant competitive factors include productivity, cost-effectiveness, and the level of technical service and support. The importance of these factors varies according to customers’ needs and the type of products or services offered. Industry conditions that affected Applied Global Services’ sales of spares and services in fiscal 2012 were principally semiconductor manufacturers' wafer starts and factory utilization rates.
Products in the Display segment are generally subject to strong competition from a number of major competitors. Applied holds established market positions with its technically-differentiated TFT-LCD manufacturing solutions for PECVD, color filter PVD, PVD array, PVD touch panel, and TFT array testing, although its market position could change quickly due to customers' evolving requirements. The competitive environment for the Display segment in fiscal 2012 was characterized by the weakest level of industry investment in TV manufacturing equipment in recent history, while investment continued in equipment to make touch screen and high-end mobile devices. Important factors affecting the competitive position of Applied's Display products include: industry trends, Applied's ability to innovate and develop new products, and the extent to which Applied's products are technically-differentiated, as well as which customers within a highly concentrated customer base are making capital equipment investments and Applied's existing position at these customers.
Applied's products within the Energy and Environmental Solutions segment compete in several diverse market areas, including primarily the c-Si solar equipment market. All of these markets are characterized by extreme pressure to reduce customers' overall production costs and improve performance. In relation to solar, for fiscal 2012, end-market demand continued to be robust as the industry further reduced manufacturing costs and made conversion efficiency improvements, enabling PV-generated electricity to reach parity with retail electricity rates in an increasing number of areas around the world. However, excess manufacturing capacity relative to end-demand created an exceptionally challenging environment, causing solar cell and wafering customers to defer purchases of new capacity to preserve capital and resulting in some industry consolidation. The rationalization of capacity will be an important factor in determining when supply and demand come back into balance. Adding to market uncertainty are international trade actions against Chinese solar manufacturers commenced in the U.S. and other regions that have resulted in the imposition of sanctions. With respect to its c-Si equipment products, Applied competes with a number of other companies, some of which have significant experience with solar applications and some of which are new entrants to the solar equipment market. The solar industry downturn has affected many of Applied's competitors and customers adversely, with some companies going through extensive financial and organizational restructuring.
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Patents and Licenses
Management believes that Applied’s competitive position significantly depends upon the Company’s research, development, engineering, manufacturing and marketing capabilities, and not just on its patent position. However, protection of Applied’s technological assets through enforcement of its intellectual property rights, including patents, is important. Therefore, Applied’s practice is to file patent applications in the United States and other countries for inventions that Applied considers significant. Applied has a substantial number of patents in the United States and other countries, and additional applications are pending for new inventions. Although Applied does not consider its business materially dependent upon any one patent, the rights of Applied and the products made and sold under its patents, taken as a whole, are a significant element of Applied’s business. In addition to patents, Applied also possesses other intellectual property, including trademarks, know-how, trade secrets, and copyrights.
Applied enters into patent and technology licensing agreements with other companies when management determines that it is in Applied’s best interest to do so. Applied pays royalties under existing patent license agreements for the use, in several of its products, of certain patented technologies that are licensed to Applied. Applied also receives royalties from licenses granted to third parties. Royalties received from or paid to third parties have not been, and are not expected to be, material to Applied’s consolidated results of operations.
In the normal course of business, Applied periodically receives and makes inquiries regarding possible patent infringement. In responding to such inquiries, it may become necessary or useful for Applied to obtain or grant licenses or other rights. However, there can be no assurance that such licenses or rights will be available to Applied on commercially reasonable terms, or at all. If Applied is not able to resolve or settle claims, obtain necessary licenses on commercially reasonable terms, and/or successfully prosecute or defend its position, Applied’s business, financial condition and results of operations could be materially and adversely affected.
Environmental Matters
Applied maintains a number of environmental, health, and safety programs that are primarily preventive in nature. As part of these programs, Applied regularly monitors ongoing compliance with applicable laws and regulations. In addition, Applied has trained personnel to conduct investigations of any environmental, health, or safety incidents, including, but not limited to, spills, releases, or possible contamination.
Compliance with federal, state and local environmental, health, and safety provisions, including, but not limited to, those regulating the discharge of materials into the environment, remedial agreements, and other actions relating to the environment have not had, and are not expected to have, a material effect on Applied’s capital expenditures, competitive position, financial condition, or results of operations.
The most recent report on Applied’s environmental, health, and safety activities can be found in the Company’s latest Citizenship Report on its website at http://www.appliedmaterials.com/about/cr/sustainability. The Citizenship Report is updated periodically. This website address is intended to be an inactive textual reference only. None of the information on, or accessible through, Applied’s website is part of this Form 10-K or is incorporated by reference herein.
Employees
At October 28, 2012, Applied employed approximately 14,500 regular employees and 500 temporary employees. In the high-technology industry, competition for highly-skilled employees is intense. Applied believes that its future success is highly dependent upon its continued ability to attract, retain, and motivate qualified employees. There can be no assurance that Applied will be able to attract, hire, assimilate, motivate, and retain a sufficient number of qualified employees.
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Executive Officers of the Registrant
The following table and notes set forth information about Applied’s executive officers as of November 30, 2012:
Name of Individual | Position |
Michael R. Splinter(1) | Chairman of Board of Directors, Chief Executive Officer |
Gary E. Dickerson(2) | President |
George S. Davis(3) | Executive Vice President, Chief Financial Officer |
Randhir Thakur(4) | Executive Vice President, General Manager Silicon Systems |
Joseph Flanagan(5) | Senior Vice President, Worldwide Operations and Supply Chain |
Mary Humiston(6) | Senior Vice President, Global Human Resources |
Manfred Kerschbaum(7) | Senior Vice President, Chief of Staff |
Thomas F. Larkins(8) | Senior Vice President, General Counsel and Corporate Secretary |
Omkaram Nalamasu(9) | Group Vice President, Chief Technology Officer |
Charlie Pappis(10) | Group Vice President, General Manager Applied Global Services |
Ali Salehpour(11) | Group Vice President, General Manager Energy and Environmental Solutions and Display Business Groups |
Thomas S. Timko(12) | Corporate Vice President, Corporate Controller and Chief Accounting Officer |
(1) | Mr. Splinter, age 62, has been Chief Executive Officer of Applied since April 2003 and Chairman of the Board of Directors since March 2009. Prior to joining Applied, Mr. Splinter was an executive at Intel Corporation (Intel), a manufacturer of chips and computer, networking and communications products, where Mr. Splinter held a number of positions, including Executive Vice President and Director of Sales and Marketing and Executive Vice President and General Manager of the Technology and Manufacturing Group. |
(2) | Mr. Dickerson, age 55, was named President of Applied in June 2012, after working on merger integration matters since joining Applied following its acquisition of Varian in November 2011. Mr. Dickerson was Chief Executive Officer and a director of Varian from 2004. Prior to joining Varian in 2004, Mr. Dickerson served 18 years with KLA-Tencor Corporation (KLA-Tencor), a supplier of process control and yield management solutions for the semiconductor and related industries, where he held a variety of operations and product development roles before being appointed Chief Operating Officer in 1999 and then President and Chief Operating Officer in 2002. Mr. Dickerson started his semiconductor career in manufacturing and engineering management at General Motors' Delco Electronics Division and then AT&T, Inc. |
(3) | Mr. Davis, age 55, has been Executive Vice President, Chief Financial Officer of Applied since December 2009, after serving as Senior Vice President, Chief Financial Officer, since December 2006, and Group Vice President, Chief Financial Officer from November 2006. Previously, he had been Group Vice President, General Manager, Corporate Business Development since March 2005. From November 1999 to February 2005, Mr. Davis served as Vice President and Corporate Treasurer, where he managed Applied’s worldwide treasury operations and was responsible for investments, tax, financial risk management, and trade and export matters. Mr. Davis joined Applied in 1999. Prior to joining Applied, Mr. Davis served 19 years with Atlantic Richfield Company, a global oil, gas and chemical company, in a number of finance and other corporate positions. |
