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 ~~July 31, 2016~~January 29, 2017


¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-06920

Applied Materials, Inc.

(Exact name of registrant as specified in its charter)



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

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

(408) 727-5555

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

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



Large accelerated filer þ		Accelerated filer ¨

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

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

Number of shares outstanding of the issuer’s common stock as of ~~July 31, 2016: 1,080,893,856~~January 29, 2017: 1,079,831,003

APPLIED MATERIALS, INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED ~~JULY 31, 2016~~JANUARY 29, 2017

TABLE OF CONTENTS



		Page
	PART I. FINANCIAL INFORMATION
Item 1:	Financial Statements (Unaudited)	3
	Consolidated Condensed Statements of Operations for the Three ~~and Nine~~ Months Ended ~~July~~January 29, 2017 and January 31, 2016 ~~and July 26, 2015~~	3
	Consolidated Condensed Statements of Comprehensive Income for the Three ~~and Nine~~ Months Ended ~~July~~January 29, 2017 and January 31, 2016 ~~and July 26, 2015~~	4
	Consolidated Condensed Balance Sheets at ~~July 31, 2016~~January 29, 2017 and October ~~25, 2015~~30, 2016	5
	Consolidated Condensed Statement of Stockholders’ Equity for the ~~Nine~~Three Months Ended ~~July~~January 29, 2017 and January 31, 2016 ~~and July 26, 2015~~	6
	Consolidated Condensed Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~July~~January 29, 2017 and January 31, 2016 ~~and July 26, 2015~~	7
	Notes to Consolidated Condensed Financial Statements	8
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	5750
Item 4:	Controls and Procedures	5750

	PART II. OTHER INFORMATION
Item 1:	Legal Proceedings	5851
Item 1A:	Risk Factors	5851
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	6862
Item 6:	Exhibits	6963
	Signatures	7064

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(In millions, except per share amounts)


	Three Months Ended				Nine Months Ended					Three Months Ended
	July 31, 2016		July 26, 2015		July 31, 2016		July 26, 2015			January 29, 2017		January 31, 2016

	(Unaudited)									(Unaudited)
Net sales	$	2,821	$	2,490	$	7,528	$	7,291		$	3,278	$	2,257
Cost of products sold	1,629		1,472		4,416		4,298			1,833		1,341
Gross profit	1,192		1,018		3,112		2,993			1,445		916
Operating expenses:
Research, development and engineering	386		372		1,146		1,088			417		374
Marketing and selling	107		112		315		332			118		106
General and administrative	103		135		276		392			103		82
Loss (gain) on derivatives associated with terminated business combination	—		3		—		(89		)
Total operating expenses	596		622		1,737		1,723			638		562
Income from operations	596		396		1,375		1,270			807		354
Interest expense	38		24		117		71			38		42
Interest and other income, net	6		3		15		2			2		2
Income before income taxes	564		375		1,273		1,201			771		314
Provision for income taxes	59		46		162		160			68		28
Net income	$	505	$	329	$	1,111	$	1,041		$	703	$	286
Earnings per share:
Basic	$	0.47	$	0.27	$	1.00	$	0.85
Diluted	$	0.46	$	0.27	$	0.99	$	0.84
Basic and diluted										$	0.65	$	0.25
Weighted average number of shares:
Basic	1,083		1,221		1,115		1,225			1,078		1,146
Diluted	1,093		1,231		1,123		1,238			1,089		1,154

See accompanying Notes to Consolidated Condensed Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)


	Three Months Ended						Nine Months Ended						Three Months Ended
	July 31, 2016			July 26, 2015			July 31, 2016			July 26, 2015			January 29, 2017			January 31, 2016

	(Unaudited)												(Unaudited)
Net income	$	505		$	329		$	1,111		$	1,041		$	703		$	286
Other comprehensive income (loss), net of tax:
Change in unrealized net gain on investments	17			1			21			(3		)	1			1
Change in unrealized net loss on derivative instruments	(9		)	(5		)	(16		)	(5		)	15			(3		)
Change in defined and postretirement benefit plans	—			—			—			(43		)	(7		)	—
Change in cumulative translation adjustments	—			11			—			9
Other comprehensive income (loss), net of tax	8			7			5			(42		)	9			(2		)
Comprehensive income	$	513		$	336		$	1,116		$	999		$	712		$	284

See accompanying Notes to Consolidated Condensed Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(In millions)


	July 31, 2016			October 25, 2015			January 29, 2017			October 30, 2016


ASSETS
Current assets:
Cash and cash equivalents	$	2,828		$	4,797		$	3,491		$	3,406
Short-term investments	438			168			656			343
Accounts receivable, net	1,852			1,739			2,369			2,279
Inventories	2,026			1,833			2,281			2,050
Other current assets	255			724			297			275
Total current assets	7,399			9,261			9,094			8,353
Long-term investments	960			946			909			929
Property, plant and equipment, net	905			892			949			937
Goodwill	3,305			3,302			3,316			3,316
Purchased technology and other intangible assets, net	621			762			527			575
Deferred income taxes and other assets	509			145			449			460
Total assets	$	13,699		$	15,308		$	15,244		$	14,570

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt	$	—		$	1,200
Accounts payable and accrued expenses	1,800			1,833
Accounts payable, notes payable and accrued expenses							$	2,139		$	2,256
Customer deposits and deferred revenue	1,164			765			1,669			1,376
Total current liabilities	2,964			3,798			3,808			3,632
Long-term debt	3,343			3,342			3,125			3,125
Other liabilities	573			555			624			596
Total liabilities	6,880			7,695			7,557			7,353
Stockholders’ equity:
Common stock	11			11			11			11
Additional paid-in capital	6,714			6,575			6,805			6,809
Retained earnings	14,750			13,967			15,847			15,252
Treasury stock	(14,569		)	(12,848		)	(14,870		)	(14,740		)
Accumulated other comprehensive loss	(87		)	(92		)	(106		)	(115		)
Total stockholders’ equity	6,819			7,613			7,687			7,217
Total liabilities and stockholders’ equity	$	13,699		$	15,308		$	15,244		$	14,570

Amounts as of ~~July 31, 2016~~January 29, 2017 are unaudited. Amounts as of October ~~25, 2015~~30, 2016 are derived from the October ~~25, 2015~~30, 2016 audited consolidated financial statements.

See accompanying Notes to Consolidated Condensed Financial Statements.

APPLIED MATERIALS, INC

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In millions)

Common Stock
Additional
Paid-In
Capital

Retained
Earnings
Treasury Stock
Accumulated
Other
Comprehensive
Income (Loss)
Total
Nine Months Ended July 31, 2016 Shares Amount Shares Amount

(Unaudited)
Balance at October 25, 2015 1,160
$ 11
$ 6,575
$ 13,967
793
$ (12,848 ) $ (92 ) $ 7,613
Net income —
—
—
1,111
—
—
—
1,111
Other comprehensive income (loss), net of tax —
—
—
—
—
—
5
5
Dividends —
—
—
(328 ) —
—
—
(328 )
Share-based compensation —
—
150
—
—
—
—
150
Issuance under stock plans, net of a tax benefit of $18 and other 11
—
(11 ) —
—
—
—
(11 )
Common stock repurchases (90 ) —
—
—
90
(1,721 ) —
(1,721 )
Balance at July 31, 2016 1,081
$ 11
$ 6,714
$ 14,750
883
$ (14,569 ) $ (87 ) $ 6,819



	Common Stock				Additional Paid-In Capital			Retained Earnings			Treasury Stock				Accumulated Other Comprehensive Income (Loss)			Total
Three Months Ended January 29, 2017	Shares		Amount		Additional Paid-In Capital			Retained Earnings			Shares	Amount			Accumulated Other Comprehensive Income (Loss)			Total

	(Unaudited)
Balance at October 30, 2016	1,078		$	11	$	6,809		$	15,252		889	$	(14,740	)	$	(115	)	$	7,217
Net income	—		—		—			703			—	—			—			703
Other comprehensive income, net of tax	—		—		—			—			—	—			9			9
Dividends	—		—		—			(108		)	—	—			—			(108		)
Share-based compensation	—		—		54			—			—	—			—			54
Issuance under stock plans, net of a tax benefit of $44 and other	6		—		(58		)	—			—	—			—			(58		)
Common stock repurchases	(4	)	—		—			—			4	(130		)	—			(130		)
Balance at January 29, 2017	1,080		$	11	$	6,805		$	15,847		893	$	(14,870	)	$	(106	)	$	7,687


	Common Stock				Additional Paid-In Capital				Retained Earnings			Treasury Stock						Accumulated Other Comprehensive Income (Loss)				Total			Common Stock				Additional Paid-In Capital			Retained Earnings			Treasury Stock						Accumulated Other Comprehensive Income (Loss)				Total
Nine Months Ended July 26, 2015	Shares		Amount					Shares				Amount																				Retained Earnings									Accumulated Other Comprehensive Income (Loss)				Total
Three Months Ended January 31, 2016																									Shares		Amount		Additional Paid-In Capital	Additional Paid-In Capital			Retained Earnings			Shares		Amount				Accumulated Other Comprehensive Income (Loss)				Total
					Additional Paid-In Capital																	Total											Retained Earnings									Accumulated Other Comprehensive Income (Loss)				Total
	(Unaudited)																								(Unaudited)
Balance at October 26, 2014	1,221		$	12	$	6,384			Retained Earnings	$	13,072		717		$	(11,524	)	Accumulated Other Comprehensive Income (Loss)		$	(76	)		$	7,868
Balance at October 25, 2015																									1,160		$	11	$	Additional Paid-In Capital	6,575		$	13,967		793		$	(12,848	)		$	(92	)		$	7,613
Net income	—		—		—				1,041			—		—				—				1,041			—		—		—			286			—		—				—				286
Other comprehensive loss, net of tax	—		—		—				—			—		—				(42		)		(42		)	—		—		—			—			—		—				(2		)		(2		)
Dividends	—		—		—				(366		)	—		—				—				(366		)	—		—		—			(111		)	—		—				—				(111		)
Share-based compensation	—		—		141				—			—		—				—				141			—		—		54			—			—		—				—				54
Issuance under stock plans, net of a tax benefit of $54 and other	12		—		(40		)		—			—		—				—				(40		)
Issuance under stock plans, net of a tax benefit of $10 and other																									6		—		(47		)	—			—		—				—				(47		)
Common stock repurchases	(32	)	—		—				—			32		(625		)		—				(625		)	(35	)	—		—			—			35		(625		)		—				(625		)
Balance at July 26, 2015	1,201		$	12	$	6,485			$	13,747		749		$	(12,149	)		$	(118	)		$	7,977
Balance at January 31, 2016																									1,131		$	11	$	6,582		$	14,142		828		$	(13,473	)		$	(94	)		$	7,168

See accompanying Notes to Consolidated Condensed Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In millions)


	Nine Months Ended						Three Months Ended
	July 31, 2016			July 26, 2015			January 29, 2017			January 31, 2016

	(Unaudited)						(Unaudited)
Cash flows from operating activities:
Net income	$	1,111		$	1,041		$	703		$	286
Adjustments required to reconcile net income to cash provided by operating activities:
Depreciation and amortization	289			275			97			96
Share-based compensation	150			141			54			54
Excess tax benefits from share-based compensation	(18		)	(54		)	(44		)	(10		)
Deferred income taxes	14			25			25			15
Other	20			64			9			10
Changes in operating assets and liabilities:
Accounts receivable	(112		)	(322		)	(89		)	113
Inventories	(192		)	(172		)	(231		)	(2		)
Other current and non-current assets	52			(2		)	(42		)	(14		)
Accounts payable and accrued expenses	(84		)	(174		)	(158		)	(423		)
Customer deposits and deferred revenue	399			(82		)	293			85
Income taxes payable	38			(72		)	15			5
Other liabilities	2			24			14			(8		)
Cash provided by operating activities	1,669			692			646			207
Cash flows from investing activities:
Capital expenditures	(165		)	(162		)	(64		)	(68		)
Cash paid for acquisitions, net of cash acquired	(5		)	(2		)
Proceeds from sales and maturities of investments	681			900			286			241
Purchases of investments	(947		)	(960		)	(589		)	(282		)
Cash used in investing activities	(436		)	(224		)	(367		)	(109		)
Cash flows from financing activities:
Debt repayments	(1,207		)	—			—			(1,205		)
Proceeds from common stock issuances	44			43			—			2
Common stock repurchases	(1,721		)	(625		)	(130		)	(625		)
Excess tax benefits from share-based compensation	18			54			44			10
Payments of dividends to stockholders	(336		)	(368		)	(108		)	(115		)
Cash used in financing activities	(3,202		)	(896		)	(194		)	(1,933		)
Decrease in cash and cash equivalents	(1,969		)	(428		)
Increase (decrease) in cash and cash equivalents							85			(1,835		)
Cash and cash equivalents — beginning of period	4,797			3,002			3,406			4,797
Cash and cash equivalents — end of period	$	2,828		$	2,574		$	3,491		$	2,962
Supplemental cash flow information:
Cash payments for income taxes	$	144		$	258		$	35		$	44
Cash refunds from income taxes	$	104		$	10		$	2		$	5
Cash payments for interest	$	110		$	85		$	34		$	34

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 ~~25, 2015~~30, 2016 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 ~~25, 2015 (2015~~30, 2016 (2016 Form 10-K). Applied’s results of operations for the three ~~and nine~~ months ended ~~July 31, 2016~~January 29, 2017 are not necessarily indicative of future operating results. Applied’s fiscal year ends on the last Sunday in October of each year. Fiscal 2017 and 2016 ~~and 2015~~ contain 5352 weeks and 5253 weeks, respectively, and the first ~~nine~~three months of fiscal 2017 and 2016 ~~and 2015~~ contained 4013 weeks and 3914 weeks, respectively.

