Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark one)
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| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended October 30, 2016
or
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¨ | 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)
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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:
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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. þ
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.
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Large accelerated filer þ | | Accelerated filer ¨ |
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Non-accelerated filer ¨ (Do not check if a smaller reporting company) | | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ
Aggregate market value of the voting stock held by non-affiliates of the registrant as of May 1, 2016, based upon the closing sale price reported by the NASDAQ Global Select Market on that date: $22,248,434,583
Number of shares outstanding of the registrant’s Common Stock, $.01 par value, as of December 8, 2016: 1,076,570,134
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of Part III will be provided in accordance with Instruction G(3) to Form 10-K no later than February 27, 2017.
Caution Regarding Forward-Looking Statements
This Annual Report on 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, contains forward-looking statements that involve a number of risks and uncertainties.
Examples of forward-looking statements include those regarding Applied’s future financial or operating results, cash flows and cash deployment strategies, declaration of dividends, share repurchases, business strategies and priorities, costs and cost controls, products, competitive positions, management’s plans and objectives for future operations, research and development, strategic acquisitions and investments, growth opportunities, restructuring activities, backlog, working capital, liquidity, investment portfolio and policies, taxes, supply chain, manufacturing, properties, legal proceedings and claims, customer demand and spending, end-use demand, market and industry trends and outlooks, general economic conditions and other statements that are not historical facts, as well as their underlying assumptions. Forward-looking statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “potential” and “continue,” the negative of these terms, or other comparable terminology. All forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in Part 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. Forward-looking statements are based on management’s estimates, projections and expectations as of the date hereof, and Applied undertakes no obligation to revise or update any such statements.
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.
APPLIED MATERIALS, INC.
FORM 10-K FOR THE FISCAL YEAR ENDED OCTOBER 30, 2016
TABLE OF CONTENTS
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| PART I | |
Item 1: | | |
Item 1A: | | |
Item 1B: | | |
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Item 3: | | |
Item 4: | | |
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| PART II | |
Item 5: | | |
Item 6: | | |
Item 7: | | |
Item 7A: | | |
Item 8: | | |
Item 9: | | |
Item 9A: | | |
Item 9B: | | |
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| PART III | |
Item 10: | | |
Item 11: | | |
Item 12: | | |
Item 13: | | |
Item 14: | | |
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| PART IV | |
Item 15: | | |
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PART I
Incorporated in 1967, Applied is a Delaware corporation. A global company with a broad set of capabilities in materials engineering, Applied provides manufacturing equipment, services and software to the global semiconductor, display and related industries. With its diverse technology capabilities, Applied delivers products and services that improve device performance, yield and cost. Applied’s customers include manufacturers of semiconductor chips, liquid crystal and other displays, and other electronic devices. These customers may use what they manufacture in their own end products or sell the items to other companies for use in advanced electronic components. Applied’s fiscal year ends on the last Sunday in October.
As of October 30, 2016, Applied operates in three reportable segments: Semiconductor Systems (previously Silicon Systems), Applied Global Services, and Display and Adjacent Markets. A summary of financial information for each reportable segment is found in Note 14 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.
Effective in the third quarter of fiscal 2016, Applied began to account for its flexible coating systems (previously included in its Energy and Environmental Solutions segment) and display upgrade equipment (previously included in its Applied Global Services segment) under its Display and Adjacent Markets segment (previously Display). As a result of these changes, Applied’s solar business (previously included in the Energy and Environmental Solutions segment) is included in Corporate and Other as it did not meet the threshold for a separate reportable segment. Results from prior periods have been recast to conform to the current presentation.
Net sales by reportable segment for the past three fiscal years were as follows:
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| 2016 | | 2015 | | 2014 |
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Semiconductor Systems | $ | 6,873 |
| | 64% | | $ | 6,135 |
| | 64% | | $ | 5,978 |
| | 66% |
Applied Global Services | 2,589 |
| | 24% | | 2,447 |
| | 25% | | 2,114 |
| | 24% |
Display and Adjacent Markets | 1,206 |
| | 11% | | 944 |
| | 10% | | 848 |
| | 9% |
Corporate and Other | 157 |
| | 1% | | 133 |
| | 1% | | 132 |
| | 1% |
Total | $ | 10,825 |
| | 100% | | $ | 9,659 |
| | 100% | | $ | 9,072 |
| | 100% |
Semiconductor Systems
Applied’s Semiconductor Systems segment develops, manufactures and sells a wide range of manufacturing equipment used to fabricate semiconductor chips, also referred to as integrated circuits (ICs). The Semiconductor Systems segment includes semiconductor capital equipment for deposition, etch, ion implantation, rapid thermal processing, chemical mechanical planarization, metrology and inspection, and wafer packaging. The majority of Applied’s new equipment sales are to leading integrated device manufacturers and foundries worldwide.
Transistor and Interconnect
Applied’s transistor and interconnect products and technologies have enabled multiple generations of device scaling from planar transistors to today’s 3D multi-gate FinFET transistors. Applied offers products and technologies for transistor and interconnect fabrication, including epitaxy, ion implantation, oxidation and nitridation, rapid thermal processing, chemical vapor deposition, physical vapor deposition, chemical mechanical planarization and electrochemical deposition. Many of these process steps are used multiple times throughout the semiconductor chip fabrication process.
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Transistor and Interconnect Technologies | | Product(s) |
Epitaxy 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 circuity. Epi technology is used in an increasing number of IC devices in both the wafer surface and transistor areas of a chip to enhance speed. | | Centura RP Epi |
Ion Implant 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. | | VIISta Systems |
Oxidation/Nitridation Applied’s systems provide critical oxidation steps - like memory gate oxide, shallow trench isolation and liner oxide - for advanced device scaling. | | Vantage, Radiance and Centura Systems |
Rapid Thermal Processing (RTP) RTP is used primarily for annealing, which modifies the properties of deposited films. Applied’s single-wafer RTP systems are also used for growing high quality oxide and oxynitride films. | | Vantage Systems |
Physical Vapor Deposition (PVD) PVD is used to deposit high quality metal films with low resistivity for contact and interconnect devices. Applications include metal gate, silicides, contact liner/barrier, interconnect copper barrier seed and metal hard mask. | | Endura Systems |
Chemical Vapor Deposition (CVD) 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. | | Endura and Centura Systems |
Chemical Mechanical Planarization (CMP) CMP is used to planarize a wafer surface, a process that allows subsequent photolithography patterning and material deposition steps to occur with greater accuracy, resulting in more highly uniform film layers with minimal thickness variations. | | Reflexion Systems |
Electrochemical Deposition (ECD) ECD is a process by which metal atoms from a chemical fluid (an electrolyte) are deposited on the surface of an immersed object. | | Raider Platform |
Patterning and Packaging
Applied offers patterning, selective removal and packaging products and systems that enable the transfer of patterns onto device structures, making it possible to etch masks used for photolithography, and perform deposition, etching, and related processes. These systems and technologies address challenges resulting from shrinking pattern dimensions and the complexity in vertical stacking found in today’s most advanced semiconductor devices.
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Patterning and Packaging Technologies | | Product(s) |
Atomic Layer Deposition (ALD) ALD technology enables customers to fabricate thin films of either conducting or insulating material with uniform coverage in nanometer-sized structures. | | Olympia System |
Chemical Vapor Deposition (CVD) 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. | | Producer Systems |
Etch Etching is used many times throughout the IC manufacturing process to selectively remove material from the surface of a wafer. Applied offers systems for etching dielectric, metal, and silicon films to meet the requirements of advanced processing. | | Centris and Producer Systems |
Imaging and Process Control
Applied offers a suite of metrology, inspection and review systems for front- and back-end-of-line applications. These systems’ imaging capabilities and algorithms employ optical and e-beam technologies to meet the most advanced technical demands, such as self-aligned double and quad patterning, extreme ultraviolet layers, measurement-intensive optimal proximity correction mask qualification, and emerging 3D architectures. Applied delivers leading-edge capabilities that enable chipmakers to establish accurate statistical process control, ramp up production runs rapidly, and achieve consistently high production yields.
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Imaging and Process Control Technologies | | Product(s) |
Metrology and Inspection Metrology and inspection tools are used to locate, measure, and analyze critical defects and features on the wafer during various stages of the fabrication processes. Applied enables customers to characterize and control critical dimension (CD) and defect issues, especially at advanced generation technology nodes. | | SEMVision G6 Defect Analysis PROVision eBeam Inspection UVision 7 Inspection VeritySEM 5i Metrology Aera4 Mask Inspection |
Applied Global Services
The Applied Global Services (AGS) segment provides integrated solutions to optimize equipment and fab performance and productivity, including spares, upgrades, services, remanufactured earlier generation equipment and factory automation software for semiconductor, display and other products. Customer demand for products and services is fulfilled through a global distribution system with trained service engineers located in close proximity to customer sites in more than a dozen countries and 82 locations to support approximately 34,000 installed Applied semiconductor, display and other manufacturing systems worldwide. Applied offers the following general types of services and products under the Applied Global Services segment.
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AGS Solutions and Technology |
Certified Services A comprehensive service product portfolio that combines service technology and tool specific performance commitments in order to optimize customer factory productivity. |
Fab Consulting Experts using advanced analytical tools to solve production problems that have the greatest impact on customer fab productivity. |
Parts Programs Spare parts portfolio targets key manufacturing challenges and balances inventory cost and risk to efficiently meet customer fab requirements. |
Subfab Equipment Applied SubFab solutions lower costs, save energy, reduce environmental impact, and meet Environmental Protection Agency reporting regulations for greenhouse gas emissions. |
Legacy Equipment Comprehensive 200mm equipment and upgrades portfolio to address a full spectrum of production needs and extend tool lifetime. Applied legacy equipment supports new technology for a broad variety of devices including analog, power, and MEMS. |
Automation Software Automation software coordinates and streamlines every aspect of a factory-the processes, equipment and people-to provide competitive advantage to customers. |
Display and Adjacent Markets
The Display and Adjacent Markets segment is comprised of products for manufacturing liquid crystal displays (LCDs), organic light-emitting diodes (OLEDs), and other display technologies for TVs, personal computers (PCs), tablets, smart phones, and other consumer-oriented devices as well as equipment for flexible substrates. While similarities exist between the technologies utilized in semiconductor and display fabrication, the most significant differences are in the size and composition of the substrate. Substrates used to manufacture display panels and other devices are typically glass, although newer flexible materials are entering the market. Display and Adjacent Markets industry growth depends primarily on consumer demand for increasingly larger and more advanced TVs and high resolution displays for mobile devices as well as new form factors, including thin, light and curved displays, and new applications such as virtual reality. The Display and Adjacent Markets segment offers a variety of technologies and products, including:
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Display and Adjacent Markets Technologies | | Product(s) |
Array Test LCD display substrates are inspected at many stages of production to maximize yield, minimize scrap, optimize equipment utilization, and monitor manufacturing processes. At the completion of the array stage, the performance of the millions of individual pixels on each display is tested. | | Electron Beam Array Tester |
Defect Review Defects are identified during inspection steps and reviewed by a scanning electron microscope and other analyses to determine defect root cause and composition. | | Electron Beam Review (EBR) |
Chemical Vapor Deposition (CVD) During CVD processing, gases containing material atoms or molecules are introduced into the process chamber. The gases form reactive radicals or ions, which undergo chemical reactions to form thin films on the heated substrate. | | AKT PECVD Systems |
Physical Vapor Deposition (PVD) PVD is used to deposit high quality films of metals, alloys, transparent conductors and semiconductors. In Display, these films are used for contact, interconnect, transparent electrodes and transistor materials in display backplanes, as well as for transparent electrodes in color filters and touch panels. | | AKT Aristo and PiVot Systems |
Flexible Technologies Flexible coating systems utilize physical vapor deposition, thermal evaporation, chemical vapor deposition, and e-beam technology to deposit thin layers of metal onto flexible substrates. | | TopBeam, TopMet and SmartWeb Systems |
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 30, 2016 and October 25, 2015 was as follows:
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| 2016 | | 2015 |
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Semiconductor Systems | $ | 2,098 |
| | 45% | | $ | 1,720 |
| | 55% |
Applied Global Services | 866 |
| | 19% | | 779 |
| | 25% |
Display and Adjacent Markets | 1,539 |
| | 34% | | 598 |
| | 19% |
Corporate and Other | 75 |
| | 2% | | 45 |
| | 1% |
Total | $ | 4,578 |
| | 100% | | $ | 3,142 |
| | 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 order cancellations. Customers may delay delivery of products or cancel orders prior to shipment, subject to possible cancellation penalties. Delays in delivery schedules 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 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 Germany, Israel, Italy, Singapore, Taiwan, the United States and other countries in Asia. Applied uses numerous vendors, including contract manufacturers, to supply parts and assembly services for the manufacture and support of its products, including some systems being completed at customer sites.
