Edgar Filing: APPLIED MATERIALS INC /DE

e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended May 1, 2011
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission File Number 000-06920

Applied Materials, Inc.

(Exact name of registrant as specified in its charter)


Delaware		94-1655526
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

3050 Bowers Avenue, P.O. Box 58039 Santa Clara, California (Address of principal executive offices)		95052-8039 (Zip Code)

(Registrant’s telephone number, including area code)

(408) 727-5555

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o

(Do not check if a smaller reporting company)

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

Number of shares outstanding of the issuer’s common stock as of May 1, 2011: 1,318,250,161

APPLIED MATERIALS, INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MAY 1, 2011

TABLE OF CONTENTS


			Page

PART I. FINANCIAL INFORMATION
	Item 1:	Financial Statements (Unaudited)		2
		Consolidated Condensed Statements of Operations for the Three and Six Months Ended May 1, 2011 and May 2, 2010		2
		Consolidated Condensed Balance Sheets at May 1, 2011 and October 31, 2010		3
		Consolidated Condensed Statements of Stockholders’ Equity and Comprehensive Income for the Six Months Ended May 1, 2011		4
		Consolidated Condensed Statements of Cash Flows for the Six Months Ended May 1, 2011 and May 2, 2010		5
		Notes to Consolidated Condensed Financial Statements		6
	Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations		33
	Item 3:	Quantitative and Qualitative Disclosures About Market Risk		51
	Item 4:	Controls and Procedures		51

PART II. OTHER INFORMATION
	Item 1:	Legal Proceedings		52
	Item 1A:	Risk Factors		52
	Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds		64
	Item 3:	Defaults Upon Senior Securities		64
	Item 4:	Removed and Reserved		64
	Item 5:	Other Information		64
	Item 6:	Exhibits		65
		Signatures		66
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION


Item 1.	*Financial Statements*

APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS


	Three Months Ended					Six Months Ended
	May 1,			May 2,		May 1,			May 2,
	2011			2010		2011			2010
	(Unaudited)
	(In millions, except per share amounts)

Net sales	$	2,862		$	2,296	$	5,549		$	4,144
Cost of products sold		1,673			1,369		3,224			2,506

Gross margin		1,189			927		2,325			1,638
Operating expenses:
Research, development and engineering		297			306		567			575
General and administrative		112			126		224			250
Marketing and selling		107			100		216			198
Restructuring charges and asset impairments (Note 10)		(4	)		9		(33	)		113

Total operating expenses		512			541		974			1,136
Income from operations		677			386		1,351			502
Impairment of strategic investments		—			4		—			5
Interest expense		5			5		10			10
Interest income and other income, net		14			10		25			19

Income before income taxes		686			387		1,366			506
Provision for income taxes		197			123		371			159

Net income	$	489		$	264	$	995		$	347

Earnings per share:
Basic and Diluted	$	0.37		$	0.20	$	0.75		$	0.26
Weighted average number of shares:
Basic		1,320			1,345		1,322			1,343
Diluted		1,333			1,352		1,333			1,351

See accompanying Notes to Consolidated Condensed Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS*


	May 1,			October 31,
	2011			2010
	(In millions)

ASSETS
Current assets:
Cash and cash equivalents (Notes 3 and 4)	$	2,558		$	1,858
Short-term investments (Notes 3 and 4)		750			727
Accounts receivable, net (Note 6)		1,916			1,831
Inventories (Note 7)		1,794			1,547
Deferred income taxes, net		545			513
Prepaid income taxes		110			—
Other current assets		271			289

Total current assets		7,944			6,765
Long-term investments (Notes 3 and 4)		1,269			1,307
Property, plant and equipment, net (Note 7)		898			963
Goodwill (Note 8)		1,336			1,336
Purchased technology and other intangible assets, net (Note 8)		236			287
Deferred income taxes and other assets		274			285

Total assets	$	11,957		$	10,943


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	1		$	1
Accounts payable and accrued expenses (Note 7)		1,760			1,766
Customer deposits and deferred revenue (Note 7)		1,279			847
Income taxes payable		211			274

Total current liabilities		3,251			2,888
Long-term debt		204			204
Employee benefits and other liabilities (Note 12)		320			315

Total liabilities		3,775			3,407

Commitments and contingencies (Note 14)
Stockholders’ equity (Note 11):
Common stock		13			13
Additional paid-in capital		5,524			5,406
Retained earnings		12,308			11,511
Treasury stock		(9,664	)		(9,396	)
Accumulated other comprehensive income		1			2

Total stockholders’ equity		8,182			7,536

Total liabilities and stockholders’ equity	$	11,957		$	10,943


*		Amounts as of May 1, 2011 are unaudited. Amounts as of October 31, 2010 are derived from the October 31, 2010 audited consolidated financial statements.

See accompanying Notes to Consolidated Condensed Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME


																Accumulated
						Additional										Other
	Common Stock					Paid-In		Retained			Treasury Stock					Comprehensive
Six Months Ended May 1, 2011	Shares			Amount		Capital		Earnings			Shares		Amount			Income			Total
	(Unaudited)
	(In millions)

Balance at October 31, 2010		1,328		$	13	$	5,406	$	11,511			537	$	(9,396	)	$	2		$	7,536
Components of comprehensive income, net of tax:
Net income		—			—		—		995			—		—			—			995
Change in unrealized net gain on investments		—			—		—		—			—		—			(2	)		(2	)
Change in unrealized net gain on derivative instruments		—			—		—		—			—		—			2			2
Change in defined benefit plan liability		—			—		—		—			—		—			(1	)		(1	)

Comprehensive income																				994
Dividends		—			—		—		(198	)		—		—			—			(198	)
Share-based compensation		—			—		72		—			—		—			—			72
Issuance under stock plans, net of a tax benefit of $4 million and other		9			—		46		—			—		—			—			46
Common stock repurchases		(19	)		—		—		—			19		(268	)		—			(268	)

Balance at May 1, 2011		1,318		$	13	$	5,524	$	12,308			556	$	(9,664	)	$	1		$	8,182

See accompanying Notes to Consolidated Condensed Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS


	Six Months Ended
	May 1,			May 2,
	2011			2010
	(Unaudited)
	(In millions)

Cash flows from operating activities:
Net income	$	995		$	347
Adjustments required to reconcile net income to cash provided by operating activities:
Depreciation and amortization		128			163
Loss on fixed asset retirements		1			12
Provision for bad debts		—			6
Restructuring charges and asset impairments		(33	)		113
Deferred income taxes		(17	)		(75	)
Net recognized loss on investments		5			14
Share-based compensation		72			62
Changes in operating assets and liabilities, net of amounts acquired:
Accounts receivable		(85	)		(365	)
Inventories		(246	)		(1	)
Prepaid income taxes		(110	)		185
Other current assets		20			(1	)
Other assets		(2	)		(9	)
Accounts payable and accrued expenses		25			211
Customer deposits and deferred revenue		432			111
Income taxes payable		(64	)		138
Employee benefits and other liabilities		8			(12	)

Cash provided by operating activities		1,129			899

Cash flows from investing activities:
Capital expenditures		(81	)		(98	)
Proceeds from sale of facility		39			—
Cash paid for acquisition, net of cash acquired		—			(323	)
Proceeds from sales and maturities of investments		904			540
Purchases of investments		(896	)		(829	)

Cash used in investing activities		(34	)		(710	)

Cash flows from financing activities:
Debt repayments, net		(1	)		(5	)
Proceeds from common stock issuances		59			97
Common stock repurchases		(268	)		(100	)
Payment of dividends to stockholders		(186	)		(161	)

Cash used in financing activities		(396	)		(169	)

Effect of exchange rate changes on cash and cash equivalents		1			—

Increase in cash and cash equivalents		700			20

Cash and cash equivalents — beginning of period		1,858			1,576

Cash and cash equivalents — end of period	$	2,558		$	1,596

Supplemental cash flow information:
Cash payments for income taxes	$	556		$	98
Cash refunds for income taxes	$	2		$	196
Cash payments for interest	$	7		$	7

See accompanying Notes to Consolidated Condensed Financial Statements.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)


Note 1	Basis of Presentation

Basis of Presentation

In the opinion of management, the unaudited interim consolidated condensed financial statements of Applied Materials, Inc. and its subsidiaries (Applied or the Company) included herein have been prepared on a basis consistent with the October 31, 2010 audited consolidated financial statements and include all material adjustments, consisting of normal recurring adjustments, necessary to fairly present the information set forth therein. These unaudited interim consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Applied’s Annual Report on Form 10-K for the fiscal year ended October 31, 2010 (2010 Form 10-K). Applied’s results of operations for the three and six months ended May 1, 2011 are not necessarily indicative of future operating results. Applied’s fiscal year ends on the last Sunday in October of each year. Fiscal 2011 contains 52 weeks, while fiscal 2010 contained 53 weeks, and the first six months of fiscal 2011 contained 26 weeks, while the first six months of fiscal 2010 contained 27 weeks.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, Applied evaluates its estimates, including those related to accounts receivable and sales allowances, fair values of financial instruments, inventories, intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair values of share-based awards, and income taxes, among others. Applied bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Revenue Recognition

Applied recognizes revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; seller’s price to buyer is fixed or determinable; and collectability is probable. Applied’s shipping terms are customarily FOB Applied shipping point or equivalent terms. Applied’s revenue recognition policy generally results in revenue recognition at the following points: (1) for all transactions where legal title passes to the customer upon shipment, Applied recognizes revenue upon shipment for all products that have been demonstrated to meet product specifications prior to shipment; the portion of revenue associated with certain installation-related tasks is deferred, and that revenue is recognized upon completion of the installation-related tasks; (2) for products that have not been demonstrated to meet product specifications prior to shipment, revenue is recognized at customer technical acceptance; (3) for transactions where legal title does not pass at shipment, revenue is recognized when legal title passes to the customer, which is generally at customer technical acceptance; and (4) for arrangements containing multiple elements, the revenue relating to the undelivered elements is deferred using the relative selling price method utilizing estimated sales prices until delivery of the deferred elements. Applied limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or adjustment. In cases where Applied has sold products that have been demonstrated to meet product specifications prior to shipment, Applied believes that at the time of delivery, it has an enforceable claim to amounts recognized as revenue. The completed contract method is used for SunFab^tm thin film production lines. Spare parts revenue is generally recognized upon shipment, and services revenue is generally recognized over the period that the services are provided.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Applied elected to early adopt amended accounting standards issued by the Financial Accounting Standards Board (FASB) for multiple deliverable revenue arrangements on a prospective basis for applicable transactions originating or materially modified after October 25, 2009. The new standard changed the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable to be based on the relative selling price. The FASB also amended the accounting standards for revenue recognition to exclude software that is contained in a tangible product from the scope of software revenue guidance when the software is essential to the tangible product’s functionality. Implementation of this new authoritative guidance had an insignificant impact on reported net sales as compared to net sales under previous guidance, as the new guidance did not change the units of accounting within sales arrangements and the elimination of the residual method for the allocation of arrangement consideration had an inconsequential impact on the amount and timing of reported net sales.

For fiscal 2010 and subsequent periods, when a sales arrangement contains multiple elements, such as hardware and services and/or software products, Applied allocates revenue to each element based on a selling price hierarchy. The selling price for a deliverable is based on its vendor specific objective evidence (VSOE) if available, third party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. Applied generally utilizes the ESP due to the nature of its products. In multiple element arrangements where more-than-incidental software deliverables are included, revenue is allocated to each separate unit of accounting for each of the non-software deliverables and to the software deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is then allocated to each software deliverable using the guidance for recognizing software revenue, as amended.

Recent Accounting Pronouncements

In December 2010, the FASB amended its existing guidance for goodwill and other intangible assets. This authoritative guidance modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if there are qualitative factors indicating that it is more likely than not that a goodwill impairment exists. The qualitative factors are consistent with the existing guidance which requires goodwill of a reporting unit to be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This authoritative guidance becomes effective for Applied in fiscal 2012. The implementation of this authoritative guidance is not expected to have a material impact on Applied’s financial position or results of operations.

In December 2010, the FASB issued authoritative guidance on business combinations. This authoritative guidance requires a public entity that presents comparative financial statements to disclose the revenue and earnings of the combined entity as though the business combinations that occurred during the current year had occurred as of the beginning of the prior annual reporting period. In addition, this authoritative guidance expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This authoritative guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Applied will comply with this authoritative guidance in fiscal 2012.


Note 2	Earnings Per Share

Basic earnings per share is determined using the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined using the weighted average number of common shares and potential common shares (representing the dilutive effect of stock options, restricted stock units, and employee

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

stock purchase plans shares) outstanding during the period. Applied’s net income has not been adjusted for any period presented for purposes of computing basic or diluted earnings per share due to the Company’s non-complex capital structure. For purposes of computing diluted earnings per share, weighted average potential common shares do not include stock options with an exercise price greater than the average fair market value of Applied common stock for the period as the effect would be anti-dilutive.