Effective in the third quarter of fiscal 2016, Applied began to account for its roll-to-roll web coating systems (previously included in the Energy and Environmental Solutions segment) and display upgrade equipment (previously included in the Applied Global Services segment) under the Display and Adjacent Markets segment (previously Display). As a result of these changes, Applied's solar business (previously included in the Energy and Environmental Solutions segment) is included in Corporate and Other as it did not meet the threshold for a separate reportable segment. Results for prior periods have been recast to conform to the current presentation. As of July 31, 2016, Applied's three primary reportable segments are: Semiconductor Systems (previously Silicon Systems), Applied Global Services and Display and Adjacent Markets. See Note 14 of Notes to the Consolidated Condensed Financial Statements for further detail on reportable segments.

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

Use of Estimates

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

Revenue Recognition

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

~~Table of Contents~~

~~APPLIED MATERIALS, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)~~

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

Table of Contents

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Recent Accounting Pronouncements

Accounting Standards Adopted

Debt Issuance Costs. In April 2015, the Financial Accounting Standard Board (FASB) issued authoritative guidance that requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts. Effective in the first quarter of fiscal 2017, Applied adopted the authoritative guidance retrospectively. The adoption of this guidance did not have a significant impact on Applied’s consolidated financial statements. See Note 9 of Notes to Consolidated Condensed Financial Statements for additional discussion.

Fair Value Disclosures. In May 2015, the FASB issued authoritative guidance to remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The new guidance also removes the requirement of certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. The guidance became effective for Applied in the first quarter of fiscal 2017, with retrospective application. The adoption of this guidance only impacts disclosures in Applied’s annual consolidated financial statements.

Intangibles: Internal-Use Software. In April 2015, the FASB issued authoritative guidance for customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This guidance did not change accounting for service contracts. Applied adopted this guidance effective in the first quarter of fiscal 2017 prospectively to all arrangements entered into or materially modified after the effective date. The adoption of this guidance did not have a significant impact on Applied’s consolidated financial statements.

Accounting Standards Not Yet Adopted

Goodwill Impairment. In January 2017, the FASB issued authoritative guidance that simplifies the process required to test goodwill for impairment. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2020. Early adoption is permitted. The adoption of this guidance is not expected to have a significant impact on Applied’s consolidated financial statements.

Income Taxes: Intra-Entity Asset Transfers. In October 2016, the FASB issued authoritative guidance that requires entities to recognize at the transaction date the income tax consequences of intercompany asset transfers other than inventory. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2019, with early adoption permitted. Applied is currently evaluating the effect of this new guidance on Applied’s consolidated financial statements.

Restricted Cash. In August 2016, a new authoritative guidance was issued which addresses classification of certain cash receipts and cash payments related to the statement of cash flows. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2019. The adoption of this guidance is not expected to have a significant impact on Applied’s consolidated financial statements.

Financial Instruments: Credit Losses. In June 2016, the ~~Financial Accounting Standards Board (FASB)~~FASB issued authoritative guidance that modifies the impairment model for certain financial assets by requiring use of an expected loss methodology, which will result in more timely recognition of credit losses. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2021. Early adoption is permitted beginning in the first quarter of fiscal 2020. Applied is currently evaluating the effect of this new guidance on ~~Applied's~~Applied’s consolidated financial statements.

Share-Based Compensation. In March 2016, the FASB issued authoritative guidance that simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ~~The~~Applied plans to adopt the authoritative guidance ~~will be~~ effective ~~for Applied~~ in the first quarter of fiscal 2018. ~~Early~~Upon adoption, Applied has elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period. The new standard will result in the recognition of excess tax benefits in provision for income taxes rather than paid-in capital prospectively, which is ~~permitted~~expected to increase volatility in Applied’s results of operations. Applied also elected to apply the presentation requirements for cash flows related to excess tax benefits retrospectively. The presentation requirements for cash flows related to employee taxes paid for withheld shares will be presented as a financing activity retrospectively, as required. Applied expects cash flow from operations to increase, with a corresponding decrease in cash flow from financing activity as a result of the ~~beginning~~changes in the cash flow presentation.

Table of ~~an interim or annual reporting period. Applied is currently evaluating the effect of this new guidance on Applied's consolidated financial statements.~~Contents

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Leases. In February 2016, the FASB issued authoritative guidance for lease accounting, which requires lessees to recognize lease assets and liabilities on the balance sheet for certain lease arrangements that are classified as operating leases under the previous standard, and to provide for enhanced disclosures. The authoritative guidance will be effective for Applied in the first

quarter of fiscal 2020 and should be applied using a modified retrospective approach. Early adoption is permitted. Applied is currently evaluating the effect of this new guidance on ~~Applied's~~Applied’s consolidated financial statements.

Financial Instruments: Classification and Measurement. In January 2016, the FASB issued authoritative guidance that requires equity investments that do not result in consolidation, and are not accounted for under the equity method, to be measured at fair value, and requires recognition of any changes in fair value in net income unless the investments qualify for a new practicability exception. For financial liabilities measured at fair value, the change in fair value caused by a change in instrument-specific credit risk will be required to be presented separately in other comprehensive income. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2019. Early adoption is permitted only for the provisions related to the recognition of changes in fair value of financial liabilities caused by instrument-specific credit risk. Applied is currently evaluating the effect of this new guidance on ~~Applied's~~Applied’s consolidated financial statements.

In November 2015, the FASB issued authoritative guidance requiring all deferred tax assets and liabilities, and any related valuation allowance, to be classified as noncurrent on the balance sheet. Applied elected to prospectively adopt the authoritative guidance in the beginning of the first quarter of fiscal 2016. Prior periods were not retrospectively adjusted.

Inventory Measurement. In July 2015, the FASB issued authoritative guidance that requires inventory to be measured at the lower of cost and net realizable value instead of at lower of cost or market. This guidance does not apply to inventory that is measured using last-in, first out (LIFO) or the retail inventory method but applies to all other inventory including those measured using first-in, first-out (FIFO) or the average cost method. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2018 and should be applied prospectively. Early adoption is permitted as of the beginning of an interim or annual reporting period. Applied is currently evaluating the effect of this new guidance on ~~Applied's~~Applied’s consolidated financial statements.

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

~~Table of Contents~~

~~APPLIED MATERIALS, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)~~

In April 2015, the FASB issued authoritative guidance for customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This guidance will not change accounting for service contracts. Applied will adopt this guidance in the first quarter of fiscal 2017 prospectively to all arrangements entered into or materially modified after the effective date. The adoption of this guidance is not expected to have a significant impact on Applied's consolidated financial statements.

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

Revenue Recognition.In May 2014, the FASB issued authoritative guidance that requires revenue recognition to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This new standard will supersede most current revenue recognition guidance, including industry-specific guidance. Entities will have the option of using either a full retrospective or modified retrospective approach to adopting the guidance. Under the modified approach, an entity would recognize the cumulative effect of initially applying the guidance with an adjustment to the opening balance of retained earnings in the period of adoption. In addition, the modified approach will require additional disclosures. In August 2015, the FASB issued an amendment to defer the effective date by one year and allow entities to early adopt no earlier than the original effective date. With this amendment, the guidance will be effective for Applied in the first quarter of fiscal ~~2019. Subsequent~~2019, which is the Company’s planned adoption date. In fiscal 2016, Applied established a project steering committee and cross-functional implementation team to identify potential differences that would result from applying the ~~amendment,~~requirements of the ~~FASB issued additional clarifying~~new standard to Applied’s revenue contracts. In addition, the implementation ~~guidance.~~team is also responsible for identifying and implementing changes to business processes, systems and controls to support recognition and disclosure under the new standard. Applied is ~~currently evaluating~~continuing to evaluate the effect of this new guidance on ~~Applied's~~Applied’s financial position, results of operations and its ongoing financial reporting, including the selection of a transition method.

Table of Contents

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


Note 2	Earnings Per Share

Basic earnings per share is determined using the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined using the weighted average number of common shares and potential common shares (representing the dilutive effect of stock options, restricted stock units, and employee stock purchase plan shares) outstanding during the period. ~~Applied's~~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~~Company’s non-complex capital structure.


	Three Months Ended				Nine Months Ended				Three Months Ended
	July 31, 2016		July 26, 2015		July 31, 2016		July 26, 2015		January 29, 2017		January 31, 2016

	(In millions, except per share amounts)								(In millions, except per share amounts)
Numerator:
Net income	$	505	$	329	$	1,111	$	1,041	$	703	$	286
Denominator:
Weighted average common shares outstanding	1,083		1,221		1,115		1,225		1,078		1,146
Effect of dilutive stock options, restricted stock units and employee stock purchase plan shares	10		10		8		13		11		8
Denominator for diluted earnings per share	1,093		1,231		1,123		1,238		1,089		1,154
Basic earnings per share	$	0.47	$	0.27	$	1.00	$	0.85
Diluted earnings per share	$	0.46	$	0.27	$	0.99	$	0.84
Basic and diluted earnings per share									$	0.65	$	0.25
Potentially dilutive securities	—		—		—		1		—		2

Potentially dilutive securities attributable to outstanding stock options and restricted stock units ~~were~~are excluded from the calculation of diluted earnings per share ~~because~~where the combined exercise price, average unamortized fair value and assumed tax benefits upon the exercise of options and the vesting of restricted stock units ~~were~~are greater than the average market price of Applied common stock, and therefore their inclusion would ~~have been~~be anti-dilutive.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


Note 3	Cash, Cash Equivalents and Investments

Summary of Cash, Cash Equivalents and Investments

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


July 31, 2016	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
January 29, 2017									Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value

	(In millions)								(In millions)
Cash	$	1,084	$	—	$	—	$	1,084	$	1,322	$	—	$	—	$	1,322
Cash equivalents:
Money market funds	1,380		—		—		1,380		1,533		—		—		1,533
U.S. Treasury and agency securities	40		—		—		40		50		—		—		50
Non-U.S. government securities*									31		—		—		31
Municipal securities	167		—		—		167		210		—		—		210
Commercial paper, corporate bonds and medium-term notes	157		—		—		157		345		—		—		345
Total Cash equivalents	1,744		—		—		1,744		2,169		—		—		2,169
Total Cash and Cash equivalents	$	2,828	$	—	$	—	$	2,828	$	3,491	$	—	$	—	$	3,491
Short-term and long-term investments:
U.S. Treasury and agency securities	$	253	$	—	$	—	$	253	$	103	$	—	$	1	$	102
Non-U.S. government securities*	20		—		—		20		35		—		—		35
Municipal securities	409		3		—		412		560		—		1		559
Commercial paper, corporate bonds and medium-term notes	306		1		—		307		470		—		1		469
Asset-backed and mortgage-backed securities	264		1		1		264		265		—		1		264
Total fixed income securities	1,252		5		1		1,256		1,433		—		4		1,429
Publicly traded equity securities	33		48		4		77		26		47		1		72
Equity investments in privately-held companies	65		—		—		65		64		—		—		64
Total short-term and long-term investments	$	1,350	$	53	$	5	$	1,398	$	1,523	$	47	$	5	$	1,565
Total Cash, Cash equivalents and Investments	$	4,178	$	53	$	5	$	4,226	$	5,014	$	47	$	5	$	5,056

_________________________

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

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


October 25, 2015	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
October 30, 2016									Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value