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 selecting and qualifying alternate suppliers for key parts; monitoring the financial condition of key suppliers; maintaining appropriate inventories of key parts; qualifying new parts on a timely basis; and ensuring quality and performance of parts.
Research, Development and Engineering
Applied’s long-term growth strategy requires continued development of new materials engineering capabilities, including products and platforms that enable expansion into new and adjacent markets. Applied’s significant investments in research, development and engineering (RD&E) must generally enable it to deliver new products and technologies before the emergence of strong demand, thus allowing customers to incorporate these products into their manufacturing plans during early-stage technology selection. Applied works closely with its global customers to design systems and processes that meet their planned technical and production requirements.
Applied’s product development and engineering organizations are located primarily in the United States, as well as in Canada, China, Europe, India, Israel, Singapore and Taiwan. In addition, certain outsourced RD&E activities, process support and customer demonstrations are performed in the United States, India, China, Singapore and Taiwan.
Applied’s investments in RD&E for product development and engineering programs over the last three fiscal years were as follows: $1.5 billion (14 percent of net sales) in fiscal 2016, $1.5 billion (15 percent of net sales) in fiscal 2015, and $1.4 billion (16 percent of net sales) in fiscal 2014. Applied has spent an average of 15 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, environmental control and product ideation.
Marketing and Sales
Net sales by geographic region for the past three fiscal years, determined by the location of customers’ facilities to which products were shipped, were as follows:
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Taiwan | $ | 2,843 |
| | 26% | | $ | 2,600 |
| | 27% | | $ | 2,702 |
| | 30% |
China | 2,259 |
| | 21% | | 1,623 |
| | 17% | | 1,608 |
| | 18% |
Korea | 1,883 |
| | 17% | | 1,654 |
| | 17% | | 965 |
| | 10% |
Japan | 1,279 |
| | 12% | | 1,078 |
| | 11% | | 817 |
| | 9% |
Southeast Asia | 803 |
| | 7% | | 432 |
| | 4% | | 356 |
| | 4% |
Asia Pacific | 9,067 |
| | 83% | | 7,387 |
| | 76% | | 6,448 |
| | 71% |
United States | 1,143 |
| | 11% | | 1,630 |
| | 17% | | 1,966 |
| | 22% |
Europe | 615 |
| | 6% | | 642 |
| | 7% | | 658 |
| | 7% |
Total | $ | 10,825 |
| | 100% | | $ | 9,659 |
| | 100% | | $ | 9,072 |
| | 100% |
Because of the highly technical nature of its products, Applied markets and sells products worldwide almost entirely through a direct sales force.
Global and regional economic conditions can impact the company’s business and financial results. Applied’s business is based on capital equipment investments by major semiconductor, display and other manufacturers, and is subject to significant variability in customer demand for Applied’s products. Customers’ expenditures depend on many factors, including: general economic conditions; anticipated market demand and pricing for semiconductors, display technologies and other electronic devices; the development of new technologies; customers’ factory utilization; capital resources and financing; and government policies and incentives. In addition, a significant driver in the semiconductor and display industries is end-demand for mobile consumer products, which is characterized by seasonality that impacts the timing of customer investments in manufacturing equipment and, in turn, Applied’s business.
Information on net sales to unaffiliated customers and long-lived assets attributable to Applied’s geographic regions is included in Note 14 of Notes to Consolidated Financial Statements. The following companies accounted for at least 10 percent of Applied’s net sales in each fiscal year, which were for products in multiple reportable segments.
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Taiwan Semiconductor Manufacturing Company Limited | 16% | | 15% | | 21% |
Samsung Electronics Co., Ltd. | 13% | | 18% | | 12% |
Micron Technology, Inc. | 11% | | * | | * |
Intel Corporation | 11% | | * | | * |
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, cost-effectiveness and the ability to support a global customer base. 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 in a single region, which may benefit from policies and regulations that favor domestic companies, to global, diversified companies. 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, particularly mobility devices such as smartphones and tablets. The growth of data and new innovations such as augmented and virtual reality and smart vehicles are also creating new opportunities for the industry. As a result, products within the Semiconductor Systems segment are subject to significant changes in customer requirements, including transitions to smaller dimensions, 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 variety of technologically-differentiated products that must continuously evolve to satisfy customers’ requirements in order to compete effectively in the marketplace. 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, which has experienced increasing consolidation. Some of these competitors offer a single product line and others offer multiple product lines, and range from suppliers serving a single region to global, diversified companies. The competitive environment for Semiconductor Systems in fiscal 2016 reflected steady overall demand for semiconductor equipment, with continued investments by memory customers in technology upgrades and additional capacity, reflecting primarily the transition from planar technology to 3D architectures. Demand from foundry customers reflected investments in new technology at advanced nodes, driven by demand for advanced mobile chips.
Products and services within the Applied Global Services segment complement Semiconductor Systems and Display and Adjacent Markets 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 2016 were principally semiconductor manufacturers’ wafer starts and factory utilization rates.
Products in the Display and Adjacent Markets segment are generally subject to strong competition from a number of major competitors primarily in Asia. Applied holds established market positions with its technically-differentiated LCD and OLED 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 Company has also entered a new business in yield control with its new inline e-beam review (EBR) system. The competitive environment for the Display and Adjacent Markets Groups in fiscal 2016 was characterized by increasing demand for manufacturing equipment for high-end mobile devices and continued demand for TV manufacturing equipment, although the TV manufacturing equipment sector remains susceptible to cyclical conditions. Important factors affecting the competitive position of Applied’s Display and Adjacent Markets 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.
Patents and Licenses
Applied’s competitive position significantly depends upon its research, development, engineering, manufacturing and marketing capabilities, as well as its patent position. Protection of Applied’s technology assets through enforcement of its intellectual property rights, including patents, is important. Applied’s practice is to file patent applications in the United States and other countries for inventions that it considers significant. Applied has approximately 10,200 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 its business. In addition to its patents, Applied possesses other intellectual property, including trademarks, know-how, trade secrets, and copyrights.
Applied enters into patent and technology licensing agreements with other companies when it is determined to be in its best interest. Applied pays royalties under existing patent license agreements for the use, in several of its products, of certain patented technologies. 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, 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 preventative 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 laws and regulations, including 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 Applied’s latest Citizenship Report on its website at http://www.appliedmaterials.com/company/corporate-responsibility/reports. 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 30, 2016, Applied employed approximately 15,600 regular employees and 1,100 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.
Executive Officers of the Registrant
The following table and notes set forth information about Applied’s executive officers:
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Name of Individual | Position |
Gary E. Dickerson(1) | President, Chief Executive Officer |
Ginetto Addiego(2) | Senior Vice President, Engineering, Operations and Quality |
Robert J. Halliday(3) | Senior Vice President, Chief Financial Officer |
Thomas F. Larkins(4) | Senior Vice President, General Counsel and Corporate Secretary |
Omkaram Nalamasu(5) | Senior Vice President, Chief Technology Officer |
Ali Salehpour(6) | Senior Vice President, General Manager, New Markets and Service Group |
Charles Read(7) | Corporate Vice President, Corporate Controller and Chief Accounting Officer |
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(1) | Mr. Dickerson, age 59, was named President of Applied in June 2012 and appointed Chief Executive Officer and a member of the Board of Directors in September 2013. Before joining Applied, he served as Chief Executive Officer and a director of Varian Semiconductor Equipment Associates, Inc. (Varian) from 2004 until its acquisition by Applied in November 2011. Prior to Varian, 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, including President and Chief Operating Officer. Mr. Dickerson started his semiconductor career in manufacturing and engineering management at General Motors’ Delco Electronics Division and then AT&T Technologies. |
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(2) | Dr. Addiego, age 57, has been Senior Vice President, Engineering, Operations and Quality since June 2015. He served as Senior Vice President, Engineering from March 2014 to June 2015. He previously was with Applied from 1996 to 2005, leading various product groups as well as global organizations, including Global Operations, Foundation Engineering, and Information Technology. From March 2011 to March 2014, Dr. Addiego was President and Chief Operating Officer of Ultra Clean Technology Corp., a supplier of critical subsystems for the semiconductor capital equipment, medical device, energy, research, and flat panel industries. From February 2005 to March 2011, Dr. Addiego worked at Novellus Systems, Inc., a provider of advanced process equipment for the semiconductor industry, where he served as Executive Vice President and Chief Administrative Officer and Executive Vice President of Corporate Global Operations. |
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(3) | Mr. Halliday, age 62, has been Senior Vice President, Chief Financial Officer of Applied since February 2013. He previously served as a Group Vice President and General Manager in Applied’s Silicon Systems segment following the completion of Applied’s acquisition of Varian in November 2011. Mr. Halliday had served as Chief Financial Officer of Varian since 2001 and as an Executive Vice President of Varian since 2004. He was Varian’s Treasurer from November 2002 to October 2006 and from February 2009 to February 2010. |
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(4) | Mr. Larkins, age 55, has been Senior Vice President, General Counsel and Corporate Secretary of Applied since November 2012. Previously, Mr. Larkins was employed by Honeywell International Inc., 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. |
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(5) | Dr. Nalamasu, age 58, has been Senior Vice President, Chief Technology Officer since June 2013, and President of Applied Ventures, LLC, Applied’s venture capital arm, since November 2013. He had served as Group Vice President, Chief Technology Officer from January 2012 to June 2013, and as Corporate Vice President, Chief Technology Officer from January 2011 to January 2012. Upon joining Applied in June 2006 until January 2011, Dr. Nalamasu was an Appointed Vice President of Research and served as Deputy Chief Technology Officer and General Manager for the 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 Rensselaer, Dr. Nalamasu served in several leadership roles at Bell Laboratories. |
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(6) | Mr. Salehpour, age 55, has been Senior Vice President, General Manager, New Markets and Service Group since September 2013. He previously served as Group Vice President, General Manager Energy and Environmental Solutions and Display Business Groups, since joining Applied in November 2012. Prior to Applied, Mr. Salehpour worked at KLA-Tencor for 16 years, where he served as a Senior Vice President and General Manager and worked for 10 years in senior management positions at Schlumberger Test Systems. |
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(7) | Mr. Read, age 50, has been Corporate Vice President, Corporate Controller and Chief Accounting Officer of Applied since joining the Company in September 2013. Prior to Applied, Mr. Read worked at Brocade Communications Systems, Inc., a provider of semiconductor and software-based network solutions, since October 2002, where he most recently served as Vice President, Corporate Controller. Prior to Brocade, Mr. Read worked at KPMG LLP, an audit, tax and advisory firm, from 1996 to 2002. |
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. The SEC’s website, www.sec.gov, contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. These website addresses are intended to be an inactive textual references only. None of the information on, or accessible through, these websites is part of this Form 10-K or is incorporated by reference herein.
The following risk factors could materially and adversely affect Applied’s business, financial condition or results of operations and cause reputational harm, and should be carefully considered in evaluating the Company and its business, in addition to other information presented elsewhere in this report.
