APPLIED MATERIALS INC / DE: Management report and analysis of the financial situation and operating results (form 10-K)

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introduction

Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) is intended to facilitate an understanding of Applied's
business and results of operations. This MD&A should be read in conjunction with
Applied's Consolidated Financial Statements and the accompanying Notes to
Consolidated Financial Statements included elsewhere in this Form 10-K. The
following discussion contains forward-looking statements and should also be read
in conjunction with the cautionary statement set forth at the beginning of this
Form 10-K. MD&A consists of the following sections:

•Applied's Pandemic Response
•Overview: a summary of Applied's business and measurements
•Results of Operations: a discussion of operating results
•Segment Information: a discussion of segment operating results
•Recent Accounting Pronouncements: a discussion of new accounting pronouncements
and its impact to Applied's consolidated financial statements
•Financial Condition, Liquidity and Capital Resources: an analysis of cash
flows, sources and uses of cash
•Off-Balance Sheet Arrangements and Contractual Obligations
•Critical Accounting Policies and Estimates: a discussion of critical accounting
policies that require the exercise of judgments and estimates
•Non-GAAP Adjusted Results: a presentation of results reconciling GAAP to
non-GAAP adjusted measures
Applied's Pandemic Response
As the COVID-19 pandemic emerged in 2020, Applied Materials responded quickly to
put in place precautionary measures to keep its workplaces healthy and safe,
while ensuring compliance with orders and restrictions imposed by government
authorities, everywhere Applied operates in the world.
Applied's top priority during the ongoing COVID-19 pandemic remains protecting
the health and safety of its employees and their families, customers, suppliers
and community. Applied continues to support workplace flexibility such as remote
working where possible and follow enhanced safety and health protocols-including
screenings, social distancing, and use of personal protective equipment. Applied
is keeping its labs and operations active and continuing to support customers.
Applied has implemented a multi-phase plan to return to working on-site, which
takes into consideration factors such as Applied's business and employee needs,
local government regulations, community case trends, and recommendations from
public health officials. The plan involves multiple phases that gradually allow
additional workers to return onsite while practicing social distancing and other
safety measures.
Applied will continue to monitor and evaluate the ongoing COVID-19 pandemic and
will work to respond appropriately to the impact of COVID-19 on its business,
its customers' and suppliers' businesses and its communities.
Overview
Applied provides manufacturing equipment, services and software to the
semiconductor, display, and related industries. Applied's customers include
manufacturers of semiconductor wafers and chips, liquid crystal and organic
light-emitting diode (OLED) displays, and other electronic devices. These
customers may use what they manufacture in their own end products or sell the
items to other companies for use in advanced electronic components. Each of
Applied's businesses is subject to variable industry conditions, as demand for
manufacturing equipment and services can change depending on supply and demand
for chips, display technologies, and other electronic devices, as well as other
factors, such as global economic and market conditions, and the nature and
timing of technological advances in fabrication processes.
Applied operates in three reportable segments: Semiconductor Systems, Applied
Global Services, and Display and Adjacent Markets. A summary of financial
information for each reportable segment is found in Note 18 of Notes to
Consolidated Financial Statements. A discussion of factors that could affect
Applied's operations is set forth under "Risk Factors" in Part I, Item 1A, which
is incorporated herein by reference. Product development and manufacturing
activities occur primarily in the United States, Europe, Israel, and Asia.
Applied's broad range of equipment and service products are highly technical and
are sold primarily through a direct sales force.
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Applied's results are driven primarily by customer spending on capital equipment
and services to support key technology transitions or to increase production
volume in response to worldwide demand for semiconductors and displays. Spending
by semiconductor customers, which include companies that operate in the foundry,
logic and memory markets, is driven by demand for advanced electronic products,
including smartphones and other mobile devices, servers, personal computers,
automotive devices, storage, and other products. The growth of data and emerging
end-market drivers such as artificial intelligence, the Internet of Things, 5G
networks, smart vehicles and augmented and virtual reality are also creating the
next wave of growth for the industry. As a result, products within the
Semiconductor Systems segment are subject to significant changes in customer
requirements, including transitions to smaller dimensions, increasingly complex
chip architectures, new materials and an increasing number of applications.
Demand for display manufacturing equipment spending depends primarily on
consumer demand for increasingly larger and more advanced TVs as well as larger
and higher resolution displays for next-generation mobile devices, and
investments in new types of display technologies. While certain existing
technologies may be adapted to new requirements, some applications create the
need for an entirely different technological approach. The timing of customer
investment in manufacturing equipment is also affected by the timing of
next-generation process development and the timing of capacity expansion to meet
end-market demand. In light of these conditions, Applied's results can vary
significantly year-over-year, as well as quarter-over-quarter.
Applied's strategic priorities include developing products that help solve
customers' challenges at technology inflections; expanding its served market
opportunities in the semiconductor and display industries; and growing its
services business. Applied's long-term growth strategy requires continued
development of new materials engineering capabilities, including products and
platforms that enable expansion into new and adjacent markets. Applied's
significant investments in research, development and engineering must generally
enable it to deliver new products and technologies before the emergence of
strong demand, thus allowing customers to incorporate these products into their
manufacturing plans during early-stage technology selection. Applied works
closely with its global customers to design systems and processes that meet
their planned technical and production requirements.
The following table presents certain significant measurements for the past three
fiscal years:

                                                                                                               Change
                                         2021               2020               2019            2021 over 2020          2020 over 2019

                                                          (In millions,

except amounts and percentages per share)

Net sales                            $  23,063          $  17,202          $  14,608          $        5,861          $        2,594

Gross margin                              47.3  %            44.7  %            43.7  %          2.6 points              1.0 points
Operating income                     $   6,889          $   4,365          $   3,350          $        2,524          $        1,015
Operating margin                          29.9  %            25.4  %            22.9  %          4.5 points              2.5 points
Net income                           $   5,888          $   3,619          $   2,706          $        2,269          $          913
Earnings per diluted share           $    6.40          $    3.92          $    2.86          $         2.48          $         1.06



Fiscal 2021 contained 53 weeks, and fiscal 2020 and 2019 each contained 52
weeks.
COVID-19 was designated a pandemic during fiscal 2020 and the resulting
restrictions put in place worldwide impacted Applied's supply chains and
manufacturing operations.
In fiscal 2021, the COVID-19 pandemic accelerated the digital transformation of
the economy, creating increased global demand for semiconductors. As a result,
semiconductor equipment customers continued to make strategic investments in new
technology transitions. Foundry and logic spending increased in fiscal 2021
compared to fiscal 2020 driven by customer investment in both advanced and
mature nodes. Spending by memory customers increased in fiscal 2021 compared to
fiscal 2020, as the industry made investments to maintain balance between supply
and demand and invested in new technology. While customers' strategic
investments continued, supply chain constraints impacted Applied's ability to
fulfill demand primarily in the fourth quarter of fiscal 2021. Applied expects
demand to remain strong and supply shortages to persist into fiscal 2022, and
managing these near-term supply chain constraints is a top priority.
Applied saw continued growth in its services business in fiscal 2021 compared to
fiscal 2020 driven by an increase in the installed base of equipment and in
long-term service agreements. Applied's Display and Adjacent Markets revenue
remained relatively flat in fiscal 2021 compared to fiscal 2020 due to increased
investment in display manufacturing equipment for TVs, offset by decreased
investment in display manufacturing equipment for mobile products.