(4) | Dr. Thakur, age 50, has been Executive Vice President, General Manager Silicon Systems Group since December 2009, after serving as Senior Vice President, General Manager Silicon Systems Group since October 2009. Previously, he was Senior Vice President, General Manager, Thin Film Solar and Display. He was appointed Senior Vice President, General Manager, Strategic Operations when he rejoined Applied in May 2008. He previously was with Applied from 2000 to 2005 in a variety of executive roles including Group Vice President, General Manager for Front End Products. From September 2005 to May 2008, Dr. Thakur served as Executive Vice President of Technology and Fab Operations at SanDisk Corporation, a data storage solutions manufacturer, and as head of SanDisk’s worldwide operations. Prior to joining Applied in 2000, Dr. Thakur served in leadership roles at Steag Electronic Systems, an electronics company, and Micron Technology, Inc., a semiconductor manufacturer. |
(5) | Mr. Flanagan, age 41, joined Applied as Senior Vice President, Worldwide Operations and Supply Chain in February 2010. Prior to joining Applied, Mr. Flanagan held executive positions in global operations for Nortel Networks Corporation, a telecommunications equipment manufacturer, since 2006, including President of Nortel Business Services from August 2009 to February 2010, and Senior Vice President of Global Operations from August 2007 until August 2009. Previously, Mr. Flanagan held a number of positions from 1993 to 2006 at General Electric Company (GE), a global infrastructure, finance and media company. |
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(6) | Ms. Humiston, age 47, was named Senior Vice President, Global Human Resources in July 2011. She was Corporate Vice President, Global Human Resources from June 2009 to June 2010 and then promoted to Group Vice President in July 2010. Prior to June 2009, she served as the Corporate Vice President of Human Resources for both the Energy and Environmental Solutions and Display groups. Prior to joining Applied, Ms. Humiston was Vice President of Human Resources at Honeywell International Inc., which provides technologies to address safety, security and energy, from October 2002 to June 2008, with responsibility for various corporate and international organizations. She previously held executive positions with PeoplePC, an internet service provider; Gap, Inc., an apparel retailer; and GE. |
(7) | Mr. Kerschbaum, age 58, was named Senior Vice President, Chief of Staff in September 2009. Prior to that, he served as Senior Vice President, General Manager, Applied Global Services from January 2005 to September 2009. Mr. Kerschbaum was Senior Vice President, Global Operations from July 2004 to January 2005 and from October 2002 to May 2003. From May 2003 to July 2004, he was Group Vice President, Foundation Engineering and Operations. From January 1996 to October 2002, he held various positions in Applied Materials North America, most recently as Group Vice President, General Manager, Applied Materials North America. Mr. Kerschbaum has served in various other operations, customer service and engineering positions since joining Applied in 1983. Mr. Kerschbaum has announced his intent to retire from the Company in January 2013. |
(8) | Mr. Larkins, age 51, was named Senior Vice President, General Counsel and Corporate Secretary of Applied in November 2012, with responsibility for global legal affairs, intellectual property and security. Previously, Mr. Larkins was employed by Honeywell International (Honeywell), a diversified global technology and manufacturing company, where he was Vice President, Corporate Secretary and Deputy General Counsel from 2002 until joining Applied. Mr. Larkins served in various other positions at Honeywell (formerly AlliedSignal) after joining the company in 1997, including Vice President and General Counsel of its Automation and Control Solutions business segment, and General Counsel of its Aerospace Services business unit. |
(9) | Dr. Nalamasu, age 54, was promoted to Group Vice President, Chief Technology Officer for Applied in January 2012, after serving as Corporate Vice President, Chief Technology Officer since January 2011. Upon joining Applied in June 2006 and until January 2011, Dr. Nalamasu was an Appointed Vice President of Research and served as Deputy Chief Technology Officer and General Manager for Advanced Technologies Group. From 2002 to 2006, Dr. Nalamasu was a NYSTAR distinguished professor of Materials Science and Engineering at Rensselaer Polytechnic Institute, where he also served as Vice President of Research from 2005 to 2006. Prior to that, he held various R&D leadership positions at Bell Labs and later Lucent Technologies, Inc., a telecommunications company, for 17 years. |
(10) | Mr. Pappis, age 51, has been Group Vice President and General Manager of Applied Global Services since September 2009. He previously held positions in Applied Global Services as Corporate Vice President and General Manager for the Semiconductor Service Solutions group and as general manager for Equipment Productivity Services. He has held various other management positions since joining Applied in 1986. |
(11) | Mr. Salehpour, age 51, joined Applied in November 2012 as Group Vice President, General Manager Energy and Environmental Solutions and Display Business Groups. Prior to Applied, Mr. Salehpour worked at KLA-Tencor for 16 years, where he served most recently as Senior Vice President and General Manager SFS-ADE Divisions from 2008. Previous positions at KLA-Tencor included President North America Field Operations from 2005 to 2008, and Senior Vice President and General Manager Intel Business Unit from 2001 to 2005. Prior to KLA-Tencor, Mr. Salehpour worked in the Schlumberger Test Systems unit of Schlumberger Ltd. in marketing, account management and engineering roles. |
(12) | Mr. Timko, age 44, joined Applied in March 2010 as Corporate Vice President, Corporate Controller and Chief Accounting Officer. From June 2006 until March 2010, Mr. Timko was with Delphi Automotive LLP, a supplier to the automotive, computing, communications, energy and consumer accessories markets, where he was most recently Chief Accounting Officer and Controller. He served as Assistant Controller for The Interpublic Group of Companies, Inc., a global provider of advertising and marketing services, from December 2004 to June 2006, and previously at Dover Corporation, a manufacturer of industrial products. Mr. Timko began his career in 1991 with PricewaterhouseCoopers LLC, a provider of audit and assurance, tax and advisory services, and is a certified public accountant. |
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Available Information
Applied’s website is http://www.appliedmaterials.com. Applied makes available free of charge, on or through its website, its annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with, or furnishing them to, the SEC. This website address is intended to be an inactive textual reference only. None of the information on, or accessible through, Applied’s website is part of this Form 10-K or is incorporated by reference herein.
Item 1A: | Risk Factors |
The following factors could materially affect Applied’s business, financial condition or results of operations and should be carefully considered in evaluating the Company and its business.
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, 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. More recently, consumer buying patterns for electronic products, combined with growing customer concentration, have led to a seasonality effect in demand for semiconductor equipment, particularly from foundry customers.
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 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. 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. If Applied does not accurately forecast and timely and appropriately adapt to changes in its business environment, Applied’s business, financial condition and results of operations may be materially and adversely affected.
Applied is exposed to risks associated with the uncertain global economy.
Uncertain global economic conditions and slowing or negative growth in China, Europe, and the United States, along with continuing difficulties in the financial markets, national debt and fiscal concerns in various regions (including a potential “fiscal cliff” in the U.S. if remedial legislation is not enacted by December 31, 2012), 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 a market recovery. 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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If Applied does not timely and appropriately adapt to changes resulting from the uncertain macroeconomic environment and industry conditions, or to difficulties in the financial markets, Applied’s business, financial condition and results of operations may be materially and adversely affected.
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, including:
• | the nature and timing 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 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, particularly when financial market conditions are difficult; |
• | 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; |
• | 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, LCDs 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. |
If Applied does not successfully manage the risks resulting from the ongoing changes in the semiconductor, flat panel display, solar and related industries, its business, financial condition and results of operations could be materially and adversely affected.