The industries that Applied serves can be volatile and difficult to predict.
As a supplier to the global semiconductor and display and related industries, Applied is subject to business cycles, the timing, length and volatility of which can be difficult to predict and which vary among its businesses. These industries historically have been cyclical and are subject to volatility and sudden changes in customer requirements for new manufacturing capacity and advanced technology, which depend on several factors, including general economic conditions, end-user demand, customers’ capacity utilization, production volumes, access to affordable capital, consumer buying patterns, inventory levels relative to demand, and technology transitions. These changes can affect the timing and amounts of customer investments in technology and manufacturing equipment, and can have a significant impact on Applied’s net sales, operating expenses, gross margins and net income. The amount and mix of capital equipment spending between different products and technologies can have a significant impact on the results of operations of Applied’s Semiconductor Systems segment, which is the largest contributor to its consolidated net sales.
To meet rapidly changing demand in the industries it serves, Applied must accurately forecast demand and effectively manage its resources and production capacity across its businesses, and may incur unexpected or additional costs to align its business operations. During periods of increasing demand for its products, Applied must have sufficient manufacturing capacity and inventory to meet customer demand; effectively manage its supply chain; attract, retain and motivate a sufficient number of qualified employees; and continue to control costs. During periods of decreasing demand, Applied must reduce costs and align its cost structure with prevailing market conditions; effectively manage its supply chain; and motivate and retain key employees. If Applied does not effectively manage these challenges during periods of changing demand, its business performance and results of operations may be adversely impacted. Even with effective allocation of resources and management of costs, during periods of decreasing demand, Applied’s gross margins and earnings may be adversely impacted.
Applied is exposed to risks associated with an uncertain global economy.
Uncertain global economic and business conditions, along with uncertainties in the financial markets, national debt and fiscal concerns in various regions, pose challenges to the industries in which Applied operates. Markets for semiconductors and displays depend largely on business and consumer spending and demand for electronic products. 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 purchasing for equipment or services, which may have an adverse impact on Applied’s revenues, results of operations and financial condition. 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, additional inventory or bad debt expense for Applied. Economic and industry uncertainty may similarly affect suppliers, which could impair their ability to deliver parts and negatively affect Applied’s ability to manage operations and deliver its products. These conditions may also lead to consolidation or strategic alliances among other equipment manufacturers, which could adversely affect Applied’s ability to compete effectively.
Uncertain economic and industry conditions also make 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. If Applied does not appropriately manage its business operations, it could have a significant negative impact on its business performance and financial condition. Applied may be required to implement additional cost reduction efforts, including restructuring activities, which may adversely affect Applied’s ability to capitalize on opportunities. Even during periods of economic uncertainty or lower revenues, Applied must continue to invest in research and development and maintain a global business infrastructure to compete effectively and support its customers, which can have a negative impact on its operating margins and earnings.
Applied maintains an investment portfolio that is subject to general credit, liquidity, 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, which could affect its ability to manage its operations.
Applied is exposed to risks as a result of ongoing changes in the various industries in which it operates.
The global semiconductor, display and related industries in which Applied operates are characterized by ongoing changes affecting some or all of these industries that impact demand for and the profitability of Applied’s products, including:
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• | the nature, timing and degree of visibility of changes in end demand for electronic products, including those related to fluctuations in consumer buying patterns tied to seasonality or the introduction of new products, and the effects of these changes on foundry and other customers’ businesses and on demand for Applied’s products; |
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• | increasing capital requirements for building and operating new fabrication plants and customers’ ability to raise the necessary capital; |
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• | regulatory or tax policies impacting the timing of customers’ investment in new or expanded fabrication plants; |
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• | differences in growth rates among the semiconductor, display and other industries in which Applied operates; |
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• | the increasing importance of establishing, improving and maintaining strong relationships with customers; |
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• | 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; |
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• | the need for customers to continually reduce the total cost of manufacturing system ownership; |
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• | 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; |
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• | manufacturers’ ability to reconfigure and re-use fabrication systems which can reduce demand for new equipment; |
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• | the increasing importance of, and difficulties in, developing products with sufficient differentiation to influence customers’ purchasing decisions; |
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• | requirements for shorter cycle times for the development, manufacture and installation of manufacturing equipment; |
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• | price and performance trends for semiconductor devices and displays, and the corresponding effect on demand for such products; |
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• | the increasing importance of the availability of spare parts to maximize the time that customers’ systems are available for production; |
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• | the increasing role for and complexity of software in Applied products; and |
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• | the increasing focus on reducing energy usage and improving the environmental impact and sustainability associated with manufacturing operations. |
Applied is exposed to risks as a result of ongoing changes specific to the semiconductor industry.
The largest proportion of Applied’s consolidated net sales and profitability is derived from sales of manufacturing equipment in the Semiconductor Systems segment to the global semiconductor industry. In addition, a majority of the revenues of Applied Global Services is from sales to semiconductor manufacturers. The semiconductor industry is characterized by ongoing changes particular to this industry that impact demand for and the profitability of Applied’s semiconductor equipment and service products, including:
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• | the increasing cost of research and development due to many factors, including decreasing linewidths on a chip, the use of new materials, new and more complex device structures, more applications and process steps, increasing chip design costs, and the increasing cost and complexity of integrated manufacturing processes; |
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• | the need to reduce product development time, despite the increasing difficulty of technical challenges; |
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• | the growing number of types and varieties of semiconductors and number of applications across multiple substrate sizes; |
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• | 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; |
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• | challenges in generating organic growth given semiconductor manufacturers’ levels of capital expenditures and the allocation of capital investment to market segments that Applied does not serve, such as lithography, or segments where Applied’s products have lower relative market presence; |
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• | the importance of increasing market positions in segments with growing demand; |
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• | semiconductor manufacturer’s ability to reconfigure and re-use equipment, and the resulting effect on their need to purchase new equipment and services; |
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• | the increasing frequency and complexity of technology transitions and inflections, such as 3-D transistors and advanced interconnects, and Applied’s ability to timely and effectively anticipate and adapt to these changes; |
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• | shorter cycle times between order placements by customers and product shipment require greater reliance on forecasting of customer investment, which may lead to inventory write-offs and manufacturing inefficiencies that decrease gross margin; |
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• | competitive factors that make it difficult to enhance position, including challenges in securing development-tool-of-record (DTOR) and production-tool-of-record (PTOR) positions with customers; |
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• | consolidation in the semiconductor industry, including among semiconductor manufacturers and among manufacturing equipment suppliers; |
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• | shifts in sourcing strategies by computer and electronics companies that impact the equipment requirements of Applied’s foundry customers; |
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• | the concentration of new wafer starts in Korea and Taiwan, where Applied’s service penetration and service-revenue-per-wafer-start have been lower than in other regions; |
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• | investment in semiconductor manufacturing capabilities in China, and its effect on the demand for semiconductor manufacturing equipment; and |
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• | 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. |
If Applied does not accurately forecast, and allocate appropriate resources and investment towards addressing, key technology changes and inflections, successfully develop and commercialize products to meet demand for new technologies, and effectively address industry trends, its business and results of operations may be adversely impacted.
Applied is exposed to risks as a result of ongoing changes specific to the display industry.
The global display industry historically has experienced considerable volatility in capital equipment investment levels, due in part to the limited number of display manufacturers, the concentrated nature of end-use applications, production capacity relative to end-use demand, and panel manufacturer profitability. Industry growth depends primarily on consumer demand for increasingly larger and more advanced TVs, and on demand for advanced smartphones and mobile device displays, which demand is highly sensitive to cost and improvements in technologies and features. The display industry is characterized by ongoing changes particular to this industry that impact demand for and the profitability of Applied’s display products, including:
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• | the importance of new types of display technologies, such as organic light-emitting diode (OLED), low temperature polysilicon (LTPS), flexible displays and metal oxide, and new touch panel films; |
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• | the timing and extent of an expansion of manufacturing facilities in China, which may be affected by changes in economic conditions in China; |
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• | the rate of transition to larger substrate sizes for TVs and to new display technologies for TVs and mobile applications, and the resulting effect on capital intensity in the industry and on Applied’s product differentiation, gross margin and return on investment; and |
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• | the variability in demand for display manufacturing equipment, and uncertainty with respect to future display technology end-use applications and growth drivers. |
If Applied does not successfully develop and commercialize products to meet demand for new and emerging display technologies, or if industry demand for display manufacturing equipment and technologies slows, Applied’s business and its results of operations may be adversely impacted.
The industries in which Applied operates are highly competitive and subject to rapid technological and market changes.
Applied operates in a highly competitive environment in which innovation is critical, and its future success depends on many factors, including the development of new technologies and effective commercialization and customer acceptance of its equipment, services and related products. In order to successfully grow its businesses, Applied must increase its position in its current markets, expand into adjacent and new markets, and optimize operational performance. The development, introduction and support of a broadening set of products in a geographically diverse and competitive environment, and that may require greater collaboration with customers and other industry participants, have grown more complex and expensive over time. Furthermore, new or improved products may entail higher costs and lower profits. To compete successfully, Applied must:
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• | identify and address technology inflections, market changes, new applications, customer requirements and end-use demand; |
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• | develop new products and disruptive technologies, improve and develop new applications for existing products, and adapt products for use by customers in different applications and markets with varying technical requirements; |
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• | differentiate its products from those of competitors, meet customers’ performance specifications, appropriately price products, and achieve market acceptance; |
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• | maintain operating flexibility to enable responses to changing markets, applications, customers and customer requirements; |
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• | enhance its worldwide operations across its businesses to reduce cycle time, enable continuous quality improvement, reduce costs, and enhance design for manufacturability and serviceability; |
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• | focus on product development and sales and marketing strategies that address customers’ high value problems and strengthen customer relationships; |
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• | effectively allocate resources between its existing products and markets, the development of new products, and expanding into new and adjacent markets; |
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• | improve the productivity of capital invested in R&D activities; |
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• | accurately forecast demand, work with suppliers and meet production schedules for its products; |
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• | improve its manufacturing processes and achieve cost efficiencies across product offerings; |
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• | adapt to changes in value offered by companies in different parts of the supply chain; |
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• | qualify products for evaluation and volume manufacturing with its customers; and |
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• | implement changes in its design engineering methodology to reduce material costs and cycle time, increase commonality of platforms and types of parts used in different systems, and improve product life cycle management. |
If Applied does not successfully anticipate technology inflections, develop and commercialize new products and technologies, and respond to changes in customer requirements and market trends, its business performance and results of operations may be adversely impacted.
Applied is exposed to risks associated with a highly concentrated customer base.
Applied’s customer base is highly concentrated, and has become increasingly concentrated as a result of continued consolidation. Applied’s customer base is also geographically concentrated. A relatively limited number of manufacturers account for a substantial portion of Applied’s business. As a result, the actions of even a single customer can expose Applied’s business and results of operations to greater volatility. The mix and type of customers, and sales to any single customer, may vary significantly from quarter to quarter and from year to year, and have a significant impact on Applied’s net sales, gross margins and net income. Applied’s products are configured to customer specifications, and changing, rescheduling or canceling orders may result in significant, non-recoverable costs. If customers do not place orders, or they substantially reduce, delay or cancel orders, Applied may not be able to replace the business, which may have a significant adverse impact on its results of operations and financial condition. The concentration of Applied’s customer base increases its risks related to the financial condition of its customers, and the deterioration in financial condition of a single customer or the failure of a single customer to perform its obligations could have a material adverse effect on Applied’s results of operations and cash flow. To the extent its customers experience liquidity constraints, Applied may incur additional bad debt expense, which may have a significant impact on its results of operations. Major customers may also seek pricing, payment, intellectual property-related, or other commercial terms that are less favorable to Applied, which may have a negative impact on Applied’s business, revenue and gross margins.
Applied is exposed to the risks of operating a global business.