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In response to the ongoing COVID-19 pandemic and evolving conditions and
worldwide response, Applied made adjustments to its global operations and is
actively managing its responses in collaboration with its employees, customers
and suppliers. However, the situation remains fluid and uncertain. For
additional risks associated with the ongoing COVID-19 pandemic, see the risk
factor entitled "The ongoing COVID-19 pandemic and global measures taken in
response thereto have adversely impacted, and may continue to adversely impact,
Applied's operations and financial results" in Part I, Item 1A, "Risk Factors."
Results of Operations
Net Sales
Net sales for the periods indicated were as follows:
                                                                                                                                                                 Change
                                                                                                                                                                           2020 over
                                          2021                                      2020                                    2019                    2021 over 2020            2019

                                                                    (In millions, except percentages)
Semiconductor Systems        $     16,286             71%                $ 11,367             66%                $  9,027             62%                     43  %              26  %
Applied Global Services             5,013             22%                   4,155             24%                   3,854             26%                     21  %               8  %
Display and Adjacent Markets        1,634             7%                    1,607             9%                    1,651             11%                      2  %              (3) %
Corporate and Other                   130             -%                       73             1%                       76             1%                      78  %              (4) %
Total                        $     23,063            100%                $ 17,202            100%                $ 14,608            100%                     34  %              18  %

Fiscal 2021 versus fiscal 2020 and fiscal 2020 versus fiscal 2019 net sales increased primarily due to increased customer investments in semiconductor equipment and hardware. spending on services. The Semiconductor Systems segment continued to be the largest contributor to net sales. Net sales by geographic area, determined by the location of customer facilities to which products have been shipped, are as follows:

                                                                                                                                                                  Change
                                                                                                                                                                            2020 over
                                          2021                                      2020                                    2019                    2021 over 2020            2019

                                                                    (In millions, except percentages)
China                        $      7,535             33%                $  5,456             32%                $  4,277             29%                     38  %               28  %
Korea                               5,012             22%                   3,031             18%                   1,929             13%                     65  %               57  %
Taiwan                              4,742             20%                   3,953             23%                   2,965             20%                     20  %               33  %
Japan                               1,962             8%                    1,996             11%                   2,198             15%                     (2) %               (9) %
Southeast Asia                        677             3%                      411             2%                      548             4%                      65  %              (25) %
Asia Pacific                       19,928             86%                  14,847             86%                  11,917             81%                     34  %               25  %
United States                       2,038             9%                    1,619             10%                   1,871             13%                     26  %              (13) %
Europe                              1,097             5%                      736             4%                      820             6%                      49  %              (10) %
Total                        $     23,063            100%                $ 17,202            100%                $ 14,608            100%                     34  %               18  %


The changes in net sales in all regions in fiscal 2021 compared to fiscal 2020
primarily reflected changes in investments in semiconductor manufacturing
equipment and customer spending on comprehensive service agreements. The
decrease in net sales to customers in Japan for fiscal 2021 compared to fiscal
2020 primarily reflected a decrease in investments in semiconductor
manufacturing equipment, partially offset by an increase in customer spending on
comprehensive service agreements.
The changes in net sales in all regions in fiscal 2020 compared to fiscal 2019
primarily reflected changes in semiconductor equipment spending. The increase in
net sales to customers in China, Taiwan and Korea for fiscal 2020 compared to
fiscal 2019 was primarily due to increased investments in semiconductor
manufacturing equipment and customer spending on comprehensive service
agreements. The increase in China was partially offset by a decrease in customer
spending in display manufacturing equipment. The decrease in net sales to
customers in Japan and United States for fiscal 2020 compared to fiscal 2019
primarily reflected a decrease in investments in semiconductor and display
manufacturing equipment. The decrease in net sales to customers in Southeast
Asia and Europe for fiscal 2020 compared to fiscal 2019 primarily reflected a
decrease in investments in semiconductor manufacturing equipment and customer
spending on legacy systems and spares.
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Gross Margin
Gross margins for the periods indicated were as follows:
                                                                    Change
                 2021        2020        2019       2021 over 2020          2020 over 2019

                                     (In millions, except percentages)
Gross margin    47.3  %     44.7  %     43.7  %       2.6 points              1.0 points


Gross margin in fiscal 2021 increased compared to fiscal 2020 primarily due to
the increase in net sales and favorable changes in customer and product mix,
partially offset by higher freight costs and higher personnel costs due to an
increase in headcount to provide manufacturing capacity and flexibility.
Gross margin in fiscal 2020 increased compared to fiscal 2019 primarily due to
the increase in net sales and favorable changes in customer and product mix,
partially offset by higher freight costs, and higher personnel costs due to
increase in headcount to provide manufacturing capacity and flexibility,
underutilization of headcount due to COVID-19 restrictions preventing travel to
customer site and incremental employee compensation related to the COVID-19
pandemic.
Gross margin during fiscal 2021, 2020 and 2019 included $118 million, $103
million and $89 million, respectively, of share-based compensation expense.
Research, Development and Engineering
Research, Development and Engineering (RD&E) expenses for the periods indicated
were as follows:
                                                                                                             Change
                                           2021             2020             2019            2021 over 2020           2020 over 2019

                                                                           

(In millions) Research, development and engineering $ 2,485 $ 2,234 $ 2,054 $

           251          $           180


Applied's future operating results depend to a considerable extent on its
ability to maintain a competitive advantage in the equipment and service
products it provides. Development cycles range from 12 to 36 months depending on
whether the product is an enhancement of an existing product, which typically
has a shorter development cycle, or a new product, which typically has a longer
development cycle. Most of Applied's existing products resulted from internal
development activities and innovations involving new technologies, materials and
processes. In certain instances, Applied acquires technologies, either in
existing or new product areas, to complement its existing technology
capabilities and to reduce time to market.
Management believes that it is critical to continue to make substantial
investments in RD&E to assure the availability of innovative technology that
meets the current and projected requirements of its customers' most advanced
designs. Applied has maintained and intends to continue its commitment to
investing in RD&E in order to continue to offer new products and technologies.
Applied continued its RD&E investments across Semiconductor Systems and Display
and Adjacent Markets on the development of new unit process systems and
integrated materials solutions. Areas of investment include etch, deposition,
inspection, patterning, packaging and other technologies to improve chip
performance, power, area, cost and time-to-market. In Display and Adjacent
Markets, RD&E investments were focused on expanding the Company's market
opportunity with new display technologies.
The increases in RD&E expenses during both fiscal 2021 compared to fiscal 2020
and fiscal 2020 compared to fiscal 2019 were primarily due to additional
headcount and higher expense associated with share-based compensation and
variable compensation. These increases reflect Applied's ongoing investments in
product development initiatives, consistent with the Company's growth strategy.
Applied continued to prioritize existing RD&E investments in technical
capabilities and critical research and development programs in current and new
markets, with a focus on semiconductor technologies.
RD&E expenses during fiscal 2021, 2020 and 2019 included $129 million, $116
million and $99 million, respectively, of share-based compensation expense.
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Marketing and Selling
Marketing and selling expenses for the periods indicated were as follows:
                                                                         Change
                         2021       2020       2019       2021 over 2020       2020 over 2019