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 that industry in addition to the general industry changes described in the preceding risk factor, including:
• | the increasing cost of research and development due to many factors, including: decreasing linewidths on a chip, the use of new materials such as cobalt and yttrium, 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’ decreasing capital expenditures as a percentage of revenue, and their increasing capital investment in market segments that Applied does not serve, such as lithography, or segments where Applied's products have lower relative market share; |
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• | the importance of increasing market positions in under-penetrated segments, such as etch and inspection; |
• | 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; |
• | 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 market share, including challenges in securing development-tool-of-record (DTOR) and production-tool-of-record (PTOR) positions with customers; |
• | potential shifts in sourcing strategies by a major computer and electronics company that may impact the equipment requirements of Applied's foundry customers; |
• | the concentration of new wafer starts in Korea, 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, such as the transition to 20nm devices, in order to enable opportunities for market share gains. In addition, the proposed industry transition from 300mm to 450mm wafers presents opportunities as well as risks and uncertainties, including those related to cost, technical complexity, timing, and the resulting effect on demand for manufacturing equipment and services. Recently, several semiconductor customers have invested in another wafer fabrication equipment supplier to help fund development of 450mm and other new technologies, which may influence the timing of technology transitions, funding allocations or other matters. If Applied does not successfully manage the risks resulting from these and other ongoing changes occurring in the semiconductor industry, its business, financial condition and results of operations could be materially and adversely affected.
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. Current global solar PV production capacity exceeds anticipated near-term end-use demand, causing customers to significantly reduce or delay investments in manufacturing capacity and new technology, or to cease operations. In addition to the general industry changes described above in the third risk factor, 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; |
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• | the increasing number of government-affiliated entities in China that are becoming customers; |
• | the financial condition of solar PV customers and their access to affordable financing and capital; and |
• | increasing solar industry challenges of solar panel manufacturing overcapacity and weaker operating performance and outlook, leading to the increasing deterioration of the solar equipment market and of the financial condition of Applied's customers. |
If Applied does not successfully manage the risks resulting from the ongoing changes occurring in the solar industry, its business, financial condition and results of operations could be materially and adversely affected.
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 LCD manufacturers, the concentrated nature of LCD end-use applications, and excess production capacity relative to end-use demand. Industry growth has depended primarily on consumer demand for increasingly larger and more advanced LCD TVs, which demand has slowed significantly, and more recently on demand for smartphones and other mobile devices, which demand is highly sensitive to cost and improvements in technologies and features. In addition to the general industry changes described above in the third risk factor, the display industry is characterized by ongoing changes particular to that industry, including:
• | the timing and extent of a planned 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 slowing rate of transition to larger substrate sizes for LCD TVs and the resulting effect on capital intensity in the industry and on Applied’s product differentiation, gross margin and return on investment; |
• | the increasing 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 LCD technology end-use applications and growth drivers. |
If Applied does not successfully manage the risks resulting from the ongoing changes occurring in the display industry, its business, financial condition and results of operations could be materially and adversely affected.
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 market share 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 increasingly 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 sales and marketing strategies that 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. |
If Applied does not successfully manage these challenges, its business, financial condition and results of operations could be materially and adversely affected.
Applied is exposed to risks associated with a highly concentrated customer base.
Applied’s semiconductor customer base historically has been, and is becoming even more, highly concentrated as a result of economic and industry conditions. In fiscal 2012, three semiconductor manufacturers accounted for 60 percent of Silicon Systems Group net sales and two customers accounted for 36 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. In fiscal 2012, customers in Taiwan accounted for 32 percent of net sales for the Silicon Systems Group segment, while customers in Korea and the U.S. together constituted 49 percent; customers in Taiwan and China accounted for a total of 66 percent of net sales for the Display segment; and customers in China accounted for 49 percent of net sales for the Energy and Environmental Solutions segment.
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 may result in changes in 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, which may result in added complexities in managing customer relationships and transactions and make it more challenging for Applied’s business units to generate organic growth. In addition, the mix and type of customers, and sales to any single customer, may vary significantly from quarter to quarter and from year to year. If customers do not place orders, or they substantially reduce, delay or cancel orders, Applied may not be able to replace the business. As Applied’s products are configured to customer specifications, changing, rescheduling or canceling orders may result in significant, non-recoverable costs. Major customers may also seek, and on occasion receive, pricing, payment, intellectual property-related, or other commercial terms that are less favorable to Applied. These factors could have a material adverse effect on Applied’s business, financial condition and results of operations.
Applied is exposed to the risks of operating a global business.
In fiscal 2012, approximately 80 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, Italy and Switzerland. 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 in a particular country, such as Korea and China; |
• | variations among, and changes in, local, regional, national or international laws and regulations (including intellectual |
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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; |
• | 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; |
• | reliance on various information systems, data centers and software applications to conduct many aspects of Applied's business, which may be vulnerable to cyberattacks by third parties or breached due to employee error, misuse or other causes that could result in business disruptions, misappropriation of confidential information, or other adverse consequences in the event that Applied’s firewalls and security processes and practices are ineffective; |
• | 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, LCDs 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. These challenges may materially and adversely affect Applied’s business, financial condition and results of operations.
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; |
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• | Applied’s ability to rapidly expand or reduce its operations to meet increased or decreased demand, respectively, and the associated effect on working capital; |
•new materials, processes and technologies;
• | the need to attract, motivate and retain employees with skills and expertise in these new areas; |
• | new and more diverse customers and suppliers, including some with limited operating histories, uncertain and/or limited funding, evolving business models and/or locations in regions where Applied does not have, or has limited, operations; |
• | new or different competitors with potentially more financial or other resources, industry experience and/or established customer relationships; |
• | entry into new industries and countries, with differing levels of government involvement, laws and regulations, and business, employment and safety practices; |
• | third parties’ intellectual property rights; and |
• | the need to comply with, or work to establish, industry standards and practices. |
In addition, Applied from time to time receives funding from United States and other government agencies for certain strategic development programs to increase its research and development resources and address new market opportunities. As a condition to this government funding, Applied may be subject to certain record-keeping, audit, intellectual property rights-sharing and/or other obligations.
If Applied does not successfully manage the risks resulting from its diversification and entry into new markets and industries, its business, financial condition and results of operations could be materially and adversely affected.
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, the adverse conditions in the credit and financial markets and industry slowdowns have caused, and may continue to 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 (such as Israel, which has recently experienced increased geopolitical conflict). |
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. Any or all of these factors could materially and adversely affect Applied’s business, financial condition and results of operations.
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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, competitors’ hiring practices, 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. If Applied does not successfully attract, retain and motivate key employees with appropriate skills, Applied may be unable to capitalize on its opportunities and its business, financial condition and operating results may be materially and adversely affected.
Applied is exposed to risks associated with acquisitions and strategic investments.
Applied has made, and in the future intends to make, acquisitions of or investments in companies, technologies or products in existing, related or new markets for Applied. In November 2011, Applied completed its acquisition of Varian Semiconductor Equipment Associates, Inc. (Varian), which was the Company’s largest acquisition to date. Acquisitions involve numerous risks that vary depending on the scale and nature of the acquisition, including but not limited to:
• | diversion of management’s attention from other operational matters; |
• | inability to complete acquisitions as anticipated or at all; |
• | the appropriateness of valuation and other transaction terms; |
• | 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 of an acquired business, which can impact the ability to realize anticipated synergies or other benefits; |
• | 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 from the acquired business; |
• | reductions in cash balances and/or increases in debt obligations to finance the acquisition, 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; |
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• | 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. Mergers and acquisitions and strategic investments are inherently subject to significant risks. If Applied does not successfully manage the risks associated with acquisitions and strategic investments, its business, financial condition and results of operations could be materially and adversely affected.
Applied is exposed to various risks related to legal proceedings or claims and protection of intellectual property rights.
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.
In February 2010, the Seoul Prosecutor’s Office for the Eastern District in Korea indicted certain employees of Applied Materials Korea (AMK), including the former head of AMK who at the time of indictment was a vice president of Applied Materials, Inc., along with employees of several other companies, alleging the improper receipt and use of confidential information of Samsung Electronics Co., Ltd. (Samsung), a major customer. Hearings on these matters have been ongoing. On November 22, 2012, the Court held the last hearing and scheduled the announcement of its decision for January 24, 2013.
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. If Applied is not able to favorably resolve or settle legal proceedings or claims, or in the event of any adverse findings against Applied or any of its employees, Applied’s business, financial condition and results of operations could be materially and adversely affected and Applied may suffer harm to its reputation.