Applied has product development, engineering, manufacturing, sales and other operations in many countries, and some of its business activities are concentrated in certain geographic areas. Moreover, in fiscal 2016, approximately 89 percent of Applied’s net sales were to customers in regions outside the United States. As a result of the global nature of its operations, Applied’s business performance and results of operations may be adversely affected by a number of factors, including:
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• | varying regional economic and geopolitical business conditions and demands; |
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• | 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; |
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• | customer- or government-supported efforts to influence Applied to conduct more of its operations and sourcing in a particular country, such as Korea and China; |
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• | variations among, and changes in, local, regional, national or international laws and regulations, including contract, intellectual property, labor, tax, and import/export laws, and the interpretation and application of such laws and regulations; |
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• | global trade issues, including the ability to obtain required import and export licenses, and international trade disputes; |
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• | ineffective or inadequate legal protection of intellectual property rights in certain countries; |
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• | positions taken by governmental agencies regarding possible national commercial and/or security issues posed by international business operations; |
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• | fluctuating raw material, commodity, energy and shipping costs or shipping delays; |
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• | geographically diverse operations and projects, which require an effective organizational structure and allocation of resources, and appropriate business processes, procedures and controls; |
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• | supply chain interruptions, and service interruptions from utilities, transportation, data hosting or telecommunications providers; |
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• | a diverse workforce with different experience levels, languages, cultures, customs, business practices and worker expectations, and differing employment practices and labor issues; |
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• | variations in the ability to develop relationships with local customers, suppliers and governments; |
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• | 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, Chinese yuan or Singapore dollar; |
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• | the need to provide sufficient levels of technical support in different locations around the world; |
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• | political instability, natural disasters, 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; |
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• | hiring and integration of an increasing number of workers in new countries; |
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• | the increasing need for a mobile workforce to work in or travel to different regions; and |
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• | uncertainties with respect to economic growth rates in various countries, including for the manufacture and sale of semiconductors and displays 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. In addition, government authorities may impose conditions that require the use of local suppliers or partnerships with local companies, require the license or other transfer of intellectual property, or engage in other efforts to promote local businesses and local competitors, which could have a significant adverse impact on Applied’s business.
Applied is exposed to risks associated with business combinations, acquisitions and strategic investments.
Applied engages in acquisitions of or investments in companies, technologies or products in existing, related or new markets for Applied. Business combinations, acquisitions and investments involve numerous risks to Applied’s business, financial condition and operating results, including but not limited to:
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• | diversion of management’s attention and disruption of ongoing businesses; |
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• | contractual restrictions on the conduct of Applied’s business during the pendency of a proposed transaction; |
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• | inability to complete proposed transactions due to the failure to obtain regulatory or other approvals, litigation or other disputes, and any ensuing obligation to pay a termination fee; |
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• | the failure to realize expected returns from acquired businesses; |
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• | requirements imposed by government regulators in connection with their review of a transaction, which may include, among other things, divestitures and restrictions on the conduct of Applied’s existing business or the acquired business; |
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• | ineffective integration of operations, systems, technologies, products or employees, which can impact the ability to realize anticipated synergies or other benefits; |
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• | failure to commercialize technologies from acquired businesses or developed through strategic investments; |
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• | dependence on unfamiliar supply chains or relatively small supply partners; |
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• | 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; |
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• | failure to retain and motivate key employees of acquired businesses; |
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• | the potential impact of the announcement or consummation of a proposed transaction on relationships with third parties; |
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• | potential changes in Applied’s credit rating, which could adversely impact the Company’s access to and cost of capital; |
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• | reductions in cash balances or increases in debt obligations to finance activities associated with a transaction, which reduce the availability of cash flow for general corporate or other purposes, including share repurchases and dividends; |
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• | 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; |
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• | challenges associated with managing new, more diverse and more widespread operations, projects and people; |
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• | inability to obtain and protect intellectual property rights in key technologies; |
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• | inadequacy or ineffectiveness of an acquired company’s internal financial controls, disclosure controls and procedures, or environmental, health and safety, anti-corruption, human resource, or other policies or practices; |
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• | 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; |
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• | unknown, underestimated or undisclosed commitments or liabilities; and |
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• | 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 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.
Applied’s indebtedness and debt covenants could adversely affect its financial condition and business.
Applied has $3.4 billion in aggregate principal amount of senior unsecured notes outstanding. Under the indenture governing the senior unsecured notes, it may be required to offer to repurchase the notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest, upon a change of control of Applied and a contemporaneous downgrade of the notes below investment grade. Applied also has in place a $1.5 billion committed revolving credit agreement. While no amounts were outstanding under this credit agreement at October 30, 2016, Applied may borrow amounts in the future under the agreement. Applied may also enter into new financing arrangements. Applied’s ability to satisfy its debt obligations is dependent upon the results of its business operations and subject to other risks discussed in this section. Significant changes in Applied’s credit rating or changes in the interest rate environment could have a material adverse consequence on Applied’s access to and cost of capital for future financings, and financial condition. If Applied fails to satisfy its debt obligations, or comply with financial and other debt covenants, it may be in default and any borrowings may become immediately due and payable, and such default may also constitute a default under other of Applied’s obligations. There can be no assurance that Applied would have sufficient financial resources or be able to arrange financing to repay any borrowings at such time.
Applied is exposed to risks associated with expanding into new and related markets and industries.
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 those developed in collaboration with third parties, or obtained through acquisitions. Applied’s ability to successfully expand its business into new and related markets and industries may be adversely affected by a number of factors, including:
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• | the need to devote additional resources to develop new products for, and operate in, new markets; |
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• | the need to develop new sales and technical marketing strategies, cultivate relationships with new customers and meet different customer service requirements; |
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• | differing rates of profitability and growth among multiple businesses; |
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• | Applied’s ability to anticipate demand, capitalize on opportunities, and avoid or minimize risks; |
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• | the complexity of managing multiple businesses with variations in production planning, execution, supply chain management and logistics; |
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• | the adoption of new business models, business processes and systems; |
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• | the complexity of entering into and effectively managing strategic alliances or partnering opportunities; |
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• | new materials, processes and technologies; |
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• | the need to attract, motivate and retain employees with skills and expertise in these new areas; |
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• | new and more diverse customers and suppliers, including some with limited operating histories, uncertain or limited funding, evolving business models or locations in regions where Applied does not have, or has limited, operations; |
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• | new or different competitors with potentially more financial or other resources, industry experience and established customer relationships; |
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• | entry into new industries and countries, with differing levels of government involvement, laws and regulations, and business, employment and safety practices; |
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• | third parties’ intellectual property rights; and |
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• | the need to comply with, or work to establish, industry standards and practices. |
In addition, Applied from time to time receives funding from United States and other government agencies for certain strategic development programs to increase its research and development resources and address new market opportunities. As a condition to this government funding, Applied may be subject to certain record-keeping, audit, intellectual property rights-sharing and/or other obligations.
Manufacturing interruptions or delays could affect Applied’s ability to meet customer demand and lead to higher costs, while the failure to estimate customer demand accurately could result in excess or obsolete inventory.
Applied’s business depends on its timely supply of equipment, services and related products that meet the rapidly changing technical and volume requirements of its customers, which depends in part on the timely delivery of parts, including components and subassemblies, from suppliers, including contract manufacturers. Some key parts are subject to long lead-times 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. Variable 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. These conditions may cause some suppliers to scale back operations, exit businesses, merge with other companies, or file for bankruptcy protection and possibly cease operations. Applied may also experience significant interruptions of its manufacturing operations, delays in its ability to deliver products or services, increased costs or customer order cancellations as a result of:
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• | the failure or inability of suppliers to timely deliver sufficient quantities of quality parts on a cost-effective basis; |
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• | volatility in the availability and cost of materials, including rare earth elements; |
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• | difficulties or delays in obtaining required import or export approvals; |
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• | shipment delays due to transportation interruptions or capacity constraints; |
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• | information technology or infrastructure failures; and |
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• | natural disasters or other events beyond Applied’s control (such as earthquakes, floods or storms, regional economic downturns, pandemics, social unrest, political instability, terrorism, or acts of war), particularly where it conducts manufacturing. |
If a supplier fails to meet Applied’s requirements concerning quality, cost, protection of intellectual property, 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. If Applied is unable to meet its customers’ demand for a prolonged period due to its inability to obtain certain parts or components, it could affect its ability to manage its operations, and have an adverse impact on Applied’s business, results of operations and customer relationships. 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.
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. Achieving this objective may be difficult due to many factors, including fluctuations in global economic and industry conditions, management changes, Applied’s organizational structure, global competition for talent and the availability of qualified employees, cost reduction activities (including workforce reductions and unpaid shutdowns), availability of career development opportunities, the ability to obtain necessary authorizations for workers to provide services outside their home countries, and the effectiveness of Applied’s compensation and benefit programs, including its share-based programs. Restructuring programs present particular challenges to the extent they involve the departure of knowledgeable and experienced employees and the resulting need to identify and train existing or new workers to perform necessary functions, which may result in unexpected costs, reduced productivity, and/or difficulties with respect to internal processes and controls.
Applied is exposed to various risks related to protection and enforcement of intellectual property rights.
Applied’s success depends in significant part on the protection of its patents, trade secrets, copyrights and other intellectual property rights. Infringement of Applied’s rights by a third party, such as the unauthorized manufacture or sale of equipment or spare parts, could result in uncompensated lost market and revenue opportunities for Applied. Policing any unauthorized use of intellectual property is difficult and costly and Applied cannot be certain that the measures it has implemented will prevent misuse. Applied’s ability to enforce its intellectual property rights is subject to litigation risks, as well as uncertainty as to the protection and enforceability of those rights in some countries. If Applied seeks to enforce its intellectual property rights, it may be subject to claims that those rights are invalid or unenforceable, and others may seek counterclaims against Applied, which could have a negative impact on its business. If Applied is unable to enforce and protect intellectual property rights, or if they are circumvented, invalidated, rendered obsolete by the rapid pace of technological change, it could have an adverse impact on its competitive position and business. In addition, changes in intellectual property laws or their interpretation, such as recent changes in U.S. patent laws, may impact Applied’s ability to protect and assert its intellectual property rights, increase costs and uncertainties in the prosecution of patent applications and enforcement or defense of issued patents, and diminish the value of Applied’s intellectual property.
Third parties may also assert claims against Applied and its products. Claims that Applied’s products infringe the rights of others, whether or not meritorious, can be expensive and time-consuming to defend and resolve, and may divert the efforts and attention of management and personnel. The inability to obtain rights to use third party intellectual property on commercially reasonable terms could have an adverse impact on Applied’s business. In addition, Applied may face claims based on the theft or unauthorized use or disclosure of third-party trade secrets and other confidential business information. Any such incidents and claims could severely harm Applied’s business and reputation, result in significant expenses, harm its competitive position, and prevent Applied from selling certain products, all of which could have a significant adverse impact on Applied’s business and results of operations.
Applied is exposed to risks related to cybersecurity threats and incidents.
In the conduct of its business, Applied collects, uses, transmits and stores data on information technology systems. This data includes confidential information belonging to Applied or its customers or other business partners, as well as personally-identifiable information of individuals. Applied has experienced, and expects to continue to be subject to, cybersecurity threats and incidents, ranging from employee error or misuse to individual attempts to gain unauthorized access to information systems to sophisticated and targeted measures known as advanced persistent threats, none of which have been material to the Company to date. Applied devotes significant resources to network security, data encryption and other measures to protect its systems and data from unauthorized access or misuse. However, depending on their nature and scope, cybersecurity incidents could result in business disruption; the misappropriation, corruption or loss of confidential information and critical data (Applied’s and that of third parties); reputational damage; litigation with third parties; diminution in the value of Applied’s investment in research, development and engineering; data privacy issues; and increased cybersecurity protection and remediation costs.