	Three Months Ended				Six Months Ended
	May 1,		May 2,		May 1,		May 2,
	2011		2010		2011		2010
	(In millions, except per share amounts)

Numerator:
Net income	$	489	$	264	$	995	$	347
Denominator:
Weighted average common shares outstanding		1,320		1,345		1,322		1,343
Effect of dilutive stock options, restricted stock units and employee stock purchase plans shares		13		7		11		8

Denominator for diluted income per share		1,333		1,352		1,333		1,351

Basic and diluted earnings per share	$	0.37	$	0.20	$	0.75	$	0.26
Potentially dilutive securities		18		40		18		43

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)


Note 3	Cash, Cash Equivalents and Investments

Summary of Cash, Cash Equivalents and Investments

The following tables summarizes Applied’s cash, cash equivalents and investments by security type:


			Gross		Gross
			Unrealized		Unrealized		Estimated
May 1, 2011	Cost		Gains		Losses		Fair Value
	(In millions)

Cash	$	478	$	—	$	—	$	478

Cash equivalents:
Money market funds		1,746		—		—		1,746
U.S. commercial paper, corporate bonds and medium-term notes		169		—		—		169
U.S. Treasury and agency securities		150		—		—		150
Obligations of states and political subdivisions		15		—		—		15

Total Cash equivalents		2,080		—		—		2,080

Total Cash and Cash equivalents	$	2,558	$	—	$	—	$	2,558

Short-term and long-term investments:
U.S. Treasury and agency securities	$	543	$	3	$	—	$	546
Obligations of states and political subdivisions		516		3		—		519
U.S. commercial paper, corporate bonds and medium-term notes		456		4		—		460
Other debt securities*		400		3		1		402

Total fixed income securities		1,915		13		1		1,927
Publicly traded equity securities		8		25		—		33
Equity investments in privately-held companies		59		—		—		59

Total short-term and long-term investments	$	1,982	$	38	$	1	$	2,019

Total Cash, Cash equivalents and Investments	$	4,540	$	38	$	1	$	4,577

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)


			Gross		Gross
			Unrealized		Unrealized		Estimated
October 31, 2010	Cost		Gains		Losses		Fair Value
	(In millions)

Cash	$	701	$	—	$	—	$	701

Cash equivalents:
Money market funds		1,139		—		—		1,139
Obligations of states and political subdivisions		18		—		—		18

Total Cash equivalents		1,157		—		—		1,157

Total Cash and Cash equivalents	$	1,858	$	—	$	—	$	1,858

Short-term and long-term investments:
U.S. Treasury and agency securities	$	665	$	8	$	—	$	673
Obligations of states and political subdivisions		500		5		—		505
U.S. commercial paper, corporate bonds and medium-term notes		502		7		—		509
Other debt securities*		261		3		1		263

Total fixed income securities		1,928		23		1		1,950
Publicly traded equity securities		9		16		—		25
Equity investments in privately-held companies		59		—		—		59

Total short-term and long-term investments	$	1,996	$	39	$	1	$	2,034

Total Cash, Cash equivalents and Investments	$	3,854	$	39	$	1	$	3,892


*		Other debt securities consist primarily of investment grade asset-backed and mortgage-backed securities.

Maturities of Investments

The following table summarizes the contractual maturities of Applied’s investments at May 1, 2011:


			Estimated
	Cost		Fair Value
	(In millions)

Due in one year or less	$	710	$	712
Due after one through five years		803		811
Due after five years		3		3
No single maturity date		466		493

	$	1,982	$	2,019

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

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Gains and Losses on Investments

Gross realized gains and losses on sales of investments during the three and six months ended May 1, 2011 and May 2, 2010 were as follows:


	Three Months Ended				Six Months Ended
	May 1,		May 2,		May 1,		May 2,
	2011		2010		2011		2010

Gross realized gains	$	8	$	2	$	13	$	2
Gross realized losses	$	1	$	—	$	1	$	1

At May 1, 2011, Applied had a gross unrealized loss of $1 million related to its investment portfolio due to a decrease in the fair value of certain fixed income securities. Applied regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether an unrealized loss was considered to be temporary, or other-than-temporary and therefore impaired, include: the length of time and extent to which fair value has been lower than the cost basis; the financial condition, credit quality and near-term prospects of the investee; and whether it is more likely than not that Applied will be required to sell the security prior to recovery. Generally, the contractual terms of investments in marketable securities do not permit settlement at prices less than the amortized cost of the investments. Applied has determined that the gross unrealized losses on its marketable securities at May 1, 2011 are temporary in nature and therefore it did not recognize any impairment of its marketable securities for the three and six months ended May 1, 2011. Applied did not recognize any impairment on its equity investments in privately-held companies for both the three and six months ended May 1, 2011. Applied determined that the gross unrealized losses on its marketable securities at May 2, 2010, were temporary in nature and therefore it did not recognize any impairment of its marketable securities for the three and six months ended May 2, 2010. During the first six months of fiscal 2010, Applied determined that certain of its equity investments in privately-held companies were other-than-temporarily impaired and, accordingly, recognized impairment charges in the amounts of $4 million and $5 million for the three and six months ended May 2, 2010, respectively.

The following table provides the fair market value of Applied’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired as of May 1, 2011.


	In Loss Position for
	Less Than 12 Months				Total
			Gross				Gross
			Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses
	(In millions)

Other debt securities	$	127	$	1	$	127	$	1

Total	$	127	$	1	$	127	$	1

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


Note 4	Fair Value Measurements

Applied’s financial assets are measured and recorded at fair value, except for equity investments held in privately-held companies. These equity investments are generally accounted for under the cost method of accounting and are periodically assessed for other-than-temporary impairment when events or circumstances indicate that an other-than-temporary decline in value may have occurred. Applied’s nonfinancial assets, such as goodwill, intangible assets, and property, plant and equipment, are recorded at cost and are assessed for impairment when events or circumstances indicate that an other-than-temporary decline in value may have occurred.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Fair Value Hierarchy

Applied uses the following fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:


	•	Level 1 — Quoted prices in active markets for identical assets or liabilities;

	•	Level 2 — Observable inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

	•	Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Applied’s investments are comprised primarily of debt securities that are classified as available-for-sale and recorded at their fair values. In determining the fair value of investments, Applied uses pricing information from pricing services that value securities based on quoted market prices and models that utilize observable market inputs. In the event a fair value estimate is unavailable from a pricing service, Applied generally obtains non-binding price quotes from brokers. Applied then reviews the information provided by the pricing services or brokers to determine the fair value of its short-term and long-term investments. In addition, to validate pricing information obtained from pricing services, Applied periodically performs supplemental analysis on a sample of securities. Applied reviews any significant unanticipated differences identified through this analysis to determine the appropriate fair value.

Investments with remaining effective maturities of 12 months or less from the balance sheet date are classified as short-term investments. Investments with remaining effective maturities of more than 12 months from the balance sheet date are classified as long-term investments. As of May 1, 2011, substantially all of Applied’s available-for-sale, short-term and long-term investments were recognized at fair value that was determined based upon observable inputs.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Financial assets and liabilities (excluding cash balances) measured at fair value on a recurring basis are summarized below as of May 1, 2011 and October 31, 2010:


	May 1, 2011								October 31, 2010
	Level 1		Level 2		Level 3		Total		Level 1		Level 2			Level 3		Total
	(In millions)								(In millions)

Assets:
Money market funds	$	1,746	$	—	$	—	$	1,746	$	1,139	$	—		$	—	$	1,139
U.S. Treasury and agency securities		84		612		—		696		153		520			—		673
U.S. commercial paper, corporate bonds and medium-term notes		—		629		—		629		—		509			—		509
Obligations of states and political subdivisions		—		534		—		534		—		523			—		523
Other debt securities		—		402		—		402		—		263			—		263
Publicly traded equity securities		33		—		—		33		25		—			—		25
Foreign exchange derivative assets		—		10		—		10		—		6			—		6

Total	$	1,863	$	2,187	$	—	$	4,050	$	1,317	$	1,821		$	—	$	3,138

Liabilities:
Foreign exchange derivative liabilities	$	—	$	—	$	—	$	—	$	—	$	(1	)	$	—	$	(1	)

Total	$	—	$	—	$	—	$	—	$	—	$	(1	)	$	—	$	(1	)

There were no significant transfers in and out of Level 1 and Level 2 fair value measurements and there were no Level 3 investments during either the three or six months ended May 1, 2011 and May 2, 2010. Applied did not have any financial assets measured at fair value on a recurring basis within Level 3 fair value measurements during the three and six months ended May 1, 2011 and May 2, 2010.

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

Equity investments in privately-held companies are generally accounted for under the cost method of accounting and are periodically assessed for other-than-temporary impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred. If Applied determines that an other-than-temporary impairment has occurred, the investment will be written down to its estimated fair value based on available information, such as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operational performance and any other readily available market data. Equity investments in privately-held companies totaled $59 million at May 1, 2011, of which $46 million of investments were accounted for under the cost method of accounting and $13 million of Level 3 investments had been measured at fair value on a non-recurring basis due to an other-than-temporary decline in value. At May 2, 2010, equity investments in privately-held companies totaled $68 million, of which $52 million of investments were accounted for under the cost method of accounting and $16 million of Level 3 investments had been measured at fair value on a non-recurring basis due to an other-than-temporary decline in value. There were no impairments in our equity investments in privately-held companies for the three and six months ended May 1, 2011.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

The following tables present the balances of equity securities at May 1, 2011 and May 2, 2010 that had been measured at fair value on a non-recurring basis, using the process described above, and the impairment charges recorded during the three months then ended:


							Total		Total
							Impairment for		Impairment for
							the Three		the Six Months
							Months Ended		Ended
	Level 1		Level 2		Level 3		May 1, 2011		May 1, 2011
	(In millions)

Equity investments in privately-held companies measured at fair value on a non-recurring basis during fiscal 2011	$	—	$	—	$	13	$	—	$	—


							Total		Total
							Impairment for		Impairment for
							the Three		the Six Months
							Months Ended		Ended
	Level 1		Level 2		Level 3		May 2, 2010		May 2, 2010
	(In millions)

Equity investments in privately-held companies measured at fair value on a non-recurring basis during fiscal 2010	$	—	$	—	$	16	$	4	$	5

At October 31, 2010, equity investments in privately-held companies totaled $59 million, of which $40 million of investments were accounted for under the cost method of accounting and $19 million of Level 3 investments had been measured at fair value on a non-recurring basis due to an other-than-temporary decline in value.

Other

The carrying amounts of Applied’s financial instruments, including cash and cash equivalents, accounts receivable, notes payable, and accounts payable and accrued expenses, approximate fair value due to the short maturities of these financial instruments. The carrying amount of Applied’s long-term debt at May 1, 2011 was $205 million and the estimated fair value was $242 million. At October 31, 2010, the carrying amount of long-term debt was $205 million and the estimated fair value was $238 million. The estimated fair value of long-term debt is determined by Level 2 inputs and is based primarily on quoted market prices for the same or similar issues.


Note 5	Derivative Instruments and Hedging Activities

Derivative Financial Instruments

Applied conducts business in a number of foreign countries, with certain transactions denominated in local currencies, such as Japanese yen, euro, Israeli shekel, Taiwanese dollar and Swiss franc. Applied uses derivative financial instruments, such as forward exchange contracts and currency option contracts, to hedge certain forecasted foreign currency denominated transactions expected to occur typically within the next 24 months. The purpose of Applied’s foreign currency management is to mitigate the effect of exchange rate fluctuations on certain foreign currency denominated revenues, costs and eventual cash flows. The terms of currency instruments used for hedging purposes are generally consistent with the timing of the transactions being hedged. Applied does not use derivative financial instruments for trading or speculative purposes.

Derivative instruments and hedging activities, including foreign currency exchange contracts, are recognized on the balance sheet at fair value. Changes in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of any hedges, are recognized currently in earnings. All of Applied’s derivative

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

financial instruments are recorded at their fair value in other current assets or in accounts payable and accrued expenses.

Hedges related to anticipated transactions are designated and documented at the inception of the hedge as cash flow hedges and are typically entered into once per month. Cash flow hedges are evaluated for effectiveness quarterly. The effective portion of the gain or loss on these hedges is reported as a component of accumulated other comprehensive income or loss (AOCI) in stockholders’ equity and is reclassified into earnings when the hedged transaction affects earnings. The majority of the after-tax net income or loss related to derivative instruments included in AOCI at May 1, 2011 is expected to be reclassified into earnings within 12 months. Changes in the fair value of currency forward exchange and option contracts due to changes in time value are excluded from the assessment of effectiveness. Both ineffective hedge amounts and hedge components excluded from the assessment of effectiveness are recognized in earnings. If the transaction being hedged is no longer probable to occur, or if a portion of any derivative is deemed to be ineffective, Applied promptly recognizes the gain or loss on the associated financial instrument in general and administrative expenses. The amount recognized due to discontinuance of cash flow hedges that were probable not to occur by the end of the originally specified time period was not significant for the three and six months ended May 1, 2011 and May 2, 2010.

Additionally, forward exchange contracts are generally used to hedge certain foreign currency denominated assets or liabilities. These derivatives are typically entered into once per month and are not designated for hedge accounting treatment. Accordingly, changes in the fair value of these hedges are recorded in earnings to offset the changes in the fair value of the assets or liabilities being hedged.