In addition, 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. 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. 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. Applied previously entered into an arrangement with one of its competitors to decrease the risk of patent infringement lawsuits in the future. There can be no assurance that the intended results of this arrangement will be achieved or that Applied will be able to adequately protect its intellectual property rights with the restrictions associated with the arrangement. If Applied is not able to favorably resolve or settle claims, obtain or enforce intellectual property rights, obtain necessary licenses on commercially reasonable terms, and/or successfully prosecute or defend its intellectual property position, Applied’s business, financial condition and results of operations could be materially and adversely affected and Applied may suffer harm to its reputation.
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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 the Asia supply chain and improve back office and information technology infrastructure for more efficient transaction processing. Applied also is implementing a multi-year, company-wide program to transform certain business processes or extend established processes, including the transition to a single enterprise resource planning (ERP) software system to perform various functions. The implementation of additional functionality to the ERP system 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, negatively affect employee morale, 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, any or all of which could materially and adversely affect Applied’s business, financial condition and results of operations.
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. For example, in the fourth quarter of fiscal 2012, Applied concluded that the carrying value of the Energy and Environmental Solutions reporting unit exceeded its fair value and accordingly recorded a $421 million goodwill impairment charge. Applied may be required to record future charges to earnings during the period in which an impairment of goodwill or amortizable intangible assets is determined to exist, which could materially and adversely affect Applied’s results of operations.
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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.; or (4) valuation of Applied’s deferred tax assets and liabilities.
To better align with the increasingly international nature of its business, Applied is transitioning certain manufacturing, supply chain, and other operations into Asia, bringing these activities closer to customers. These changes are expected to result in a reduction of future 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 provisions, Applied must meet requirements relating to various activities. Applied’s ability to realize benefits from these provisions could be materially affected if, among other things, applicable requirements are not met, or if 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, which could materially and adversely affect Applied’s financial condition and results of operations.
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, each of which could have a material adverse effect on Applied’s business, financial condition and results of operations.
Applied is exposed to various risks related to the regulatory environment.
Applied is subject to various risks related to: (1) new, different, inconsistent or even conflicting laws, rules and regulations that may be enacted by executive order, legislative bodies and/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. For example, 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 in laws, regulations and standards may create uncertainty 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. If Applied is found by a court or regulatory agency not to be in compliance with applicable laws, rules or regulations, Applied could be subject to legal or regulatory sanctions, the public’s and customers’ perception of Applied could decline, and Applied’s business, financial condition and results of operations could be materially and adversely affected.
Item 1B: | Unresolved Staff Comments |
None.
28
Item 2: | Properties |
Information concerning Applied’s principal properties at October 28, 2012 is set forth below:
Location | Type | Principal Use | Square Footage | Ownership | ||
Santa Clara, CA | Office, Plant & Warehouse | Headquarters; Marketing; Manufacturing; Distribution; Research, Development, Engineering; Customer Support | 1,512,000 150,000 | Owned Leased | ||
Austin, TX | Office, Plant & Warehouse | Manufacturing | 1,719,000 145,000 | Owned Leased | ||
Rehovot, Israel | Office, Plant & Warehouse | Manufacturing; Research, Development, Engineering; Customer Support | 417,000 5,000 | Owned Leased | ||
Alzenau, Germany | Office, Plant & Warehouse | Manufacturing; Research, Development and Engineering | 281,000 | Leased | ||
Kalispell, MT | Office, Plant & Warehouse | Manufacturing; Research, Development, Engineering; Customer Support | 252,000 | Owned | ||
Cheseaux, Switzerland | Office, Plant & Warehouse | Manufacturing; Research, Development, Engineering; Customer Support | 165,000 | Leased | ||
Treviso, Italy | Office, Plant & Warehouse | Manufacturing; Research, Development, Engineering; Customer Support | 150,000 | Leased | ||
Singapore | Office, Plant & Warehouse | Manufacturing and Customer Support | 392,000 5,000 | Owned Leased | ||
Gloucester, MA | Office, Plant & Warehouse | Manufacturing; Research, Development, Engineering; Customer Support | 319,000 135,000 | Owned Leased | ||
Tainan, Taiwan | Office, Plant & Warehouse | Manufacturing and Customer Support | 320,000 | Owned | ||
Xi’an, China | Office, Plant & Warehouse | Research, Development and Engineering | 567,000 | Owned | ||
Hsinchu, Taiwan | Office & Warehouse | Customer Support | 93,000 6,000 | Owned Leased | ||
Shanghai, China | Office & Warehouse | Customer Support | 105,000 | Leased | ||
Because of the interrelation of Applied’s operations, properties within a country may be shared by the segments operating within that country. Products in the Silicon Systems Group are manufactured in Austin, Texas; Gloucester, Massachusetts; Rehovot, Israel; and Singapore. Remanufactured products in the Applied Global Services segment are produced primarily in Austin, Texas. Products in the Display segment are manufactured in Santa Clara, California; Alzenau, Germany; and Tainan, Taiwan. Products in the Energy and Environmental Solutions segment are primarily manufactured in Alzenau, Germany; Cheseaux, Switzerland; and Treviso, Italy.
In addition to the above properties, Applied leases office space for marketing, sales, engineering and customer support offices in 79 locations throughout the world: 17 in Europe, 23 in Japan, 16 in North America (principally the United States), 7 in China, 7 in Korea, 6 in Southeast Asia, and 3 in Taiwan.
Applied also owns 112 acres of buildable land in Texas that could accommodate approximately 1,708,000 square feet of additional building space, 12.5 acres in California that could accommodate approximately 400,000 square feet of additional building space, 10.8 acres in Massachusetts that could accommodate approximately 65,000 square feet of additional building space and 10 acres in Israel that could accommodate approximately 111,000 square feet of additional building space. Applied also leases 4 acres in Italy that could accommodate approximately 180,000 square feet of additional building space.
Applied considers the properties that it owns or leases as adequate to meet its current and future requirements. Applied regularly assesses the size, capability and location of its global infrastructure and periodically makes adjustments based on these assessments.
29
Item 3: | Legal Proceedings |
The information set forth under “Legal Matters” in Note 15 of Notes to Consolidated Financial Statements is incorporated herein by reference.
Item 4: | Mine Safety Disclosures |
None.
PART II
Item 5: | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information
The following table sets forth the high and low closing sale prices for the periods presented as reported on the NASDAQ Global Select Market.
Price Range | |||||||
High | Low | ||||||
Fiscal 2011 | |||||||
First quarter | $ | 16.10 | $ | 12.37 | |||
Second quarter | $ | 16.85 | $ | 14.46 | |||
Third quarter | $ | 15.24 | $ | 12.27 | |||
Fourth quarter | $ | 12.62 | $ | 9.85 | |||
Fiscal 2012 | |||||||
First quarter | $ | 12.73 | $ | 10.13 | |||
Second quarter | $ | 13.21 | $ | 11.49 | |||
Third quarter | $ | 11.99 | $ | 10.01 | |||
Fourth quarter | $ | 12.05 | $ | 10.65 | |||
Applied’s common stock is traded on the NASDAQ Global Select Market under the symbol AMAT. As of November 21, 2012, there were 3,895 registered holders of Applied common stock.
30
Performance Graph
The performance graph below shows the five-year cumulative total stockholder return on Applied common stock during the period from October 28, 2007 through October 28, 2012. This is compared with the cumulative total return of the Standard & Poor’s 500 Stock Index and the RDG Semiconductor Composite Index over the same period. The comparison assumes $100 was invested on October 28, 2007 in Applied common stock and in each of the foregoing indices and assumes reinvestment of dividends, if any. Dollar amounts in the graph are rounded to the nearest whole dollar. The performance shown in the graph represents past performance and should not be considered an indication of future performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Applied Materials, Inc., the S&P 500 Index
and the RDG Semiconductor Composite Index
* | $100 invested on 10/28/07 in stock or 10/31/07 in index, including reinvestment of dividends. |
Indexes calculated on month-end basis.