	(In millions)								(In millions)
Cash	$	1,010	$	—	$	—	$	1,010	$	1,103	$	—	$	—	$	1,103
Cash equivalents:
Money market funds	3,272		—		—		3,272		1,889		—		—		1,889
Non-U.S. government securities	60		—		—		60
U.S. Treasury and agency securities									10		—		—		10
Non-U.S. government securities*									10		—		—		10
Municipal securities	73		—		—		73		253		—		—		253
Commercial paper, corporate bonds and medium-term notes	382		—		—		382		141		—		—		141
Total Cash equivalents	3,787		—		—		3,787		2,303		—		—		2,303
Total Cash and Cash equivalents	$	4,797	$	—	$	—	$	4,797	$	3,406	$	—	$	—	$	3,406
Short-term and long-term investments:
U.S. Treasury and agency securities	$	84	$	—	$	—	$	84	$	195	$	—	$	—	$	195
Non-U.S. government securities	9		—		—		9
Non-U.S. government securities*									5		—		—		5
Municipal securities	384		2		—		386		408		—		—		408
Commercial paper, corporate bonds and medium-term notes	250		—		—		250		273		1		—		274
Asset-backed and mortgage-backed securities	262		—		—		262		253		1		1		253
Total fixed income securities	989		2		—		991		1,134		2		1		1,135
Publicly traded equity securities	28		17		—		45		26		44		3		67
Equity investments in privately-held companies	78		—		—		78		70		—		—		70
Total short-term and long-term investments	$	1,095	$	19	$	—	$	1,114	$	1,230	$	46	$	4	$	1,272
Total Cash, Cash equivalents and Investments	$	5,892	$	19	$	—	$	5,911	$	4,636	$	46	$	4	$	4,678

_________________________

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

Maturities of Investments

The following table summarizes the contractual maturities of Applied’s investments at ~~July 31, 2016~~January 29, 2017:


	Cost		Estimated Fair Value		Cost		Estimated Fair Value

	(In millions)				(In millions)
Due in one year or less	$	422	$	422	$	639	$	639
Due after one through five years	566		570		529		526
No single maturity date**	362		406		355		400
	$	1,350	$	1,398	$	1,523	$	1,565

_________________________

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

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Gains and Losses on Investments

During the three ~~and nine~~ months ended ~~July~~January 29, 2017 and January 31, 2016, ~~and July 26, 2015,~~ gross realized gains and losses on investments were not material.

At ~~July 31, 2016~~January 29, 2017 and October ~~25, 2015,~~30, 2016, gross unrealized losses related to ~~Applied's~~Applied’s investment portfolio were not material. Applied regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether an unrealized loss is considered to be temporary, or other-than-temporary and therefore impaired, include: the length of time and extent to which fair value has been lower than the cost basis; the financial condition, credit quality and near-term prospects of the investee; and whether it is more likely than not that Applied will be required to sell the security prior to recovery. Generally, the contractual terms of investments in marketable securities do not permit settlement at prices less than the amortized cost of the investments. Applied determined that the gross unrealized losses on its marketable fixed-income securities at ~~July~~January 29, 2017 and January 31, 2016 ~~and July 26, 2015~~ were temporary in nature and therefore it did not recognize any impairment of its marketable fixed-income securities during the three ~~and nine~~ months ended ~~July~~January 29, 2017 or January 31, ~~2016 or July 26, 2015.~~2016. Impairment charges on equity investments in privately-held companies during the three ~~and nine~~ months ended ~~July~~January 29, 2017 and January 31, 2016 ~~and July 26, 2015~~ were not material. These impairment charges are included in interest and other income, net in the Consolidated Condensed Statement of Operations.

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


Note 4	Fair Value Measurements

Applied’s financial assets are measured and recorded at fair value, except for equity investments in privately-held companies. These equity investments are generally accounted for under the cost method of accounting and are periodically assessed for other-than-temporary impairment when events or circumstances indicate that an other-than-temporary decline in value may have occurred. Applied’s nonfinancial assets, such as goodwill, intangible assets, and property, plant and equipment, are recorded at cost and are assessed for impairment ~~when~~whenever events or changes in circumstances indicate that the carrying value of an ~~other-than-temporary decline in value~~asset may ~~have occurred.~~not be recoverable.

Fair Value Hierarchy

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

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

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

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

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

Investments with remaining effective maturities of 12 months or less from the balance sheet date are classified as short-term investments. Investments with remaining effective maturities of more than 12 months from the balance sheet date are classified as long-term investments. As of ~~July 31, 2016~~January 29, 2017, 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.

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Assets Measured at Fair Value on a Recurring Basis

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


	July 31, 2016						October 25, 2015						January 29, 2017						October 30, 2016
	Level 1		Level 2		Total		Level 1		Level 2		Total		Level 1		Level 2		Total		Level 1		Level 2		Total

	(In millions)												(In millions)
Assets:
Money market funds	$	1,380	$	—	$	1,380	$	3,272	$	—	$	3,272	$	1,533	$	—	$	1,533	$	1,889	$	—	$	1,889
U.S. Treasury and agency securities	90		203		293		72		12		84		83		69		152		107		98		205
Non-U.S. government securities	—		20		20		—		69		69		—		66		66		—		15		15
Municipal securities	—		579		579		—		459		459		—		769		769		—		661		661
Commercial paper, corporate bonds and medium-term notes	—		464		464		—		632		632		—		814		814		—		415		415
Asset-backed and mortgage-backed securities	—		264		264		—		262		262		—		264		264		—		253		253
Publicly traded equity securities	77		—		77		45		—		45		72		—		72		67		—		67
Total	$	1,547	$	1,530	$	3,077	$	3,389	$	1,434	$	4,823	$	1,688	$	1,982	$	3,670	$	2,063	$	1,442	$	3,505

There were no transfers between Level 1 and Level 2 fair value measurements during the three ~~and nine~~ months ended ~~July 31, 2016~~January 29, 2017 or ~~July 26, 2015.~~January 31, 2016. Applied did not have any financial assets measured at fair value on a recurring basis within Level 3 fair value measurements as of ~~July 31, 2016~~January 29, 2017 or October ~~25, 2015.~~30, 2016.

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

Equity investments in privately-held companies are generally accounted for under the cost method of accounting and are periodically assessed for other-than-temporary impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred. If Applied determines that an other-than-temporary impairment has occurred, the investment will be written down to its estimated fair value based on available information, such as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operational performance and any other readily available market data. At ~~July 31, 2016~~January 29, 2017, equity investments in privately-held companies totaled ~~$65~~$64 million, of which ~~$58~~$56 million of investments were accounted for under the cost method of accounting and $7$8 million of investments had been measured at fair value on a non-recurring basis within Level 3 fair value measurements due to an other-than-temporary decline in value. At October ~~25, 2015,~~30, 2016, equity investments in privately-held companies totaled ~~$78~~$70 million, of which ~~$70~~$62 million of investments were accounted for under the cost method of accounting and $8 million of investments had been measured at fair value on a non-recurring basis within Level 3 fair value measurements due to an other-than-temporary decline in value. Impairment charges on equity investments in privately-held companies during the three ~~and nine~~ months ended ~~July~~January 29, 2017 and January 31, 2016 ~~and July 26, 2015~~ were not material.

Other

The carrying amounts of Applied’s financial instruments, including cash and cash equivalents, accounts receivable, notes payable - short term, and accounts payable and accrued expenses, approximate fair value due to their short maturities. At ~~July 31,~~January 29, 2017, the carrying amount of long-term debt was $3.1 billion and the estimated fair value was $3.4 billion. At October 30, 2016, the carrying amount of long-term debt was ~~$3.3 billion and the estimated fair value was $3.8 billion. At October 25, 2015, the carrying amount of long-term debt was $3.3~~$3.1 billion and the estimated fair value was $3.5 billion. The estimated fair value of long-term debt is determined by Level 2 inputs and is based primarily on quoted market prices for the same or similar issues. See Note 9 of the Notes to the Consolidated Condensed Financial Statements for further detail of existing debt.

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


Note 5	Derivative Instruments and Hedging Activities

Derivative Financial Instruments

Applied conducts business in a number of foreign countries, with certain transactions denominated in local currencies, such as the Japanese yen, euro, Israeli shekel and Taiwanese dollar. 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.

During fiscal 2015, Applied entered into and settled a series of forward-starting interest rate swap agreements, with a total notional amount of $600 million to hedge against the variability of cash flows due to changes in the benchmark interest rate of fixed rate debt. These instruments were designated as cash flow hedges at inception and settled in conjunction with the issuance of debt in September 2015. The loss from the settlement of the interest rate swap agreement ~~that~~which was included in accumulated other comprehensive income (AOCI) in ~~stockholders'~~stockholders’ equity is being amortized to interest expense over the term of the senior unsecured 10-year notes issued in September 2015.

Applied does not use derivative financial instruments for trading or speculative purposes. Derivative instruments and hedging activities, including foreign currency exchange contracts and interest rate swap agreements, are recognized on the balance sheet at fair value. Changes in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of any hedges, are recognized currently in earnings. All of Applied’s derivative financial instruments are recorded at their fair value in other current assets or in accounts payable and accrued expenses.

Hedges related to anticipated transactions are designated and documented at the inception of the hedge as cash flow hedges and foreign exchange derivatives 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 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 foreign exchange derivative instruments included in AOCI at ~~July 31, 2016~~January 29, 2017 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 earnings. 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 nine~~ months ended ~~July~~January 29, 2017 and January 31, ~~2016 and July 26, 2015.~~2016.

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.

In September 2013, Applied purchased foreign exchange option contracts to limit its foreign exchange risk associated with the then-anticipated business combination with Tokyo Electron Limited (TEL). These derivatives did not qualify for hedge accounting treatment and were marked to market at the end of each reporting period with gains and losses recorded as part of operating expenses. Due to the termination of the then-anticipated business combination with TEL on April 26, 2015, these foreign exchange option contracts were sold during the third quarter of fiscal 2015. During the three and nine months ended July 26, 2015, Applied recorded a loss of $3 million and a gain of $89 million, respectively, related to these contracts. The cash flow impact of these derivatives has been classified as operating cash flows in the Consolidated Condensed Statements of Cash Flows.

The fair values of foreign exchange derivative instruments at ~~July 31, 2016~~January 29, 2017 and October ~~25, 2015~~30, 2016 were not material.

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

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


		Three Months Ended																		Three Months Ended
		July 31, 2016									July 26, 2015									January 29, 2017								January 31, 2016
		Effective Portion						Ineffective Portion and Amount Excluded from Effectiveness Testing			Effective Portion					Ineffective Portion and Amount Excluded from Effectiveness Testing				Effective Portion					Ineffective Portion and Amount Excluded from Effectiveness Testing			Effective Portion						Ineffective Portion and Amount Excluded from Effectiveness Testing
	Location of Gain or (Loss) Reclassified from AOCI into Income	Gain or (Loss) Recognized in AOCI			Gain or (Loss) Reclassified from AOCI into Income			Gain or (Loss) Recognized in Income			Gain or (Loss) Recognized in AOCI			Gain or (Loss) Reclassified from AOCI into Income		Gain or (Loss) Recognized in Income			Location of Gain or (Loss) Reclassified from AOCI into Income	Gain or (Loss) Recognized in AOCI		Gain or (Loss) Reclassified from AOCI into Income			Gain or (Loss) Recognized in Income			Gain or (Loss) Recognized in AOCI			Gain or (Loss) Reclassified from AOCI into Income			Gain or (Loss) Recognized in Income

		(In millions)																		(In millions)
Derivatives in Cash Flow Hedging Relationships
Foreign exchange contracts	Cost of products sold	$	(26	)	$	(13	)	$	1		$	5		$	2	$	(1	)	Cost of products sold	$	16	$	(4	)	$	(2	)	$	(6	)	$	1		$	—
Foreign exchange contracts	General and administrative	—			1			(1		)	—			3		—			General and administrative	—		(3		)	—			—			(1		)	(1		)
Interest rate swaps	Interest expense	—			(1		)	—			$	(8	)	$	—	$	—		Interest expense	—		(1		)	—			—			(1		)	—
Total		$	(26	)	$	(13	)	$	—		$	(3	)	$	5	$	(1	)		$	16	$	(8	)	$	(2	)	$	(6	)	$	(1	)	$	(1	)

Nine Months Ended
July 31, 2016 July 26, 2015
Effective Portion Ineffective Portion and Amount
Excluded from
Effectiveness
Testing Effective Portion Ineffective Portion and Amount
Excluded from
Effectiveness
Testing
Location of Gain or
(Loss) Reclassified
from AOCI into
Income Gain or
(Loss)
Recognized
in AOCI Gain or (Loss)
Reclassified
from AOCI into
Income Gain or (Loss)
Recognized in
Income Gain or
(Loss)
Recognized
in AOCI Gain or (Loss)
Reclassified
from AOCI into
Income Gain or (Loss)
Recognized in
Income

(In millions)
Derivatives in Cash Flow Hedging Relationships
Foreign exchange contracts Cost of products sold $ (49 ) $ (21 ) $ 1
$ 10
$ 15
$ (3 )
Foreign exchange contracts General and administrative —
(1 ) (2 ) —
(5 ) (1 )
Interest rate swaps Interest expense —
(1 ) —
(8 ) —
—
Total $ (49 ) $ (23 ) $ (1 ) $ 2
$ 10
$ (4 )

~~Table of Contents~~

~~APPLIED MATERIALS, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)~~


		Amount of Gain or (Loss) Recognized in Income												Amount of Gain or (Loss) Recognized in Income
		Three Months Ended						Nine Months Ended						Three Months Ended
	Location of Gain or (Loss) Recognized in Income	July 31, 2016			July 26, 2015			July 31, 2016			July 26, 2015		Location of Gain or (Loss) Recognized in Income	January 29, 2017		January 31, 2016

		(In millions)												(In millions)
Derivatives Not Designated as Hedging Instruments
Foreign exchange contracts	Gain on derivatives associated with terminated business combination	$	—		$	(3	)	$	—		$	89	General and administrative	$	31	$	(4	)
Foreign exchange contracts	General and administrative	(31		)	11			(67		)	31
Total		$	(31	)	$	8		$	(67	)	$	120		$	31	$	(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 immaterial as of ~~July 31, 2016.~~January 29, 2017.