Applied is exposed to various risks related to legal proceedings.
Applied from time to time is, and in the future may be, involved in legal proceedings or claims regarding patent infringement, intellectual property rights, antitrust, environmental regulations, securities, contracts, product performance, product liability, unfair competition, misappropriation of trade secrets, employment, workplace safety, and other matters. Applied also on occasion receives notification from customers who believe that Applied owes them indemnification or other obligations related to claims made against such customers by third parties.
Legal proceedings and claims, whether with or without merit, and associated internal investigations, may be time-consuming and expensive to prosecute, defend or conduct; divert management’s attention and other Applied resources; inhibit Applied’s ability to sell its products; result in adverse judgments for damages, injunctive relief, penalties and fines; and negatively affect Applied’s business. There can be no assurance regarding the outcome of current or future legal proceedings, claims or investigations.
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 Germany, Israel, Italy, Singapore, Taiwan, the United States and other countries in Asia, and assembly of some systems is completed at customer sites. In addition, Applied outsources certain functions to third parties, including companies in the United States, India, China, Korea, Malaysia and other countries. Outsourced functions include contract manufacturing, engineering, customer support, software development, information technology support, finance and administrative activities. The expanding role of third party providers has required changes to Applied’s existing operations and the adoption of new procedures and processes for retaining and managing these providers, as well as redistributing responsibilities as warranted, in order to realize the potential productivity and operational efficiencies, assure quality and continuity of supply, and protect the intellectual property of Applied and its customers, suppliers and other partners. If Applied does not accurately forecast the amount, timing and mix of demand for products, or if contract manufacturers or other outsource providers fail to perform in a timely manner or at satisfactory quality levels, Applied’s ability to meet customer requirements could suffer, particularly during a market upturn.
In addition, Applied must regularly implement or update comprehensive programs and processes to better align its global organizations, including initiatives to enhance its supply chain and improve back office and information technology infrastructure for more efficient transaction processing. The implementation of new processes and information systems and additional functionality to the existing systems entails certain risks, including difficulties with changes in business processes that could disrupt Applied’s operations, such as its ability to track orders and timely ship products, project inventory requirements, manage its supply chain and aggregate financial and operational data. During transitions Applied must continue to rely on legacy information systems, which may be costly or inefficient, while the implementation of new initiatives may not achieve the anticipated benefits and may divert management’s attention from other operational activities, or have other unintended consequences.
If Applied does not effectively develop and implement its outsourcing and relocation strategies, if required export and other governmental approvals are not timely obtained, if Applied’s third party providers do not perform as anticipated, if there are delays or difficulties in enhancing business processes or if there are delays or difficulties in implementing or enhancing information systems, 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, all of which could 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. Applied may be required to record future charges to earnings during the period in which an impairment of goodwill or intangible assets is determined to exist.
Applied is exposed to risks associated with operating in jurisdictions with complex and changing tax laws.
Applied is subject to income taxes in the United States and foreign jurisdictions. Significant judgment is required to determine and estimate worldwide tax liabilities. Applied’s provision for income taxes and effective tax rates could be affected by numerous factors, including changes in: (1) applicable tax laws; (2) amount and composition of pre-tax income in jurisdictions with differing tax rates; (3) plans to indefinitely reinvest certain funds held outside of the U.S.; and (4) valuation of deferred tax assets and liabilities. An increase in Applied’s provision for income taxes and effective tax rate could have a material adverse impact on Applied’s results of operations and financial condition. As of October 30, 2016, Applied intends to indefinitely reinvest approximately $3.3 billion of cash, cash equivalents and marketable securities held by foreign subsidiaries and does not plan to repatriate these funds. Applied would need to accrue and pay U.S. taxes if these funds were repatriated.
Consistent with the international nature of its business, Applied conducts certain manufacturing, supply chain, and other operations in Asia, bringing these activities closer to customers and reducing operating costs. In certain foreign jurisdictions, conditional reduced income tax rates have been granted to Applied. To obtain the benefit of these tax incentives, Applied must meet requirements relating to various activities. Applied’s ability to realize benefits from these incentives could be materially affected if, among other things, applicable requirements are not met or Applied incurs net losses in these jurisdictions.
In addition, Applied is subject to examination by the Internal Revenue Service and other tax authorities, and from time to time amends 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 effective tax rates.
Applied is subject to risks associated 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; handling, discharge, recycling and disposal of hazardous 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 could result in: significant remediation or other legal liabilities; the imposition of penalties and fines; restrictions on the development, manufacture, sale or use of certain of its products; limitations on the operation of its facilities or ability to use its real property; and a decrease in the value of its real property. Applied could be required to alter its manufacturing and operations and incur substantial expense in order to comply with environmental and safety regulations. Any failure to comply with environmental and safety regulations could subject Applied to significant costs and liabilities that could adversely affect Applied’s business, financial condition and results of operations.
Applied is exposed to various risks related to the global regulatory environment.
As a public company with global operations, Applied is subject to the laws of the United States and multiple foreign jurisdictions and the rules and regulations of various governing bodies, which may differ among jurisdictions, including those related to financial and other disclosures, corporate governance, intellectual property, tax, trade, anti-competition, employment, immigration, privacy, and anti-corruption. Changing, inconsistent or conflicting laws, rules and regulations, and ambiguities in their interpretation and application, create uncertainty and challenges, and compliance with laws, rules and regulations may be onerous and expensive, divert management time and attention from revenue-generating activities, and otherwise adversely impact Applied’s business operations. Violations of law, rules and regulations could result in fines, criminal sanctions, restrictions on Applied’s business, and damage to its reputation, and could have an adverse impact on its business operations, financial condition and results of operations.
| |
Item 1B: | Unresolved Staff Comments |
None.
Information concerning Applied’s properties at October 30, 2016 is set forth below:
|
| | | | | |
(Square feet in thousands) | United States | | Other Countries | | Total |
Owned | 3,745 | | 1,629 | | 5,374 |
Leased | 564 | | 1,103 | | 1,667 |
Total | 4,309 | | 2,732 | | 7,041 |
Because of the interrelation of Applied’s operations, properties within a country may be shared by the segments operating within that country. The Company’s headquarters offices are in Santa Clara, California. Products in Semiconductor Systems are manufactured in Austin, Texas; Gloucester, Massachusetts; Kalispell, Montana; Rehovot, Israel; and Singapore. Remanufactured equipment products in the Applied Global Services segment are produced primarily in Austin, Texas. Products in the Display and Adjacent Markets segment are manufactured in Alzenau, Germany; Tainan, Taiwan; and Santa Clara, California. Other products are manufactured in Treviso, Italy.
Applied also owns and leases offices, plants and warehouse locations in many locations throughout the world, including in Europe, Japan, North America (principally the United States), Israel, China, India, Korea, Southeast Asia and Taiwan. These facilities are principally used for manufacturing; research, development and engineering; and marketing, sales and customer support.
Applied also owns a total of approximately 280 acres of buildable land in Montana, Texas, California, Massachusetts, Israel and Italy that could accommodate 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.
The information set forth under “Legal Matters” in Note 13 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 2016 | | | |
First quarter | $ | 19.26 |
| | $ | 16.08 |
|
Second quarter | $ | 21.56 |
| | $ | 15.64 |
|
Third quarter | $ | 26.90 |
| | $ | 19.61 |
|
Fourth quarter | $ | 30.57 |
| | $ | 25.97 |
|
Fiscal 2015 | | | |
First quarter | $ | 25.40 |
| | $ | 21.04 |
|
Second quarter | $ | 25.63 |
| | $ | 21.49 |
|
Third quarter | $ | 20.38 |
| | $ | 17.37 |
|
Fourth quarter | $ | 17.62 |
| | $ | 14.37 |
|
Applied’s common stock is traded on the NASDAQ Global Select Market under the symbol AMAT. As of December 8, 2016, there were 3,062 registered holders of Applied common stock.
Performance Graph
The performance graph below shows the five-year cumulative total stockholder return on Applied common stock during the period from October 30, 2011 through October 30, 2016. 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 30, 2011 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
*Assumes $100 invested on 10/30/11 in stock or 10/31/11 in index, including reinvestment of dividends.
Indexes calculated on month-end basis.
Copyright© 2016 Standard & Poor’s, a division of S&P global. All rights reserved.
|
| | | | | | | | | | | | | | | | | |
| 10/30/2011 | | 10/28/2012 | | 10/27/2013 | | 10/26/2014 | | 10/25/2015 | | 10/30/2016 |
Applied Materials | 100.00 |
| | 86.93 |
| | 148.68 |
| | 179.96 |
| | 143.74 |
| | 255.27 |
|
S&P 500 Index | 100.00 |
| | 115.21 |
| | 146.52 |
| | 171.82 |
| | 180.75 |
| | 188.90 |
|
RDG Semiconductor Composite Index | 100.00 |
| | 96.65 |
| | 127.68 |
| | 160.86 |
| | 154.90 |
| | 191.65 |
|
Dividends
During each of fiscal 2016, 2015, and 2014, Applied’s Board of Directors declared four quarterly cash dividends in the amount of $0.10 per share. Applied currently anticipates that cash dividends will continue to be paid on a quarterly basis, although the declaration of any future cash dividend is at the discretion of the Board of Directors and will depend on Applied’s financial condition, results of operations, capital requirements, business conditions and other factors, as well as a determination by the Board of Directors that cash dividends are in the best interests of Applied’s stockholders.
Issuer Purchases of Equity Securities
The following table provides information as of October 30, 2016 with respect to the shares of common stock repurchased by Applied during the fourth quarter of fiscal 2016 pursuant to the publicly-announced stock repurchase program approved by the Board of Directors on June 9, 2016, which authorized up to $2.0 billion in repurchases.