Fair values of derivative instruments were as follows:


		Asset Derivatives					Liability Derivatives
	Balance Sheet	May 1,				Balance Sheet	May 1,
	Location	2011		October 31, 2010		Location	2011		October 31, 2010
		(In millions)					(In millions)

Derivatives Designated as Hedging Instruments

Foreign exchange contracts	Other current assets	$	9	$	5	Accrued expenses	$	—	$	1

Derivatives Not Designated as Hedging Instruments

Foreign exchange contracts	Other current assets	$	1	$	1	Accrued expenses	$	—	$	—

Total derivatives		$	10	$	6		$	—	$	1

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

The effect of derivative instruments on the Consolidated Condensed Statement of Operations for the three and six months ended May 1, 2011 and May 2, 2010 was as follows:


		Three Months Ended May 1, 2011							Three Months Ended May 2, 2010
						Ineffective Portion								Ineffective Portion
						and Amount								and Amount
						Excluded from								Excluded from
						Effectiveness								Effectiveness
	Location of Gain	Effective Portion				Testing			Effective Portion					Testing
	or (Loss)	Gain or (Loss)		Gain or (Loss)		Gain or (Loss)			Gain or (Loss)		Gain or (Loss)			Gain or (Loss)
	Reclassified from	Recognized in		Reclassified from		Recognized in			Recognized in		Reclassified from			Recognized in
	AOCI into Income	AOCI		AOCI into Income		Income			AOCI		AOCI into Income			Income
		(In millions)							(In millions)

Derivatives in Cash Flow Hedging Relationships

Foreign exchange contracts	Cost of products sold	$	8	$	1	$	(1	)	$	1	$	—		$	—
Foreign exchange contracts	General and administrative		—		2		(1	)		—		(2	)		—

Total		$	8	$	3	$	(2	)	$	1	$	(2	)	$	—


		Six Months Ended May 1, 2011							Six Months Ended May 2, 2010
						Ineffective Portion									Ineffective Portion
						and Amount									and Amount
						Excluded from									Excluded from
						Effectiveness									Effectiveness
	Location of Gain	Effective Portion				Testing			Effective Portion						Testing
	or (Loss)	Gain or (Loss)		Gain or (Loss)		Gain or (Loss)			Gain or (Loss)			Gain or (Loss)			Gain or (Loss)
	Reclassified from	Recognized in		Reclassified from		Recognized in			Recognized in			Reclassified from			Recognized in
	AOCI into Income	AOCI		AOCI into Income		Income			AOCI			AOCI into Income			Income
		(In millions)							(In millions)

Derivatives in Cash Flow Hedging Relationships

Foreign exchange contracts	Cost of products sold	$	12	$	5	$	(3	)	$	(2	)	$	(1	)	$	—
Foreign exchange contracts	General and administrative		—		3		(1	)		—			(1	)		(1	)

Total		$	12	$	8	$	(4	)	$	(2	)	$	(2	)	$	(1	)


		Three Months Ended				Six Months Ended
		May 1,		May 2,		May 1,		May 2,
		2011		2010		2011		2010
	Location of Gain
	or (Loss)
	Recognized in	Amount of Gain or (Loss)				Amount of Gain or (Loss)
	Income	Recognized in Income				Recognized in Income
		(In millions)				(In millions)

Derivatives Not Designated as Hedging Instruments

Foreign exchange contracts	General and administrative	$	1	$	7	$	3	$	(4	)

Total		$	1	$	7	$	3	$	(4	)

Credit Risk Contingent Features

If Applied’s credit rating were to fall below investment grade, it would be in violation of credit risk contingent provisions of the derivative instruments discussed above, and certain counterparties to the derivative instruments could request immediate payment on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit risk-related contingent features that were in a net liability position was not material as of May 1, 2011.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Entering into foreign exchange contracts with banks exposes Applied to credit-related losses in the event of the banks’ nonperformance. However, Applied does not consider its exposure to be significant.


Note 6	Accounts Receivable, Net

Applied has agreements with various financial institutions to sell accounts receivable and discount promissory notes from selected customers. Applied also discounts letters of credit through various financial institutions. Applied sells its accounts receivable without recourse. Details of discounted letters of credit, factored accounts receivable and discounted promissory notes for the three and six months ended May 1, 2011 and May 2, 2010 were as follows:


	Three Months Ended				Six Months Ended
	May 1,		May 2,		May 1,		May 2,
	2011		2010		2011		2010
	(In millions)

Discounted letters of credit	$	50	$	26	$	173	$	53
Factored accounts receivable and discounted promissory notes		19		24		55		50

Total	$	69	$	50	$	228	$	103

Financing charges on the sale of receivables and discounting of letters of credit are included in interest expense in the accompanying Consolidated Condensed Statements of Operations and were not material for both periods presented.

Accounts receivable are presented net of allowance for doubtful accounts of $74 million at both May 1, 2011 and October 31, 2010. Applied sells principally to manufacturers within the semiconductor, display and solar industries. While Applied believes that its allowance for doubtful accounts is adequate and represents Applied’s best estimate as of May 1, 2011, Applied will continue to closely monitor customer liquidity and other economic conditions, which may result in changes to Applied’s estimates regarding collectability.


Note 7	Balance Sheet Detail


	May 1,		October 31,
	2011		2010
	(In millions)

Inventories
Customer service spares	$	313	$	324
Raw materials		413		260
Work-in-process		476		500
Finished goods		592		463

	$	1,794	$	1,547

Included in finished goods inventory is $229 million at May 1, 2011, and $148 million at October 31, 2010, of newly-introduced systems at customer locations where the sales transaction did not meet Applied’s revenue recognition criteria as set forth in Note 1.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)


			May 1,			October 31,
	Useful Life		2011			2010
	(In years)		(In millions)

Property, Plant and Equipment, Net
Land and improvements			$	204		$	227
Buildings and improvements		3-30		1,184			1,234
Demonstration and manufacturing equipment		3-5		677			670
Furniture, fixtures and other equipment		3-15		705			719
Construction in progress				24			19

Gross property, plant and equipment				2,794			2,869
Accumulated depreciation				(1,896	)		(1,906	)

			$	898		$	963


Accounts Payable and Accrued Expenses
Accounts payable	$	814	$	658
Compensation and employee benefits		377		435
Warranty		184		155
Dividends payable		105		93
Other accrued taxes		60		99
Restructuring reserve		23		104
Other		197		222

	$	1,760	$	1,766


Customer Deposits and Deferred Revenue
Customer deposits	$	475	$	407
Deferred revenue		804		440

	$	1,279	$	847

In the first quarter of fiscal 2011, Applied received $39 million in proceeds from the sale of a property located in North America and incurred a loss of $1 million on the transaction. At May 1, 2011, Applied had $66 million of assets held for sale.

Other accrued expenses included contractual termination obligation charges of $15 million and $40 million as of May 1, 2011 and October 31, 2010, respectively.


Note 8	Goodwill, Purchased Technology and Other Intangible Assets

Goodwill and Purchased Intangible Assets

Applied’s methodology for allocating the purchase price relating to purchase acquisitions is determined through established and generally accepted valuation techniques. Goodwill is measured as the excess of the cost of the acquisition over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. Applied assigns assets acquired (including goodwill) and liabilities assumed to one or more reporting units as of the date of acquisition. Typically, acquisitions relate to a single reporting unit and thus do not require the allocation of goodwill to multiple reporting units. If the products obtained in an acquisition are assigned to multiple reporting units, the goodwill is distributed to the respective reporting units as part of the purchase price allocation process.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Goodwill and purchased intangible assets with indefinite useful lives are not amortized, but are reviewed for impairment annually during the fourth quarter of each fiscal year and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The process of evaluating the potential impairment of goodwill and intangible assets requires significant judgment, especially in emerging markets. Applied regularly monitors current business conditions and other factors including, but not limited to, adverse industry or economic trends, restructuring actions and lower projections of profitability that may impact future operating results. For goodwill, Applied performs a two-step impairment test. In the first step, Applied compares the estimated fair value of each reporting unit to its carrying value. Applied’s reporting units are consistent with the reportable segments identified in Note 15, based on the manner in which Applied operates its business and the nature of those operations. Applied determines the fair value of each of its reporting units based on a weighting of income and market approaches. Under the income approach, Applied calculates the fair value of a reporting unit based on the present value of estimated future cash flows. Estimated future cash flows will be impacted by a number of factors including anticipated future operating results, estimated cost of capital and/or discount rates. Under the market approach, Applied estimates the fair value based on market multiples of revenue or earnings for comparable companies, as appropriate. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then Applied would perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. Applied would then allocate the fair value of the reporting unit to all of the assets and liabilities of that unit, as if Applied had acquired the reporting unit in a business combination, with the fair value of the reporting unit being the “purchase price.” The excess of the “purchase price” over the carrying amounts assigned to assets and liabilities represents the implied fair value of goodwill. If Applied determined that the carrying value of a reporting unit’s goodwill exceeded its implied fair value, Applied would record an impairment charge equal to the difference.

Applied conducted impairment tests in the fourth quarter of fiscal 2010, and the results of the first step of the impairment test indicated that Applied’s goodwill and purchased intangible assets with indefinite useful lives for each of its reporting units were not impaired. The purchased intangible assets with indefinite lives consisted primarily of a trade name. In the second quarter of fiscal 2011, Applied negotiated the divestiture of certain assets and determined the trade name included in assets held for sale to be impaired, and recorded $18 million of impairment charges.

Effective in the first quarter of fiscal 2011, Applied transferred its SunFab thin film solar product from the Energy and Environmental Solutions segment to the Applied Global Services segment. As a result of this transfer, Applied reallocated $17 million of goodwill from its Energy and Environmental Solutions segment to its Applied Global Services segment.

Details of goodwill and other indefinite-lived intangible assets were as follows:


	May 1, 2011						October 31, 2010
			Other						Other
			Intangible						Intangible
	Goodwill		Assets		Total		Goodwill		Assets		Total
	(In millions)

Silicon Systems Group	$	381	$	—	$	381	$	381	$	—	$	381
Applied Global Services		194		—		194		177		18		195
Display		116		—		116		116		—		116
Energy and Environmental Solutions		645		—		645		662		—		662

Carrying amount	$	1,336	$	—	$	1,336	$	1,336	$	18	$	1,354

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Finite-Lived Purchased Intangible Assets

Applied amortizes purchased intangible assets with finite lives using the straight-line method over the estimated economic lives of the assets, ranging from 1 to 15 years.

Applied evaluates long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset group may not be recoverable. Applied assesses the fair value of the assets based on the amount of the undiscounted future cash flow that the assets are expected to generate and recognizes an impairment loss when estimated undiscounted future cash flow expected to result from the use of the asset, plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When Applied identifies an impairment, Applied reduces the carrying value of the group of assets to comparable market values, when available and appropriate, or to its estimated fair value based on a discounted cash flow approach.

Intangible assets, such as purchased technology, are generally recorded in connection with a business acquisition. The value assigned to intangible assets is usually based on estimates and judgments regarding expectations for the success and life cycle of products and technology acquired. Applied evaluates the useful lives of its intangible assets each reporting period to determine whether events and circumstances require revising the remaining period of amortization. In addition, Applied reviews intangible assets for impairment when events or changes in circumstances indicate their carrying value may not be recoverable. Management considers such indicators as significant differences in actual product acceptance from the estimates, changes in the competitive and economic environment, technological advances, and changes in cost structure.

Details of amortized intangible assets were as follows:


	May 1, 2011									October 31, 2010
				Other									Other
	Purchased			Intangible						Purchased			Intangible
	Technology			Assets			Total			Technology			Assets			Total
	(In millions)

Silicon Systems Group	$	310		$	20		$	330		$	310		$	20		$	330
Applied Global Services		28			50			78			32			61			93
Display		110			33			143			110			33			143
Energy and Environmental Solutions		105			232			337			105			232			337

Gross carrying amount	$	553		$	335		$	888		$	557		$	346		$	903

Silicon Systems Group	$	(252	)	$	(8	)	$	(260	)	$	(247	)	$	(6	)	$	(253	)
Applied Global Services		(18	)		(40	)		(58	)		(19	)		(43	)		(62	)
Display		(99	)		(23	)		(122	)		(96	)		(23	)		(119	)
Energy and Environmental Solutions		(42	)		(170	)		(212	)		(37	)		(163	)		(200	)

Accumulated amortization	$	(411	)	$	(241	)	$	(652	)	$	(399	)	$	(235	)	$	(634	)

Carrying amount	$	142		$	94		$	236		$	158		$	111		$	269

Aggregate amortization expense was $13 million and $28 million for the three months ended May 1, 2011 and May 2, 2010, respectively, and $27 million and $53 million for the six months ended May 1, 2011 and May 2, 2010, respectively. In the second quarter of fiscal 2011, Applied negotiated the divestiture of certain assets held in the Applied Global Services segment and determined identified purchased technology and finite-lived intangible assets included in assets held for sale to be impaired, and recorded $6 million of impairment charges.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

As of May 1, 2011, future estimated amortization expense is expected to be as follows:


	Amortization Expense
	(In millions)

2011	$	25
2012		50
2013		48
2014		40
2015		25
Thereafter		48

	$	236


Note 9	Borrowing Facilities

Applied has credit facilities for unsecured borrowings in various currencies of up to $1.1 billion, of which $1.0 billion is comprised of a 5-year revolving credit agreement with a group of banks that is scheduled to expire in January 2012. This agreement provides for borrowings in United States dollars at interest rates keyed to one of the two rates selected by Applied for each advance and includes financial and other covenants with which Applied was in compliance at May 1, 2011. Remaining credit facilities in the amount of approximately $96 million are with Japanese banks. Applied’s ability to borrow under these facilities is subject to bank approval at the time of the borrowing request, and any advances will be at rates indexed to the banks’ prime reference rate denominated in Japanese yen. No amounts were outstanding under any of these facilities at both May 1, 2011 and October 31, 2010.


Note 10	Restructuring and Asset Impairments

On July 21, 2010, Applied announced a plan to restructure its Energy and Environmental Solutions segment, which was expected to impact between 400 to 500 positions globally. During the third quarter of fiscal 2010, Applied incurred employee severance charges of $45 million associated with this program. During the first quarter of fiscal 2011, as a result of changes in Applied’s operating environment and business requirements, Applied revised its workforce reduction under this program to approximately 200 positions and recorded a favorable adjustment of $28 million. The improved economic environment continued in the second quarter of fiscal 2011, and as a result Applied recorded an additional favorable adjustment of $8 million. As of May 1, 2011, the remaining severance accrual associated with restructuring reserves under this program was $2 million.

On November 11, 2009, Applied announced a restructuring program to reduce its global workforce as of October 25, 2009 by approximately 1,300 to 1,500 positions, or 10 to 12 percent, over a period of 18 months. During the first quarter of fiscal 2010, Applied recorded restructuring charges of $104 million associated with this program. During the third quarter of fiscal 2010, as a result of changes in business requirements, Applied revised its global workforce reduction under this program to approximately 1,000 positions and recorded a favorable adjustment of $20 million. The improved economic environment continued in the second quarter of fiscal 2011, and as a result Applied recorded an additional favorable adjustment of $19 million. As of May 1, 2011, the remaining severance accrual associated with restructuring reserves under this program was $16 million.

During the first and second quarters of fiscal 2011, Applied favorably adjusted the severance accrual associated with a global restructuring program announced in the first quarter of fiscal 2009 by $4 million and $1 million, respectively. As of May 1, 2011, no severance accrual remained under this program.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Changes in severance accruals associated with restructuring reserves for the six months ended May 1, 2011 were as follows:


	Severance
	(In millions)

Balance, October 31, 2010	$	99
Consumption of reserves		(14	)
Adjustment of restructuring reserves		(32	)

Balance, January 30, 2011		53
Consumption of reserves		(7	)
Adjustment of restructuring reserves		(28	)

Balance, May 1, 2011	$	18

In addition, as of May 1, 2011, Applied had $5 million in restructuring reserves associated with facilities.