Entering into derivative contracts with banks exposes Applied to credit-related losses in the event of the banks’ nonperformance. However, Applied’s exposure is not considered significant.

Table of Contents

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


Note 6	Accounts Receivable, Net

Applied sold ~~$57~~$63 million of accounts receivable during the three ~~and nine~~ months ended ~~July 31, 2016.~~January 29, 2017. Applied did not sell accounts receivable during the three ~~and nine~~ months ended ~~July 26, 2015.~~January 31, 2016. Applied did not discount letters of credit issued by customers or discount promissory notes during the three ~~and nine~~ months ended ~~July~~January 29, 2017 and January 31, ~~2016 and July 26, 2015.~~2016. Financing charges on the sale of receivables and discounting of letters of credit are included in interest expense in the accompanying Consolidated Condensed Statements of Operations and were not material for all periods presented.

Accounts receivable are presented net of allowance for doubtful accounts of ~~$48~~$51 million at ~~July 31, 2016~~January 29, 2017 and ~~$49 million at~~ October ~~25, 2015.~~30, 2016. Applied sells its products principally to manufacturers within the semiconductor and display industries. While Applied believes that its allowance for doubtful accounts is adequate and represents its best estimate as of ~~July 31, 2016,~~January 29, 2017, it continues to closely monitor customer liquidity and industry and economic conditions, which may result in changes to Applied’s estimates.

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


Note 7	Balance Sheet Detail


	July 31, 2016		October 25, 2015		January 29, 2017		October 30, 2016

	(In millions)				(In millions)
Inventories
Customer service spares	$	432	$	382	$	461	$	452
Raw materials	461		461		490		474
Work-in-process	392		271		387		393
Finished goods	741		719		943		731
	$	2,026	$	1,833	$	2,281	$	2,050

~~Table of Contents~~

~~APPLIED MATERIALS, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)~~

Included in finished goods inventory are ~~$183~~$315 million at ~~July 31, 2016~~January 29, 2017, and $~~155~~190 million at October ~~25, 2015,~~30, 2016, of newly-introduced systems at customer locations where the sales transaction did not meet Applied’s revenue recognition criteria as set forth in Note 1. Finished goods inventory includes ~~$205~~$210 million and $~~185~~197 million of evaluation inventory at ~~July 31, 2016~~January 29, 2017 and October ~~25, 2015,~~30, 2016, respectively.

July 31,
2016 October 25,
2015

(In millions)
Other Current Assets
Deferred income taxes, net¹
$ —
$ 403
Prepaid income taxes and income taxes receivable 76
127
Prepaid expenses and other 179
194
$ 255
$ 724

¹ July 31, 2016 balance reflects the effects of the prospective adoption of the authoritative guidance in the first quarter of fiscal 2016, which required all deferred tax assets and liabilities, and any related valuation allowance to be classified as noncurrent on the balance sheet.

Useful Life July 31,
2016 October 25,
2015

(In years) (In millions)
Property, Plant and Equipment, Net
Land and improvements $ 159
$ 157
Buildings and improvements 3-30 1,259
1,247
Demonstration and manufacturing equipment 3-5 1,017
920
Furniture, fixtures and other equipment 3-15 569
574
Construction in progress 54
48
Gross property, plant and equipment 3,058
2,946
Accumulated depreciation (2,153 ) (2,054 )
$ 905
$ 892



	January 29, 2017		October 30, 2016

	(In millions)
Other Current Assets
Prepaid income taxes and income taxes receivable	$	91	$	87
Prepaid expenses and other	206		188
	$	297	$	275

July 31,
2016 October 25,
2015

(In millions)
Accounts Payable and Accrued Expenses
Accounts payable $ 717
$ 658
Compensation and employee benefits 449
509
Warranty 139
126
Dividends payable 108
116
Income taxes payable 23
60
Other accrued taxes 45
58
Interest payable 35
36
Other 284
270
$ 1,800
$ 1,833



	Useful Life	January 29, 2017			October 30, 2016

	(In years)	(In millions)
Property, Plant and Equipment, Net
Land and improvements		$	159		$	159
Buildings and improvements	3-30	1,269			1,261
Demonstration and manufacturing equipment	3-5	1,024			992
Furniture, fixtures and other equipment	3-15	552			547
Construction in progress		91			84
Gross property, plant and equipment		3,095			3,043
Accumulated depreciation		(2,146		)	(2,106		)
		$	949		$	937

1819

Table of Contents

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

July 31,
2016 October 25,
2015

(In millions)
Customer Deposits and Deferred Revenue
Customer deposits $ 383
$ 132
Deferred revenue 781
633
$ 1,164
$ 765



	January 29, 2017		October 30, 2016

	(In millions)
Accounts Payable, Notes Payable and Accrued Expenses
Accounts payable	$	867	$	813
Notes payable, short-term	200		200
Compensation and employee benefits	367		517
Warranty	170		153
Dividends payable	108		108
Income taxes payable	59		101
Other accrued taxes	40		50
Interest payable	35		31
Other	293		283
	$	2,139	$	2,256



	January 29, 2017		October 30, 2016

	(In millions)
Customer Deposits and Deferred Revenue
Customer deposits	$	408	$	471
Deferred revenue	1,261		905
	$	1,669	$	1,376

Applied typically receives deposits on future deliverables from customers in the Display and Adjacent Markets segment and, in certain instances, may also receive deposits from customers in the Applied Global Services segment.


	July 31, 2016		October 25, 2015		January 29, 2017		October 30, 2016

	(In millions)				(In millions)
Other Liabilities
Deferred income taxes	$	16	$	56	$	2	$	1
Income taxes payable	284		227		350		337
Defined and postretirement benefit plans	190		187		179		182
Other	83		85		93		76
	$	573	$	555	$	624	$	596

1920

Table of Contents

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


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 purchase price over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. Applied assigns assets acquired (including goodwill) and liabilities assumed to one or more reporting units as of the date of acquisition. Typically, acquisitions relate to a single reporting unit and thus do not require the allocation of goodwill to multiple reporting units. If the products obtained in an acquisition are assigned to multiple reporting units, the goodwill is distributed to the respective reporting units as part of the purchase price allocation process.

Goodwill and purchased intangible assets with indefinite useful lives are not amortized, but are reviewed for impairment annually during the fourth quarter of each fiscal year and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The process of evaluating the potential impairment of goodwill and intangible assets requires significant judgment, especially in emerging markets. Applied regularly monitors current business conditions and considers other factors including, but not limited to, adverse industry or economic trends, restructuring actions and lower projections of profitability that may impact future operating results.

To test goodwill for impairment, Applied first performs a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, Applied then performs the two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. Under the two-step goodwill impairment test, Applied would in the first step compare the estimated fair value of each reporting unit to its carrying value. Applied determines the fair value of each of its reporting units based on a weighting of income and market approaches. If the carrying value of a reporting unit exceeds its fair value, Applied would then perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If Applied determines that the carrying value of a reporting unit’s goodwill exceeds its implied fair value, Applied would record an impairment charge equal to the difference.

As of ~~July 31, 2016, Applied's~~January 29, 2017, Applied’s reporting units include Transistor and Interconnect Group, Patterning and Packaging Group, and Imaging and Process Control Group, which combine to form the Semiconductor Systems reporting segment, Applied Global Services, and Display and Adjacent Markets.

Due to this change, Applied performed a goodwill impairment test for Applied Global Services and Display and Adjacent Markets immediately before the changes in the composition of the segments, reallocated $31 million of goodwill from Applied Global Services associated with the display upgrade equipment business to Display and Adjacent Markets based on the estimated relative fair value of each business unit and, then performed another goodwill impairment test for Applied Global Services and Display and Adjacent Markets after the change. There was no goodwill associated with the roll-to-roll web coating systems business. Prior period information in the tables below has been reclassified to conform to current presentation, which reflects the new organizational structure.

~~Table of Contents~~

~~APPLIED MATERIALS, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)~~

In performing the goodwill impairment test, Applied utilized both the discounted cash flow method (weighted 75%) and the guideline company method (weighted 25%) to estimate the fair value of the reporting units. The estimates used in the impairment testing were consistent with the discrete forecasts that Applied uses to manage its business, and considered any significant developments that occurred during the quarter. Under the discounted cash flow method, cash flows beyond the discrete forecast were estimated using a terminal growth rate, which considered the long-term earnings growth rate specific to the reporting units. The estimated future cash flows were 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 was derived using both known and estimated market metrics, and was adjusted to reflect both the timing and risks associated with the estimated cash flows. The tax rate used in the discounted cash flow method was the median tax rate of comparable companies which reflected Applied's current international structure, which is consistent with the market participant perspective. Under the guideline company method, market multiples were applied to forecasted revenues and earnings before interest, taxes, depreciation and amortization. The market multiples used were consistent with comparable publicly-traded companies and considered each reporting unit's size, growth and profitability relative to its comparable companies. Based on Applied's analysis, the estimated fair value exceeded the carrying value for Applied Global Services and Display and Adjacent Markets segments before and after the change in their compositions, and therefore, the second step of the goodwill impairment test was not required.

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

Details of goodwill and other indefinite-lived intangible assets as of ~~July 31, 2016~~January 29, 2017 and October ~~25, 2015~~30, 2016 were as follows:

July 31, 2016 October 25, 2015
Goodwill Other
Intangible
Assets Total Goodwill Other
Intangible
Assets Total

(In millions)
Semiconductor Systems $ 2,151
$ —
$ 2,151
$ 2,151
$ —
$ 2,151
Applied Global Services 999
5
1,004
996
5
1,001
Display and Adjacent Markets 155
20
175
155
20
175
Carrying amount $ 3,305
$ 25
$ 3,330
$ 3,302
$ 25
$ 3,327

~~From time to time, Applied makes acquisitions of and investments in companies related to existing or new markets for Applied.~~



	January 29, 2017						October 30, 2016
	Goodwill		Other Intangible Assets		Total		Goodwill		Other Intangible Assets		Total

	(In millions)
Semiconductor Systems	$	2,151	$	—	$	2,151	$	2,151	$	—	$	2,151
Applied Global Services	1,010		5		1,015		1,010		5		1,015
Display and Adjacent Markets	155		18		173		155		20		175
Carrying amount	$	3,316	$	23	$	3,339	$	3,316	$	25	$	3,341

Other intangible assets that are not subject to amortization consist primarily of in-process technology, which will be subject to amortization upon commercialization. The fair value assigned to in-process technology was determined using the income approach taking into account estimates and judgments regarding risks inherent in the development process, including the likelihood of achieving technological success and market acceptance. If an in-process technology project is abandoned, the acquired technology attributable to the project will be written-off.