|
| | | | | | | | | | | | | | | | | |
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 | | | | | | | | | |
(August 1, 2016 to August 28, 2016) | 0.1 |
| | $ | 25.86 |
| | $ | 1 |
| | 0.1 |
| | $ | 1,952 |
|
Month #2 | | | | | | | | | |
(August 29, 2016 to September 25, 2016) | 1.2 |
| | $ | 29.86 |
| | 36 |
| | 1.2 |
| | $ | 1,916 |
|
Month #3 | | | | | | | | | |
(September 26, 2016 to October 30, 2016) | 4.7 |
| | $ | 28.75 |
| | 134 |
| | 4.7 |
| | $ | 1,782 |
|
Total | 6.0 |
| | $ | 28.95 |
| | $ | 171 |
| | 6.0 |
| | |
| |
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) | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| | | | | | | | | |
| (In millions, except percentages and per share amounts) |
New orders | $ | 12,416 |
| | $ | 10,104 |
| | $ | 9,648 |
| | $ | 8,466 |
| | $ | 8,037 |
|
Net sales | $ | 10,825 |
| | $ | 9,659 |
| | $ | 9,072 |
| | $ | 7,509 |
| | $ | 8,719 |
|
Gross profit | $ | 4,511 |
| | $ | 3,952 |
| | $ | 3,843 |
| | $ | 2,991 |
| | $ | 3,313 |
|
Gross margin | 41.7 | % | | 40.9 | % | | 42.4 | % | | 39.8 | % | | 38.0 | % |
Research, development and engineering | $ | 1,540 |
| | $ | 1,451 |
| | $ | 1,428 |
| | $ | 1,320 |
| | $ | 1,237 |
|
Operating income | $ | 2,152 |
| | $ | 1,693 |
| | $ | 1,520 |
| | $ | 432 |
| | $ | 411 |
|
Operating margin | 19.9 | % | | 17.5 | % | | 16.8 | % | | 5.8 | % | | 4.7 | % |
Income before income taxes | $ | 2,013 |
| | $ | 1,598 |
| | $ | 1,448 |
| | $ | 350 |
| | $ | 316 |
|
Net income | $ | 1,721 |
| | $ | 1,377 |
| | $ | 1,072 |
| | $ | 256 |
| | $ | 109 |
|
Earnings per diluted share | $ | 1.54 |
| | $ | 1.12 |
| | $ | 0.87 |
| | $ | 0.21 |
| | $ | 0.09 |
|
Long-term debt | $ | 3,143 |
| | $ | 3,342 |
| | $ | 1,947 |
| | $ | 1,946 |
| | $ | 1,946 |
|
Cash dividends declared per common share | $ | 0.40 |
| | $ | 0.40 |
| | $ | 0.40 |
| | $ | 0.39 |
| | $ | 0.35 |
|
Total assets | $ | 14,588 |
| | $ | 15,308 |
| | $ | 13,174 |
| | $ | 12,043 |
| | $ | 12,102 |
|
| |
(1) | Each fiscal year ended on the last Sunday in October. Fiscal 2016 contained 53 weeks and fiscal 2015, 2014, 2013, and 2012 each contained 52 weeks. |
| |
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 |
| |
• | Recent Accounting Pronouncements: a discussion of new accounting pronouncements and its impact to Applied’s consolidated financial statements |
| |
• | Financial Condition, Liquidity and Capital Resources: an analysis of cash flows, sources and uses of cash |
| |
• | Off-Balance Sheet Arrangements and Contractual Obligations |
| |
• | Critical Accounting Policies and Estimates: a discussion of critical accounting policies that require the exercise of judgments and estimates |
| |
• | Non-GAAP Adjusted Results: a presentation of results reconciling GAAP to non-GAAP adjusted measures |
Overview
Applied provides manufacturing equipment, services and software to the global semiconductor, display, and related industries. Applied’s customers include manufacturers of semiconductor wafers and chips, liquid crystal and other displays, and other electronic devices. These customers may use what they manufacture in their own end products or sell the items to other companies for use in advanced electronic components. Applied operates in three reportable segments: Semiconductor Systems (previously Silicon Systems), Applied Global Services, and Display and Adjacent Markets (previously Display). A summary of financial information for each reportable segment is found in Note 14 of Notes to Consolidated Financial Statements. A discussion of factors that could affect Applied’s operations is set forth under “Risk Factors” in Part I, Item 1A, which is incorporated herein by reference. Product development and manufacturing activities occur primarily in the United States, Europe, Israel, and Asia. Applied’s broad range of equipment and service products are highly technical and are sold primarily through a direct sales force.
Applied’s results are driven primarily by worldwide demand for semiconductors and displays, which in turn depends on end-user demand for electronic products. Each of Applied’s businesses is subject to variable industry conditions, as demand for manufacturing equipment and services can change depending on supply and demand for chips, display technologies, and other electronic devices, as well as other factors, such as global economic and market conditions, and the nature and timing of technological advances in fabrication processes. In addition, a significant driver in the semiconductor and display industries is end-demand for mobile consumer products, which is characterized by seasonality that impacts the timing of customer investments in manufacturing equipment and, in turn, Applied’s business. In light of these conditions, Applied’s results can vary significantly year-over-year, as well as quarter-over-quarter.
The following table presents certain significant measurements for the past three fiscal years:
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | Change |
| 2016 | | 2015 | | 2014 | | 2016 over 2015 | | 2015 over 2014 |
| | | | | | | | | |
| (In millions, except per share amounts and percentages) |
New orders | $ | 12,416 |
| | $ | 10,104 |
| | $ | 9,648 |
| | $ | 2,312 |
| | $ | 456 |
|
Net sales | $ | 10,825 |
| | $ | 9,659 |
| | $ | 9,072 |
| | $ | 1,166 |
| | $ | 587 |
|
Gross profit | $ | 4,511 |
| | $ | 3,952 |
| | $ | 3,843 |
| | $ | 559 |
| | $ | 109 |
|
Gross margin | 41.7 | % | | 40.9 | % | | 42.4 | % | | 0.8 points | | (1.5) points |
Operating income | $ | 2,152 |
| | $ | 1,693 |
| | $ | 1,520 |
| | $ | 459 |
| | $ | 173 |
|
Operating margin | 19.9 | % | | 17.5 | % | | 16.8 | % | | 2.4 points | | 0.7 points |
Net income | $ | 1,721 |
| | $ | 1,377 |
| | $ | 1,072 |
| | $ | 344 |
| | $ | 305 |
|
Earnings per diluted share | $ | 1.54 |
| | $ | 1.12 |
| | $ | 0.87 |
| | $ | 0.42 |
| | $ | 0.25 |
|
Non-GAAP Adjusted Results | | | | | | | | | |
Non-GAAP adjusted gross profit | $ | 4,676 |
| | $ | 4,147 |
| | $ | 4,002 |
| | $ | 529 |
| | $ | 145 |
|
Non-GAAP adjusted gross margin | 43.2 | % | | 42.9 | % | | 44.1 | % | | 0.3 points | | (1.2) points |
Non-GAAP adjusted operating income | $ | 2,347 |
| | $ | 1,896 |
| | $ | 1,781 |
| | $ | 451 |
| | $ | 115 |
|
Non-GAAP adjusted operating margin | 21.7 | % | | 19.6 | % | | 19.6 | % | | 2.1 points | | — |
Non-GAAP adjusted net income | $ | 1,950 |
| | $ | 1,457 |
| | $ | 1,314 |
| | $ | 493 |
| | $ | 143 |
|
Non-GAAP adjusted earnings per diluted share | $ | 1.75 |
| | $ | 1.19 |
| | $ | 1.07 |
| | $ | 0.56 |
| | $ | 0.12 |
|
Reconciliations of non-GAAP adjusted measures are presented below under “Non-GAAP Adjusted Results.” Fiscal 2016 contained 53 weeks and fiscal 2015 and 2014 each contained 52 weeks.
Applied’s strategic priorities include developing products that help solve customers’ challenges at technology inflections; expanding its served market opportunities in the semiconductor and display industries; and growing its services business.
Mobility, and the increasing technological functionality of mobile devices, continues to be a strong driver of semiconductor industry spending. During fiscal 2016, memory manufacturers invested in technology upgrades and additional capacity, both of which were driven primarily by the transition from planar NAND to 3D NAND. Foundry customers also invested in technology upgrades and new capacity to meet demand for advanced mobile chips. Mobility investments, including increasing investments in new technology such as OLED for mobile devices, represents a significant driver of display industry spending, which has resulted in higher manufacturing capacity expansion for mobile applications. As a result, new orders for display equipment increased in fiscal 2016 compared to the prior year. Demand for larger LCD TVs is also a factor for display industry investments, although demand for TV manufacturing equipment remains susceptible to cyclical conditions.
In fiscal 2017, Applied expects these trends to continue to drive demand for the semiconductor industry, and in turn for the Semiconductor Systems segment. Applied also expects healthy spending in semiconductor spares and services, and increased spending for display manufacturing equipment in fiscal 2017.
Effective in the third quarter of fiscal 2016, Applied began to account for its flexible coating systems (previously in Energy and Environmental Solutions) and display upgrade equipment (previously in Applied Global Services) under the Display and Adjacent Markets segment. As a result of the change, Applied’s solar business (previously in Energy and Environmental Solutions) is included in Corporate and Other as it did not meet the threshold for a separate reportable segment. Results for prior periods have been recast to conform to the current presentation.
Results of Operations
New Orders
New orders for the periods indicated were as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Change |
| 2016 | | 2015 | | 2014 | | 2016 over 2015 | | 2015 over 2014 |
| | | | | | | | | | | | | | | |
| (In millions, except percentages) |
Semiconductor Systems | $ | 7,289 |
| | 59% | | $ | 6,581 |
| | 65% | | $ | 6,132 |
| | 64% | | 11% | | 7% |
Applied Global Services | 2,775 |
| | 22% | | 2,582 |
| | 26% | | 2,345 |
| | 24% | | 7% | | 10% |
Display and Adjacent Markets | 2,160 |
| | 17% | | 828 |
| | 8% | | 1,066 |
| | 11% | | 161% | | (22)% |
Corporate and Other | 192 |
| | 2% | | 113 |
| | 1% | | 105 |
| | 1% | | 70% | | 8% |
Total | $ | 12,416 |
| | 100% | | $ | 10,104 |
| | 100% | | $ | 9,648 |
| | 100% | | 23% | | 5% |
New orders for fiscal 2016 increased across all segments compared to the prior year, primarily due to higher demand for display and semiconductor equipment. New orders for the Semiconductor Systems segment continued to comprise the majority of Applied’s consolidated total new orders.
New orders for fiscal 2015 slightly increased from fiscal 2014 due to higher demand for semiconductor equipment, and semiconductor spares and services, partially offset by lower demand for display equipment.
New orders by geographic region for each fiscal year, determined by the product shipment destination specified by the customer, were as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Change |
| 2016 | | 2015 | | 2014 | | 2016 over 2015 | | 2015 over 2014 |
| | | | | | | | | | | | | | | |
| (In millions, except percentages) |
Taiwan | $ | 3,389 |
| | 27% | | $ | 2,808 |
| | 28% | | $ | 2,740 |
| | 28% | | 21% | | 2% |
China | 2,905 |
| | 23% | | 1,472 |
| | 14% | | 1,517 |
| | 16% | | 97% | | (3)% |
Korea | 2,286 |
| | 19% | | 1,709 |
| | 17% | | 1,086 |
| | 11% | | 34% | | 57% |
Japan | 980 |
| | 8% | | 1,786 |
| | 18% | | 1,031 |
| | 11% | | (45)% | | 73% |
Southeast Asia | 847 |
| | 7% | | 430 |
| | 4% | | 412 |
| | 4% | | 97% | | 4% |
Asia Pacific | 10,407 |
| | 84% | | 8,205 |
| | 81% | | 6,786 |
| | 70% | | 27% | | 21% |
United States | 1,235 |
| | 10% | | 1,323 |
| | 13% | | 2,200 |
| | 23% | | (7)% | | (40)% |
Europe | 774 |
| | 6% | | 576 |
| | 6% | | 662 |
| | 7% | | 34% | | (13)% |
Total | $ | 12,416 |
| | 100% | | $ | 10,104 |
| | 100% | | $ | 9,648 |
| | 100% | | 23% | | 5% |
The increase in new orders from customers in Taiwan, Europe and Southeast Asia in fiscal 2016 compared to fiscal 2015 was primarily due to higher demand for semiconductor equipment, and the increase in new orders in China in fiscal 2016 reflected increased demand for semiconductor and display equipment. The increase in new orders from customers in Korea in fiscal 2016 was primarily due to higher demand for display equipment. The decrease in new orders from customers in Japan in fiscal 2016 compared to the prior year was primarily attributed to lower orders from memory customers, partially offset by higher demand for display equipment.
The changes in new orders from customers in Korea, Japan, the United States and Europe in fiscal 2015 compared with fiscal 2014 primarily reflected changes in customer mix for semiconductor equipment.
Changes in backlog during each fiscal year were as follows:
|
| | | | | | | |
| 2016 | | 2015 |
| | | |
| (In millions) |
Beginning balance | $ | 3,142 |
| | $ | 2,917 |
|
New orders | 12,416 |
| | 10,104 |
|
Net sales | (10,825 | ) | | (9,659 | ) |
Net adjustments | (155 | ) | | (220 | ) |
Ending balance | $ | 4,578 |
| | $ | 3,142 |
|
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 64 percent of backlog as of the end of fiscal 2016 is anticipated to be shipped within the next two quarters.
Applied’s backlog was $4.6 billion at October 30, 2016 compared to $3.1 billion at October 25, 2015. Backlog adjustments were negative for fiscal 2016 and totaled $155 million, primarily due to change in expected timing of shipments, order cancellations and other adjustments, partially offset by favorable foreign currency impact. Backlog adjustments were also negative for fiscal 2015 and totaled $220 million, primarily consisting of order cancellations, unfavorable foreign currency impacts and other adjustments.