During the second quarter of fiscal 2011, Applied incurred impairment charges of $24 million associated with certain intangible assets and purchased technology. See Note 8 of the Notes to Consolidated Condensed Financial Statement.

During the second quarter of fiscal 2010, Applied recorded an asset impairment charge of $9 million to write down a facility to its estimated fair value based on prices for comparable local properties. The facility was reclassified as an asset held for sale. In the first quarter of fiscal 2011, Applied recorded additional impairment charges of $3 million related to this facility.


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

Comprehensive Income

Components of comprehensive income, on an after-tax basis where applicable, were as follows:


	Three Months Ended						Six Months Ended
	May 1,			May 2,			May 1,			May 2,
	2011			2010			2011			2010
				(In millions)

Net income	$	489		$	264		$	995		$	347
Change in unrealized net gain on investments		(1	)		—			(2	)		2
Change in unrealized net gain on derivative instruments
qualifying as cash flow hedges		3			2			2			1
Change in defined benefit plan liability		(1	)		—			(1	)		—
Foreign currency translation adjustments		—			(2	)		—			(2	)

Comprehensive income	$	490		$	264		$	994		$	348

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Components of accumulated other comprehensive income, on an after-tax basis where applicable, were as follows:


	May 1,			October 31,
	2011			2010
	(In millions)

Pension liability	$	(40	)	$	(39	)
Unrealized gain on investments, net		23			25
Unrealized gain on derivative instruments qualifying as cash flow hedges		6			4
Cumulative translation adjustments		12			12

	$	1		$	2

For further details on derivative instruments, see Note 5 of the Notes to Consolidated Condensed Financial Statements.

Stock Repurchase Program

On March 8, 2010, Applied’s Board of Directors approved a new stock repurchase program authorizing up to $2.0 billion in repurchases over the next three years ending in March 2013. Under this authorization, Applied renewed its systematic stock repurchase program and may also make supplemental stock repurchases from time to time, depending on market conditions, stock price and other factors. During the three months ended May 1, 2011, Applied repurchased 8 million shares of its common stock at an average price of $15.54 per share for a total cash outlay of $118 million. During the six months ended May 1, 2011, Applied repurchased 19 million shares of its common stock at an average price of $14.48 per share for a total cash outlay of $268 million.

During the three and six months ended May 2, 2010, Applied repurchased 8 million shares of its common stock at an average price of $13.10 per share for a total cash outlay of $100 million. In light of the planned Varian acquisition (discussed in Note 16 of Notes to Consolidated Condensed Financial Statements), Applied expects to temporarily reduce the amount of its stock repurchases.

Dividends

On March 8, 2011, Applied’s Board of Directors approved an increase in the quarterly cash dividend to $0.08 per share, payable on June 22, 2011 to stockholders of record as of June 1, 2011. In December 2010, Applied’s Board of Directors declared a quarterly cash dividend in the amount of $0.07 per share that was paid on March 23, 2011 to stockholders of record as of March 2, 2011. Applied currently anticipates that it will continue to pay cash dividends on a quarterly basis in the future, although the declaration and amount of any future cash dividend are at the discretion of the Board of Directors and will depend on Applied’s financial condition, results of operations, capital requirements, business conditions and other factors, as well as a determination that cash dividends are in the best interest of Applied’s stockholders.

Share-Based Compensation

Applied has adopted stock plans that permit grants to employees of share-based awards, including stock options, restricted stock and restricted stock units (also referred to as “performance shares” under Applied’s principal equity compensation plan, the Employee Stock Incentive Plan). In addition, the Employee Stock Incentive Plan provides for the automatic grant of restricted stock units to non-employee directors and permits the grant of share-based awards to consultants. Applied also has two Employee Stock Purchase Plans, one generally for United States employees and a second for employees of international subsidiaries (collectively, ESPP), which enable eligible employees to purchase Applied common stock.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

During the three and six months ended May 1, 2011 and May 2, 2010, Applied recognized equity-based compensation expense related to stock options, ESPP shares, restricted stock units and restricted stock. Total equity-based compensation and related tax benefits were as follows:


	Three Months Ended				Six Months Ended
	May 1,		May 2,		May 1,		May 2,
	2011		2010		2011		2010
	(In millions)				(In millions)

Equity-based compensation	$	38	$	29	$	72	$	62
Tax benefit recognized	$	11	$	9	$	21	$	18

The effect of share-based compensation on the results of operations for the three and six months ended May 1, 2011 and May 2, 2010 was as follows:


	Three Months Ended				Six Months Ended
	May 1,		May 2,		May 1,		May 2,
	2011		2010		2011		2010
	(In millions)				(In millions)

Cost of products sold	$	13	$	8	$	24	$	13
Research, development, and engineering		12		10		22		22
General and administrative		9		7		18		16
Marketing and selling		4		4		8		11

Total share-based compensation	$	38	$	29	$	72	$	62

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

At May 1, 2011, Applied had $253 million in total unrecognized compensation expense, net of estimated forfeitures, related to stock option, restricted stock unit, restricted stock grants and ESPP, which will be recognized over a weighted average period of 2.8 years. At May 1, 2011, there were 156 million shares available for stock option, restricted stock unit, and restricted stock grants and an additional 56 million shares available for issuance under the ESPP.

Stock Options

Applied grants options to purchase shares of its common stock to employees and consultants. The exercise price of each stock option equals the fair market value of Applied common stock on the date of grant. Most options are scheduled to vest over four years and expire no later than seven years from the grant date. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. This model was developed for use in estimating the value of publicly traded options that have no vesting restrictions and are fully transferable. Applied’s employee stock options have characteristics significantly different from those of publicly traded options. There were no stock options granted in the six months ended May 1, 2011.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Stock option activity for the six months ended May 1, 2011 was as follows:


				Weighted
				Average
				Exercise
	Shares			Price
	(In millions, except per share amounts)

Outstanding, at October 31, 2010		51		$	15.04
Granted		—		$	—
Exercised		(4	)	$	9.39
Canceled and forfeited		(13	)	$	21.16

Outstanding at May 1, 2011		34		$	13.21

Exercisable at May 1, 2011		28		$	14.30

Restricted Stock Units and Restricted Stock

Restricted stock units are converted into shares of Applied common stock upon vesting on a one-for-one basis. Restricted stock has the same rights as other issued and outstanding shares of Applied common stock except these shares have no right to dividends and are held in escrow until the award vests. Restricted stock units and awards of restricted stock typically vest over three to four years. Vesting of restricted stock units and restricted stock usually is subject to the grantee’s continued service with Applied and, in some cases, achievement of specified performance goals. The compensation expense related to these awards is determined using the fair market value of Applied common stock on the date of the grant, and the compensation expense is recognized over the vesting period. Beginning in fiscal 2007, Applied initiated a performance-based equity award program for named executive officers and other key employees. Awards of restricted stock units or restricted stock granted under this program vest only if specific performance goals set by the Human Resources and Compensation Committee of Applied’s Board of Directors (the Committee) are achieved and if the grantee remains employed by Applied through the applicable vesting date. The performance goals require the achievement of targeted adjusted annual operating profit margin levels as compared to Applied’s peer companies in at least one of the four fiscal years beginning with the fiscal year of the grant. The fair value of these performance-based awards is estimated using the fair market value of Applied common stock on the date of the grant and assumes that the specified performance goals will be achieved. If achieved, these awards vest over a specified remaining service period. If the performance goals are not met, no compensation expense is recognized and any previously recognized compensation expense is reversed. The expected cost of each award is reflected over the service period and is reduced for estimated forfeitures. The Committee approved the grant of 2 million performance-based restricted stock units and 0.1 million performance-based shares of restricted stock under this program in the six months ended May 1, 2011. With respect to the performance-based awards granted in fiscal 2010, as of May 1, 2011, 40 percent of the awards had been earned, subject to additional time-based vesting requirements. The remaining 60 percent of the awards may still be earned, depending on future performance in one or more of fiscal years 2011 through 2013. With respect to most of the performance-based awards granted in fiscal 2008, as of May 1, 2011, 78 percent of the awards had been earned, subject to additional time-based vesting requirements. The remaining 22 percent of the awards may still be earned depending on performance during fiscal 2011.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Restricted stock unit and restricted stock activity for the six months ended May 1, 2011 was as follows:


				Weighted		Weighted
				Average		Average
				Grant Date		Remaining
	Shares			Fair Value		Contractual Term
	(In millions, except per share amounts)

Non-vested restricted stock units and restricted stock at October 31, 2010		18		$	13.33		2.8 Years
Granted		14		$	12.66
Vested		(3	)	$	13.59
Canceled		(1	)	$	13.27

Non-vested restricted stock units and restricted stock at May 1, 2011		28		$	12.96		3.0 Years

Employee Stock Purchase Plans

Under the ESPP, substantially all employees may purchase Applied common stock through payroll deductions at a price equal to 85 percent of the lower of the fair market value of Applied common stock at the beginning or end of each 6-month purchase period, subject to certain limits. Based on the Black-Scholes option pricing model, the weighted average estimated fair value of purchase rights under the ESPP was $3.61 and $3.00 for the three and six months ended May 1, 2011 and May 2, 2010, respectively. The number of shares issued under the ESPP during the three and six months ended May 1, 2011 and May 2, 2010 was 3 million and 2 million, respectively. Compensation expense is calculated using the fair value of the employees’ purchase rights under the Black-Scholes model. Underlying assumptions used in the model are outlined in the following table:


	Three Months Ended						Six Months Ended
	May 1,			May 2,			May 1,			May 2,
	2011			2010			2011			2010

ESPP:
Dividend yield		1.98	%		2.24	%		1.98	%		2.24	%
Expected volatility		27	%		33	%		27	%		33	%
Risk-free interest rate		0.17	%		0.18	%		0.17	%		0.18	%
Expected life (in years)		0.5			0.5			0.5			0.5


Note 12	Employee Benefit Plans

Applied sponsors a number of employee benefit plans, including defined benefit plans of certain foreign subsidiaries, and a plan that provides certain medical and vision benefits to eligible retirees. A summary of the

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

components of net periodic benefit costs of these defined and postretirement benefit plans for the three and six months ended May 1, 2011 and May 2, 2010 is presented below:


	Three Months Ended						Six Months Ended
	May 1,			May 2,			May 1,			May 2,
	2011			2010			2011			2010
	(In millions)						(In millions)

Service cost	$	4		$	3		$	8		$	7
Interest cost		3			4			7			7
Expected return on plan assets		(3	)		(2	)		(6	)		(4	)
Amortization of actuarial loss		1			—			1			—

Net periodic benefit cost	$	5		$	5		$	10		$	10


Note 13	Income Taxes

Applied’s effective income tax rate for the second quarter of fiscal 2011 and fiscal 2010 was a provision of 28.8 percent and 31.8 percent, respectively. Applied’s effective income tax rate for the first six months of fiscal 2011 and fiscal 2010 was a provision of 27.2 percent and 31.5 percent, respectively. The rates for the three and six months ended May 1, 2011 were both lower than the rates for the comparable periods in the prior year primarily due to an increase in income in jurisdictions outside the U.S. with lower tax rates. The tax rates for the three and six months ended May 1, 2011 further benefited from tax incentives offered in several jurisdictions. The tax rates for the three and six months ended May 1, 2011 and May 2, 2010 included the impact of restructuring charges. Applied’s future effective income tax rate depends on various factors, such as tax legislation, the geographic composition of Applied’s pre-tax income, and the tax rate on equity compensation. Management carefully monitors these factors and timely adjusts the interim income tax rate accordingly.

At May 1, 2011, income taxes payable amounted to $211 million as compared to $274 million at October 31, 2010, a decrease of $63 million. During the same period, prepaid income taxes increased by $110 million. The changes in income taxes payable and prepaid income taxes from October 31, 2010 to May 1, 2011 were primarily due to the timing of estimated tax payments as required by IRS regulations.

A number of Applied’s tax returns remain subject to examination by taxing authorities. These include U.S. federal returns for fiscal 2005 and later years, California returns for fiscal 2006 and later years, tax returns for certain other states for fiscal 2005 and later years, and tax returns in certain jurisdictions outside of the United States for fiscal 2003 and later years.

The timing of the resolution of income tax examinations, as well as the amounts and timing of various tax payments that may be made as part of the resolution process, is highly uncertain. This could cause large fluctuations in the balance sheet classification of current assets and non-current assets and liabilities. Applied does not expect a material change in unrecognized tax benefits in the next 12 months.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)


Note 14	Commitments and Contingencies

Warranty

Changes in the warranty reserves during the three and six months ended May 1, 2011 and May 2, 2010 were as follows:


	Three Months Ended						Six Months Ended
	May 1,			May 2,			May 1,			May 2,
	2011			2010			2011			2010
	(In millions)

Beginning balance	$	173		$	137		$	155		$	117
Provisions for warranty		48			32			99			66
Consumption of reserves		(37	)		(29	)		(70	)		(43	)

Ending balance	$	184		$	140		$	184		$	140

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

Guarantees

In the ordinary course of business, Applied provides standby letters of credit or other guarantee instruments to third parties as required for certain transactions initiated by either Applied or its subsidiaries. As of May 1, 2011, the maximum potential amount of future payments that Applied could be required to make under these guarantee agreements was approximately $53 million. Applied has not recorded any liability in connection with these guarantee agreements beyond that required to appropriately account for the underlying transaction being guaranteed. Applied does not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under these guarantee agreements.

Applied also has agreements with various banks to facilitate subsidiary banking operations worldwide, including overdraft arrangements, issuance of bank guarantees, and letters of credit. As of May 1, 2011, Applied Materials Inc. has provided parent guarantees to banks for approximately $191 million to cover these services.