Copyright© 2012 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
10/28/2007 | 10/26/2008 | 10/25/2009 | 10/31/2010 | 10/30/2011 | 10/28/2012 | ||||||||||||
Applied Materials | 100.00 | 61.22 | 71.06 | 69.23 | 72.37 | 62.92 | |||||||||||
S&P 500 Index | 100.00 | 63.90 | 70.17 | 81.76 | 88.37 | 101.81 | |||||||||||
RDG Semiconductor Composite Index | 100.00 | 54.74 | 68.59 | 84.46 | 91.33 | 82.37 | |||||||||||
Dividends
During fiscal 2012, Applied’s Board of Directors declared three quarterly cash dividends in the amount of $0.09 per share each and one quarterly cash dividend in the amount of $0.08 per share. During fiscal 2011, Applied’s Board of Directors declared three quarterly cash dividends in the amount of $0.08 per share each and one quarterly cash dividend in the amount of $0.07 per share. During fiscal 2010, Applied’s Board of Directors declared three quarterly cash dividends in the amount of $0.07 per share each and one quarterly cash dividend in the amount of $0.06. Dividends declared during fiscal 2012, 2011 and 2010 amounted to $438 million, $408 million and $361 million, respectively. Applied currently anticipates that it will continue to pay cash dividends on a quarterly basis in the future, although the declaration and amount of any future cash dividends are 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 that cash dividends are in the best interests of Applied’s stockholders.
31
Repurchases of Applied Common Stock
The following table provides information as of October 28, 2012 with respect to the shares of common stock repurchased by Applied during the fourth quarter of fiscal 2012.
Period | Total Number of Shares Purchased | Average Price Paid per Share | Aggregate Price Paid | Total Number of Shares Purchased as Part of Publicly Announced Program* | Maximum Dollar Value of Shares That May Yet be Purchased Under the Program* | ||||||||||||
(In millions, except per share amounts) | |||||||||||||||||
Month #1 | |||||||||||||||||
(July 30, 2012 to August 26, 2012) | 5.7 | $ | 11.82 | $ | 67 | 5.7 | $ | 2,279 | |||||||||
Month #2 | |||||||||||||||||
(August 27, 2012 to September 23, 2012) | 19.2 | $ | 11.69 | 224 | 19.2 | $ | 2,055 | ||||||||||
Month #3 | |||||||||||||||||
(September 24, 2012 to October 28, 2012) | 20.2 | $ | 11.13 | 225 | 20.2 | $ | 1,830 | ||||||||||
Total | 45.1 | $ | 11.46 | $ | 516 | 45.1 | |||||||||||
* | On March 5, 2012, the Board of Directors approved a new stock repurchase program authorizing up to $3.0 billion in repurchases over the next three years, ending March 2015. |
32
Item 6: | Selected Financial Data |
The following selected financial information has been derived from Applied’s historical audited consolidated financial statements and should be read in conjunction with the consolidated financial statements and the accompanying notes for the corresponding fiscal years:
Fiscal Year(1) | 2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||
(In millions, except percentages, per share amounts and number of employees) | |||||||||||||||||||
Net sales | $ | 8,719 | $ | 10,517 | $ | 9,549 | $ | 5,014 | $ | 8,129 | |||||||||
Gross margin | $ | 3,313 | $ | 4,360 | $ | 3,715 | $ | 1,431 | $ | 3,443 | |||||||||
(% of net sales) | 38.0 | 41.5 | 38.9 | 28.5 | 42.4 | ||||||||||||||
Research, development and engineering | $ | 1,237 | $ | 1,118 | $ | 1,143 | $ | 934 | $ | 1,104 | |||||||||
(% of net sales) | 14.2 | 10.6 | 12.0 | 18.6 | 13.6 | ||||||||||||||
Selling, general and administrative | $ | 1,076 | $ | 901 | $ | 942 | $ | 735 | $ | 965 | |||||||||
(% of net sales) | 12.3 | 8.6 | 9.9 | 14.7 | 11.9 | ||||||||||||||
Operating income (loss) | $ | 411 | $ | 2,398 | $ | 1,384 | $ | (394 | ) | $ | 1,355 | ||||||||
(% of net sales) | 4.7 | 22.8 | 14.5 | (7.9 | ) | 16.7 | |||||||||||||
Income (loss) before income taxes | $ | 316 | $ | 2,378 | $ | 1,387 | $ | (486 | ) | $ | 1,409 | ||||||||
Effective tax rate (%) | 65.5 | 19.0 | 32.4 | (37.2 | ) | 31.8 | |||||||||||||
Net income (loss) | $ | 109 | $ | 1,926 | $ | 938 | $ | (305 | ) | $ | 961 | ||||||||
(% of net sales) | 1.3 | 18.3 | 9.8 | (6.1 | ) | 11.8 | |||||||||||||
Earnings (loss) per diluted share | $ | 0.09 | $ | 1.45 | $ | 0.70 | $ | (0.23 | ) | $ | 0.70 | ||||||||
Weighted average common shares, diluted | 1,277 | 1,330 | 1,349 | 1,333 | 1,375 | ||||||||||||||
New orders | $ | 8,037 | $ | 10,142 | $ | 10,249 | $ | 4,097 | $ | 9,155 | |||||||||
Order backlog | $ | 1,606 | $ | 2,392 | $ | 3,244 | $ | 2,735 | $ | 4,848 | |||||||||
Working capital | $ | 2,837 | $ | 7,561 | $ | 3,877 | $ | 3,749 | $ | 3,719 | |||||||||
Long-term debt | $ | 1,946 | $ | 1,947 | $ | 204 | $ | 201 | $ | 202 | |||||||||
Cash dividends declared per common share | $ | 0.35 | $ | 0.31 | $ | 0.27 | $ | 0.24 | $ | 0.24 | |||||||||
Stockholders’ equity | $ | 7,235 | $ | 8,800 | $ | 7,536 | $ | 7,095 | $ | 7,549 | |||||||||
Total assets | $ | 12,102 | $ | 13,861 | $ | 10,943 | $ | 9,574 | $ | 11,006 | |||||||||
Capital expenditures | $ | 162 | $ | 209 | $ | 169 | $ | 249 | $ | 288 | |||||||||
Regular employees | 14,526 | 12,973 | 13,045 | 12,619 | 14,824 | ||||||||||||||
(1) | Each fiscal year ended on the last Sunday in October. |
33
Item 7: | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Introduction
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to facilitate an understanding of Applied’s business and results of operations. This MD&A should be read in conjunction with Applied’s Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements included elsewhere in this Form 10-K. The following discussion contains forward-looking statements and should also be read in conjunction with the cautionary statement set forth at the beginning of this Form 10-K. MD&A consists of the following sections:
• | Overview: a summary of Applied’s business and measurements |
• | Results of Operations: a discussion of operating results |
• | Segment Information: a discussion of segment operating results |
• | Business Combinations: a summary or overview of acquired businesses |
• | Recent Accounting Pronouncements: a discussion of new accounting pronouncements and its impact to Applied's consolidated financial statements |
• | Financial Condition, Liquidity and Capital Resources: an analysis of cash flows, sources and uses of cash, contractual obligations and financial position |
• | Off-Balance Sheet Arrangements and Contractual Obligations |
• | Critical Accounting Policies: a discussion of critical accounting policies that require the exercise of judgments and estimates |
• | Non-GAAP Results: a presentation of results reconciling GAAP to non-GAAP measures |
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 displays (LCDs), 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 16 of Notes to Consolidated Financial Statements. A discussion of factors that could affect Applied’s operations is set forth under “Risk Factors” in Item 1A, which is incorporated herein by reference. Product development and manufacturing activities occur primarily in North America, Europe 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 historically have been 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 highly cyclical industry conditions, as demand for manufacturing equipment and services can change depending on supply and demand for chips, LCDs, solar PVs and other electronic devices, as well as other factors, such as global economic and market conditions, and technological advances in fabrication processes. In light of this cyclicality, Applied's results can vary significantly year-over-year, as well as quarter-over-quarter.