Backlog as of the end of the most recent two fiscal years was as follows: |
| | | | | | | | | | | | | |
| 2016 | | 2015 | | Change 2016 over 2015 |
| | | | | | | | | |
| (In millions, except percentages) |
Semiconductor Systems | $ | 2,098 |
| | 45% | | $ | 1,720 |
| | 55% | | 22% |
Applied Global Services | 866 |
| | 19% | | 779 |
| | 25% | | 11% |
Display and Adjacent Markets | 1,539 |
| | 34% | | 598 |
| | 19% | | 157% |
Corporate and Other | 75 |
| | 2% | | 45 |
| | 1% | | 67% |
Total | $ | 4,578 |
| | 100% | | $ | 3,142 |
| | 100% | | 46% |
Total backlog in fiscal 2016 compared to fiscal 2015 increased primarily due to higher demand for display and semiconductor equipment. In the fourth quarter of fiscal 2016 approximately 37 percent of net sales in the Semiconductor Systems segment, Applied’s largest business segment, were for orders received and shipped within the quarter, down from 55 percent in the fourth quarter of fiscal 2015.
Net Sales
Net sales for the periods indicated were as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Change |
| 2016 | | 2015 | | 2014 | | 2016 over 2015 | | 2015 over 2014 |
| | | | | | | | | | | | | | | |
| (In millions, except percentages) |
Semiconductor Systems | $ | 6,873 |
| | 64% | | $ | 6,135 |
| | 64% | | $ | 5,978 |
| | 66% | | 12% | | 3% |
Applied Global Services | 2,589 |
| | 24% | | 2,447 |
| | 25% | | 2,114 |
| | 24% | | 6% | | 16% |
Display and Adjacent Markets | 1,206 |
| | 11% | | 944 |
| | 10% | | 848 |
| | 9% | | 28% | | 11% |
Corporate and Other | 157 |
| | 1% | | 133 |
| | 1% | | 132 |
| | 1% | | 18% | | 1% |
Total | $ | 10,825 |
| | 100% | | $ | 9,659 |
| | 100% | | $ | 9,072 |
| | 100% | | 12% | | 6% |
Net sales in fiscal 2016 compared to fiscal 2015 increased primarily due to increased customer investments in semiconductor and display equipment. The Semiconductor Systems segment’s relative share of total net sales remained flat compared to the prior year and remains the largest contributor of net sales.
Net sales increased in fiscal 2015 compared to fiscal 2014 primarily due to greater customer investments in semiconductor spares and services, 200mm equipment systems and display and semiconductor equipment.
Net sales by geographic region, determined by the location of customers’ facilities to which products were shipped, were as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Change |
| 2016 | | 2015 | | 2014 | | 2016 over 2015 | | 2015 over 2014 |
| | | | | | | | | | | | | | | |
| (In millions, except percentages) |
Taiwan | $ | 2,843 |
| | 26% | | $ | 2,600 |
| | 27% | | $ | 2,702 |
| | 30% | | 9% | | (4)% |
China | 2,259 |
| | 21% | | 1,623 |
| | 17% | | 1,608 |
| | 18% | | 39% | | 1% |
Korea | 1,883 |
| | 17% | | 1,654 |
| | 17% | | 965 |
| | 10% | | 14% | | 71% |
Japan | 1,279 |
| | 12% | | 1,078 |
| | 11% | | 817 |
| | 9% | | 19% | | 32% |
Southeast Asia | 803 |
| | 7% | | 432 |
| | 4% | | 356 |
| | 4% | | 86% | | 21% |
Asia Pacific | 9,067 |
| | 83% | | 7,387 |
| | 76% | | 6,448 |
| | 71% | | 23% | | 15% |
United States | 1,143 |
| | 11% | | 1,630 |
| | 17% | | 1,966 |
| | 22% | | (30)% | | (17)% |
Europe | 615 |
| | 6% | | 642 |
| | 7% | | 658 |
| | 7% | | (4)% | | (2)% |
Total | $ | 10,825 |
| | 100% | | $ | 9,659 |
| | 100% | | $ | 9,072 |
| | 100% | | 12% | | 6% |
The changes in net sales in all regions for fiscal 2016 compared to fiscal 2015 reflected increased spending on semiconductor equipment and changes in customer mix for semiconductor equipment. The changes in net sales in Korea, Japan and China also reflected changes in customer mix for display equipment.
The changes in net sales in Korea, Japan and Taiwan in fiscal 2015 compared to fiscal 2014 primarily reflected changes in customer mix for semiconductor equipment. The decrease in net sales in the United States was due to lower customer spending on semiconductor equipment, partially offset by increased spending on semiconductor spares and services, and 200mm equipment.
Gross Margin
Gross margins for the periods indicated were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | Change |
| 2016 | | 2015 | | 2014 | | 2016 over 2015 | | 2015 over 2014 |
| | | | | | | | | |
| (In millions, except percentages) |
Gross profit | $ | 4,511 |
| | $ | 3,952 |
| | $ | 3,843 |
| | $ | 559 |
| | $ | 109 |
|
Gross margin | 41.7 | % | | 40.9 | % | | 42.4 | % | | 0.8 points | | (1.5) points |
Non-GAAP Adjusted Results | | | | | | | | | |
Non-GAAP adjusted gross profit | $ | 4,676 |
| | $ | 4,147 |
| | $ | 4,002 |
| | $ | 529 |
| | $ | 145 |
|
Non-GAAP adjusted gross margin | 43.2 | % | | 42.9 | % | | 44.1 | % | | 0.3 points | | (1.2) points |
Reconciliations of non-GAAP adjusted measures are presented below under “Non-GAAP Adjusted Results” below.
Gross profit, non-GAAP adjusted gross profit, gross margin and non-GAAP adjusted gross margin in fiscal 2016 increased compared to fiscal 2015 primarily due to higher net sales, partially offset by unfavorable changes in product mix.
Gross profit and non-GAAP adjusted gross profit in fiscal 2015 increased compared to fiscal 2014, primarily due to higher net sales, while gross margin and non-GAAP adjusted gross margin decreased primarily due to unfavorable changes in product mix and the absence of a recovery of a regional customs duty assessment charge recorded in fiscal 2014.
Gross profit and non-GAAP adjusted gross profit during fiscal 2016, 2015 and 2014 included $62 million, $57 million and $53 million, respectively, of share-based compensation expense.
Research, Development and Engineering
Research, Development and Engineering (RD&E) expenses for the periods indicated were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | Change |
| 2016 | | 2015 | | 2014 | | 2016 over 2015 | | 2015 over 2014 |
| | | | | | | | | |
| (In millions) |
Research, development and engineering | $ | 1,540 |
| | $ | 1,451 |
| | $ | 1,428 |
| | $ | 89 |
| | $ | 23 |
|
Applied’s future operating results depend to a considerable extent on its ability to maintain a competitive advantage in the equipment and service products it provides. Development cycles range from 12 to 36 months depending on whether the product is an enhancement of an existing product, which typically has a shorter development cycle, or a new product, which typically has a longer development cycle. Most of Applied’s existing products resulted from internal development activities and innovations involving new technologies, materials and processes. In certain instances, Applied acquires technologies, either in existing or new product areas, to complement its existing technology capabilities and to reduce time to market.
Management believes that it is critical to continue to make substantial investments in RD&E to assure the availability of innovative technology that meets the current and projected requirements of its customers’ most advanced designs. Applied has maintained and intends to continue its commitment to investing in RD&E in order to continue to offer new products and technologies.
In fiscal 2016, Applied increased its RD&E investments in new product growth across Semiconductor Systems and Display and Adjacent Markets, including etch, e-beam inspection, new materials engineering solutions to improve transistor performance and OLED displays. Applied’s investments in etch were focused on supporting the adoption of the Producer® Selectra™ Etch system, an extreme selectivity etch tool for enabling continued scaling of 3D logic and memory chips. The investment in e-beam inspection was in support of the PROVision™ system, which helps achieve higher yields at advanced nodes by detecting the most challenging defects and monitoring process marginality. Applied also invested in materials engineering solutions to improve transistor performance by lowering the contact resistance between the transistor and interconnect wiring. In Display and Adjacent Markets, RD&E investments were focused on expanding the company’s market opportunity with a new high-resolution inline e-beam review system and forthcoming solutions to improve OLED and flexible display manufacturing.
RD&E expenses increased in fiscal 2016 compared to the prior year and also in fiscal 2015 compared to fiscal 2014, reflecting the impact of ongoing investments in product development initiatives. As part of its growth strategy, Applied continued to reprioritize existing spend, to enable increased funding for investments in technical capabilities and critical RD&E programs in current and new markets, with a focus on semiconductor technologies. RD&E expense during fiscal 2016, 2015 and 2014 included $76 million, $69 million and $66 million, respectively, of share-based compensation expense.
Marketing and Selling
Marketing and selling expenses for the periods indicated were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | Change |
| 2016 | | 2015 | | 2014 | | 2016 over 2015 | | 2015 over 2014 |
| | | | | | | | | |
| (In millions) |
Marketing and selling | $ | 429 |
| | $ | 428 |
| | $ | 423 |
| | $ | 1 |
| | $ | 5 |
|
Marketing and selling expenses remained relatively flat in fiscal 2016 compared to fiscal 2015 and fiscal 2014 due to continued cost management efforts. Marketing and selling expenses for fiscal years 2016, 2015, and 2014 included $26 million, $26 million and $23 million, respectively, of share-based compensation expense.
General and Administrative
General and administrative expenses for the periods indicated were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | Change |
| 2016 | | 2015 | | 2014 | | 2016 over 2015 | | 2015 over 2014 |
| | | | | | | | | |
| (In millions) |
General and administrative | $ | 390 |
| | $ | 469 |
| | $ | 502 |
| | $ | (79 | ) | | $ | (33 | ) |
General and administrative (G&A) expenses for fiscal 2016 decreased compared to the prior year. G&A expenses were higher in fiscal 2015 primarily due to acquisition-related and integration costs related to the terminated business combination with Tokyo Electron Limited (TEL), impact of foreign currency exchange loss as a result of functional currency correction, and restructuring charges, all recorded during fiscal 2015.
G&A expenses for fiscal 2015 decreased compared to fiscal 2014 primarily due to lower acquisition-related and integration costs related to the terminated business combination with TEL, which was terminated in April 2015, and continued cost management efforts. G&A expenses during fiscal 2016, 2015 and 2014 included $37 million, $35 million and $35 million, respectively, of share-based compensation expense.
Loss (Gain) on Derivatives Associated with Terminated Business Combination
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | Change |
| 2016 | | 2015 | | 2014 | | 2016 over 2015 | | 2015 over 2014 |
| | | | | | | | | |
| (In millions) |
Loss (gain) on derivatives associated with terminated business combination | $ | — |
| | $ | (89 | ) | | $ | (30 | ) | | $ | 89 |
| | $ | (59 | ) |
Changes in gain or loss on derivatives associated with the terminated business combination with TEL resulted from exchange rate fluctuations and the sale of derivative contracts in fiscal 2015. For further details, see Note 5 of Notes to Consolidated Financial Statements.
Interest Expense and Interest and Other Income (loss), net
Interest expense and interest and other income (loss), net for the periods indicated were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | Change |
| 2016 | | 2015 | | 2014 | | 2016 over 2015 | | 2015 over 2014 |
| | | | | | | | | |
| (In millions) |
Interest expense | $ | 155 |
| | $ | 103 |
| | $ | 95 |
| | $ | 52 |
| | $ | 8 |
|
Interest and other income, net | $ | 16 |
| | $ | 8 |
| | $ | 23 |
| | $ | 8 |
| | $ | (15 | ) |
Interest expenses incurred were primarily associated with the senior unsecured notes issued in June 2011 and September 2015. Interest expense for fiscal 2016 increased compared to fiscal 2015 due to the issuance of senior unsecured notes in September 2015.