Legal Matters

Semitool Shareholder Litigation

On November 17, 2009, Applied announced that it was making a tender offer to acquire all of the outstanding shares of Semitool, Inc. (Semitool) in accordance with an Agreement and Plan of Merger entered into with Semitool. Following this announcement, three lawsuits were filed by Semitool shareholders in the District Court of the Eleventh Judicial District Court for the State of Montana, County of Flathead, against Semitool, Semitool’s directors, Applied Materials, Inc. and Applied’s acquisition subsidiary. The actions sought certification of a class of all holders of Semitool common stock, except the defendants and their affiliates. The complaints alleged that Semitool’s directors breached their fiduciary duties by, among other things, failing to maximize shareholder value and failing to disclose material information, and that Applied aided and abetted such alleged breaches. The actions sought injunctive relief, damages and attorneys’ fees.

On December 14, 2009, all parties in these cases reached an agreement in principle to settle the matters. Without admitting any wrongdoing or fault, Semitool disclosed certain additional information in its Schedule 14D-9 filed with the Securities and Exchange Commission on December 14, 2009. Following the tender of shares

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

representing over 95 percent of the outstanding shares of Semitool common stock, the merger of Semitool into Applied’s acquisition subsidiary was completed on December 21, 2009. In November 2010, the parties filed their Stipulation and Agreement of Settlement, which provided, among other things, that plaintiffs agreed to release all known and unknown claims related to the tender offer and the merger (with certain exceptions), and defendants agreed not to object to an application by plaintiffs’ counsel for an award of attorneys’ fees and expenses in an amount up to $200,000. Under its order issued January 12, 2011, the Court preliminarily approved the stipulation and settlement and certified a class of Semitool’s public shareholders solely for purposes of settlement, comprised of all record and beneficial holders of Semitool common stock from November 17, 2009 through December 21, 2009 (subject to specified exclusions). The Court further approved, as to form and content, the notice to the class and set a settlement hearing for April 4, 2011. Following the hearing on April 4, 2011, the Court issued its order and final entry of judgment approving the settlement which, upon expiration of the applicable time period, will result in a complete and final discharge of all of plaintiffs’ claims.

Jusung

Applied has been engaged in several lawsuits and patent and administrative proceedings with Jusung Engineering Co., Ltd. and/or Jusung Pacific Co., Ltd. (Jusung) in Taiwan and South Korea since 2003, and more recently in China, involving technology used in manufacturing LCDs. Applied believes that it has meritorious claims and defenses against Jusung that it intends to pursue vigorously.

In 2004, Applied filed a complaint for patent infringement against Jusung in the Hsinchu District Court in Taiwan seeking damages and a permanent injunction for infringement of a patent related to chemical vapor deposition (CVD) equipment. Jusung filed a counterclaim against Applied. On December 31, 2010, the Hsinchu District Court announced that it had ruled against Applied and dismissed the lawsuit and Jusung’s counterclaim. Applied appealed the dismissal of its lawsuit and Jusung appealed the dismissal of its counterclaim. Jusung unsuccessfully sought invalidation of Applied’s CVD patent in the Taiwanese Intellectual Property Office (TIPO). In September 2010, the Supreme Administrative Court dismissed Jusung’s appeal of the TIPO’s decision. In 2009, Jusung filed a second action with the TIPO seeking invalidation of Applied’s CVD patent, which remains pending.

In 2006, Applied filed an action in the TIPO challenging the validity of a Jusung patent related to separability of the transfer chamber on a CVD tool. Jusung sued Applied and AKT America in Hsinchu District Court in Taiwan alleging infringement of the same patent. In March 2009, the Hsinchu District Court dismissed Jusung’s lawsuit, and in October, 2010, the Taiwan Intellectual Property Court dismissed Jusung’s appeal. Separately, the TIPO granted Applied’s request for invalidation and also revoked Jusung’s patent. In January 2010, the Taiwan Intellectual Property Court granted Jusung’s appeal of the TIPO decision revoking its patent and remanded the matter to the TIPO for reconsideration of validity. TIPO subsequently granted another party’s request for invalidation of Jusung’s patent. Jusung appealed to the Taiwan Intellectual Property Court and Applied has intervened in the appeal. In November 2009, Applied filed an action in China with the Patent Reexamination Board of the State Intellectual Property Office seeking to invalidate this patent. On June 18, 2010, the Patent Reexamination Board issued a decision invalidating Jusung’s patent in China. Jusung has appealed this decision.

In 2006, Jusung filed a complaint of private prosecution in the Taipei District Court of Taiwan alleging that Applied’s outside counsel received from the Court and used a copy of an expert report that Jusung had filed in the ongoing patent infringement lawsuits that Jusung had intended to remain confidential. The complaint names as defendants Applied’s outside counsel in Taiwan, as well as Michael R. Splinter, Applied’s Chairman, President and Chief Executive Officer, as the statutory representative of Applied. The Taipei District Court dismissed the private prosecution complaint, and the matter was transferred to the Taipei District Attorney’s Office. The Taipei District Attorney’s Office issued five successive rulings not to prosecute, each of which Jusung appealed. In each instance, the Taiwan High Court District Attorney returned the matter to the Taipei District Attorney’s Office for further consideration, where it is now pending.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Korea Criminal Proceedings

In February 2010, the Seoul Prosecutor’s Office for the Eastern District of Korea (the Prosecutor’s Office) indicted employees of several companies for the alleged improper receipt and use of confidential information belonging to Samsung Electronics Co., Ltd. (Samsung), a major Applied customer based in Korea. The Prosecutor’s Office did not name Applied or any of its subsidiaries as a party to the criminal action. The individuals charged included the former head of Applied Materials Korea (AMK), who at the time of the indictment was a vice president of Applied Materials, Inc., and certain other AMK employees. Hearings on these matters are ongoing in the Seoul Eastern District Court. Applied and Samsung entered into a settlement agreement effective as of November 1, 2010, which resolves potential civil claims related to this matter, which is separate from and does not affect the criminal proceedings.

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

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


Note 15	Industry Segment Operations

Applied’s four reportable segments are: Silicon Systems Group, Applied Global Services, Display, and Energy and Environmental Solutions. Applied’s chief operating decision-maker has been identified as the President and Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire company. Segment information is presented based upon Applied’s management organization structure as of May 1, 2011 and the distinctive nature of each segment. Future changes to this internal financial structure may result in changes to Applied’s reportable segments.

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

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

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

upgrades and capacity increases through its Applied Global Services segment as these products are considered to have reached a particular stage in the product lifecycle. Effective in the first quarter of fiscal 2011, Applied accounts for thin film products under its Applied Global Services segment.

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

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

The Display segment includes products for manufacturing LCDs for TVs, personal computers, tablets, smart phones and other video-enabled devices.

The Energy and Environmental Solutions segment includes products for fabricating crystalline-silicon (c-Si) solar photovoltaic cells and modules, high throughput roll-to-roll coating systems for flexible electronics and web products, and systems used in the manufacture of energy-efficient glass.

Net sales and operating income (loss) for each reportable segment for the three and six months ended May 1, 2011 and May 2, 2010 were as follows:


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

May 1, 2011:
Silicon Systems Group	$	1,453	$	491		$	2,950	$	1,034
Applied Global Services		614		91			1,181		176
Display		158		31			305		58
Energy and Environmental Solutions		637		170			1,113		313

Total Segment	$	2,862	$	783		$	5,549	$	1,581

May 2, 2010:
Silicon Systems Group	$	1,404	$	498		$	2,374	$	803
Applied Global Services		456		89			881		153
Display		270		90			402		115
Energy and Environmental Solutions		166		(145	)		487		(181	)

Total Segment	$	2,296	$	532		$	4,144	$	890

Operating results for the three and six months ended May 1, 2011 included favorable adjustments of $8 million and $36 million, respectively, related to a restructuring program, announced in fiscal 2010, which was reported in the Energy and Environmental Solutions segment.

In the second quarter of fiscal 2011, Applied negotiated the divestiture of certain assets held in the Applied Global Services segment and determined identified intangible assets and purchased technology included in assets held for sale to be impaired. Results for the three and six months ended May 1, 2011 included impairment charges of $24 million, which were reported in the Applied Global Services segment.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)

Reconciliations of total segment operating income to Applied’s consolidated operating income for the three and six months ended May 1, 2011 and May 2, 2010 were as follows:


	Three Months Ended						Six Months Ended
	May 1,			May 2,			May 1,			May 2,
	2011			2010			2011			2010
	(In millions)						(In millions)

Total segment operating income	$	783		$	532		$	1,581		$	890
Corporate and unallocated costs		(126	)		(137	)		(251	)		(275	)
Restructuring and asset impairment benefit (charges), net		20			(9	)		21			(113	)

Income from operations	$	677		$	386		$	1,351		$	502

The following companies accounted for at least 10 percent of Applied’s net sales for the six months ended May 1, 2011, which were for products in multiple reportable segments.


	May 1,
	2011

Taiwan Semiconductor Manufacturing Company Limited		13	%
Samsung Electronics Co., Ltd.		13	%

As of May 1, 2011, accounts receivable for those customers that accounted for at least 10 percent of Applied’s net sales for the six months ended May 1, 2011, as a percentage of total accounts receivable, were as follows:


	May 1,
	2011

Taiwan Semiconductor Manufacturing Company Limited		18	%
Samsung Electronics Co., Ltd.		10	%


Note 16	Subsequent Event

Applied expects to fund the transaction with a combination of existing cash balances and debt. Subsequent to May 1, 2011, Applied put in place a $2 billion, one-year senior bridge loan facility and plans to arrange for long-term debt financing. Subsequent to May 1, 2011, Applied also put in place a new undrawn, four-year, $1.5 billion revolving credit facility, which replaced its previous undrawn $1 billion revolving credit facility.

The Merger Agreement contains certain termination rights and provides that (i) upon the termination of the Merger Agreement under specified circumstances, including, among others, by Varian to accept a superior offer or by Applied upon a change in the recommendation of Varian’s board of directors, Varian will owe Applied a cash termination fee of $147 million; and (ii) upon termination of the Merger Agreement due to the failure to obtain certain antitrust approvals, Applied will owe Varian a cash termination fee of $200 million.


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

All statements in this Quarterly Report on Form 10-Q and those made by the management of Applied, other than statements of historical fact, are forward-looking statements. Examples of forward-looking statements include statements regarding Applied’s future financial or operating results, cash flows and cash deployment strategies, declaration of dividends, share repurchases, business strategies, projected costs, products, competitive positions, management’s plans and objectives for future operations, research and development, acquisitions and joint ventures, growth opportunities, customers, working capital, liquidity, financing plans, investment portfolio and policies, and legal proceedings and claims, as well as industry trends and outlooks. These forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. 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. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in Part II, Item 1A, “Risk Factors,” below and elsewhere in this report. Other risks and uncertainties may be disclosed in Applied’s prior Securities and Exchange Commission (SEC) filings. These and many other factors could affect Applied’s future financial condition and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by Applied or on its behalf. Applied undertakes no obligation to revise or update any forward-looking statements.

Overview

Applied provides manufacturing equipment, services and software to the global semiconductor, flat panel display, solar photovoltaic (PV) and related industries. Applied’s customers include manufacturers of semiconductor wafers and chips, flat panel liquid crystal displays (LCDs), solar PV cells and modules, and other electronic devices. These customers may use what they manufacture in their own end products or sell the items to other companies for use in advanced electronic components. Applied operates in four reportable segments: Silicon Systems Group, Applied Global Services, Display, and Energy and Environmental Solutions. A summary of financial information for each reportable segment is found in Note 15 of Notes to Consolidated Condensed Financial Statements. A discussion of factors that could affect Applied’s operations is set forth under “Risk Factors” in Item 1A, which is incorporated herein by reference. Product development and manufacturing activities occur primarily in North America, 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 historically have been driven primarily by worldwide demand for semiconductors, which in turn depends on end-user demand for electronic products. Each of Applied’s businesses is subject to highly cyclical industry conditions, as demand for manufacturing equipment and services can change depending on supply and demand for chips, LCDs, solar PVs and other electronic devices, as well as other factors, such as global economic and market conditions, and technological advances in fabrication processes.

The following table presents certain significant measurements for the three and six months ended May 1, 2011 and May 2, 2010:


	Three Months Ended								Six Months Ended
	May 1,			May 2,			Change		May 1,			May 2,			Change
	2011			2010			2011 over 2010		2011			2010			2011 over 2010
	(In millions, except percentages)

New orders	$	3,185		$	2,533		$	652	$	6,157		$	4,498		$	1,659
Net sales	$	2,862		$	2,296		$	566	$	5,549		$	4,144		$	1,405
Gross margin	$	1,189		$	927		$	262	$	2,325		$	1,638		$	687
Gross margin percent		41	%		40	%		1 point		42	%		40	%		2 points
Operating income	$	677		$	386		$	291	$	1,351		$	502		$	849
Operating margin percent		24	%		17	%		7 points		24	%		12	%		12 points
Net income	$	489		$	264		$	225	$	995		$	347		$	648
Earnings per share	$	0.37		$	0.20		$	0.17	$	0.75		$	0.26		$	0.49

Fiscal year 2011 is a 52-week year with 26 weeks in the first six months, while fiscal year 2010 was a 53-week year with 27 weeks in the first six months.

Financial results for the second quarter of fiscal 2011 reflected continued demand for Applied’s semiconductor equipment and services and increased demand for crystalline silicon (c-Si) solar PV products due to more favorable global economic and industry conditions compared to the second quarter of fiscal 2010. Total orders, net sales and net income in the quarter increased year-over-year, primarily due to continued demand for semiconductor equipment and services and c-Si products. Operating income for the second quarter of fiscal 2011 included a favorable adjustment to restructuring reserves of $28 million, offset in part by asset impairment charges of $24 million, while net income for the second quarter of fiscal of 2010 included asset impairment charges of $9 million.