Table of Contents

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

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


	July 31, 2016		October 25, 2015		January 29, 2017		October 30, 2016

	(In millions)				(In millions)
Purchased technology, net	$	450	$	575	$	367	$	409
Intangible assets - finite-lived, net	146		162		137		141
Intangible assets - indefinite-lived	25		25		23		25
Total	$	621	$	762	$	527	$	575

Finite-Lived Purchased Intangible Assets

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

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

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

Details of finite-lived intangible assets were as follows:


	July 31, 2016									October 25, 2015									January 29, 2017									October 30, 2016
	Purchased Technology			Other Intangible Assets			Total			Purchased Technology			Other Intangible Assets			Total			Purchased Technology			Other Intangible Assets			Total			Purchased Technology			Other Intangible Assets			Total

	(In millions)																		(In millions)
Gross carrying amount:
Semiconductor Systems	$	1,449		$	252		$	1,701		$	1,449		$	252		$	1,701		$	1,449		$	252		$	1,701		$	1,449		$	252		$	1,701
Applied Global Services	28			44			72			28			44			72			28			44			72			28			44			72
Display and Adjacent Markets	113			36			149			113			36			149			116			38			154			115			36			151
Corporate and Other	2			9			11			1			9			10			—			9			9			1			9			10
Gross carrying amount	$	1,592		$	341		$	1,933		$	1,591		$	341		$	1,932		$	1,593		$	343		$	1,936		$	1,593		$	341		$	1,934
Accumulated amortization:
Semiconductor Systems	$	(1,001	)	$	(109	)	$	(1,110	)	$	(876	)	$	(95	)	$	(971	)	$	(1,086	)	$	(118	)	$	(1,204	)	$	(1,043	)	$	(113	)	$	(1,156	)
Applied Global Services	(27		)	(44		)	(71		)	(26		)	(44		)	(70		)	(27		)	(44		)	(71		)	(27		)	(44		)	(71		)
Display and Adjacent Markets	(113		)	(34		)	(147		)	(113		)	(34		)	(147		)	(113		)	(35		)	(148		)	(113		)	(34		)	(147		)
Corporate and Other	(1		)	$	(8	)	(9		)	(1		)	(6		)	(7		)	—			(9		)	(9		)	(1		)	(9		)	(10		)
Accumulated amortization	$	(1,142	)	$	(195	)	$	(1,337	)	$	(1,016	)	$	(179	)	$	(1,195	)	$	(1,226	)	$	(206	)	$	(1,432	)	$	(1,184	)	$	(200	)	$	(1,384	)
Carrying amount	$	450		$	146		$	596		$	575		$	162		$	737		$	367		$	137		$	504		$	409		$	141		$	550

Table of Contents

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Details of amortization expense by segment were as follows:


	Three Months Ended				Nine Months Ended				Three Months Ended
	July 31, 2016		July 26, 2015		July 31, 2016		July 26, 2015		January 29, 2017		January 31, 2016

	(In millions)								(In millions)
Semiconductor Systems	$	47	$	45	$	139	$	132	$	47	$	47
Applied Global Services	—		—		1		1
Display and Adjacent Markets	—		1		—		3		1		—
Corporate & Other	—		—		2		2		—		1
Total	$	47	$	46	$	142	$	138	$	48	$	48

Amortization expense was charged to the following categories:


	Three Months Ended				Nine Months Ended				Three Months Ended
	July 31, 2016		July 26, 2015		July 31, 2016		July 26, 2015		January 29, 2017		January 31, 2016

	(In millions)								(In millions)
Cost of products sold	$	42	$	40	$	126	$	120	$	42	$	43
Research, development and engineering	—		1		1		1		1		—
Marketing and selling	5		5		15		15		5		5
General and administrative	—		—		—		2
Total	$	47	$	46	$	142	$	138	$	48	$	48

As of ~~July 31, 2016~~January 29, 2017, future estimated amortization expense is expected to be as follows:


	Amortization Expense		Amortization Expense
	(In millions)		(In millions)
2016 (remaining 3 months)	$	47
2017	187
2017 (remaining 9 months)			$	140
2018	185		185
2019	44		44
2020	39		39
2021			35
Thereafter	94		61
Total	$	596	$	504

Table of Contents

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


Note 9	Borrowing Facilities and Debt

Applied has credit facilities for unsecured borrowings in various currencies of up to $1.6 billion, of which $1.5 billion is comprised of a committed revolving credit agreement with a group of banks that is scheduled to expire in September 2020. This agreement provides for borrowings in United States dollars at interest rates keyed to one of various benchmark rates selected by Applied for each advance, plus a margin based on ~~Applied's~~Applied’s public debt rating and includes financial and other covenants. Remaining credit facilities in the amount of approximately $7670 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 ~~July 31, 2016~~January 29, 2017 and October ~~25, 2015,~~30, 2016, and Applied has not utilized these credit facilities.

In September 2015, Applied issued senior unsecured notes in the aggregate principal amount of $1.8 billion and used a portion of the net proceeds to redeem $400 million in principal amount of its 2.650% senior notes due in 2016 at a redemption price of $405 million in November 2015. After adjusting for the carrying value of debt issuance costs and discounts, Applied recorded a $5 million loss on the prepayment of the $400 million debt, which is included in interest and other income, net in the Consolidated Condensed Statement of Operations for the first quarter of fiscal 2016.

In October 2015, a wholly-owned foreign subsidiary of Applied entered into a short-term loan agreement with multiple lenders, under which it borrowed $800 million to facilitate the return of capital to Applied. In January 2016, the $800 million aggregated principal amount of the loan was repaid.

Debt outstanding as of ~~July 31, 2016~~January 29, 2017 and October ~~25, 2015~~30, 2016 was as follows:


	Principal Amount								Principal Amount
	July 31, 2016			October 25, 2015			Effective Interest Rate	Interest Pay Dates	January 29, 2017			October 30, 2016			Effective Interest Rate	Interest Pay Dates

	(In millions)								(In millions)
Short-term debt:
2.650% Senior Notes Due 2016	$	—		$	400		2.666%	June 15, December 15
Other debt	—			800			1.0% - 1.25%
7.125% Senior Notes Due 2017									$	200		$	200		7.190%	April 15, October 15
Total short-term debt	—			1,200					200			200
Long-term debt:
7.125% Senior Notes Due 2017	200			200			7.190%	April 15, October 15
2.625% Senior Notes Due 2020	600			600			2.640%	April 1, October 1	600			600			2.640%	April 1, October 1
4.300% Senior Notes Due 2021	750			750			4.326%	June 15, December 15	750			750			4.326%	June 15, December 15
3.900% Senior Notes Due 2025	700			700			3.944%	April 1, October 1	700			700			3.944%	April 1, October 1
5.100% Senior Notes Due 2035	500			500			5.127%	April 1, October 1	500			500			5.127%	April 1, October 1
5.850% Senior Notes Due 2041	600			600			5.879%	June 15, December 15	600			600			5.879%	June 15, December 15
	3,350			3,350					3,150			3,150
Total unamortized discount	(7		)	(8		)			(7		)	(7		)
Total unamortized debt issuance costs¹									(18		)	(18		)
Total long-term debt	3,343			3,342					3,125			3,125

Total debt	$	3,343		$	4,542				$	3,325		$	3,325

¹Balances reflect the effects of the retrospective adoption of the authoritative guidance in the first quarter of fiscal 2017, which required debt issuance costs to be presented as a direct reduction from the carrying amount of the related debt liability. These amounts were originally recorded under Other Assets.

Table of Contents

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


Note 10	Stockholders’ Equity, Comprehensive Income and Share-Based Compensation

Accumulated Other Comprehensive Income (Loss)

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


	Unrealized Gain on Investments, Net		Unrealized Gain (Loss) on Derivative Instruments Qualifying as Cash Flow Hedges			Defined and Postretirement Benefit Plans			Cumulative Translation Adjustments		Total			Unrealized Gain on Investments, Net		Unrealized Gain (Loss) on Derivative Instruments Qualifying as Cash Flow Hedges			Defined and Postretirement Benefit Plans			Cumulative Translation Adjustments		Total

	(in millions)													(in millions)
Balance at October 25, 2015	$	14	$	(15	)	$	(105	)	$	14	$	(92	)
Balance at October 30, 2016														$	30	$	(18	)	$	(141	)	$	14	$	(115	)
Other comprehensive income (loss) before reclassifications	21		(31		)	—			—		(10		)	—		10			—			—		10
Amounts reclassified out of AOCI	—		15			—			—		15			1		5			(7		)	—		(1		)
Other comprehensive income (loss), net of tax	21		(16		)	—			—		5			1		15			(7		)	—		9
Balance at July 31, 2016	$	35	$	(31	)	$	(105	)	$	14	$	(87	)
Balance at January 29, 2017														$	31	$	(3	)	$	(148	)	$	14	$	(106	)


	Unrealized Gain on Investments, Net			Unrealized Gain (Loss) on Derivative Instruments Qualifying as Cash Flow Hedges			Defined and Postretirement Benefit Plans			Cumulative Translation Adjustments		Total			Unrealized Gain on Investments, Net		Unrealized Gain (Loss) on Derivative Instruments Qualifying as Cash Flow Hedges			Defined and Postretirement Benefit Plans			Cumulative Translation Adjustments		Total

	(in millions)														(in millions)
Balance at October 26, 2014	$	24		$	—		$	(105	)	$	5	$	(76	)
Balance at October 25, 2015															$	14	$	(15	)	$	(105	)	$	14	$	(92	)
Other comprehensive income (loss) before reclassifications	(3		)	1			(45		)	—		(47		)	1		(3		)	—			—		(2		)
Amounts reclassified out of AOCI	—			(6		)	2			9		5			—		—			—			—		—
Other comprehensive income (loss), net of tax	(3		)	(5		)	(43		)	9		(42		)	1		(3		)	—			—		(2		)
Balance at July 26, 2015	$	21		$	(5	)	$	(148	)	$	14	$	(118	)
Balance at January 31, 2016															$	15	$	(18	)	$	(105	)	$	14	$	(94	)

The tax effects on net income of amounts reclassified from AOCI for the three ~~and nine~~ months ended ~~July~~January 29, 2017 and January 31, 2016 ~~and July 26, 2015~~ were not material.

Stock Repurchase Program

On June 9, 2016, ~~Applied's~~Applied’s Board of Directors approved a ~~new~~ common stock repurchase program authorizing up to $2.0 billion in ~~repurchases, which followed the completion of a $3.0 billion common stock repurchase program approved on April 26, 2015.~~repurchases. At ~~July 31, 2016, $1.95~~January 29, 2017, $1.7 billion remained available for future stock repurchases under ~~the new~~this repurchase program.

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

The following table summarizes Applied’s stock repurchases for the three ~~and nine~~ months ended ~~July~~January 29, 2017 and January 31, ~~2016 and July 26, 2015:~~2016:


	Three Months Ended				Nine Months Ended				Three Months Ended
	July 31, 2016		July 26, 2015		July 31, 2016		July 26, 2015		January 29, 2017		January 31, 2016

	(in millions, except per share amount)								(in millions, except per share amount)
Shares of common stock repurchased	9.0		32.1		89.5		32.1		4		35
Cost of stock repurchased	$	196	$	625	$	1,721	$	625	$	130	$	625
Average price paid per share	$	21.88	$	19.47	$	19.22	$	19.47	$	31.80	$	17.64

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

Dividends

In ~~June~~December 2016, ~~March 2016 and December 2015, Applied's~~Applied’s Board of Directors declared a quarterly cash ~~dividends~~dividend in the amount of $0.10 per share. Dividends paid during the ~~nine~~three months ended ~~July~~January 29, 2017 and January 31, 2016 ~~and July 26, 2015~~ totaled ~~$336~~$108 million and ~~$368~~$115 million, respectively. Applied currently anticipates that cash dividends will continue to be paid on a quarterly basis, although the declaration of any future cash dividend is at the discretion of the Board of Directors and will depend on Applied’s financial condition, results of operations, capital requirements, business conditions and other factors, as well as a determination by the Board of Directors that cash dividends are in the best interests of Applied’s stockholders.

Share-Based Compensation

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

During the three ~~and nine~~ months ended ~~July~~January 29, 2017 and January 31, 2016, ~~and July 26, 2015,~~ Applied recognized share-based compensation expense related to stock options, ESPP shares, restricted stock, restricted stock units, performance shares and performance units. The effect of share-based compensation on the results of operations was as follows:


	Three Months Ended				Nine Months Ended				Three Months Ended
	July 31, 2016		July 26, 2015		July 31, 2016		July 26, 2015		January 29, 2017		January 31, 2016

	(In millions)								(In millions)
Cost of products sold	$	14	$	14	$	46	$	43	$	17	$	17
Research, development, and engineering	18		17		56		52		20		20
Marketing and selling	7		6		20		19		7		7
General and administrative	9		9		28		27		10		10
Total share-based compensation	$	48	$	46	$	150	$	141	$	54	$	54

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.