                                                     (In millions)
Marketing and selling   $ 609      $ 526      $ 521      $            83      $             5


Marketing and selling expenses for fiscal 2021 increased compared to fiscal 2020
primarily due to additional headcount and higher variable compensation.
Marketing and selling expenses remained relatively flat in fiscal 2020 compared
to fiscal 2019. Marketing and selling expenses for fiscal years 2021, 2020 and
2019 included $43 million, $36 million and $31 million, respectively, of
share-based compensation expense.
General and Administrative
General and administrative (G&A) expenses for the periods indicated were as
follows:
                                                                              Change
                              2021       2020       2019       2021 over 2020       2020 over 2019

                                                          (In millions)
General and administrative   $ 620      $ 567      $ 461      $            53      $           106


G&A expenses in fiscal 2021 increased compared to fiscal 2020 primarily due to
additional headcount and higher variable compensation. G&A expenses in fiscal
2020 increased compared to fiscal 2019 primarily due to higher expenses
associated with acquisition integration and deal costs, variable compensation,
and share-based compensation.
G&A expenses during fiscal 2021, 2020 and 2019 included $56 million, $52 million
and $44 million, respectively, of share-based compensation expense.
Severance and Related Charges
Severance and related charges for the periods indicated were as follows:
                                                                               Change
                                 2021       2020      2019      2021 over 2020       2020 over 2019

                                                            (In millions)

Severance pay and related charges $ 157 $ – $ – $ 157 $

             -


In the first quarter of fiscal 2021, Applied enacted a severance plan (Fiscal
2021 Severance Plan) to realign its workforce. Under this plan, Applied
implemented a one-time voluntary retirement program and other workforce
reduction actions. The voluntary retirement program was available to certain
U.S. employees who met minimum age and length of service requirements, as well
as other business-specific criteria. In addition, Applied implemented other
workforce reduction actions globally across the Display and Adjacent Markets
business.
Deal Termination Fee
Deal termination fee for the periods indicated were as follows:
                                                                      Change
                        2021       2020      2019      2021 over 2020       2020 over 2019

                                                   (In millions)
Deal termination fee   $ 154      $  -      $  -      $           154      $             -


On June 30, 2019, Applied entered into a Share Purchase Agreement (SPA) with
Kokusai Electric Corporation (Kokusai Electric) and KKR HKE Investment L.P.
(KKR) providing for Applied's acquisition of all outstanding shares of Kokusai
Electric. The SPA, as subsequently amended, terminated as of March 19, 2021.
Applied paid KKR a termination fee of $154 million during the second quarter of
fiscal 2021.
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Net interest expense and interest and other income (loss) Net interest expense and interest and other income (loss) for the periods indicated are as follows:

                                                                                  Change
                                  2021       2020       2019       2021 over 2020       2020 over 2019

                                                              (In millions)
Interest expense                 $ 236      $ 240      $ 237      $            (4)     $             3

Interest and other income, net $ 118 $ 41 $ 156 $

$ 77 (115)


Interest expenses incurred were primarily associated with the senior unsecured
notes. Interest expense in fiscal 2021 remained relatively flat compared fiscal
2020 and fiscal 2019 due to the average principal balance of the senior
unsecured notes remained consistent at $5.5 billion in each of the last three
years.
Interest and other income, net in fiscal 2021 increased compared to fiscal 2020,
primarily driven by a higher net gain from equity investments, partially offset
by lower interest income during fiscal 2021 compared to fiscal 2020. Interest
and other income, net in fiscal 2020 decreased compared to fiscal 2019,
primarily driven by lower interest income and a loss on early extinguishment of
debt. In addition, unrealized gains on equity investment securities from
investments during fiscal 2020 were lower compared to fiscal 2019.
Income Taxes
Provision for income taxes and effective tax rates for the periods indicated
were as follows:
                                                                                Change
                               2021        2020        2019       2021 over 2020      2020 over 2019

                                                (In millions, except percentages)
Provision for income taxes   $ 883       $ 547       $ 563       $   336             $   (16)
Effective income tax rate     13.0  %     13.1  %     17.2  %       (0.1)  points       (4.1)  points


Applied's provision for income taxes and effective tax rate are affected by the
geographical composition of pre-tax income which includes jurisdictions with
differing tax rates, conditional reduced tax rates and other income tax
incentives. It is also affected by events that are not consistent from period to
period, such as changes in income tax laws and the resolution of prior years'
income tax filings.
Applied's effective tax rate for fiscal 2021 was slightly lower than fiscal 2020
primarily due to higher proportion of pre-tax income in lower tax jurisdictions,
partially offset by resolutions of prior years' income tax filings. Applied's
effective tax rate for fiscal 2020 was lower than fiscal 2019 primarily due to a
decline in the tax expense from changes to uncertain tax positions
year-over-year, an increased tax benefit from tax credits, and increased excess
stock compensation tax benefits. This benefit was partly offset by an
unfavorable settlement of an uncertain tax position in fiscal 2020.
On June 14, 2019, the U.S. government released regulations that significantly
affect how the global intangible low-taxed income (GILTI) provision of the Tax
Cuts and Jobs Act (Tax Act) is interpreted. As a result, Applied reversed a tax
benefit of $96 million in the third quarter of fiscal 2019 that had been
realized in the first half of fiscal 2019. An accounting policy may be selected
to treat GILTI temporary differences in taxable income either as a
current-period expense when incurred (period cost method) or factor such amounts
into the measurement of deferred taxes (deferred method). Applied has chosen the
period cost method.
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Segment Information
Applied reports financial results in three segments: Semiconductor Systems,
Applied Global Services, and Display and Adjacent Markets. A description of the
products and services, as well as financial data, for each reportable segment
can be found in Note 18 of Notes to Consolidated Financial Statements.
The Corporate and Other category includes revenues from products, as well as
costs of products sold, for fabricating solar photovoltaic cells and modules and
certain operating expenses that are not allocated to its reportable segments and
are managed separately at the corporate level. These operating expenses include
costs for share-based compensation; certain management, finance, legal, human
resource, and RD&E functions provided at the corporate level; and unabsorbed
information technology and occupancy. In addition, Applied does not allocate to
its reportable segments restructuring, severance and asset impairment charges
and any associated adjustments related to restructuring actions, unless these
actions pertain to a specific reportable segment.
The results for each reportable segment are discussed below.
Semiconductor Systems Segment
The Semiconductor Systems segment is comprised primarily of capital equipment
used to fabricate semiconductor chips. Semiconductor industry spending on
capital equipment is driven by demand for advanced electronic products,
including smartphones and other mobile devices, servers, personal computers,
automotive electronics, storage, and other products, and the nature and timing
of technological advances in fabrication processes, and as a result is subject
to variable industry conditions. Development efforts are focused on solving
customers' key technical challenges in transistor, interconnect, patterning and
packaging performance.
Certain significant measures for the periods indicated were as follows:
                                                                                                                         Change
                                 2021              2020              2019                     2021 over 2020                               2020 over 2019