Financial results for the first six months of fiscal 2011 similarly reflected increased demand across all segments due to more favorable global economic and industry conditions compared to the first six months of fiscal 2010. Total orders, net sales and net income for the first six months of fiscal 2011 increased year-over-year, due to increased demand for semiconductor equipment and services and c-Si products. Operating income for the first six months of fiscal 2011 included a favorable adjustment to restructuring reserves of $60 million, offset in part by asset impairment charges of $27 million, while net income for the first six months of 2010 included restructuring charges of $104 million and asset impairment charges of $9 million.

On May 4, 2011, Applied and Varian Semiconductor Equipment Associates, Inc. (Varian) announced the signing of a definitive merger agreement (the Merger Agreement) under which Applied agreed to acquire Varian for $63 per share in cash for a total price of approximately $4.9 billion on a fully-diluted basis. Varian designs, manufactures, markets and services semiconductor processing equipment and is the leading supplier of ion implantation equipment used by chip makers around the world. Upon completion of the acquisition, Varian will operate within Applied’s Silicon Systems Group and will continue to be based in Gloucester, Massachusetts. The closing of the acquisition is subject to customary conditions, including approval by Varian’s shareholders and review by U.S. and international regulators. Applied expects to fund the transaction with a combination of existing cash balances and debt. Applied has put in place a $2 billion, one-year senior bridge loan facility and plans to arrange for long-term debt financing. Applied also has in place a new undrawn, four-year, $1.5 billion revolving credit facility, which replaced its previous undrawn $1 billion revolving credit facility.

In addition, in March 2011, Japan experienced a significant earthquake, aftershocks and a tsunami that resulted in widespread damage and business interruptions throughout the country. Certain of Applied’s customers and suppliers are located in Japan and the Company also has sales and service centers in the country. Applied has not experienced any material impact on its business or operations to date and it has taken actions to enhance its ability to meet customers’ requirements.

Results of Operations

New Orders

New orders by geographic region, determined by the product shipment destination specified by the customer, for the three and six months ended May 1, 2011 and May 2, 2010 were as follows:


	Three Months Ended											Six Months Ended
	May 1,				Change			May 2,				May 1,				Change			May 2,
	2011				2011 over 2010			2010				2011				2011 over 2010			2010
	($)		(%)		(%)			($)		(%)		($)		(%)		(%)			($)		(%)
	(In millions, except percentages and per share amounts)

Taiwan		782		25		19			655		26		1,528		25		16			1,314		29
China		668		21		21			551		22		1,322		21		73			766		17
Korea		367		12		(35	)		561		22		593		10		(37	)		948		21
Japan		269		8		70			158		6		456		7		36			335		8
Southeast Asia		143		4		(6	)		152		6		278		4		—			277		6

Asia Pacific		2,229		70		7			2,077		82		4,177		67		15			3,640		81
North America(*)		710		22		137			300		12		1,389		23		150			556		12
Europe		246		8		58			156		6		591		10		96			302		7

Total		3,185		100		26			2,533		100		6,157		100		37			4,498		100


*		Primarily the United States.

New orders of $3.2 billion for the second quarter of fiscal 2011 were up 26 percent from the second quarter of fiscal 2010. The increase was primarily attributable to an increase in demand for semiconductor equipment from foundry and logic customers, as well as increased demand for c-Si products. New orders of $6.2 billion for the first six months of fiscal 2011 were up 37 percent from the first six months of fiscal 2010. The increase was primarily attributable to an increase in demand for semiconductor equipment from logic and foundry customers, as well as increased demand for c-Si products from solar manufacturers. For the three and six months ended May 1, 2011, customers in Taiwan, North America, and China combined represented slightly more than two thirds of total new orders.

New orders by reportable segment for the three and six months ended May 1, 2011 and May 2, 2010 were as follows:


	Three Months Ended										Six Months Ended
	May 1,				Change		May 2,				May 1,				Change		May 2,
	2011				2011 over 2010		2010				2011				2011 over 2010		2010
	($)		(%)		(%)		($)		(%)		($)		(%)		(%)		($)		(%)
	(In millions, except percentages)

Silicon Systems Group		1,715		54		21		1,416		56		3,325		54		30		2,551		57
Applied Global Services		603		19		25		483		19		1,155		19		21		957		21
Display		255		8		—		256		10		397		6		4		382		8
Energy and Environmental Solutions		612		19		62		378		15		1,280		21		111		608		14

Total		3,185		100		26		2,533		100		6,157		100		37		4,498		100

The Silicon Systems Group’s relative share of total new orders decreased in the three and six months ended May 1, 2011 as compared to the three and six months ended May 2, 2010, while the relative share of new orders in the Energy and Environmental Solutions segment increased.

Applied’s backlog for the most recent three fiscal quarters was as follows: $3.9 billion at May 1, 2011, $3.5 billion at January 30, 2011, and $3.2 billion at October 31, 2010. Backlog increased in the second quarter of fiscal 2011 primarily due to increases in new orders for the Silicon Systems Group segment and the Energy and Environmental Solutions segment reflecting increased demand for semiconductor equipment and c-Si products, respectively. 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; (2) contractual service revenue and maintenance fees to be earned within the next 12 months; and (3) orders for SunFab lines that are anticipated to be recognized as revenue 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. The majority of sales in the Silicon Systems Group, Applied’s largest business segment, were from orders received and shipped in the same quarter.

Net Sales

Net sales by geographic region, determined by the location of customers’ facilities to which products were shipped, for the three and six months ended May 1, 2011 and May 2, 2010 were as follows:


	Three Months Ended											Six Months Ended
	May 1,				Change			May 2,				May 1,				Change			May 2,
	2011				2011 over 2010			2010				2011				2011 over 2010			2010
	($)		(%)		(%)			($)		(%)		($)		(%)		(%)			($)		(%)
	(In millions, except percentages)

China		741		26		219			232		10		1,415		26		278			374		9
Taiwan		650		23		(7	)		699		30		1,286		23		6			1,213		29
Korea		299		10		(53	)		632		28		468		8		(51	)		964		23
Japan		208		7		(11	)		233		10		374		7		(8	)		407		10
Southeast Asia		185		7		76			105		5		339		6		41			241		6

Asia Pacific		2,083		73		10			1,901		83		3,882		70		21			3,199		77
North America(*)		467		16		103			230		10		1,077		19		129			471		11
Europe		312		11		89			165		7		590		11		24			474		12

Total		2,862		100		25			2,296		100		5,549		100		34			4,144		100


*		Primarily the United States.

Net sales of $2.9 billion for the second quarter of fiscal 2011 were up 25 percent from the second quarter of fiscal 2010. For three and six months ended May 1, 2011, customers in China, Taiwan, and North America combined represented about two thirds of total net sales. Net sales of $5.5 billion for the first six months of fiscal 2011 were up 34 percent from the first six months of fiscal 2010. For the three and six months ended May 1, 2011, the majority of net sales in China reflected purchases of c-Si products by solar PV manufacturers, and the majority of net sales in Taiwan were due to purchases of semiconductor products by logic and foundry customers.

Net sales by reportable segment for the three and six months ended May 1, 2011 and May 2, 2010 were as follows:


	Three Months Ended											Six Months Ended
	May 1,				Change			May 2,				May 1,				Change			May 2,
	2011				2011 over 2010			2010				2011				2011 over 2010			2010
	($)		(%)		(%)			($)		(%)		($)		(%)		(%)			($)		(%)
	(In millions, except percentages)

Silicon Systems Group		1,453		51		3			1,404		61		2,950		53		24			2,374		57
Applied Global Services		614		21		35			456		20		1,181		21		34			881		21
Display		158		6		(41	)		270		12		305		6		(24	)		402		10
Energy and Environmental Solutions		637		22		284			166		7		1,113		20		129			487		12

Total		2,862		100		25			2,296		100		5,549		100		34			4,144		100

The Silicon Systems Group’s relative share of total net sales decreased for the three and six months ended May 1, 2011 as compared to the three and six months ended May 2, 2010, while net sales in the Energy and Environmental Solutions segment increased significantly.

Gross Margin

Gross margins for the three and six months ended May 1, 2011 and May 2, 2010 were as follows:


	Three Months Ended								Six Months Ended
	May 1,			May 2,			Change		May 1,			May 2,			Change
	2011			2010			2011 over 2010		2011			2010			2011 over 2010
	(In millions, except percentages)

Gross margin	$	1,189		$	927		$	262	$	2,325		$	1,638		$	687
Gross margin (% of net sales)		41	%		40	%		1 point		42	%		40	%		2 points

The increases in the gross margin for both the three and six months ended May 1, 2011 from the three and six months ended May 2, 2010 were principally attributable to higher net sales, more favorable product mix, higher factory utilization, lower costs from continued transition of the manufacturing of certain Silicon Systems Group products to Applied’s Singapore Operations Center, and continued cost control measures. Gross margin during the second quarters of fiscal 2011 and 2010 included $13 million and $8 million of share-based compensation expense, respectively. Gross margin during the first six months of fiscal 2011 and 2010 included $24 million and $13 million of share-based compensation expense, respectively.

Research, Development and Engineering

Research, Development and Engineering (RD&E) expenses for the three and six months ended May 1, 2011 and May 2, 2010 were as follows:


	Three Months Ended							Six Months Ended
	May 1,		May 2,		Change			May 1,		May 2,		Change
	2011		2010		2011 over 2010			2011		2010		2011 over 2010
	(In millions)

Research, development and engineering	$	297	$	306	$	(9	)	$	567	$	575	$	(8	)

Applied’s future operating results depend to a considerable extent on its ability to maintain a competitive advantage in the equipment and service products it provides. Applied believes that it is critical to continue to make substantial investments in RD&E to assure the availability of innovative technology that meets the current and projected requirements of its customers’ most advanced designs. Applied historically has maintained its commitment to investing in RD&E in order to continue to offer new products and technologies. The reduction in RD&E expense for the three and six months ended May 1, 2011 as compared to the comparable 2010 periods was principally due to the reduction of the thin film development activities. RD&E expense during the second quarters of fiscal 2011 and 2010 included $12 million and $10 million of share-based compensation expense, respectively. RD&E expense during the first six months of both fiscal 2011 and 2010 included $22 million of share-based compensation expense. 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. From time to time, Applied also acquires technologies, either in existing or new product areas, to complement its existing technology capabilities and to reduce time to market.

Marketing, Selling, General and Administrative

Marketing, selling, general and administrative expenses for the three and six months ended May 1, 2011 and May 2, 2010 were as follows:


	Three Months Ended							Six Months Ended
	May 1,		May 2,		Change			May 1,		May 2,		Change
	2011		2010		2011 over 2010			2011		2010		2011 over 2010
	(In millions)

Marketing, selling, general and administrative	$	219	$	226	$	(7	)	$	440	$	448	$	(8	)

The decrease in marketing, selling, general and administrative expenses for both the three and six months ended May 1, 2011 reflected lower general and administrative expenses as a result of the restructuring of the Energy and Environmental Solutions segment that occurred in the third quarter of fiscal 2010, offset in part by increased marketing and selling expenses. Marketing, selling and general and administrative expenses during the second quarters of fiscal 2011 and 2010 included $13 million and $11 million of share-based compensation expense, respectively. Foreign currency fluctuation gain in the second quarter of fiscal 2011 amounted to $19 million as compared to a loss of $3 million in the second quarter of fiscal 2010. Marketing, selling and general and administrative expenses during the first six months of fiscal 2011 and 2010 included $26 million and $27 million of share-based compensation expense, respectively. Foreign currency fluctuation gain in the six months ended May 1, 2011 amounted to $13 million as compared to a loss of $3 million in the six months ended May 2, 2010.

Restructuring and Asset Impairments

Restructuring and asset impairment expenses for the three and six months ended May 1, 2011 and May 2, 2010 were as follows:


	Three Months Ended								Six Months Ended
	May 1,			May 2,		Change			May 1,			May 2,		Change
	2011			2010		2011 over 2010			2011			2010		2011 over 2010
	(In millions)

Restructuring and asset impairments	$	(4	)	$	9	$	(13	)	$	(33	)	$	113	$	(146	)

During the second quarter of fiscal 2011, Applied incurred impairment charges of $24 million associated with certain intangible assets and purchased technology. See Note 8 of Notes to Consolidated Condensed Financial Statements.

For further details, see Note 10 of Notes to Consolidated Condensed Financial Statements.

Net Interest Income and Other Income, Net

Net interest income and other income, net, for the three and six months ended May 1, 2011 and May 2, 2010 were as follows:


	Three Months Ended						Six Months Ended
	May 1,		May 2,		Change		May 1,		May 2,		Change
	2011		2010		2011 over 2010		2011		2010		2011 over 2010
	(In millions)

Net interest income and other income, net	$	9	$	5	$	4	$	15	$	9	$	6

The increases in net interest income and other income, net for both the three and six months ended May 1, 2011 were primarily due to an increase in gains realized on sale of investment securities.

Income Taxes

Income tax expenses for the three and six months ended May 1, 2011 and May 2, 2010 were as follows:


	Three Months Ended								Six Months Ended
	May 1,			May 2,			Change		May 1,			May 2,			Change
	2011			2010			2011 over 2010		2011			2010			2011 over 2010
	(In millions, except percentages)

Provision for income taxes	$	197		$	123		$	74	$	371		$	159		$	212
Effective income tax rate		29	%		32	%		(3) points		27	%		31	%		(4) points

The rates for the first three and first six months ended May 1, 2011 were both lower than the rates for the comparable periods in the prior year primarily due to an increase in income in jurisdictions outside the U.S. with lower tax rates. The tax rates for the three and six months ended May 1, 2011 further benefited from tax incentives offered in several jurisdictions. The tax rates for the three and six months ended May 1, 2011 and May 2, 2010 included the impact of restructuring charges. Applied’s future effective income tax rate depends on various factors, such as tax legislation, the geographic composition of Applied’s pre-tax income, and the tax rate on equity compensation. Management carefully monitors these factors and timely adjusts the interim income tax rate accordingly.