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

At ~~July 31, 2016~~January 29, 2017, Applied had $~~297~~400 million in total unrecognized compensation expense, net of estimated forfeitures, related to grants of share-based awards and shares issued under Applied’s ESPP, which will be recognized over a weighted average period of ~~2.6~~2.9 years. At ~~July 31, 2016~~January 29, 2017, there were ~~107~~92 million shares available for grants of share-based awards under the Employee Stock Incentive Plan, and an additional 2623 million shares available for issuance under the ESPP.

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

A summary of the changes in restricted stock units, restricted stock, performance shares and performance units outstanding under Applied’s equity compensation plans during the ~~nine~~three months ended ~~July 31, 2016~~January 29, 2017 is presented below:


	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value

	(In millions, except per share amounts)				(In millions, except per share amounts)
Outstanding at October 25, 2015	27		$	16.41
Outstanding at October 30, 2016					25		$	18.28
Granted	11		$	18.36	7		$	30.36
Vested	(11	)	$	14.16	(9	)	$	16.26
Canceled	(2	)	$	17.54	—		$	19.32
Outstanding at July 31, 2016	25		$	18.16
Outstanding at January 29, 2017					23		$	22.75

At ~~July 31, 2016,~~January 29, 2017, 1 million additional performance-based awards could be earned upon achievement of certain levels of ~~achievement of Applied's~~Applied’s total shareholder return relative to a peer group at a future date.

During the first quarter of fiscal ~~2016,~~2017, certain executive officers were granted awards that are subject to the achievement of specified performance ~~goals (performance-based awards).~~goals. These ~~performance-based~~ awards become eligible to vest only if performance goals are achieved and will vest only if the grantee remains employed by Applied through each applicable vesting date. ~~These performance-based~~Certain awards require the achievement of apositive operating margin for and vest ratably over three years. Other awards require the achievement of targeted ~~level of adjusted annual operating profit margin. Additional shares become eligible for time-based vesting if Applied achieves certain~~ levels of ~~total shareholder return (TSR) relative~~operating margin and wafer fabrication equipment market share, and the number of shares that may vest in full after three years ranges from 0% to ~~a peer group, comprised~~200% of ~~companies in~~ the ~~Standard & Poor's 500 Information Technology Index, measured at the end of a two-year period.~~target amount.

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

~~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. Applied issued 3 million shares during the nine months ended July 31, 2016 and 2 million shares during the nine months ended July 26, 2015. 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:

Nine Months Ended
July 31, 2016 July 26, 2015
ESPP:
Dividend yield 2.07% 1.56%
Expected volatility 29.8% 31.4%
Risk-free interest rate 0.49% 0.07%
Expected life (in years) 0.5 0.5
Weighted average estimated fair value $4.47 $6.04

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Note 11 Employee Benefit Plans

Applied sponsors a number of employee benefit plans, including defined benefit plans of certain foreign subsidiaries, and a plan that provides certain medical and vision benefits to eligible retirees. A summary of the components of net periodic benefit costs of these defined and postretirement benefit plans for the three ~~and nine~~ months ended ~~July~~January 29, 2017 and January 31, 2016 ~~and July 26, 2015~~ is presented below:


	Three Months Ended						Nine Months Ended						Three Months Ended
	July 31, 2016			July 26, 2015			July 31, 2016			July 26, 2015			January 29, 2017			January 31, 2016

	(In millions)
Service cost	$	3		$	4		$	10		$	11		$	3		$	3
Interest cost	3			3			10			10			2			4
Expected return on plan assets	(4		)	(4		)	(12		)	(12		)	(4		)	(4		)
Amortization of prior service credit													(4		)	—
Amortization of actuarial loss	2			2			4			5			2			1
Curtailment and settlement gain	—			—			(5		)	(1		)	—			(4		)
Net periodic benefit cost	$	4		$	5		$	7		$	13		$	(1	)	$	—

Note 12 Income Taxes

Applied’s effective tax rates for the ~~third~~first quarters of fiscal 2017 and 2016 ~~and 2015~~ were ~~10.5~~8.8 percent and ~~12.3 percent, respectively. Applied's effective tax rates for the first nine months of fiscal 2016 and 2015 were 12.7 percent and 13.3~~8.9 percent, respectively. The effective tax ~~rates~~rate for the ~~third~~first quarter ~~and first nine months~~ of fiscal ~~2016 were lower than in~~2017 remained relatively flat compared to the same ~~periods~~period in the prior year primarily due to ~~changes in the geographical composition of income, partially offset by~~favorable resolutions and changes related to income tax liabilities for ~~prior years. The effective~~uncertain tax ~~rate for~~positions during the first ~~nine months~~quarter of fiscal ~~2015 included the effect of an adjustment primarily to correct an error~~2017 and expected changes in the ~~recognition~~geographical composition of cost of sales in the U.S. related to intercompany sales. While this error had no impact on Applied’s consolidated cost of sales, it resulted in overstating profitability in the U.S. and the provision for income, taxes, income taxes payable and other tax balance sheet accounts in each year since fiscal 2010. The impact of the adjustment to the first nine months of fiscal 2015 was a decrease in provision for income taxes of $35 million which was determined to be immaterial on the originating periods and fiscal 2015. Accordingly, a restatement was not considered necessary. In addition, the effective tax rates for the first nine months of fiscal 2015 included the tax benefit from acquisition costs that became deductible as a result of the termination of the proposed business combination with TEL. The effective tax rates for the first nine months of fiscal 2016 and 2015 both included the tax benefit fromoffset by the reinstatement of the U.S. ~~federal research and development~~R&D tax credit during ~~these periods~~the first quarter of fiscal 2016 which was retroactive to its expiration in December of the prior ~~years.~~year.

During the next twelve months, it is reasonably possible that existing liabilities for unrecognized tax benefits could be reduced by up to $15 million as a result of the lapse of statutes of limitation.

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~~APPLIED MATERIALS, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)~~


Note 13	Warranty, Guarantees and Contingencies

Warranty

Changes in the warranty reserves are presented below:


	Three Months Ended						Nine Months Ended						Three Months Ended
	July 31, 2016			July 26, 2015			July 31, 2016			July 26, 2015			January 29, 2017			January 31, 2016

	(In millions)												(In millions)
Beginning balance	$	121		$	123		$	126		$	113		$	153		$	126
Warranties issued	35			29			91			98			40			26
Change in reserves related to preexisting warranty	7			(2		)	(9		)	(4		)	3			(11		)
Consumption of reserves	(24		)	(25		)	(69		)	(82		)	(26		)	(22		)
Ending balance	$	139		$	125		$	139		$	125		$	170		$	119

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

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

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 ~~July 31, 2016~~January 29, 2017, the maximum potential amount of future payments that Applied could be required to make under these guarantee agreements was approximately ~~$50 million~~.$50 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 ~~July 31, 2016~~,January 29, 2017, Applied has provided parent guarantees to banks for approximately ~~$100~~$100 million to cover these arrangements.

Legal Matters

Korea Criminal Proceedings

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

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~~APPLIED MATERIALS, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)~~

Other Matters

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

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

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


Note 14	Industry Segment Operations

Applied’s three reportable segments are: Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets. As defined under the accounting literature, Applied’s chief operating decision-maker has been identified as the President and Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Segment information is presented based upon Applied’s management organization structure as of ~~July 31, 2016~~January 29, 2017 and the distinctive nature of each segment. Future changes to this internal financial structure may result in changes to Applied’s reportable segments.

Effective in the third quarter of fiscal 2016, Applied began to account for its roll-to-roll web coating systems (previously included in the Energy and Environmental Solutions segment) and display upgrade equipment (previously included in the Applied Global Services segment) under the Display and Adjacent Markets segment (previously Display). As a result of these changes, Applied's solar business (previously in the Energy and Environmental Solutions segment) is included in Corporate and Other as it did not meet the threshold as a separate reportable segment. Results for prior periods have been recast to conform to the current presentation, which reflects the new organizational structure.

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

The Display and Adjacent Markets segment includes products for manufacturing liquid crystal displays (LCDs), organic light-emitting diodes (OLEDs), upgrades and ~~roll-to-roll web~~flexible coating systems and other display technologies for TVs, personal computers, smart phones, and other consumer-oriented devices.

Each operating 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. The chief operating decision-maker does not evaluate operating segments using total asset information.

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.

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 related to share-based compensation; certain management, finance, legal, human resources, and research, development and engineering functions provided at the corporate level; and unabsorbed information technology and occupancy. In addition, Applied does not allocate to its reportable segments restructuring and asset impairment charges and any associated adjustments related to restructuring actions, unless these actions pertain to a specific reportable segment. Segment operating income also 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.

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

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


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

	(In millions)										(In millions)
July 31, 2016:
January 29, 2017:
Semiconductor Systems	$	1,786	$	511		$	4,746	$	1,140		$	2,150	$	690
Applied Global Services	657		175			1,896		489			676		178
Display and Adjacent Markets	313		63			754		142			422		115
Corporate and Other	65		(153		)	132		(396		)	30		(176		)
Total	$	2,821	$	596		$	7,528	$	1,375		$	3,278	$	807
July 26, 2015:
January 31, 2016:
Semiconductor Systems	$	1,635	$	411		$	4,641	$	1,092		$	1,373	$	265
Applied Global Services	646		162			1,836		470			606		149
Display and Adjacent Markets	185		35			709		163			254		48
Corporate and Other	24		(212		)	105		(455		)	24		(108		)
Total	$	2,490	$	396		$	7,291	$	1,270		$	2,257	$	354

The reconciling items included in Corporate and Other were as follows:


	Three Months Ended						Nine Months Ended						Three Months Ended
	July 31, 2016			July 26, 2015			July 31, 2016			July 26, 2015			January 29, 2017			January 31, 2016

	(In millions)												(In millions)
Unallocated net sales	$	65		$	24		$	132		$	105		$	30		$	24
Unallocated cost of products sold and expenses	(170		)	(186		)	(378		)	(458		)	(152		)	(78		)
Share-based compensation	(48		)	(46		)	(150		)	(141		)	(54		)	(54		)
Certain items associated with terminated business combination	—			(1		)	—			(50		)
Gain (loss) on derivatives associated with terminated business combination	—			(3		)	—			89
Total	$	(153	)	$	(212	)	$	(396	)	$	(455	)	$	(176	)	$	(108	)

The following customers accounted for at least 10 percent of Applied’s net sales for the ~~nine~~three months ended ~~July 31, 2016, which were for~~January 29, 2017, and sales to these customers included products inand services from multiple reportable segments.



	Percentage of Net Sales
Taiwan Semiconductor Manufacturing Company Limited	13	%
~~Micron Technology, Inc.~~	1324	%
Samsung Electronics Co., Ltd.	12	%
~~Intel Corporation~~	1118	%

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

The following ~~management's~~management’s discussion and analysis is provided in addition to the accompanying consolidated condensed financial statements and notes to assist in understanding ~~Applied's~~Applied’s results of operations and financial condition. Financial information as of ~~July 31, 2016~~January 29, 2017 should be read in conjunction with the financial statements for the fiscal year ended October ~~25, 2015~~30, 2016 contained in the ~~Company's~~Company’s Form 10-K filed December ~~9, 2015.~~15, 2016.

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

Overview

Applied provides manufacturing equipment, services and software to the global semiconductor, display, and related industries. Applied’s customers include manufacturers of semiconductor wafers and chips, liquid crystal and other displays, and other electronic devices. These customers may use what they manufacture in their own end products or sell the items to other companies for use in advanced electronic components. Applied operates in three reportable segments: Semiconductor Systems, ~~(previously Silicon Systems),~~ Applied Global Services and Display and Adjacent ~~Markets (previously Display).~~Markets. A summary of financial information for each reportable segment is found in Note 14 of Notes to Consolidated Condensed Financial Statements. A discussion of factors that could affect Applied’s operations is set forth under “Risk Factors” in Part II, Item 1A, which is incorporated herein by reference. Product development and manufacturing activities occur primarily in the United States, Europe, Israel, and Asia. Applied’s broad range of equipment and service products are highly technical and are sold primarily through a direct sales force.