Interest and other income, net primarily includes interest earned on cash and investments, realized gains or losses on sales of securities and impairment of strategic investments. Interest and other income, net in fiscal 2016 increased compared to fiscal 2015 primarily due to higher interest income from investments, partially offset by a $5 million loss from prepayment of $400 million debt. Interest and other income, net in fiscal 2015 decreased compared to fiscal 2014 primarily due to lower realized gains on sales of strategic investments in fiscal 2015.
Income Taxes
Provision for income taxes and effective tax rates for the periods indicated were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | Change |
| 2016 | | 2015 | | 2014 | | 2016 over 2015 | | 2015 over 2014 |
| | | | | | | | | |
| (In millions, except percentages) |
Provision for income taxes | $ | 292 |
| | $ | 221 |
| | $ | 376 |
| | $ | 71 |
| | $ | (155 | ) |
Effective income tax rate | 14.5 | % | | 13.8 | % | | 26.0 | % | | 0.7 points | | (12.2) points |
Applied’s provision for income taxes and effective tax rate are affected by the geographical composition of pre-tax income which includes jurisdictions with differing tax rates, conditional reduced tax rates and other income tax incentives. It is also affected by events that are not consistent from period to period, such as changes in income tax laws and the resolution of prior years’ income tax filings.
Applied’s effective tax rates for fiscal 2016, 2015 and 2014 were 14.5%, 13.8% and 26.0%, respectively. The effective tax rate for fiscal 2016 was higher than fiscal 2015 primarily due to resolutions and changes related to income tax liabilities for uncertain tax positions, partially offset by changes in the geographical composition of income.
The effective tax rate for fiscal 2015 was lower than the rate for fiscal 2014 primarily due to acquisition costs that became deductible in the second quarter of fiscal 2015 as a result of the termination of the proposed business combination with TEL, an adjustment in the second quarter of fiscal 2015 to correct an error in the recognition of cost of sales in the U.S. related to intercompany sales as discussed below, reinstatement of the U.S. federal research and development tax credit during the first quarter of fiscal 2015 which was retroactive to its expiration in December 2013, resolutions and changes related to income tax liabilities for prior years, and changes in the geographical composition of income.
The effective tax rate for fiscal 2015 included the effect of an adjustment primarily to correct an error in the recognition of cost of sales in the U.S. related to intercompany sales. While this error had no impact on Applied’s consolidated cost of sales, it resulted in overstating profitability in the U.S. and the provision for income taxes, income taxes payable and other tax balance sheet accounts in each year since fiscal 2010. The impact of the adjustment to fiscal 2015 was a decrease in provision for income taxes of $28 million which was determined to be immaterial on the originating periods and fiscal 2015. Accordingly, a restatement was not considered necessary.
Segment Information
Applied reports financial results in three segments: Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets. A description of the products and services, as well as financial data, for each reportable segment can be found in Note 14 of Notes to Consolidated Financial Statements.
The Corporate and Other category includes revenues from products, as well as costs of products sold, for fabricating solar photovoltaic cells and modules and certain operating expenses that are not allocated to its reportable segments and are managed separately at the corporate level. These operating expenses include costs for share-based compensation; certain management, finance, legal, human resource, and RD&E functions provided at the corporate level; and unabsorbed information technology and occupancy. In addition, Applied does not allocate to its reportable segments restructuring and asset impairment charges and any associated adjustments related to restructuring actions, unless these actions pertain to a specific reportable segment.
The results for each reportable segment are discussed below.
Semiconductor Systems Segment
The Semiconductor Systems segment includes semiconductor capital equipment for deposition, etch, ion implantation, rapid thermal processing, chemical mechanical planarization, metrology and inspection, and wafer level packaging. Development efforts are focused on solving customers’ key technical challenges in transistor, interconnect, patterning and packaging performance as devices scale to advanced technology nodes. The mobility trend remains the largest influence on industry spending, as it drives semiconductor device manufacturers to continually improve their ability to deliver high-performance, low-power processors and affordable memories.
Certain significant measures for the periods indicated were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Change |
| 2016 | | 2015 | | 2014 | | 2016 over 2015 | | 2015 over 2014 |
| | | | | | | | | | | | | |
| (In millions, except percentages and ratios) |
New orders | $ | 7,289 |
| | $ | 6,581 |
| | $ | 6,132 |
| | $ | 708 |
| | 11% | | $ | 449 |
| | 7% |
Net sales | 6,873 |
| | 6,135 |
| | 5,978 |
| | 738 |
| | 12% | | 157 |
| | 3% |
Book to bill ratio | 1.1 |
| | 1.1 |
| | 1.0 |
| | | | | | | | |
Operating income | 1,807 |
| | 1,410 |
| | 1,391 |
| | 397 |
| | 28% | | 19 |
| | 1% |
Operating margin | 26.3 | % | | 23.0 | % | | 23.3 | % | | | | 3.3 points | | | | (0.3) points |
Non-GAAP Adjusted Results | | | | | | | | | | | | | |
Non-GAAP adjusted operating income | 1,991 |
| | 1,588 |
| | $ | 1,565 |
| | 403 |
| | 25% | | 23 |
| | 1% |
Non-GAAP adjusted operating margin | 29.0 | % | | 25.9 | % | | 26.2 | % | | | | 3.1 points | | | | (0.3) points |
Reconciliations of non-GAAP adjusted measures are presented below under “Non-GAAP Adjusted Results.”
New orders for Semiconductor Systems by end use application for the periods indicated were as follows:
|
| | | | | |
| 2016 | | 2015 | | 2014 |
Foundry | 46% | | 34% | | 52% |
Memory | 42% | | 53% | | 35% |
Logic and other | 12% | | 13% | | 13% |
| 100% | | 100% | | 100% |
The following region accounted for at least 30 percent of total net sales for the Semiconductor Systems segment for one or more of past three fiscal years:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Change |
| 2016 | | 2015 | | 2014 | | 2016 over 2015 | | 2015 over 2014 |
| | | | | | | | | | | | | |
| (In millions, except percentages) |
Taiwan | $ | 2,165 |
| | $ | 1,982 |
| | $ | 2,186 |
| | $ | 183 |
| | 9% | | $ | (204 | ) | | (9)% |
Customers in Taiwan accounted for 32 percent, 32 percent and 37 percent of total net sales for Semiconductor Systems in fiscal 2016, 2015 and 2014, respectively. The increase in net sales from customers in Taiwan primarily reflected increased investments from foundry customers.
Financial results in the Semiconductor Systems segment for fiscal 2016 reflected steady overall demand for semiconductor equipment, with continued investments by memory customers in technology upgrades and additional capacity, reflecting primarily the transition from planar technology to 3D architectures. Foundry customers also invested in technology upgrades and new capacity to meet demand for advanced mobile chips. New orders for fiscal 2016 increased compared to the prior year primarily due to higher demand from foundry customers, partially offset by lower demand from memory customers. Net sales for fiscal 2016 increased compared to fiscal 2015 primarily due to higher spending from foundry and memory customers. The increase in the operating income, non-GAAP adjusted operating income, operating margin and non-GAAP adjusted operating margin for fiscal 2016 compared to fiscal 2015 primarily reflected higher net sales. Three customers accounted for approximately 54 percent of this segment’s new orders for fiscal 2016, each of whom represented at least 10 percent of this segment’s new orders. Four customers accounted for approximately 60 percent of this segment’s net sales for fiscal 2016, each of whom represented at least 10 percent of this segment’s net sales.
The increase in new orders and net sales in fiscal 2015 compared to fiscal 2014 primarily reflected increased demand and spending from memory customers, partially offset by lower demand and spending from foundry customers. Two customers accounted for approximately 41 percent of net sales and three customers accounted for 53 percent of new orders in this segment in fiscal 2015. Operating income and non-GAAP adjusted operating income for fiscal 2015 increased compared to fiscal 2014, reflecting the increase in net sales, partially offset by changes in product mix and higher research and development expenses.
Applied Global Services Segment
The Applied Global Services segment provides integrated solutions to optimize equipment and fab performance and productivity, including spares, upgrades, services, certain remanufactured earlier generation equipment and factory automation software for semiconductor, display and other products. Customer demand for products and services is fulfilled through a global distribution system with trained service engineers located in close proximity to customer sites.
Certain significant measures for the periods indicated were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Change |
| 2016 | | 2015 | | 2014 | | 2016 over 2015 | | 2015 over 2014 |
| | | | | | | | | | | | | |
| (In millions, except percentages and ratios) |
New orders | $ | 2,775 |
| | $ | 2,582 |
| | $ | 2,345 |
| | $ | 193 |
| | 7% | | $ | 237 |
| | 10 | % |
Net sales | 2,589 |
| | 2,447 |
| | 2,114 |
| | 142 |
| | 6% | | 333 |
| | 16 | % |
Book to bill ratio | 1.1 |
| | 1.1 |
| | 1.1 |
| | | | | | | | |
Operating income | 682 |
| | 630 |
| | 538 |
| | 52 |
| | 8% | | 92 |
| | 17 | % |
Operating margin | 26.3 | % | | 25.7 | % | | 25.4 | % | | | | 0.6 points | | | | 0.3 points |
Non-GAAP Adjusted Results | | | | | | | | | | | | | |
Non-GAAP adjusted operating income | 683 |
| | 633 |
| | 541 |
| | 50 |
| | 8% | | 92 |
| | 17 | % |
Non-GAAP adjusted operating margin | 26.4 | % | | 25.9 | % | | 25.6 | % | | | | 0.5 points | | | | 0.3 points |
Reconciliations of non-GAAP adjusted measures are presented below under “Non-GAAP Adjusted Results.”
There was no single region that accounted for at least 30 percent of total net sales for the Applied Global Services segment for any of the past three fiscal years.
New orders and net sales for fiscal 2016 slightly increased compared to fiscal 2015 primarily due to higher demand and spending on spares and services, partially offset by lower investments in 200mm equipment systems. Operating income, non-GAAP adjusted operating income, operating margin and non-GAAP adjusted operating margin for fiscal 2016 increased compared to fiscal 2015, reflecting higher net sales partially offset by increased headcount to support business growth. One customer accounted for approximately 15 percent of this segment’s new orders for fiscal 2016. Two customers accounted for approximately 23 percent of this segment’s net sales for fiscal 2016, each of whom represented at least 10 percent of this segment’s net sales.
New orders and net sales for fiscal 2015 increased compared to fiscal 2014 mainly due to higher demand for semiconductor spares and services, and 200mm equipment systems. Operating income, operating margin, non-GAAP adjusted operating income, and non-GAAP adjusted operating margin increased in fiscal 2015 compared fiscal 2014, reflecting the increase in net sales, which was partially offset by unfavorable product mix and the absence of a recovery of a regional customs duty assessment charge recorded in fiscal 2014.
Display and Adjacent Markets Segment
The Display and Adjacent Markets segment encompasses products for manufacturing liquid crystal displays (LCDs), organic light-emitting diodes (OLEDs), upgrades and flexible coating systems and other display technologies for TVs, personal computers (PCs), tablets, smart phones and other consumer-oriented devices. The segment is focused on expanding its presence through technologically-differentiated equipment for manufacturing large-scale TVs; emerging markets such as OLED, low temperature polysilicon (LTPS), metal oxide, and touch panel sectors; and development of products that provide customers with improved performance and yields. Display and Adjacent Markets industry growth depends primarily on consumer demand for increasingly larger and more advanced TVs as well as larger and higher resolution displays for next generation mobile devices, including OLED.
Certain significant measures for the periods presented were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Change |
| 2016 | | 2015 | | 2014 | | 2016 over 2015 | | 2015 over 2014 |
| | | | | | | | | | | | | |
| (In millions, except percentages and ratios) |
New orders | $ | 2,160 |
| | $ | 828 |
| | $ | 1,066 |
| | $ | 1,332 |
| | 161% | | $ | (238 | ) | | |