Segment Information

Applied reports financial results in four segments: Silicon Systems Group, Applied Global Services, Display, and Energy and Environmental Solutions. A description of the products and services, as well as financial data, for each reportable segment can be found in Note 15 of Notes to Consolidated Condensed Financial Statements. Applied does not allocate to its reportable segments certain operating expenses that it manages separately at the corporate level. These unallocated costs include costs for share-based compensation; certain management, finance, legal, human resources, 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 charges or adjustments pertain to a specific reportable segment.

The results for each reportable segment are discussed below.

Silicon Systems Group Segment

The Silicon Systems Group segment includes semiconductor capital equipment for deposition, etch, rapid thermal processing, chemical mechanical planarization, metrology and inspection, and wafer packaging. Development efforts are focused on solving customers’ key technical challenges, including transistor performance and nanoscale patterning, and improving chip manufacturing productivity to reduce costs.

Factors that influenced the competitive environment for the Silicon Systems Group in the first six months of fiscal 2011 included the rebound in the semiconductor industry, driven by higher demand for consumer and computing devices. Higher factory utilization rates and tight device supply led manufacturers to increase their wafer fab equipment (WFE) capital spending, which is the major driver for Silicon Systems Group net sales.

Certain significant measures for the three and six months ended May 1, 2011 and May 2, 2010 were as follows:


	Three Months Ended											Six Months Ended
	May 1,			May 2,			Change					May 1,			May 2,			Change
	2011			2010			2011 over 2010					2011			2010			2011 over 2010
	(In millions, except percentages)

New orders	$	1,715		$	1,416		$	299		21	%	$	3,325		$	2,551		$	774	30	%
Net sales		1,453			1,404			49		3	%		2,950			2,374			576	24	%
Operating income		491			498			(7	)	(1)	%		1,034			804			230	29	%
Operating margin		34	%		35	%				(1) point			35	%		34	%			1 point

New orders increased by $299 million to $1.7 billion for the second quarter of fiscal 2011 compared to the second quarter of fiscal 2010. The increases in new orders for the three months ended May 1, 2011 were primarily from foundry and logic customers partially offset by decreased orders from memory customers. New orders also increased by $774 million to $3.3 billion for the first six months of fiscal 2011 compared to the first six months of fiscal 2010. The increases in new orders for the six months ended May 1, 2011 were primarily from logic and foundry customers, while orders from memory customers declined.

New orders for the Silicon Systems Group by end use application for the three and six months ended May 1, 2011 and May 2, 2010 were as follows:


	Three Months Ended						Six Months Ended
	May 1,			May 2,			May 1,			May 2,
	2011			2010			2011			2010

Foundry		47	%		37	%		51	%		39	%
Memory		28	%		51	%		25	%		50	%
Logic and other		25	%		12	%		24	%		11	%

		100	%		100	%		100	%		100	%

Net sales increased by $49 million to $1.5 billion for the second quarter of fiscal 2011 compared to the second quarter of fiscal 2010, and also increased by $576 million to $3.0 billion for the first six months of fiscal 2011 compared to the first six months of fiscal 2010. The increases in net sales for the three and six months ended May 1, 2011 were from logic and foundry customers, while investment from memory customers declined. Three customers accounted for 58 percent of net sales in this segment in the first six months of fiscal 2011. Approximately 59 percent of net sales in the second quarter of fiscal 2011 were for orders received and shipped within the quarter.

The following regions accounted for at least 30 percent of total net sales for the Silicon Systems Group segment for either the three or six months ended May 1, 2011 and May 2, 2010:


	Three Months Ended											Six Months Ended
	May 1,				Change			May 2,				May 1,				Change			May 2,
	2011				2011 over 2010			2010				2011				2011 over 2010			2010
	($)		(%)		(%)			($)		(%)		($)		(%)		(%)			(%)		(%)
	(In millions, except percentages)

Taiwan		453		31		(7	)		489		35		866		29		1			859		36
Korea		210		14		(54	)		453		32		328		11		(55	)		723		30

In the second quarter of fiscal 2011, customers in Taiwan and Korea accounted for 45 percent of total net sales for the Silicon Systems Group segment as compared to 67 percent in the second quarter of fiscal 2010. For the first six months of fiscal 2011, customers in Taiwan and Korea accounted for 40 percent of total net sales for the Silicon Systems Group segment as compared to 66 percent for the first six months of fiscal 2010.

The book to bill ratio (new orders divided by net sales) increased to 1.2 for the second quarter of fiscal 2011 compared to 1.0 for the second quarter of fiscal 2010. The increase for the three months ended May 1, 2010 reflected a higher year-over-year increase in demand. The book to bill ratio was 1.1 for the first six months of both fiscal 2011 and fiscal 2010.

Operating income decreased by $7 million to $491 million for the second quarter of fiscal 2011 compared to the second quarter of fiscal 2010. The decrease in operating income for the three months ended May 1, 2011 was due to an increase in operating expenses. Operating income increased by $230 million to $1.0 billion for the first six months of fiscal 2011 compared to the first six months of fiscal 2010. Operating income for the six months ended May 1, 2011 increased due to higher revenue from semiconductor equipment sales and reflected the recovery in the semiconductor equipment industry during the first half of fiscal 2011 and lower costs from continued transition of the manufacturing of certain products to Applied’s Singapore Operations Center.

Operating results of the Silicon Systems Group may be affected by an agreement between Applied and Samsung Electronics Co., Ltd (Samsung) that is generally effective for a three-year period from November 1, 2010, which provides in part for volume-based rebates and other incentives to Samsung. The financial impact of the rebates and incentives on the segment is highly variable and depends on the volume of semiconductor equipment purchases by Samsung.

Applied Global Services Segment

The Applied Global Services segment encompasses technically differentiated products, including spares, services, certain earlier generation equipment products, and remanufactured equipment, to improve operating efficiency, reduce operating costs, and lessen the environmental impact of semiconductor, display and solar customers’ factories. 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 fiscal 2010, as part of the restructuring of the Energy and Environmental Solutions segment, Applied discontinued sales to new customers of its fully-integrated SunFab production lines but continued to offer individual tools for thin film solar manufacturing. Applied is supporting existing SunFab customers with services, upgrades and capacity increases through its Applied Global Services segments these products are considered to have reached a particular stage in the product lifecycle. Effective in the first quarter of fiscal 2011, Applied accounts for SunFab thin film products under its Applied Global Services segment.

Industry conditions that affected Applied Global Services’ sales of spares and services in the first six months of fiscal 2011 were principally semiconductor manufacturers’ wafer starts as well as additions to the tool installed base.

Certain significant measures for the three and six months ended May 1, 2011 and May 2, 2010 were as follows:


	Three Months Ended										Six Months Ended
	May 1,			May 2,			Change				May 1,			May 2,			Change
	2011			2010			2011 over 2010				2011			2010			2011 over 2010
							(In millions, except percentages)

New orders	$	603		$	483		$	120	25	%	$	1,155		$	957		$	198	21	%
Net sales		614			456			158	35	%		1,181			881			300	34	%
Operating income		91			89			2	1	%		176			153			23	15	%
Operating margin		15	%		20	%			(5) points			15	%		17	%			(2) points

New orders increased by $120 million to $603 million for the second quarter of fiscal 2011 compared to the second quarter of fiscal 2010, and also increased by $198 million to $1.2 billion for the first six months of fiscal 2011 compared to the first six months of fiscal 2010. The increases in new orders for the three and six months ended May 1, 2011 were primarily due to higher demand for spare parts and refurbished equipment, reflecting customers’ higher factory utilization rates.

Net sales increased by $158 million to $614 million for the second quarter of fiscal 2011 compared to the second quarter of fiscal 2010, and also increased by $300 million to $1.2 billion for the first six months of fiscal

2011 compared to the first six months of fiscal 2010. The increases in net sales for the three and six months ended May 1, 2011 were due primarily to higher sales of refurbished equipment.

The book to bill ratio decreased to 1.0 for the second quarter of fiscal 2011 compared to 1.1 for the second quarter of fiscal 2010. The book to bill ratio decreased to 1.0 for the first six months of fiscal 2011 compared to 1.1 for the first six months of fiscal 2010. The decrease for both the three and six months ended May 1, 2011 reflected a higher year-over-year increase in net sales relative to demand.

Operating income increased by $2 million to $91 million for the second quarter of fiscal 2011 compared to the second quarter of fiscal 2010. Operating income increased by $23 million to $176 million for the first six months of fiscal 2011 compared to the first six months of fiscal 2010. The increases in operating income for the three and six months ended May 1, 2011 primarily reflected increased sales and improved gross margins of refurbished equipment and included impairment charges of $24 million. The decreases in operating margin for the three and six months ended May 1, 2011 were due to changes in product mix and impairment charges incurred.

Display Segment

The Display segment encompasses products for manufacturing LCDs for TVs, personal computers, tablets, smart phones, and other video-enabled devices. The segment is focused on expanding market share by differentiation with larger-scale substrates, entry into new markets, and development of products to enable cost reductions through productivity and uniformity.

The competitive environment for Applied’s Display segment in the first half of fiscal 2011, as compared to the fourth quarter of fiscal 2010 was characterized by decreased capacity requirements for larger flat panel televisions and growing global demand for touch screen devices.

Certain significant measures for the three and six months ended May 1, 2011 and May 2, 2010 were as follows:


	Three Months Ended											Six Months Ended
	May 1,			May 2,			Change					May 1,			May 2,			Change
	2011			2010			2011 over 2010					2011			2010			2011 over 2010
	(In millions, except percentages)

New orders	$	255		$	256		$	(1	)	—		$	397		$	382		$	15		4	%
Net sales		158			270			(112	)	(41)	%		305			402			(97	)	(24)	%
Operating income		31			90			(59	)	(66)	%		58			115			(57	)	(50)	%
Operating margin		19	%		33	%				(14) points			19	%		29	%				(10) points

New orders remained essentially flat for the second quarter of fiscal 2011 compared to the second quarter of fiscal 2010, and increased by $15 million to $397 million for the first six months of fiscal 2011 compared to the first six months of fiscal 2010. The increase in new orders for the six months ended May 1, 2011 reflected increased demand from major panel makers for touch panel and Low-Temperature Polycrystalline Silicon (LTPS) systems.

Net sales decreased by $112 million to $158 million for the second quarter of fiscal 2011 compared to the second quarter of fiscal 2010, and also decreased by $97 million to $305 million for the first six months of fiscal 2011 compared to the first six months of fiscal 2010. The decreases in net sales for the three and six months ended May 1, 2011 reflected decreased demand for core LCD products, partially offset by increased demand for touch panel and LTPS systems. One customer accounted for 32 percent of net sales in the Display segment in the first six months of fiscal 2011.

The following regions accounted for at least 30 percent of total net sales for the Display Group segment for either the three or six months ended May 1, 2011 and May 2, 2010:


	Three Months Ended											Six Months Ended
	May 1,				Change			May 2,				May 1,				Change			May 2,
	2011				2011 over 2010			2010				2011				2011 over 2010			2010
	($)		(%)		(%)			($)		(%)		($)		(%)		(%)			($)		(%)
	(In millions, except percentages)

China		82		52		91			43		16		143		47		110			68		17
Korea		20		13		(85	)		129		48		20		7		(87	)		150		37
Taiwan		18		11		(79	)		85		32		99		32		(26	)		133		33

Customers in China accounted for 52 percent of net sales in this segment for the second quarter of fiscal 2011. In the second quarter of fiscal 2010, customers in Korea and Taiwan accounted for 80 percent of total net sales for the Display segment. For the first six months of fiscal 2011, customers in China and Taiwan combined accounted for 79 percent of net sales in this segment. For the first six months of fiscal 2010, customers in Korea and Taiwan accounted for 70 percent of total net sales for the Display segment.

The book to bill ratio increased to 1.6 for the second quarter of fiscal 2011 compared to 1.0 for the second quarter of fiscal 2010. The book to bill ratio increased to 1.3 for the first six months of fiscal 2011 compared to 1.0 for the first six months of fiscal 2010. The increase for both the three and six months ended May 1, 2010, reflected lower year-over-year net sales relative to year-over-year new orders.

Operating income decreased by $59 million to $31 million for the second quarter of fiscal 2011 compared to the second quarter of fiscal 2010. Operating income decreased by $57 million to $58 million for the first six months of fiscal 2011 compared to the first six months of fiscal 2010. The decreases in operating income for the three and six months ended May 1, 2011 primarily reflected a decrease in net sales. The decreases in operating margin for the three and six months ended May 1, 2011 were due to changes in product mix.

Energy and Environmental Solutions Segment

The Energy and Environmental Solutions segment includes products for fabricating c — Si solar PVs, high throughput roll-to-roll coating systems for flexible electronics and web products, and systems used in the manufacture of energy-efficient glass. This business is focused on delivering solutions to generate and conserve energy, with an emphasis on lowering the cost to produce solar power by providing equipment to enhance manufacturing scale and efficiency. Until the first quarter of fiscal 2011, the Energy and Environmental Solutions segment included the fully-integrated SunFab production line for manufacturing thin film solar panels. During the third quarter of fiscal 2010, Applied announced a plan to restructure its Energy and Environmental Solutions segment in response to adverse market conditions for thin film solar and as a result, Applied discontinued sales to new customers of its fully-integrated SunFab lines, but is offering individual tools for thin film solar manufacturing. Applied is supporting existing SunFab line customers with services, upgrades and capacity increases through its Applied Global Services segment, and effective in the first quarter of fiscal 2011, Applied accounts for thin film products under its Applied Global Services segment rather than its Energy and Environmental Solutions segment. RD&E efforts to improve thin film panel efficiency and high-productivity deposition is continuing under the Energy and Environmental Solutions segment.