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

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


	Three Months Ended									Change				Three Months Ended									Change
	July 31, 2016			May 1, 2016			July 26, 2015			Q3 2016 over Q2 2016		Q3 2016 over Q3 2015		January 29, 2017			October 30, 2016			January 31, 2016			Q1 2017 over Q4 2016			Q1 2017 over Q1 2016

	(In millions, except per share amounts and percentages)													(In millions, except per share amounts and percentages)
New orders	$	3,658		$	3,451		$	2,892		$	207	$	766
Net sales	$	2,821		$	2,450		$	2,490		$	371	$	331	$	3,278		$	3,297		$	2,257		$	(19	)	$	1,021
Gross profit	$	1,192		$	1,004		$	1,018		$	188	$	174	$	1,445		$	1,399		$	916		$	46		$	529
Gross margin	42.3		%	41.0		%	40.9		%	1.3 points		1.4 points		44.1		%	42.4		%	40.6		%	1.7 points			3.5 points
Operating income	$	596		$	425		$	396		$	171	$	200	$	807		$	777		$	354		$	30		$	453
Operating margin	21.1		%	17.3		%	15.9		%	3.8 points		5.2 points		24.6		%	23.6		%	15.7		%	1.0 points			8.9 points
Net income	$	505		$	320		$	329		$	185	$	176	$	703		$	610		$	286		$	93		$	417
Earnings per diluted share	$	0.46		$	0.29		$	0.27		$	0.17	$	0.19	$	0.65		$	0.56		$	0.25		$	0.09		$	0.40
Non-GAAP Adjusted Results
Non-GAAP adjusted gross profit	$	1,233		$	1,045		$	1,093		$	188	$	140	$	1,487		$	1,441		$	957		$	46		$	530
Non-GAAP adjusted gross margin	43.7		%	42.7		%	43.9		%	1.0 points		(0.2) points		45.4		%	43.7		%	42.4		%	1.7 points			3.0 points
Non-GAAP adjusted operating income	$	644		$	470		$	517		$	174	$	127	$	852		$	832		$	401		$	20		$	451
Non-GAAP adjusted operating margin	22.8		%	19.2		%	20.8		%	3.6 points		2.0 points		26.0		%	25.2		%	17.8		%	0.8 points			8.2 points
Non-GAAP adjusted net income	$	550		$	376		$	410		$	174	$	140	$	732		$	722		$	302		$	10		$	430
Non-GAAP adjusted earnings per diluted share	$	0.50		$	0.34		$	0.33		$	0.16	$	0.17	$	0.67		$	0.66		$	0.26		$	0.01		$	0.41

Nine Months Ended Change
July 31,
2016 July 26,
2015 YTD Q3 2016
over
YTD Q3 2015

(In millions, except per share amounts and percentages)
New orders $ 9,384
$ 7,680
$ 1,704
Net sales $ 7,528
$ 7,291
$ 237
Gross profit $ 3,112
$ 2,993
$ 119
Gross margin 41.3 % 41.1 % 0.2 points
Operating income $ 1,375
$ 1,270
$ 105
Operating margin 18.3 % 17.4 % 0.9 points
Net income $ 1,111
$ 1,041
$ 70
Earnings per diluted share $ 0.99
$ 0.84
$ 0.15
Non-GAAP Adjusted Results
Non-GAAP adjusted gross profit $ 3,235
$ 3,147
$ 88
Non-GAAP adjusted gross margin 43.0 % 43.2 % (0.2) points
Non-GAAP adjusted operating income $ 1,515
$ 1,440
$ 75
Non-GAAP adjusted operating margin 20.1 % 19.8 % 0.3 points
Non-GAAP adjusted net income $ 1,228
$ 1,110
$ 118
Non-GAAP adjusted earnings per diluted share $ 1.09
$ 0.90
$ 0.19

Reconciliations of non-GAAP adjusted measures are presented below under "Non-GAAP Adjusted Results." Fiscal 2017 and 2016 ~~and 2015~~ contains 5352 weeks and 5253 weeks, respectively, and the first ~~nine~~three months of fiscal 2017 and 2016 ~~and 2015~~ contained 4013 weeks and 3914 weeks, respectively.

Mobility, and the increasing technological functionality of mobile devices, continues to be a strong driver of semiconductor industry spending. During the first ~~nine~~three months of fiscal ~~2016,~~2017, memory manufacturers invested in technology upgrades and ~~additional~~new capacity, both of which were driven in part by the transition from planar NAND to 3D NAND. Foundry customers also invested in technology upgrades and new capacity to meet demand for advanced mobile chips. For the ~~remainder of the~~fiscal year, Applied anticipates ~~advanced foundry and 3D NAND~~healthy spending ~~will drive our~~levels in all semiconductor ~~business.~~categories. Mobility investments, including increasing investments in new technology, represents a significant driver of display ~~industry~~equipment spending, which has resulted in ~~higher~~ manufacturing capacity expansion for mobile ~~applications. As a result, new orders for display equipment increased in the first nine months of fiscal 2016 compared to the same period in the prior year.~~applications, notably OLED displays. Applied expects ~~strong~~these investments ~~in mobile display manufacturing equipment~~to continue for the remainder of fiscal ~~2016. Demand~~2017, accompanied by demand for new equipment for making larger LCD ~~TVs is also a factor for display industry investments, although demand for TV manufacturing equipment remains susceptible to highly cyclical conditions.~~

Effective in the third quarter of fiscal 2016, Applied began to account for its roll-to-roll web coating systems (previously in Energy and Environmental Solutions) and display upgrade equipment (previously in Applied Global Services) under the Display and Adjacent Markets segment. As a result of the change, Applied's solar business (previously in Energy and Environmental Solutions) is included in Corporate and Other as it did not meet the threshold for a separate reportable segment. Results for prior periods have been recast to conform to the current presentation.TVs.

Results of Operations

~~New Orders~~

~~New orders for the periods indicated were as follows:~~

Three Months Ended Change
July 31,
2016 May 1,
2016 July 26,
2015 Q3 2016
over
Q2 2016 Q3 2016
over
Q3 2015

(In millions, except percentages)
Semiconductor Systems $ 2,215
61% $ 1,966
57% $ 2,007
69% 13% 10%
Applied Global Services 590
16% 636
18% 543
19% (7)% 9%
Display and Adjacent Markets 803
22% 762
22% 318
11% 5% 153%
Corporate and Other 50
1% 87
3% 24
1% (43)% 108%
Total $ 3,658
100% $ 3,451
100% $ 2,892
100% 6% 26%

Nine Months Ended Change
July 31,
2016 July 26,
2015 YTD Q3 2016
over
YTD Q3 2015

(In millions, except percentages)
Semiconductor Systems $ 5,456
58% $ 5,137
67% 6%
Applied Global Services 1,981
21% 1,839
24% 8%
Display and Adjacent Markets 1,773
19% 609
8% 191%
Corporate and Other 174
2% 95
1% 83%
Total $ 9,384
100% $ 7,680
100% 22%

New orders for the third quarter of fiscal 2016 increased compared to the prior quarter primarily due to higher demand for semiconductor and display equipment, partially offset by lower orders for services. New orders for the third quarter and first nine months of fiscal 2016 increased across all segments compared to the same periods in the prior year, primarily due to higher demand for semiconductor and display equipment. New orders for the Semiconductor Systems continued to comprise the majority of Applied's consolidated total new orders.

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

Three Months Ended Change
July 31,
2016 May 1,
2016 July 26,
2015 Q3 2016
over
Q2 2016 Q3 2016
over
Q3 2015

(In millions, except percentages)
Taiwan $ 1,240
34% $ 445
13% $ 828
29% 179% 50%
China 849
23% 903
26% 442
15% (6)% 92%
Korea 689
19% 792
23% 349
12% (13)% 97%
Japan 270
7% 339
10% 727
25% (20)% (63)%
Southeast Asia 139
4% 392
11% 142
5% (65)% (2)%
Asia Pacific 3,187
87% 2,871
83% 2,488
86% 11% 28%
United States 259
7% 386
11% 262
9% (33)% (1)%
Europe 212
�� 6% 194
6% 142
5% 9% 49%
Total $ 3,658
100% $ 3,451
100% $ 2,892
100% 6% 26%

Nine Months Ended Change
July 31,
2016 July 26,
2015 YTD Q3 2016
over
YTD Q3 2015

(In millions, except percentages)
Taiwan $ 2,219
24% $ 1,962
26% 13%
China 2,254
24% 1,090
14% 107%
Korea 1,854
20% 1,502
20% 23%
Japan 718
7% 1,334
17% (46)%
Southeast Asia 763
8% 330
4% 131%
Asia Pacific 7,808
83% 6,218
81% 26%
United States 1,014
11% 1,041
14% (3)%
Europe 562
6% 421
5% 33%
Total $ 9,384
100% $ 7,680
100% 22%

The increase in new orders from customers in Taiwan in the third quarter of fiscal 2016 compared to the prior quarter, and in the first nine months of fiscal 2016 compared to the same periods in the prior year, was primarily due to higher demand from foundry customers. The decreases in new orders from customers in Southeast Asia and Korea in the third quarter of fiscal 2016 compared to the prior quarter was primarily due to a decrease in memory orders, while the decreases in the United States and Japan reflected lower demand for display equipment from customers in those regions. The decrease in new orders from China primarily reflected a decrease in memory orders partially offset by higher demand for display equipment.

The changes in new orders from customers in China, Korea, Japan and Europe in the third quarter and first nine months of fiscal 2016 compared to the same periods in the prior year primarily reflected changes in customer mix for semiconductor equipment. In addition, the changes in new orders from customers in Korea, China and Japan also reflected changes in customer mix for display equipment. The increase in new orders from customers in Southeast Asia in the first nine months of fiscal 2016 compared to the same period in the prior year primarily reflected higher demand from memory customers.

~~Changes in backlog during the nine months ended~~ ~~July 31, 2016~~ ~~were as follows:~~

July 31,
2016
(In millions)
Beginning balance $ 3,142
New orders 9,384
Net sales (7,528 )
Net adjustments (49 )
Ending balance $ 4,949

Backlog consists of: (1) orders for which written authorizations have been accepted and assigned shipment dates are within the next 12 months, or shipment has occurred but revenue has not been recognized; and (2) contractual service revenue and maintenance fees to be earned within the next 12 months. Applied’s backlog at any particular time is not necessarily indicative of actual sales for any future periods due to the potential for customer changes in delivery schedules or cancellation of orders. Approximately 67 percent of backlog as of the end of the third quarter of fiscal 2016 is anticipated to be shipped within the next two quarters. Backlog adjustments were negative during the first nine months of fiscal 2016 and totaled $49 million, primarily consisting order cancellations, partially offset by favorable foreign currency impact.

~~Backlog as of the end of the most recent three fiscal quarters was as follows:~~

July 31,
2016 May 1,
2016 January 31,
2016 Q3 2016
over
Q2 2016 Q3 2016
over
Q1 2016

(In millions, except percentages)
Semiconductor Systems $ 2,461
50% $ 2,044
49% $ 1,602
51% 20% 54%
Applied Global Services 765
15% 876
21% 896
29% (13)% (15)%
Display and Adjacent Markets 1,640
33% 1,144
27% 553
18% 43% 197%
Corporate and Other 83
2% 104
3% 58
2% (20)% 43%
Total $ 4,949
100% $ 4,168
100% $ 3,109
100% 19% 59%

Total backlog in the third quarter of fiscal 2016 compared to the prior quarter increased primarily due to higher demand for semiconductor and display equipment. In the third quarter of fiscal 2016, approximately 64 percent of net sales in the Semiconductor Systems segment, Applied’s largest business segment, were for orders received and shipped within the quarter, up from 62 percent in the prior quarter.

Net Sales

Net sales for the periods indicated were as follows:


	Three Months Ended									Change		Three Months Ended									Change
	July 31, 2016			May 1, 2016			July 26, 2015			Q3 2016 over Q2 2016	Q3 2016 over Q3 2015	January 29, 2017			October 30, 2016			January 31, 2016			Q1 2017 over Q4 2016	Q1 2017 over Q1 2016

	(In millions, except percentages)											(In millions, except percentages)
Semiconductor Systems	$	1,786	64%	$	1,587	65%	$	1,635	66%	13%	9%	$	2,150	65%	$	2,127	64%	$	1,373	61%	1%	57%
Applied Global Services	657		23%	633		26%	646		26%	4%	2%	676		21%	693		21%	606		27%	(2)%	12%
Display and Adjacent Markets	313		11%	187		7%	185		7%	67%	69%	422		13%	452		14%	254		11%	(7)%	66%
Corporate and Other	65		2%	43		2%	24		1%	51%	171%	30		1%	25		1%	24		1%	20%	25%
Total	$	2,821	100%	$	2,450	100%	$	2,490	100%	15%	13%	$	3,278	100%	$	3,297	100%	$	2,257	100%	(1)%	45%

Nine Months Ended Change
July 31,
2016 July 26,
2015 YTD Q3 2016
over
YTD Q3 2015

(In millions, except percentages)
Semiconductor Systems $ 4,746
63% $ 4,641
64% 2%
Applied Global Services 1,896
25% 1,836
25% 3%
Display and Adjacent Markets 754
10% 709
10% 6%
Corporate and Other 132
2% 105
1% 26%
Total $ 7,528
100% $ 7,291
100% 3%

Net sales for the ~~third~~first quarter of fiscal ~~2016~~2017 decreased slightly compared to the prior quarter ~~and for the third quarter and first nine months of fiscal 2016 compared to the same periods in the prior year, increased~~ primarily due to lower customer investments for display equipment and services, partially offset by increased investments in semiconductor ~~and display~~ equipment. The Semiconductor Systems segment’s relative share of total net sales ~~decreased~~increased slightly compared to the prior quarter ~~but still remains~~and continued to represent the largest contributor of net sales.