                                                                          

(In millions, except percentages and ratios)

Net sales                     $ 16,286          $ 11,367          $ 9,027          $       4,919                  43   %       $       2,340                   26   %

Operating income              $  6,311          $  3,714          $ 2,464          $       2,597                  70   %       $       1,250                   51   %
Operating margin                  38.8  %           32.7  %          27.3  %                                6.1 points                                  5.4 points




Semiconductor Systems net sales by end use application for the periods shown are as follows:

                                       2021       2020       2019

Foundry, logic and other                60  %      59  %      52  %
Dynamic random-access memory (DRAM)     19  %      20  %      22  %
Flash memory                            21  %      21  %      26  %

                                       100  %     100  %     100  %


Semiconductor equipment customers continued to make strategic investments in new
technology transitions during fiscal 2021. Foundry and logic spending increased,
in absolute dollars, in fiscal 2021 compared to fiscal 2020 driven by customer
investment in both advanced and mature nodes. Spending by memory customers also
increased, in absolute dollars, in fiscal 2021 compared to the prior year.
Operating margin for fiscal 2021 increased compared to fiscal 2020, primarily
reflecting higher net sales and favorable changes in customer and product mix,
partially offset by higher personnel costs due to the hiring of additional
headcount to provide manufacturing capacity and flexibility, and higher freight
costs. In fiscal 2021, two customers each accounted for more than 10 percent of
this segment's total net sales, and together they accounted for approximately 43
percent of this segment's total net sales.
Net sales for fiscal 2020 increased compared to fiscal 2019 primarily due to
higher spending, in absolute dollars, from foundry, logic and other customers.
Operating margin for fiscal 2020 increased compared to fiscal 2019, primarily
reflecting higher net sales and favorable changes in customer and product mix
and lower travel-related spending due to COVID-19 travel restrictions, partially
offset by increased RD&E expenses, higher freight costs, higher personnel costs
due to additional headcount to provide manufacturing capacity and flexibility,
and incremental employee compensation related to the COVID-19 pandemic.
There was no single region that accounted for at least 30 percent of total net
sales for the Semiconductor Systems segment for any of the past three fiscal
years.
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Applied Global Services Segment
The Applied Global Services segment provides integrated solutions to optimize
equipment and fab performance and productivity, including spares, upgrades,
services, certain remanufactured earlier generation equipment and factory
automation software for semiconductor, display and solar products.
Demand for Applied Global Services' solutions are driven by Applied's large and
growing installed base of manufacturing systems, and customers' needs to shorten
ramp times, improve device performance and yield, and optimize factory output
and operating costs. Industry conditions that affect Applied Global Services'
sales of spares and services are primarily characterized by increases in
semiconductor manufacturers' wafer starts and continued strong utilization
rates, growth of the installed base of equipment, growing service intensity of
newer tools, and the Company's ability to sell more comprehensive service
agreements.
Certain significant measures for the periods indicated were as follows:
                                                                                                                    Change
                                 2021             2020             2019                     2021 over 2020                            2020 over 2019

                                                                        (In

millions, except percentages and ratios)

Net sales                     $ 5,013          $ 4,155          $ 3,854          $         858                  21   %       $   301                   8     %

Operating income              $ 1,508          $ 1,127          $ 1,101          $         381                  34   %       $    26                   2     %
Operating margin                 30.1  %          27.1  %          28.6  %                                3.0 points                            (1.5) points



Net sales for fiscal 2021 increased compared to fiscal 2020 primarily due to
higher customer spending on comprehensive service agreements and spares, and the
impact of an additional one week during fiscal 2021. Operating margin for fiscal
2021 increased compared to fiscal 2020 primarily due to higher net sales,
partially offset by higher expense related to an increase in headcount to
support business growth and higher freight costs. In fiscal 2021, two customers
each accounted for more than 10 percent of this segment's total net sales.
Net sales for fiscal 2020 increased compared to fiscal 2019 primarily due to
higher customer spending on comprehensive service agreements, semiconductor
spares and legacy systems. Operating margin for fiscal 2020 decreased compared
to fiscal 2019 primarily due to an increase in headcount to support business
growth, underutilization of headcount due to COVID-19 restrictions preventing
travel to customer sites, higher freight costs and incremental employee
compensation related to the COVID-19 pandemic.
There was no single region that accounted for at least 30 percent of total net
sales for the Applied Global Services segment for any of the past three fiscal
years.
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Display and Adjacent Markets Segment
The Display and Adjacent Markets segment encompasses products for manufacturing
liquid crystal and OLED displays, and other display technologies for TVs,
monitors, laptops, personal computers, electronic tablets, smart phones, and
other consumer-oriented devices and equipment upgrades. The segment is focused
on expanding its presence through technologically-differentiated equipment for
manufacturing large-scale LCD TVs, OLEDs, low temperature polysilicon (LTPS),
metal oxide, and touch panel sectors; and development of products that provide
customers with improved performance and yields.
Display industry growth depends primarily on consumer demand for increasingly
larger and more advanced TVs as well as larger and higher resolution displays
for next-generation mobile devices. Uneven spending patterns by customers in the
Display and Adjacent Markets segment can cause significant fluctuations
quarter-over-quarter, as well as year-over-year.
Certain significant measures for the periods presented were as follows:
                                                                                                                    Change
                                 2021             2020             2019                      2021 over 2020                            2020 over 2019

                                                                        (In

millions, except percentages and ratios)

Net sales                     $ 1,634          $ 1,607          $ 1,651          $         27                   2     %       $   (44)                  (3)  %

Operating income              $   314          $   291          $   294          $         23                   8     %       $    (3)                  (1)  %
Operating margin                 19.2  %          18.1  %          17.8  %                                1.1 points                             0.3 points