34
The following table presents certain significant measurements for the past three fiscal years:
Change | |||||||||||||||||||
Fiscal Year | 2012 | 2011 | 2010 | 2012 over 2011 | 2011 over 2010 | ||||||||||||||
(In millions, except per share amounts and percentages) | |||||||||||||||||||
New orders | $ | 8,037 | $ | 10,142 | $ | 10,249 | $ | (2,105 | ) | $ | (107 | ) | |||||||
Net sales | $ | 8,719 | $ | 10,517 | $ | 9,549 | $ | (1,798 | ) | $ | 968 | ||||||||
Gross margin | $ | 3,313 | $ | 4,360 | $ | 3,715 | $ | (1,047 | ) | $ | 645 | ||||||||
Gross margin percent | 38.0 | % | 41.5 | % | 38.9 | % | (3.5) points | 2.6 points | |||||||||||
Operating income | $ | 411 | $ | 2,398 | $ | 1,384 | $ | (1,987 | ) | $ | 1,014 | ||||||||
Operating margin percent | 4.7 | % | 22.8 | % | 14.5 | % | (18.1) points | 8.3 points | |||||||||||
Net income | $ | 109 | $ | 1,926 | $ | 938 | $ | (1,817 | ) | $ | 988 | ||||||||
Earnings per diluted share | $ | 0.09 | $ | 1.45 | $ | 0.70 | $ | (1.36 | ) | $ | 0.75 | ||||||||
Non-GAAP Results | |||||||||||||||||||
Gross margin | $ | 3,566 | $ | 4,397 | $ | 3,788 | $ | (831 | ) | $ | 609 | ||||||||
Gross margin percent | 40.9 | % | 41.8 | % | 39.7 | % | (0.9) points | 2.1 points | |||||||||||
Operating income | $ | 1,379 | $ | 2,411 | $ | 1,731 | $ | (1,032 | ) | $ | 680 | ||||||||
Operating margin percent | 15.8 | % | 22.9 | % | 18.1 | % | (7.1) points | 4.8 points | |||||||||||
Net income | $ | 960 | $ | 1,723 | $ | 1,181 | $ | (763 | ) | $ | 542 | ||||||||
Earnings per diluted share | $ | 0.75 | $ | 1.30 | $ | 0.88 | $ | (0.55 | ) | $ | 0.42 | ||||||||
Reconciliations of non-GAAP measures are presented under "Non-GAAP Results" below. Fiscal 2012 and 2011 each contained 52 weeks each, while fiscal 2010 contained 53 weeks.
Fiscal 2012 was a year characterized by significant fluctuations in demand for semiconductor equipment, which is Applied's largest business, coupled with an extremely weak market environment for display and solar equipment. Mobility, connectivity and cloud computing trends drove the semiconductor industry spending, with mobility as the biggest influence. Applied also completed its acquisition of Varian in the first quarter of fiscal 2012. Consumer buying patterns for electronic products, combined with growing semiconductor customer concentration, contributed to a seasonality effect, with relatively strong demand for semiconductor equipment led by foundry customers during the first half of fiscal 2012, followed by softening of demand from foundry and logic customers in the third quarter of fiscal 2012 and further declines across all categories of wafer fab equipment customers in the fourth quarter of fiscal 2012. Low investment levels for display equipment continued in fiscal 2012, characterized by decreased capacity requirements for larger flat panel televisions as conditions in this industry remained challenging. As with the semiconductor industry, demand for mobility products, such as smartphones and tablets, significantly influenced equipment spending in the display industry. In the solar industry, fiscal 2012 was characterized by continued excess manufacturing capacity, which led to significantly reduced demand for c-Si equipment, as well as weaker operating performance and outlook by the fourth quarter of fiscal 2012.
The first nine months of fiscal 2011 reflected increased demand across all segments except Display due to more favorable global economic and industry conditions than in fiscal 2010, although demand softened for semiconductor, LCD and solar equipment in the last quarter of fiscal 2011. Towards the end of fiscal 2011, the semiconductor, LCD and solar industries were negatively impacted by uncertainty in the macroeconomic environment and the LCD and solar equipment industries were also negatively impacted by overcapacity.
Applied's strategic priorities for 2013 include expanding market share in wafer fab equipment and growing its technical capabilities, extending its technology leadership in solar and display equipment and enhancing its organization in key product areas. In semiconductor equipment, Applied intends to increase investment in 300mm and 450mm research and development and enhance the technical field team. In addition, Applied plans to make selective investments in developing enabling technologies for display and solar products.
35
Results of Operations
The following table presents certain quarterly and full fiscal year financial information:
Fiscal Quarter | Fiscal Year | ||||||||||||||||||
First | Second | Third | Fourth | ||||||||||||||||
(In millions, except per share amounts) | |||||||||||||||||||
2012: | |||||||||||||||||||
New orders | $ | 2,008 | $ | 2,765 | $ | 1,799 | $ | 1,465 | $ | 8,037 | |||||||||
Net sales | $ | 2,189 | $ | 2,541 | $ | 2,343 | $ | 1,646 | $ | 8,719 | |||||||||
Gross margin | $ | 786 | $ | 1,011 | $ | 930 | $ | 586 | $ | 3,313 | |||||||||
Operating income (loss) | $ | 179 | $ | 409 | $ | 322 | $ | (499 | ) | $ | 411 | ||||||||
Net income (loss) | $ | 117 | $ | 289 | $ | 218 | $ | (515 | ) | $ | 109 | ||||||||
Earnings (loss) per diluted share | $ | 0.09 | $ | 0.22 | $ | 0.17 | $ | (0.42 | ) | $ | 0.09 | ||||||||
2011: | |||||||||||||||||||
New orders | $ | 2,971 | $ | 3,185 | $ | 2,390 | $ | 1,596 | $ | 10,142 | |||||||||
Net sales | $ | 2,686 | $ | 2,862 | $ | 2,787 | $ | 2,182 | $ | 10,517 | |||||||||
Gross margin | $ | 1,136 | $ | 1,189 | $ | 1,184 | $ | 852 | $ | 4,360 | |||||||||
Operating income | $ | 674 | $ | 677 | $ | 687 | $ | 361 | $ | 2,398 | |||||||||
Net income | $ | 506 | $ | 489 | $ | 476 | $ | 456 | $ | 1,926 | |||||||||
Earnings per diluted share | $ | 0.38 | $ | 0.37 | $ | 0.36 | $ | 0.34 | $ | 1.45 | |||||||||
2010: | |||||||||||||||||||
New orders | $ | 1,965 | $ | 2,533 | $ | 2,725 | $ | 3,026 | $ | 10,249 | |||||||||
Net sales | $ | 1,849 | $ | 2,296 | $ | 2,518 | $ | 2,886 | $ | 9,549 | |||||||||
Gross margin | $ | 711 | $ | 927 | $ | 860 | $ | 1,217 | $ | 3,715 | |||||||||
Operating income | $ | 116 | $ | 386 | $ | 183 | $ | 699 | $ | 1,384 | |||||||||
Net income | $ | 83 | $ | 264 | $ | 123 | $ | 468 | $ | 938 | |||||||||
Earnings per diluted share | $ | 0.06 | $ | 0.20 | $ | 0.09 | $ | 0.35 | $ | 0.70 | |||||||||
Orders and sales for manufacturing equipment historically has been volatile across all segments as a result of sudden changes in demand and other factors, including global economic and market conditions and rapid technological advances in fabrication processes. Applied’s business was subject to cyclical industry conditions in fiscal 2012, 2011 and 2010. As a result of these conditions and the changing global economic environment, there were significant fluctuations in Applied’s quarterly new orders and net sales, both within and across the three fiscal years. As of the end of fiscal 2012 and 2011, the semiconductor, display and solar equipment industries were each in a capacity-driven downturn. The nature and timing of a recovery in capital equipment investment are expected to depend largely on the macroeconomic environment.