Certain significant measures for the three and six months ended May 1, 2011 and May 2, 2010 were as follows:


	Three Months Ended										Six Months Ended
	May 1,			May 2,			Change				May 1,			May 2,			Change
	2011			2010			2011 over 2010				2011			2010			2011 over 2010
							(In millions, except percentages)

New orders	$	612		$	378		$	234	62	%	$	1,280		$	608		$	672	111	%
Net sales		637			166			471	284	%		1,113			487			626	129	%
Operating income (loss)		170			(145	)		315	217	%		313			(181	)		494	273	%
Operating margin		27	%		(87	)%			114 points			28	%		(37	)%			65 points

New orders increased by $234 million to $612 million for the second quarter of fiscal 2011 compared to the second quarter of fiscal 2010, and also increased by $672 million to $1.3 billion for the first six months of fiscal 2011 compared to the first six months of fiscal 2010. The increases in new orders for the three and six months ended May 1, 2011 reflected significantly increased demand for c-Si products, particularly wafering and metallization products. Government subsidies for solar panel manufacturers in China drove demand by these manufacturers, leading to order growth year-over-year for both the three and six months ended May 1, 2011.

Net sales increased by $471 million to $637 million for the second quarter of fiscal 2011 compared to the second quarter of fiscal 2010, and also increased by $626 million to $1.1 billion for the first six months of fiscal 2011 compared to the first six months of fiscal 2010. The increases in net sales for the three and six months ended May 1, 2011 primarily reflected higher sales to c-Si customers. Net sales for the three and six months ended May 2, 2010 included $22 million and $230 million, respectively, in revenue from SunFab thin film customers.

The following regions accounted for at least 30 percent of total net sales for the Energy and Environmental Solutions segment for either the three or six months ended May 1, 2011 and May 2, 2010:


	Three Months Ended											Six Months Ended
	May 1,				Change			May 2,				May 1,				Change			May 2,
	2011				2011 over 2010			2010				2011				2011 over 2010			2010
	($)		(%)		(%)			($)		(%)		($)		(%)		(%)			($)		(%)
	(In millions, except percentages)

China		487		76		387			100		60		876		79		425			167		34
Europe		22		3		(21	)		28		17		42		4		(83	)		250		51

For the second quarter of fiscal 2011, customers in China accounted for 79 percent of new orders and 76 percent of net sales in the Energy and Environmental Solutions segment. For the first six months of fiscal 2011, customers in China accounted for 79 percent of new orders and 79 percent of net sales in this segment. In the second quarter of fiscal 2010, customers in China accounted for 60 percent of total net sales for the Energy and Environmental Solutions segment. For the first six months of fiscal 2010, customers in Europe and China accounted for 85 percent of total net sales in this segment.

The book to bill ratio decreased to 1.0 for the second quarter of fiscal 2011 compared to 2.3 for the second quarter of fiscal 2010. The book to bill ratio decreased to 1.2 for the first six months of fiscal 2011 compared to 1.3 for the first six months of fiscal 2010. The decrease for both the three and six months ended May 1, 2010 reflected a higher increase in net sales year-over-year relative to demand.

The Energy and Environmental Solutions segment reported operating income of $170 million for the second quarter of fiscal 2011 compared to an operating loss of $145 million for the second quarter of fiscal 2010. The increase in operating income in the second quarter of fiscal 2011 was attributable to higher net sales of c-Si products. The Energy and Environmental Solutions segment reported operating income of $313 million for the first six months of fiscal 2011 compared to an operating loss of $181 million for the first six months of fiscal 2010. The increase in operating income for the first six months of fiscal 2011 was attributable to significantly higher net sales of c-Si products. Operating income for the three and six months ended May 1, 2011 included favorable adjustments of $8 million and $36 million, respectively, related to a restructuring program announced in the third quarter of fiscal 2010, and reported in the Energy and Environmental Solutions segment. The increases in operating margin for the three and six months ended May 1, 2011 were due to higher manufacturing volume for c-Si products. Operating loss for the three and six months ended May 2, 2010 included an $83 million inventory charge related to thin film solar manufacturing equipment.

Financial Condition, Liquidity and Capital Resources

Applied’s cash, cash equivalents and investments increased to $4.6 billion at May 1, 2011 from $3.9 billion at October 31, 2010, due primarily to an increase in cash generated from operating activities.

Cash, cash equivalents and investments consist of the following:


	May 1,		October 31,
	2011		2010
	(In millions)

Cash and cash equivalents	$	2,558	$	1,858
Short-term investments		750		727
Long-term investments		1,269		1,307

Total cash, cash-equivalents and investments	$	4,577	$	3,892

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


	May 1,			May 2,
	2011			2010
	(In millions)

Cash provided by operating activities	$	1,129		$	899
Cash used in investing activities	$	(34	)	$	(710	)
Cash used in financing activities	$	(396	)	$	(169	)

Applied generated $1.1 billion of cash from operating activities for the six months ended May 1, 2011. The primary sources of cash from operating activities for the six months ended May 1, 2011 were net income, as adjusted to exclude the effect of non-cash charges including depreciation, amortization, share-based compensation, restructuring and asset impairments, and changes in components of working capital. The change in working capital for the six months ended May 1, 2011 was negatively impacted by increased payments for variable compensation and income taxes. Applied utilized programs to discount letters of credit issued by customers of $173 million and $53 million for the six months ended May 1, 2011 and May 2, 2010, respectively. Discounting of letters of credit depends on many factors, including the willingness of financial institutions to discount the letters of credit and the cost of such arrangements. For the six months ended May 1, 2011 and May 2, 2010, Applied factored accounts receivable and discounted promissory notes totaling $55 million and $50 million, respectively. Days sales outstanding for the second quarter of fiscal 2011 decreased to 61 days, compared to 66 days in the first quarter of fiscal 2011, primarily due to an increase in net sales from the first quarter of fiscal 2011. Days sales outstanding varies due to the timing of shipments and the payment terms. Applied’s working capital was $4.7 billion at May 1, 2011 and $3.9 billion at October 31, 2010. During the first six months of fiscal 2010, Applied received a U.S. federal income tax refund of approximately $130 million for the carryback of Applied’s net operating loss from fiscal 2009 to fiscal 2005.

Applied used $34 million of cash for investing activities during the six months ended May 1, 2011. Capital expenditures of $81 million for the six months ended May 1, 2011, which included construction in progress additions and purchases of equipment in North America, was offset by $39 million in proceeds received from the sale of a property located in North America. Proceeds from sales and maturities of investments, net of purchases of investments, totaled $8 million for the six months ended May 1, 2011. Investing activities also include investments in technology and acquisitions of companies to allow Applied to access new market opportunities or emerging technologies. During the six months ended May 2, 2010, Applied acquired Semitool Inc., a public company based in the state of Montana, for $323 million, net of cash acquired.

Applied used $396 million of cash for financing activities during the six months ended May 1, 2011, consisting primarily of $268 million in common stock repurchases and $186 million in cash dividends, offset in part by $59 million in proceeds from common stock issuances related to equity compensation awards. In March 2010, Applied’s Board of Directors approved a new stock repurchase program authorizing up to $2 billion in repurchases over the next three years ending in March 2013. In light of the planned Varian acquisition (discussed in Note 16 of Notes to Consolidated Condensed Financial Statements), Applied expects to temporarily reduce the amount of its stock repurchases.

2011 to stockholders of record as of March 2, 2011. 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.

At May 1, 2011, Applied had credit facilities for unsecured borrowings in various currencies of up to $1.1 billion, of which $1.0 billion was comprised of a 5-year revolving credit agreement with a group of banks scheduled to expire in January 2012. This agreement provides for borrowings in United States dollars at interest rates keyed to one of the two rates selected by Applied for each advance and includes financial and other covenants with which Applied was in compliance at May 1, 2011. Remaining credit facilities in the amount of approximately $96 million are with Japanese banks. Applied’s ability to borrow under these facilities is subject to bank approval at the time of the borrowing request, and any advances will be at rates indexed to the banks’ prime reference rate denominated in Japanese yen. No amounts were outstanding under any of these facilities at both May 1, 2011 and October 31, 2010.

On May 4, 2011, Applied and Varian Semiconductor Equipment Associates, Inc. (Varian) announced the signing of a definitive merger agreement (the Merger Agreement) under which Applied will acquire Varian for $63 per share in cash for a total price of approximately $4.9 billion on a fully-diluted basis. Applied expects to fund the transaction with a combination of existing cash balances and debt. Applied has put in place a $2 billion, one-year senior bridge loan facility and plans to arrange for long-term debt financing. Applied also has in place a new undrawn, four-year, $1.5 billion revolving credit facility, which replaced its previous undrawn $1 billion revolving credit facility. Subsequent to the announcement, Moody’s Investors Service and Standard & Poor’s Ratings Services issued releases stating, respectively, that Applied’s “A3 long-term rating” and “A- rating and stable rating outlook” will not be affected by the planned acquisition of Varian.

Applied’s investment portfolio consists principally of investment grade money market mutual funds, U.S. Treasury and agency securities, municipal bonds, corporate bonds and mortgage-backed and asset-backed securities, as well as equity securities. Applied regularly monitors the credit risk in its investment portfolio and takes appropriate measures, which may include the sale of certain securities, to manage such risks prudently in accordance with its investment policies.

At May 1, 2011, Applied had a gross unrealized loss in its investment portfolio of $1 million due to a decrease in the fair value of certain fixed income securities. For the six months ended May 1, 2011, Applied did not recognize any impairment on its investments.

Applied did not record a bad debt provision during the six months ended May 1, 2011. During the six months ended May 2, 2010, Applied recorded a bad debt provision of $6 million as a result of certain customers’ financial

condition. While Applied believes that its allowance for doubtful accounts at May 1, 2011 is adequate, it will continue to closely monitor customer liquidity and economic conditions.

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

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported. Note 1 of Notes to Consolidated Financial Statements describes the significant accounting policies used in the preparation of the consolidated financial statements. Certain of these significant accounting policies are considered to be critical accounting policies.

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

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

Management believes that the following are critical accounting policies:

Revenue Recognition

In 2009, the Financial Accounting Standards Board issued amended revenue recognition guidance for arrangements with multiple deliverables and certain software sold with tangible products. This new guidance eliminates the residual method of revenue recognition and allows the use of management’s best estimate of selling price for individual elements of an arrangement when vendor specific evidence or third party evidence is

unavailable. Applied implemented this guidance prospectively beginning in the first quarter of fiscal 2010 for transactions that were initiated or materially modified during fiscal 2010. The implementation of the new guidance had an insignificant impact on reported net sales as compared to net sales under previous guidance, as the new guidance did not change the units of accounting within sales arrangements and the elimination of the residual method for the allocation of arrangement consideration had an inconsequential impact on the amount and timing of reported net sales.

Warranty Costs

Applied provides for the estimated cost of warranty when revenue is recognized. Estimated warranty costs are determined by analyzing specific product, current and historical configuration statistics and regional warranty support costs. Applied’s warranty obligation is affected by product and component failure rates, material usage and labor costs incurred in correcting product failures during the warranty period. As Applied’s customer engineers and process support engineers are highly trained and deployed globally, labor availability is a significant factor in determining labor costs. The quantity and availability of critical replacement parts is another significant factor in estimating warranty costs. Unforeseen component failures or exceptional component performance can also result in changes to warranty costs. If actual warranty costs differ substantially from Applied’s estimates, revisions to the estimated warranty liability would be required, which could have a material adverse effect on Applied’s business, financial condition and results of operations.

Allowance for Doubtful Accounts

Applied maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. This allowance is based on historical experience, credit evaluations, specific customer collection history and any customer-specific issues Applied has identified. Changes in circumstances, such as an unexpected material adverse change in a major customer’s ability to meet its financial obligation to Applied or its payment trends, may require Applied to further adjust its estimates of the recoverability of amounts due to Applied, which could have a material adverse effect on Applied’s business, financial condition and results of operations.

Inventory Valuation

Inventories are generally stated at the lower of cost or market, with cost determined on a first-in, first-out basis. The carrying value of inventory is reduced for estimated obsolescence by the difference between its cost and the estimated market value based upon assumptions about future demand. Applied evaluates the inventory carrying value for potential excess and obsolete inventory exposures by analyzing historical and anticipated demand. In addition, inventories are evaluated for potential obsolescence due to the effect of known and anticipated engineering change orders and new products. If actual demand were to be substantially lower than estimated, additional adjustments for excess or obsolete inventory may be required, which could have a material adverse effect on Applied’s business, financial condition and results of operations.

Goodwill and Intangible Assets

Applied reviews goodwill and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable, and also annually reviews goodwill and intangibles with indefinite lives for impairment. Intangible assets, such as purchased technology, are generally recorded in connection with a business acquisition. The value assigned to intangible assets is usually based on estimates and judgments regarding expectations for the success and life cycle of products and technology acquired. If actual product acceptance differs significantly from the estimates, Applied may be required to record an impairment charge to reduce the carrying value of the reporting unit to its realizable value. The fair value of a reporting unit is estimated using both the income approach and the market approach taking into account such factors as future anticipated operating results and estimated cost of capital. Management uses significant judgment when assessing goodwill for potential impairment, especially in emerging markets. A severe decline in market value could result in an unexpected impairment charge for impaired goodwill, which could have a material adverse effect on Applied’s business, financial condition and results of operations.

Income Taxes

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

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

The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with Applied’s expectations could have a material impact on Applied’s results of operations and financial condition.

Non-GAAP Results

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

Non-GAAP operating income for the three and six months ended May 1, 2011 was $685 million and $1.3 billion, respectively, as compared to non-GAAP operating income of $425 million and $681 million for the three and six months ended May 2, 2010, respectively.

Non-GAAP net income for the second quarter of fiscal 2011 was $501 million, or $0.38 per share, as compared to a non-GAAP net income of $292 million or $0.22 per share for the second quarter of fiscal 2010. Non-GAAP net income for the six months ended May 1, 2011 was $985 million, or $0.74 per share, as compared to a non-GAAP net income of $471 million or $0.35 per share for the six months ended May 2, 2010.

The following table presents a reconciliation of the GAAP and non-GAAP results for the three and six months ended May 1, 2011 and May 2, 2010:

APPLIED MATERIALS, INC.

RECONCILIATION OF GAAP TO NON-GAAP RESULTS