Net sales for fiscal 2021 remained relatively flat compared to fiscal 2020
primarily due to higher customer investment in display manufacturing equipment
for TVs, offset by a decrease in customer investments in display manufacturing
equipment for mobile products. Operating margin for fiscal 2021 increased
compared to fiscal 2020 primarily due to higher net sales and favorable changes
in customer and product mix. In fiscal 2021, three customers each accounted for
at least 10 percent of this segment's net sales, and together they accounted for
approximately 65 percent of this segment's total net sales.
Net sales for fiscal 2020 decreased compared to fiscal 2019 primarily due to
lower customer investments in display manufacturing equipment for TVs, partially
offset by higher customer investments in display manufacturing equipment for
mobile products. Operating margin for fiscal 2020 increased compared to fiscal
2019, reflecting favorable changes in customer and product mix and lower
travel-related spending due to COVID-19 travel restrictions.
The following region accounted for at least 30 percent of total net sales for
the Display and Adjacent Markets segment for one or more of the periods
presented:
                                                                                                                             Change
                      2021                      2020                      2019                       2021 over 2020                         2020 over 2019

                                                                        (In millions, except percentages)

China          $ 1,361       83  %       $ 1,343       84  %       $ 1,469       89  %       $         18               1  %       $       (126)              (9) %




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Recent Accounting Pronouncements
For a description of recent accounting pronouncements, including the expected
dates of adoption and estimated effects, if any, on Applied's consolidated
financial statements, see Note 1, "Summary of Significant Accounting Policies,"
of the Notes to Consolidated Financial Statements.
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Financial Condition, Liquidity and Capital Resources Applied’s cash, cash equivalents and investments consist of the following:

                                                October 31,       October 25,
                                                    2021              2020

                                                        (In millions)
Cash and cash equivalents                      $      4,995      $      5,351
Short-term investments                                  464               387
Long-term investments                                 2,055             1,538

Total cash, cash equivalents and investments $ 7,514 $ 7,276


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

                                           2021          2020          2019

                                                    (In millions)
Cash provided by operating activities   $  5,442      $  3,804      $  3,247
Cash used in investing activities       $ (1,216)     $   (130)     $   (443)
Cash used in financing activities       $ (4,591)     $ (1,337)     $ (3,115)


Kokusai Electric Corporation
On June 30, 2019, Applied entered into a Share Purchase Agreement (SPA) with
Kokusai Electric Corporation (Kokusai Electric) and KKR HKE Investment L.P.
(KKR) providing for Applied's acquisition of all outstanding shares of Kokusai
Electric. The SPA, as subsequently amended, terminated as of March 19, 2021.
Applied paid KKR a termination fee of $154 million during the second quarter of
fiscal 2021.
Operating Activities
Cash from operating activities for fiscal 2021 was $5.4 billion, which reflects
net income adjusted for the effect of non-cash charges and changes in working
capital components. Non-cash charges included depreciation, amortization,
severance and related charges, share-based compensation and deferred income
taxes. Cash provided by operating activities increased in fiscal 2021 compared
to fiscal 2020 primarily due to higher net income, partially offset by an
increase in the accounts receivable balance. Cash provided by operating
activities increased in fiscal 2020 compared to fiscal 2019 primarily due to
higher net income.
Applied has agreements with various financial institutions to sell accounts
receivable and discount promissory notes from selected customers. Applied sells
its accounts receivable generally without recourse. Applied, from time to time,
also discounts letters of credit issued by customers through various financial
institutions. The discounting of letters of credit depends on many factors,
including the willingness of financial institutions to discount the letters of
credit and the cost of such arrangements. Applied sold $1.3 billion, $1.2
billion and $1.5 billion of accounts receivable during fiscal 2021, 2020 and
2019, respectively. Applied did not discount letters of credit issued by
customers in fiscal 2021. Applied discounted letters of credit issued by
customers of $105 million and $48 million in fiscal, 2020 and 2019,
respectively. There was no discounting of promissory notes in each of fiscal
2021, 2020 and 2019.
Applied's working capital was $9.8 billion at October 31, 2021 and $8.9 billion
at October 25, 2020.
Days sales outstanding at the end of fiscal 2021, 2020 and 2019 was 74 days, 57
days, and 61 days, respectively. Days sales outstanding varies due to the timing
of shipments and payment terms. The increase in days sales outstanding at the
end of fiscal 2021 was primarily due to unfavorable revenue linearity and lower
account receivable factoring compared to the end of fiscal 2020. The decrease in
days sales outstanding at the end of fiscal 2020 was primarily due to higher
accounts receivable factoring and favorable revenue linearity compared to the
end of fiscal 2019.
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Investing Activities
Applied used $1.2 billion, $130 million and $443 million of cash in investing
activities in fiscal 2021, 2020 and 2019, respectively. Capital expenditures in
fiscal 2021, 2020 and 2019 were $668 million, $422 million and $441 million,
respectively. Capital expenditures in fiscal 2021 and 2020 were primarily for
investments in demonstration and testing equipment, real property acquisitions
and improvements, and network equipment. Capital expenditures in fiscal 2019
were primarily for real property acquisitions and improvements in North America
and Taiwan, as well as investments in demonstration, testing and laboratory
tools. Purchases of investments, net of proceeds from sales and maturities of
investments, for 2021 was $536 million, Proceeds from sales and maturities of
investments, net of purchase of investments were $399 million and $26 million
for fiscal 2020 and 2019, respectively. Investing activities also included
investments in technology to allow Applied to access new market opportunities or
emerging technologies.
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.
Financing Activities
Applied used $4.6 billion of cash in financing activities in fiscal 2021,
consisting primarily of repurchases of common stock of $3.8 billion, cash
dividends to stockholders of $838 million and tax withholding payments for
vested equity awards of $178 million, offset by proceeds from common stock