36
New Orders
New orders by geographic region, determined by the product shipment destination specified by the customer, were as follows:
2012 | Change 2012 over 2011 | 2011 | Change 2011 over 2010 | 2010 | ||||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||
Taiwan | $ | 2,155 | 27 | % | (4)% | $ | 2,235 | 22 | % | (19)% | $ | 2,760 | 27 | % | ||||||||||
China | 403 | 5 | % | (80)% | 2,066 | 20 | % | (4)% | 2,155 | 21 | % | |||||||||||||
Korea | 1,784 | 22 | % | 39% | 1,286 | 13 | % | (24)% | 1,703 | 17 | % | |||||||||||||
Japan | 600 | 7 | % | (40)% | 1,001 | 10 | % | 35% | 741 | 7 | % | |||||||||||||
Southeast Asia | 283 | 4 | % | (39)% | 463 | 5 | % | (31)% | 675 | 7 | % | |||||||||||||
Asia Pacific | 5,225 | 65 | % | (26)% | 7,051 | 70 | % | (12)% | 8,034 | 79 | % | |||||||||||||
United States | 1,995 | 25 | % | (4)% | 2,069 | 20 | % | 53% | 1,348 | 13 | % | |||||||||||||
Europe | 817 | 10 | % | (20)% | 1,022 | 10 | % | 18% | 867 | 8 | % | |||||||||||||
Total | $ | 8,037 | 100 | % | (21)% | $ | 10,142 | 100 | % | (1)% | $ | 10,249 | 100 | % | ||||||||||
New orders for fiscal 2012 decreased from fiscal 2011, reflecting a steep decline in demand for c-Si solar equipment, combined with reduced demand for LCD TV and semiconductor equipment, partially offset by new orders of $1.0 billion attributable to Varian. The reduction in new orders from customers in China primarily reflected the decreased investments in the solar industry due to overcapacity. Customers in Taiwan, United States and Korea together represented 74 percent of total new orders for fiscal 2012. In the fourth quarter of fiscal 2012, new orders were $1.5 billion, down 19 percent from the prior quarter, reflecting lower semiconductor equipment demand, partially offset by modest order increases in other segments.
New orders for fiscal 2011 were slightly down from fiscal 2010, primarily attributable to decreased demand for semiconductor equipment from memory customers and decreased demand for LCD TV equipment, partially offset by increased demand for touch panel tools from display customers and increased demand for c-Si equipment from solar manufacturers. Customers in Taiwan, United States and China together represented 62 percent of total new orders for fiscal 2011. In the fourth quarter of fiscal 2011, new orders were $1.6 billion, down 33 percent from the third quarter of fiscal 2011.
New orders by reportable segment for the past three fiscal years were as follows:
2012 | Change 2012 over 2011 | 2011 | Change 2011 over 2010 | 2010 | ||||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||
Silicon Systems Group | $ | 5,294 | 66 | % | (4)% | $ | 5,489 | 54 | % | (5)% | $ | 5,759 | 56 | % | ||||||||||
Applied Global Services | 2,274 | 28 | % | (3)% | 2,333 | 23 | % | 7% | 2,183 | 21 | % | |||||||||||||
Display | 274 | 4 | % | (57)% | 636 | 6 | % | (20)% | 799 | 8 | % | |||||||||||||
Energy and Environmental Solutions | 195 | 2 | % | (88)% | 1,684 | 17 | % | 12% | 1,508 | 15 | % | |||||||||||||
Total | $ | 8,037 | 100 | % | (21)% | $ | 10,142 | 100 | % | (1)% | $ | 10,249 | 100 | % | ||||||||||
New orders for fiscal 2012 decreased for all segments compared to the same periods in the prior year, mostly due to the excess manufacturing capacity in the solar industry and the continued down cycle in the display industry, partially offset by the addition of orders attributable to Varian of $1.0 billion. The Silicon Systems Group's and Applied Global Services' relative share of total new orders increased compared to the prior year as a result of the addition of Varian and the sharp decrease in orders in Display and Energy and Environmental Solutions.
For fiscal 2011 as compared to fiscal 2010, new orders by segment as well as the relative share of total new orders for the Silicon Systems Group and Display decreased, while new orders by segment as well as the relative share of new orders in Applied Global Services and Energy and Environmental Solutions increased.
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Changes in backlog during fiscal 2012 and 2011 were as follows:
2012 | 2011 | ||||||
(In millions) | |||||||
Beginning balance | $ | 2,392 | $ | 3,244 | |||
New orders | 8,037 | 10,142 | |||||
Net sales | (8,719 | ) | (10,517 | ) | |||
Net adjustments | (104 | ) | (477 | ) | |||
Ending balance | $ | 1,606 | $ | 2,392 | |||
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 75 percent of the backlog as of the end of fiscal 2012 is anticipated to be shipped within the first two quarters of fiscal 2013.
Applied’s backlog was $1.6 billion at October 28, 2012 as compared to $2.4 billion at October 30, 2011. Backlog adjustments were negative for fiscal 2012 and totaled $104 million, primarily consisting of customer cancellations.
Backlog by reportable segment as of October 28, 2012 and October 30, 2011 was as follows:
2012 | Change 2012 over 2011 | 2011 | |||||||||||||
(In millions, except percentages) | |||||||||||||||
Silicon Systems Group | $ | 705 | 44 | % | (23)% | $ | 913 | 38 | % | ||||||
Applied Global Services | 580 | 36 | % | (12)% | 662 | 28 | % | ||||||||
Display | 206 | 13 | % | (39)% | 337 | 14 | % | ||||||||
Energy and Environmental Solutions | 115 | 7 | % | (76)% | 480 | 20 | % | ||||||||
Total | $ | 1,606 | 100 | % | (33)% | $ | 2,392 | 100 | % | ||||||
Backlog decreased in fiscal 2012 from fiscal 2011 across all segments reflecting decreased demand for semiconductor, LCD and solar equipment. In the fourth quarter of fiscal 2012, approximately 53 percent of net sales in the Silicon Systems Group, Applied’s largest business segment, were for orders received and shipped within the quarter, up from 45 percent in the fourth quarter of fiscal 2011.
Net Sales
Net sales by geographic region, determined by the location of customers' facilities to which products were shipped, were as follows:
2012 | Change 2012 over 2011 | 2011 | Change 2011 over 2010 | 2010 | ||||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||
Taiwan | 2,411 | 28 | % | 15% | 2,093 | 20 | % | (24)% | 2,750 | 29 | % | |||||||||||||
China | 783 | 9 | % | (70)% | 2,574 | 24 | % | 65% | 1,557 | 16 | % | |||||||||||||
Korea | 1,897 | 22 | % | 50% | 1,263 | 12 | % | (29)% | 1,768 | 19 | % | |||||||||||||
Japan | 704 | 8 | % | (23)% | 912 | 9 | % | 19% | 768 | 8 | % | |||||||||||||
Southeast Asia | 312 | 3 | % | (47)% | 592 | 5 | % | 2% | 578 | 6 | % | |||||||||||||
Asia Pacific | 6,107 | 70 | % | (18)% | 7,434 | 70 | % | —% | 7,421 | 78 | % | |||||||||||||
United States | 1,749 | 20 | % | (11)% | 1,963 | 19 | % | 71% | 1,147 | 12 | % | |||||||||||||
Europe | 863 | 10 | % | (23)% | 1,120 | 11 | % | 14% | 981 | 10 | % | |||||||||||||
Total | $ | 8,719 | 100 | % | (17)% | $ | 10,517 | 100 | % | 10% | $ | 9,549 | 100 | % | ||||||||||
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Net sales for fiscal 2012 decreased from the prior year, primarily due to decreased industry investment in c-Si solar products and LCD TV equipment, partially offset by sales attributable to Varian. Net sales attributable to Varian were $1.0 billion for fiscal 2012. The reduction in net sales from customers in China primarily reflected the decreased investments in the solar and display industries due to overcapacity. Customers in Taiwan, Korea and United States combined represented 70 percent of total net sales in fiscal 2012. In the fourth quarter of fiscal 2012, net sales were $1.6 billion, down 30 percent from the prior quarter, led by a reduction in semiconductor equipment sales.
Net sales for fiscal 2011 increased from fiscal 2010, primarily due to increased industry investment in c-Si solar equipment and higher sales of spares and refurbished semiconductor equipment. Customers in China, Taiwan and United States combined represented 63 percent of total net sales in fiscal 2011.
Net sales by reportable segment for the past three fiscal years were as follows:
2012 | Change 2012 over 2011 | 2011 | Change 2011 over 2010 | 2010 | ||||||||||||||||||||
(In millions, except percentages) | ||||||||||||||||||||||||
Silicon Systems Group | $ | 5,536 | 64 | % | 2% | $ | 5,415 | 51 | % | 2% | $ | 5,304 | 56 | % | ||||||||||
Applied Global Services | 2,285 | 26 | % | (5)% | 2,413 | 23 | % | 29% | 1,865 | 20 | % | |||||||||||||
Display | 473 | 5 | % | (32)% | 699 | 7 | % | (22)% | 899 | 9 | % | |||||||||||||
Energy and Environmental Solutions | 425 | 5 | % | (79)% | 1,990 | 19 | % | 34% | 1,481 | 15 | % | |||||||||||||
Total | $ | 8,719 | 100 | % | (17)% | $ | 10,517 | 100 | % | 10% | $ | 9,549 | 100 | % | ||||||||||
For fiscal 2012 as compared to fiscal 2011, net sales in the Silicon Systems Group increased slightly while net sales across all other segments decreased. The decrease reflected lower investments in c-Si solar and LCD TV equipment, partially offset by sales attributable to Varian. The Silicon Systems Group's relative share of total net sales increased compared to the prior year and remains the largest contributor of net sales.
For fiscal 2011 as compared to fiscal 2010, net sales in the Silicon Systems Group remained essentially flat while net sales in Energy and Environment Solutions and Applied Global Services increased due to increased demand for c-Si equipment, and spare parts and refurbished equipment, respectively. Net sales in Display decreased during fiscal 2011 as compared to fiscal 2010 due to a weaker LCD TV market. For fiscal 2011 as compared to fiscal 2010, the relative share of total net sales in the Silicon Systems Group decreased, while the relative share of total net sales in Energy and Environmental Solutions increased. The increase in Energy and Environmental Solutions’ relative share of total net sales was due to increased demand for c-Si equipment.
Gross Margin
Gross margins for the past three fiscal years were as follows:
Change | |||||||||||||||||||
2012 | 2011 | 2010 | 2012 over 2011 | 2011 over 2010 | |||||||||||||||
(In millions, except percentages) | |||||||||||||||||||
Gross margin | $ | 3,313 | $ | 4,360 | $ | 3,715 | $ | (1,047 | ) | $ | 645 | ||||||||
Gross margin (% of net sales) | 38.0 | % | 41.5 | % | 38.9 | % | (3.5) points | 2.6 points | |||||||||||
Non-GAAP Results | |||||||||||||||||||
Gross margin | $ | 3,566 | $ | 4,397 | $ | 3,788 | $ | (831 | ) | $ | 609 | ||||||||
Gross margin (% of net sales) | 40.9 | % | 41.8 | % | 39.7 | % | (0.9) points | 2.1 points | |||||||||||
Reconciliations of non-GAAP measures are presented under "Non-GAAP Results" below.
Gross margin decreased in fiscal 2012 from fiscal 2011 due primarily to changes in segment and customer mix, inventory fair value adjustments and intangible asset amortization associated with purchase accounting, additional inventory reserves and lower net sales, partially offset by sales for a single thin film solar production line, for which inventory was fully reserved prior to fiscal 2012. Inventory fair value adjustments and intangible asset amortization, mostly associated with the acquisition of Varian, were $253 million in fiscal 2012. Inventory charges of approximately $290 million were recorded in fiscal 2012 as a result of the softening of demand for semiconductor-related businesses and continued weakness in the solar industry. Of the total inventory charges during fiscal 2012, $13 million were recorded in connection with the restructuring of the Energy and Environmental Solutions segment. The increase in gross margin and non-GAAP gross margin in fiscal 2011 from fiscal 2010 was principally
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attributable to the inventory-related charges of $330 million incurred in fiscal 2010 associated with SunFab thin film solar equipment, which lowered gross margin for fiscal 2010 by approximately 3 percentage points. Gross margin during fiscal 2012, 2011 and 2010 included $54 million, $48 million and $32 million, respectively, of share-based compensation expense.
Research, Development and Engineering
Research, Development and Engineering (RD&E) expenses for the past three fiscal years were as follows:
Change | |||||||||||||||||||
2012 | 2011 | 2010 | 2012 over 2011 | 2011 over 2010 | |||||||||||||||
(In millions) | |||||||||||||||||||
Research, development and engineering | $ | 1,237 | $ | 1,118 | $ | 1,143 | $ | 119 | $ | (25 | ) | ||||||||
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. Applied 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 historically has maintained its commitment to investing in RD&E in order to continue to offer new products and technologies. The increase in RD&E for fiscal 2012 compared to the prior year was primarily due to the RD&E expenses related to Varian of approximately $180 million and continued investment in the development of smaller linewidths and 450mm wafer equipment, partially offset by lower investments in solar R&D projects and the cessation of LED equipment development. 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. RD&E expense during fiscal 2012, 2011 and 2010 included $54 million, $46 million and $43 million, respectively, of share-based compensation expense.
In fiscal 2012, Applied developed transistor and interconnect technologies for scaling chip features to the 14nm node and beyond. Applied focused on processes to enable the formation of three dimensional transistor and memory storage architectures that improve the performance and energy efficiency of devices. For advanced interconnects, Applied focused on process technology for the void-free filling of smaller, narrower wiring structures with copper material. Complementary to this technology was the optimization of low k films to increase device performance and lengthen battery life. Efforts continued on bringing down the cost of through-silicon via (TSV) technology for packaging chips with the development of new low temperature conformal films that are also applicable for new backside-illuminated image sensors. TSV technologies permit interconnecting 3D chip stacks to enable better device performance, lower power consumption and the integration of heterogeneous devices. The Company also continued to invest in the development of 450mm wafer equipment. For LCD manufacturing, Applied developed new processes to fabricate metal oxide-based transistors, which provide smaller, faster-switching pixels for higher resolution displays. In solar, Applied focused on technology to increase the efficiency and cost-effectiveness of solar cells by optimizing the structure of its conducting lines.
In fiscal 2011, Applied developed logic and memory chip technologies to meet the requirements of manufacturing below the 22nm node. These systems were designed to help semiconductor customers continue their drive to pack more transistors in the same space using high-k/metal gate technologies and double patterning processes. These technologies include low k dielectrics and curing for interconnect structures and high-k dielectric materials and ALD processes for fabricating transistor gates. Applied also focused on processes to help customers build new three-dimensional (3D) gate structures. In addition, Applied continued to focus on optimizing the cost-effectiveness of TSV technologies to enable their widespread implementation. Applied also invested in other new product development areas such as 450mm wafer systems. For LCD manufacturing, Applied developed deposition systems to enable larger organic light-emitting diode (OLED), LCD and touch-enabled displays. In solar, Applied focused on screen printing technology to keep pace with cell manufacturers’ new higher-efficiency cell designs. Another key development area was “smart” capability, which brings a new level of precision and control to the PV production process.
In fiscal 2010, Applied developed new technology to enable next-generation 22nm and below chip designs. Applied also developed technology for TSVs. In the solar PV area, Applied continued the development of its precision wafering and cell manufacturing products for lowering the cost of producing solar-generated electricity through advanced c-Si technology. RD&E also included activities to develop products that enable lower-cost production of solar energy, production of LED devices for display backlighting and general lighting, and other products to enable energy conservation.
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Selling, General and Administrative
Selling, general and administrative (SG&A) expenses for the past three fiscal years were as follows:
Change | |||||||||||||||||||
2012 | 2011 | 2010 | 2012 over 2011 | 2011 over 2010 | |||||||||||||||
(In millions) | |||||||||||||||||||
Selling, general and administrative | $ | 1,076 | $</ | ||||||||||||||||