issuances of $175 million.
Applied used $1.3 billion of cash in financing activities in fiscal 2020,
consisting primarily of the repayment of $1.4 billion senior notes, repurchases
of common stock of $649 million, cash dividends to stockholders of $787 million
and tax withholding payments for vested equity awards of $172 million, offset by
net proceeds received from the issuance of senior unsecured notes of $1.5
billion and proceeds from common stock issuances of $174 million.
Applied used $3.1 billion of cash in financing activities in fiscal 2019,
consisting primarily of repurchases of common stock of $2.4 billion, cash
dividends to stockholders of $771 million and tax withholding payments for
vested equity awards of $86 million, offset by proceeds from common stock
issuances of $145 million.
In March 2021, Applied's Board of Directors approved a common stock repurchase
program authorizing $7.5 billion in repurchases, which supplemented the
previously existing $6.0 billion authorization approved in February 2018. At
October 31, 2021, approximately $5.0 billion remained available for future stock
repurchases under the repurchase program.
During fiscal 2021, Applied's Board of Directors declared one quarterly cash
dividend of $0.22 per share and three quarterly cash dividends of $0.24 per
share. During fiscal 2020, Applied's Board of Directors declared one quarterly
cash dividend of $0.21 per share and three quarterly cash dividends of $0.22 per
share. During fiscal 2019, Applied's Board of Directors declared one quarterly
cash dividend of $0.20 per share and three quarterly cash dividends in the
amount of $0.21 per share. Dividends paid during fiscal 2021, 2020 and 2019
amounted to $838 million, $787 million and $771 million, respectively. Applied
currently anticipates that cash dividends will continue to be paid on a
quarterly basis, although the declaration of any future cash dividend is at the
discretion of the Board of Directors and will depend on Applied's financial
condition, results of operations, capital requirements, business conditions and
other factors, as well as a determination by the Board of Directors that cash
dividends are in the best interests of Applied's stockholders.
Applied has credit facilities for unsecured borrowings in various currencies of
up to $1.6 billion, of which $1.5 billion is comprised of a committed revolving
credit agreement (Revolving Credit Agreement) with a group of banks. The
Revolving Credit Agreement includes a provision under which Applied may request
an increase in the amount of the facility of up to $500 million for a total
commitment of no more than $2.0 billion, subject to the receipt of commitments
from one or more lenders for any such increase and other customary conditions.
The Revolving Credit Agreement is scheduled to expire in February 2025, unless
extended as permitted under the Revolving Credit Agreement. The Revolving Credit
Agreement provides for borrowings in United States dollars that bear interest
for each advance at one of two rates selected by Applied, plus an applicable
margin, which varies according to Applied's public debt credit ratings. The
Revolving Credit Agreement includes financial and other covenants with which
Applied was in compliance as of October 31, 2021.
Remaining credit facilities in the amount of approximately $70 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.
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In August 2019, Applied entered into a term loan credit agreement (Term Loan
Credit Agreement) with a group of lenders under which the lenders committed to
make an unsecured term loan to Applied of up to $2.0 billion to finance in part
Applied's planned acquisition of all outstanding shares of Kokusai Electric, to
pay related transaction fees and expenses and for general corporate purposes. In
March 2021, the Term Loan Credit Agreement, as subsequently amended, terminated
automatically in accordance with its terms upon the termination of the SPA. No
amounts were borrowed under the Term Loan Credit Agreement.
Applied has a short-term commercial paper program under which Applied may issue
unsecured commercial paper notes of up to a total amount of $1.5 billion. As of
October 31, 2021, Applied did not have any commercial paper outstanding but may
issue commercial paper notes under this program from time to time in the future.
The commercial paper program is backstopped by the Revolving Credit Agreement
and borrowings under the Revolving Credit Agreement reduce the amount of
commercial paper notes Applied can issue.
In May 2020, Applied issued $750 million aggregate principal amount of 1.750%
senior unsecured notes due 2030 and $750 million aggregate principal amount of
2.750% senior unsecured notes due 2050, in a registered public offering. In June
2020, Applied used a portion of the net proceeds from the offering to redeem the
outstanding $600 million in aggregate principal amount of its 2.625% senior
unsecured notes due October 1, 2020 and $750 million in aggregate principal
amount of its 4.300% senior unsecured notes due June 15, 2021, at a total
aggregate redemption price of $1.4 billion. As a result, Applied recognized a
$33 million loss on early extinguishment of these senior unsecured notes during
the third quarter of fiscal 2020.
Applied had senior unsecured notes in the aggregate principal amount of $5.5
billion outstanding as of October 31, 2021. See Note 11 of the Notes to the
Consolidated Condensed Financial Statements for additional discussion of
existing debt. Applied may seek to refinance its existing debt and may incur
additional indebtedness depending on Applied's capital requirements and the
availability of financing.
Others
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (Tax
Act). The Tax Act requires a one-time transition tax on certain unrepatriated
earnings of foreign subsidiaries. The transition tax expense is payable in
installments over eight years, with eight percent due in each of the first five
years starting with fiscal 2018. As of October 31, 2021, Applied had $775
million of total payments remaining, payable in installments in the next five
years. Before the Tax Act, U.S. income tax had not been provided for certain
unrepatriated earnings that were considered indefinitely reinvested. Income tax
is now provided for all unrepatriated earnings.
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
Statements of Cash Flows in this report.
For details on standby letters of credit, guarantee instruments and other
agreements with banks, see Off-Balance Sheet Arrangements below.
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Off-Balance Sheet Arrangements and Contractual Obligations
Off-Balance Sheet Arrangements
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. These include
agreements with various banks to facilitate subsidiary banking operations
worldwide, including overdraft arrangements. As of October 31, 2021, the maximum
potential amount of future payments that Applied could be required to make under
these guarantee agreements was approximately $500 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 October 31, 2021, Applied has provided
parent guarantees to banks for approximately $144 million to cover these
arrangements.
Contractual Obligations
The following table summarizes Applied's contractual obligations as of
October 31, 2021:

                                                                             Payments Due by Period
                                                                  Less Than            1-3              3-5             More Than
Contractual Obligations                          Total             1 Year             Years            Years             5 Years

                                                                                  (In millions)
Debt obligations                              $  5,500          $        - 

$ – $ 700 $ 4,800
Interest expense associated with debt securities

                                      3,212                 205              410              382               2,215
Operating lease obligations                        315                  78              132               66                  39
Income tax from change in U.S. tax laws1           775                  82              234              459                   -
Purchase obligations2                            5,716               5,498              218                -                   -
Other long-term liabilities3,4                      21                   -                2                1                  18
Total                                         $ 15,539          $    5,863          $   996          $ 1,608          $    7,072


______________________
1Represents the transition tax liability associated with the deemed repatriation
of accumulated foreign earnings as a result of the enactment of the Tax Cuts and
Jobs Act into law on December 22, 2017.
2Represents Applied's agreements to purchase goods and services consisting of
Applied's outstanding purchase orders for goods and services.
3Other long-term liabilities in the table do not include pension, postretirement
and deferred compensation plans due to the uncertainty in the timing of future
payments. Applied evaluates the need to make contributions to its pension and
postretirement benefit plans after considering the funded status of the plans,
movements in the discount rate, performance of the plan assets and related tax
consequences. Payments to the plans would be dependent on these factors and
could vary across a wide range of amounts and time periods. Payments for
deferred compensation plans are dependent on activity by participants, making
the timing of payments uncertain. Information on Applied's pension,
postretirement benefit and deferred compensation plans is presented in Note 15,
Employee Benefit Plans, of the consolidated financial statements.
4Applied's other long-term liabilities in the Consolidated Balance Sheets
include deferred income tax liabilities, gross unrecognized tax benefits and
related gross interest and penalties. As of October 31, 2021, the gross
liability for unrecognized tax benefits that was not expected to result in
payment of cash within one year was $524 million. Interest and penalties related
to uncertain tax positions that were not expected to result in payment of cash
within one year of October 31, 2021 was $88 million. At this time, Applied is
unable to make a reasonably reliable estimate of the timing of payments due to
uncertainties in the timing of tax audit outcomes; therefore, such amounts are
not included in the above contractual obligation table.
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Critical Accounting Policies and Estimates
The preparation of consolidated financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires management to make judgments, assumptions and estimates that
affect the amounts reported. Note 1 of Notes to Consolidated Financial
Statements 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 I, Item 1A, "Risk Factors." Based on a critical
assessment of its accounting policies and the underlying judgments and
uncertainties affecting the application of those policies, management believes
that Applied's consolidated financial statements are fairly stated in accordance
with accounting principles generally accepted in the United States of America,
and provide a meaningful presentation of Applied's financial condition and
results of operations.
Management believes that the following are critical accounting policies and
estimates:
Revenue Recognition
Applied recognizes revenue when promised goods or services (performance
obligations) are transferred to a customer in an amount that reflects the
consideration to which Applied expects to be entitled in exchange for those
goods or services. Applied performs the following five steps to determine when
to recognize revenue: (1) identification of the contract(s) with customers, (2)
identification of the performance obligations in the contract, (3) determination
of the transaction price, (4) allocation of the transaction price to the
performance obligations in the contract, and (5) recognition of revenue when, or
as, a performance obligation is satisfied. Management uses judgment to identify
performance obligations within a contract and to determine whether multiple
promised goods or services in a contract should be accounted for separately or
as a group. Judgment is also used in interpreting commercial terms and
determining when transfer of control occurs. Moreover, judgment is used to
estimate the contract's transaction price and allocate it to each performance
obligation. Any material changes in the identification of performance
obligations, determination and allocation of the transaction price to
performance obligations, and determination of when transfer of control occurs to
the customer, could impact the timing and amount of revenue recognition, which
could have a material effect on Applied's financial condition and results of
operations.
Warranty Costs
Applied provides for the estimated cost of warranty when revenue is recognized.
Estimated warranty costs are determined by analyzing specific product, current
and historical configuration statistics and regional warranty support costs.
Applied's warranty obligation is affected by product and component failure
rates, material usage and labor costs incurred in correcting product failures
during the warranty period. As Applied's customer engineers and process support
engineers are highly trained and deployed globally, labor availability is a
significant factor in determining labor costs. The quantity and availability of
critical replacement parts is another significant factor in estimating warranty
costs. Unforeseen component failures or exceptional component performance can
also result in changes to warranty costs. If actual warranty costs differ
substantially from Applied's estimates, revisions to the estimated warranty
liability would be required, which could have a material adverse effect on
Applied's business, financial condition and results of operations.
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Allowance for Credit Losses
Applied maintains an allowance for credit losses 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 net realizable value,
with cost determined on a first-in, first-out (FIFO) basis. The carrying value
of inventory is reduced for estimated obsolescence by the difference between its
cost and the estimated net realizable 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 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.
When reviewing goodwill for impairment, Applied first performs a qualitative
assessment to determine whether it is more likely than not that the fair value
of a reporting unit is less than its carrying value.
In performing a qualitative assessment, Applied considers business conditions
and other factors including, but not limited to (i) adverse industry or economic
trends, (ii) restructuring actions and lower projections that may impact future
operating results, (iii) sustained decline in share price, and (iv) overall
financial performance and other events affecting the reporting units. If Applied
concludes that is more likely than not that the fair value of a reporting unit
is less than its carrying amount, then a quantitative impairment test is
performed by estimating the fair value of the reporting unit and comparing it to
its carrying value. If the carrying value of a reporting unit exceeds its fair
value, Applied would record an impairment charge equal to the excess of the
carrying value of the reporting unit's goodwill over its fair value.
Applied determines the fair value of each reporting unit based on a weighting of
an income and a market approach. Applied bases the fair value estimates on
assumptions that it believes to be reasonable but that are unpredictable and
inherently uncertain. Under the income approach, Applied estimates the fair
value based on discounted cash flow method.
The estimates used in the impairment testing are consistent with the discrete
forecasts that Applied uses to manage its business, and considers any
significant developments during the period. Under the discounted cash flow
method, cash flows beyond the discrete forecasts are estimated using a terminal
growth rate, which considers the long-term earnings growth rate specific to the
reporting units. The estimated future cash flows are discounted to present value
using each reporting unit's weighted average cost of capital. The weighted
average cost of capital measures a reporting unit's cost of debt and equity
financing weighted by the percentage of debt and equity in a reporting unit's
target capital structure. In addition, the weighted average cost of capital is
derived using both known and estimated market metrics, and is adjusted to
reflect both the timing and risks associated with the estimated cash flows. The
tax rate used in the discounted cash flow method is the median tax rate of
comparable companies and reflects Applied's current international structure,
which is consistent with the market participant perspective. Under the market
approach, Applied uses the guideline company method which applies market
multiples to forecasted revenues and earnings before interest, taxes,
depreciation and amortization. Applied uses market multiples that are consistent
with comparable publicly-traded companies and considers each reporting unit's
size, growth and profitability relative to its comparable companies.
Intangible assets, such as purchased technology, are generally recorded in
connection with a business acquisition. The value assigned to intangible assets
is usually based on estimates and judgments regarding expectations for the
success and life cycle of products and technology acquired. If actual product
acceptance differs significantly from the estimates, Applied may be required to
record an impairment charge to reduce the carrying value of the reporting unit
to its estimated fair value.

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Income Taxes
Applied's provision for income taxes and effective tax rate are affected by the
geographical composition of pre-tax income which includes jurisdictions with
differing tax rates, conditional reduced tax rates and other income tax
incentives. It is also affected by events that are not consistent from period to
period, such as changes to income tax laws and the resolution of prior years'
income tax filings.
Applied recognizes a current tax liability for the estimated amount of income
tax payable on tax returns for the current fiscal year. Deferred tax assets and
liabilities are recognized for the estimated future tax effects of temporary
differences between the book and tax bases of assets and liabilities. Deferred
tax assets are also recognized for net operating loss and tax credit
carryforwards. Deferred tax assets are offset by a valuation allowance to the
extent it is more likely than not that they are not expected to be realized.
Applied recognizes tax benefits from uncertain tax positions only if it is more
likely than not that the tax position will be sustained upon examination by the
taxing authorities based on the technical merits of the position. The tax
benefits recognized from such positions are estimated based on the largest
benefit that has a greater than 50% likelihood of being realized upon ultimate
settlement. Any changes in judgment related to uncertain tax positions are
recognized in Applied's provision for income taxes in the quarter in which such
change occurs. Interest and penalties related to uncertain tax positions are
recognized in Applied's provision for income taxes.
The calculation of Applied's provision for income taxes and effective tax rate
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 an adverse material impact
on Applied's results of operations and financial condition.

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Non-GAAP Adjusted Financial Results
Management uses non-GAAP adjusted financial measures to evaluate the Company's
operating and financial performance and for planning purposes, and as
performance measures in its executive compensation program. Applied believes
these measures enhance an overall understanding of its performance and
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 on a consistent basis by excluding items that management does
not believe are indicative of Applied's ongoing operating performance.
The non-GAAP adjusted financial measures presented below are adjusted to exclude
the impact of certain costs, expenses, gains and losses, including certain items
related to mergers and acquisitions; restructuring and severance charges and any
associated adjustments; certain incremental expenses related to COVID-19;
impairments of assets; gain or loss on strategic investments; loss on early
extinguishment of debt; certain income tax items and other discrete adjustments.
Additionally, non-GAAP results exclude estimated discrete income tax expense
items associated with U.S. tax legislation. Reconciliations of these non-GAAP
measures to the most directly comparable financial measures calculated and
presented in accordance with GAAP are provided in the financial tables presented
below. There are limitations in using non-GAAP financial measures because the
non-GAAP financial measures are not prepared in accordance with generally
accepted accounting principles, may be different from non-GAAP financial
measures used by other companies, and may exclude certain items that may have a
material impact upon our reported financial results. The presentation of this
additional information is not meant to be considered in isolation or as a
substitute for the directly comparable financial measures prepared in accordance
with GAAP.
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The following tables present a reconciliation of GAAP and non-GAAP adjusted consolidated results for the last three years:

                            APPLIED MATERIALS, INC.

UNAUDITED RECONCILIATION OF GAAP AND NON-GAAP RESULTS (In millions, except percentages)

                                                        2021              2020             2019

Non-GAAP Adjusted Gross Profit
Reported gross profit - GAAP basis                                          

$ 10,914 $ 7,692 $ 6,386
Certain items related to acquisitions1

                                                 27               37               37

Certain incremental expenses related to COVID-192                                           12               23                   -

Other charges                                                                                2                -                -
Non-GAAP adjusted gross profit                                              

$ 10,955 $ 7,752 $ 6,423
Non-GAAP adjusted gross margin

                                                            47.5  %          45.1  %          44.0  %
Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis                                      

$ 6,889 $ 4,365 $ 3,350
Certain items related to acquisitions1

                                                 47               54               55
Acquisition integration and deal costs                                                      45               80               22
Certain incremental expenses related to COVID-192                                           24               30                   -

Severance and related charges3                                                             157                -                   -
Deal termination fee                                                                       154                -                -

Other charges                                                                                6                -                   -
Non-GAAP adjusted operating income                                          

$ 7,322 $ 4,529 $ 3,427
Non-GAAP adjusted operating margin

                                                        31.7  %          26.3  %          23.5  %
Non-GAAP Adjusted Net Income
Reported net income - GAAP basis                                            

$ 5,888 $ 3,619 $ 2,706
Certain items related to acquisitions1

                                                 47               54               55
Acquisition integration and deal costs                                                      46               80               22
Certain incremental expenses related to COVID-192                                           24               30                -

Severance and related charges3                                                             157                -                -
Deal termination fee                                                                       154                -                -

Realized loss (gain) on strategic investments, net                                         (43)              (1)              (6)
Unrealized loss (gain) on strategic investments, net                                       (56)              (8)             (30)
Loss on early extinguishment of debt                                                         -               33                   -
Other charges                                                                                6                -                   -

Income tax effect of changes in applicable U.S. tax laws4                                    -                -              (24)

Tax effects related to transfers of intangible fixed assets within entities

                                                                                   64              114               62

Resolution of previous years tax returns and other tax items

                                                                                       33              (41)              95

Income tax effect of non-GAAP adjustments5                                                 (33)             (35)              (5)
Non-GAAP adjusted net income                                                

$ 6,287 $ 3,845 $ 2,875

1 These items are additional charges attributable to acquisitions made, consisting of

amortization of purchased intangible assets. 2 Temporary additional compensation for employees during the COVID-19 pandemic. 3 Severance pay and related charges mainly linked to a one-off voluntary departure

program offered to certain eligible employees. 4 Charges for the provision for income taxes linked to a single transitional tax due to

we tax legislation. 5 Adjustment of the provision for income taxes related to non-GAAP adjustments reflected in

Income before taxes.

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                            APPLIED MATERIALS, INC.

UNAUDITED RECONCILIATION OF GAAP AND NON-GAAP RESULTS (In millions, except per share amounts)

                                               2021             2020            2019

Non-GAAP Adjusted Earnings Per Diluted Share
Reported earnings per diluted share - GAAP basis                                   $  6.40          $  3.92          $ 2.86
Certain items associated with acquisitions                                            0.04             0.05            0.05
Acquisition integration and deal costs                                                0.04             0.07            0.02
Certain incremental expenses related to COVID-19                                      0.02             0.03                  -

Severance and related charges                                                         0.13                -               -
Deal termination fee                                                                  0.17                -               -
Realized loss (gain) on strategic investments, net                                   (0.03)               -               -

Unrealized loss (gain) on strategic investments, net                                 (0.05)           (0.01)          (0.03)
Loss on early extinguishment of debt                                                     -             0.03                  -
Other charges                                                                         0.01                -                  -
Income tax effect of change in applicable U.S. tax laws                                  -                -           (0.03)

Tax effects related to transfers of intangible fixed assets within entities

                                                                       0.07             0.12            0.07

Resolution of previous years tax returns and other tax items

                                                                             0.04            (0.04)           0.10

Non-GAAP adjusted earnings per diluted share                                

$ 6.84 $ 4.17 $ 3.04
Weighted average number of diluted shares

              919              923             945





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

                            APPLIED MATERIALS, INC.

UNAUDITED RECONCILIATION OF GAAP AND NON-GAAP RESULTS (In millions, except percentages)

                                                      2021             2020             2019

Semiconductor systems Adjusted non-GAAP operating income Reported operating income – based on GAAP

                                              $ 6,311          $ 3,714          $ 2,464
Certain items associated with acquisitions1                                              38               41               43
Acquisition integration costs                                                            (2)               3                   -
Certain incremental expenses related to COVID-192                                        12               20                   -
Other charges                                                                             3                -                   -
Non-GAAP adjusted operating income                                                  $ 6,362          $ 3,778          $ 2,507
Non-GAAP adjusted operating margin                                                     39.1  %          33.2  %          27.8  %

AGS Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis                                      

$ 1,508 $ 1,127 $ 1,101

Certain incremental expenses related to COVID-192                                         8                8                -

Other charges                                                                             1                -                -
Non-GAAP adjusted operating income                                                  $ 1,517          $ 1,135          $ 1,101
Non-GAAP adjusted operating margin                                                     30.3  %          27.3  %          28.6  %

Billboard and adjacent markets Adjusted non-GAAP operating profit Reported operating profit – based on GAAP

                                              $   314          $   291          $   294
Certain items associated with acquisitions1                                               4               12               12
Acquisition integration costs                                                             -                -                1
Certain incremental expenses related to COVID-192                                         1                1                -
Severance and related charges3                                                            8                -                -
Non-GAAP adjusted operating income                                                  $   327          $   304          $   307
Non-GAAP adjusted operating margin                                                     20.0  %          18.9  %          18.6  %


1 These items are additional charges attributable to acquisitions made, consisting of

amortization of purchased intangible assets. 2 Temporary additional compensation for employees during the COVID-19 pandemic.

Severance pay and related charges related to headcount reduction actions worldwide 3 in the Billboard and Adjacent Market activity.


Note: The reconciliation of GAAP and non-GAAP adjusted segment results above
does not include certain revenues, costs of products sold and operating expenses
that are reported within corporate and other and included in consolidated
operating income.
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