For the first quarter of fiscal 2017 compared to the same period in the prior year, net sales increased primarily due to increased customer investments in all segments.

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


	Three Months Ended									Change		Three Months Ended									Change
	July 31, 2016			May 1, 2016			July 26, 2015			Q3 2016 over Q2 2016	Q3 2016 over Q3 2015	January 29, 2017			October 30, 2016			January 31, 2016			Q1 2017 over Q4 2016	Q1 2017 over Q1 2016

	(In millions, except percentages)											(In millions, except percentages)
Taiwan	$	741	26%	$	311	13%	$	825	33%	138%	(10)%	$	1,103	34%	$	1,154	35%	$	637	28%	(4)%	73%
China	571		20%	752		31%	302		12%	(24)%	89%	647		20%	441		13%	495		22%	47%	31%
Korea	472		17%	506		21%	343		14%	(7)%	38%	670		20%	632		19%	273		12%	6%	145%
Japan	321		11%	260		10%	283		11%	23%	13%	235		7%	364		11%	334		15%	(35)%	(30)%
Southeast Asia	303		11%	252		10%	101		4%	20%	200%	97		3%	161		5%	87		4%	(40)%	11%
Asia Pacific	2,408		85%	2,081		85%	1,854		74%	16%	30%	2,752		84%	2,752		83%	1,826		81%	—%	51%
United States	289		10%	272		11%	488		20%	6%	(41)%	317		10%	289		9%	293		13%	10%	8%
Europe	124		5%	97		4%	148		6%	28%	(16)%	209		6%	256		8%	138		6%	(18)%	51%
Total	$	2,821	100%	$	2,450	100%	$	2,490	100%	15%	13%	$	3,278	100%	$	3,297	100%	$	2,257	100%	(1)%	45%

Nine Months Ended Change
July 31,
2016 July 26,
2015 YTD Q3 2016
over
YTD Q3 2015

(In millions, except percentages)
Taiwan $ 1,689
22% $ 1,842
25% (8)%
China 1,818
24% 1,146
16% 59%
Korea 1,251
17% 1,415
19% (12)%
Japan 915
12% 800
11% 14%
Southeast Asia 642
9% 289
4% 122%
Asia Pacific 6,315
84% 5,492
75% 15%
United States 854
11% 1,329
18% (36)%
Europe 359
5% 470
7% (24)%
Total $ 7,528
100% $ 7,291
100% 3%

~~The changes in net sales from customers in Taiwan and China for the third quarter of fiscal 2016 compared to the prior quarter primarily reflected changes in investments by foundry customers.~~

The changes in net sales from customers in all regions for the third quarter and first nine months of fiscal 2016 compared to the same periods in the prior year reflected changes in customer mix for semiconductor equipment. In addition, the changes in net sales from customers in Korea, Taiwan and China also reflected changes in display equipment customer mix. The increase in net sales from customers in ~~Japan in~~China for the first ~~nine months~~quarter of fiscal ~~2016~~2017 compared to the prior quarter primarily reflected an increase in customer investments in display manufacturing and memory equipment. The decrease in net sales from customers in Japan primarily reflected decreases in customer investments from memory customers.

The increase in net sales from customers in Taiwan for the first quarter of fiscal 2017 compared to the same period in the prior year ~~also~~ reflected ~~higher~~an increase in investments from foundry customers. The increase in net sales from customers in Korea and China was primarily related to increased spending in ~~services~~memory and display manufacturing equipment.

Gross Margin

Gross margins for the periods indicated were as follows:


	Three Months Ended									Change				Nine Months Ended						Change		Three Months Ended									Change
	July 31, 2016			May 1, 2016			July 26, 2015			Q3 2016 over Q2 2016		Q3 2016 over Q3 2015		July 31, 2016			July 26, 2015			YTD Q3 2016 over YTD Q3 2015		January 29, 2017			October 30, 2016			January 31, 2016			Q1 2017 over Q4 2016		Q1 2017 over Q1 2016

	(In millions, except percentages)																					(In millions, except percentages)
Gross profit	$	1,192		$	1,004		$	1,018		$	188	$	174	$	3,112		$	2,993		$	119	$	1,445		$	1,399		$	916		$	46	$	529
Gross margin	42.3		%	41.0		%	40.9		%	1.3 points		1.4 points		41.3		%	41.1		%	0.2 points		44.1		%	42.4		%	40.6		%	1.7 points		3.5 points
Non-GAAP Adjusted Results	Non-GAAP Adjusted Results																					Non-GAAP Adjusted Results
Non-GAAP adjusted gross profit	$	1,233		$	1,045		$	1,093		$	188	$	140	$	3,235		$	3,147		$	88	$	1,487		$	1,441		$	957		$	46	$	530
Non-GAAP adjusted gross margin	43.7		%	42.7		%	43.9		%	1.0 points		(0.2) points		43.0		%	43.2		%	(0.2) points		45.4		%	43.7		%	42.4		%	1.7 points		3.0 points

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

Gross profit, non-GAAP adjusted gross profit, gross margin and non-GAAP adjusted gross margin in the ~~third~~first quarter of fiscal ~~2016~~2017 increased compared to the prior quarter, primarily ~~reflecting higher net sales, partially offset by unfavorable~~due to favorable changes in product ~~mix.~~mix and material cost savings. Gross profit, ~~and~~non-GAAP adjusted gross ~~margin during the third quarter of fiscal 2015 also included inventory charges associated with the restructuring actions in the solar business. Gross~~ profit, gross margin and non-GAAP adjusted gross ~~profit~~margin in the ~~third~~first quarter ~~and first nine months~~ of fiscal ~~2016~~2017 increased compared to the same ~~periods~~period in the prior year, primarily due to ~~higher net sales, however non-GAAP adjusted gross margin decreased slightly for the same periods compared to the prior year due to unfavorable changes in~~favorable product mix.

Gross profit and non-GAAP adjusted gross profit during each of the three months ended ~~July~~January 29, 2017, October 30, 2016 and January 31, 2016 ~~May 1, 2016 and July 26, 2015~~ included ~~$14~~$17 million, ~~$15~~$16 million and $14 million, respectively, of share-based compensation expense. Gross profit and non-GAAP adjusted gross margin during the nine months ended July 31, 2016 and July 26, 2015 included $46 million and $43$17 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:

Three Months Ended Change Nine Months Ended Change
July 31,
2016 May 1,
2016 July 26,
2015 Q3 2016
over
Q2 2016 Q3 2016
over
Q3 2015 July 31,
2016 July 26,
2015 YTD Q3 2016
over
YTD Q3 2015

(In millions)
Research, development and engineering $ 386
$ 386
$ 372
$ —
$ 14
$ 1,146
$ 1,088
$ 58



	Three Months Ended						Change
	January 29, 2017		October 30, 2016		January 31, 2016		Q1 2017 over Q4 2016		Q1 2017 over Q1 2016

	(In millions)
Research, development and engineering	$	417	$	394	$	374	$	23	$	43

Applied’s future operating results depend to a considerable extent on its ability to maintain a competitive advantage in the equipment and service products it provides. Development cycles range from 12 to 36 months depending on whether the product is an enhancement of an existing product, which typically has a shorter development cycle, or a new product, which typically has a longer development cycle. Most of Applied’s existing products resulted from internal development activities and innovations involving new technologies, materials and processes. In certain instances, Applied acquires technologies, either in existing or new product areas, to complement its existing technology capabilities and to reduce time to market.

Management believes that it is critical to continue to make substantial investments in RD&E to assure the availability of innovative technology that meets the current and projected requirements of its customers’ most advanced designs. Applied has maintained and intends to continue its commitment to investing in RD&E in order to continue to offer new products and technologies.

RD&E expenses ~~remained flat~~increased during the ~~third~~first quarter of fiscal ~~2016~~2017 compared to the prior quarter ~~but increased during the third quarter~~ and ~~first nine months of fiscal 2016 compared to~~ the same ~~periods~~period in the prior year, primarily due to higher labor-related expenses, reflecting ongoing investment in product development ~~initiatives.~~initiatives, consistent with the Company’s strategy. RD&E expenses during the three months ended ~~July~~January 29, 2017, October 30, 2016 and January 31, 2016 ~~May 1, 2016 and July 26, 2015~~each included ~~$18~~$20 million $18 million and $17 million, respectively, of share-based compensation expense. RD&E expense during the nine months ended July 31, 2016 and July 26, 2015 included $56 million and $52 million, respectively, of share-based compensation expense.

Marketing and Selling

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

Three Months Ended Change Nine Months Ended Change
July 31,
2016 May 1,
2016 July 26,
2015 Q3 2016
over
Q2 2016 Q3 2016
over
Q3 2015 July 31,
2016 July 26,
2015 YTD Q3 2016
over
YTD Q3 2015

(In millions)
Marketing and selling $ 107
$ 102
$ 112
$ 5
$ (5 ) $ 315
$ 332
$ (17 )



	Three Months Ended						Change
	January 29, 2017		October 30, 2016		January 31, 2016		Q1 2017 over Q4 2016		Q1 2017 over Q1 2016

	(In millions)
Marketing and selling	$	118	$	114	$	106	$	4	$	12

Marketing and selling expenses increased slightly in the ~~third~~first quarter of fiscal ~~2016~~2017 compared to the prior ~~quarter, but decreased~~quarter. Marketing and selling expenses increased in the ~~third~~first quarter ~~and first nine months~~ of fiscal ~~2016~~2017 compared to the same ~~periods~~period in ~~the prior year~~fiscal 2016 primarily due to ~~continued cost management efforts.~~higher variable compensation expense and additional headcount. Marketing and selling expenses during the three months ended ~~July~~January 29, 2017, October 30, 2016 and January 31, 2016 ~~May 1, 2016 and July 26, 2015~~ included $7 million, $6 million and ~~$6 million, respectively, of share-based compensation expense. Marketing and selling expenses during the nine months ended July 31, 2016 and July 26, 2015 included $20 million and $19~~$7 million, respectively, of share-based compensation expense.

General and Administrative

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

Three Months Ended Change Nine Months Ended Change
July 31,
2016 May 1,
2016 July 26,
2015 Q3 2016
over
Q2 2016 Q3 2016
over
Q3 2015 July 31,
2016 July 26,
2015 YTD Q3 2016
over
YTD Q3 2015

(In millions)
General and administrative $ 103
$ 91
$ 135
$ 12
$ (32 ) $ 276
$ 392
$ (116 )



	Three Months Ended						Change
	January 29, 2017		October 30, 2016		January 31, 2016		Q1 2017 over Q4 2016			Q1 2017 over Q1 2016

	(In millions)
General and administrative	$	103	$	114	$	82	$	(11	)	$	21

G&A expenses for the ~~third~~first quarter of fiscal ~~2016 increased~~2017 decreased compared to the prior quarter primarily due to ~~higher variable compensation~~a loss recorded in the prior quarter related to the discontinuance of cash flow hedges for transactions that were probable not to occur by the end of the originally specified time period and ~~unfavorable impact from foreign exchange, partially offset by~~ savings from a temporary ~~shutdown.~~shutdown, offset by higher variable compensation expense. G&A expenses ~~for~~increased in the ~~third~~first quarter ~~and first nine months~~ of fiscal ~~2016 decreased~~2017 compared to the same ~~periods in the prior year. G&A expenses were higher for the same periods~~period in the prior year primarily due to ~~acquisition-related~~higher variable compensation and integration costs related to the terminated business combination with Tokyo Electron Limited (TEL), restructuring charges and impact of foreign currency exchange loss as a result of functional currency correction, all recorded during the third quarter of fiscal 2015.additional headcount.

G&A expenses during the three months ended ~~July~~January 29, 2017, October 30, 2016 and January 31, 2016 ~~May 1, 2016 and July 26, 2015 each~~ included $10 million, $9 million ~~of share-based compensation expense. G&A expenses during the nine months ended July 31, 2016~~ and ~~July 26, 2015 included $28 million and $27~~$10 million, respectively of share-based compensation expense.

~~Gain on Derivatives Associated with Terminated Business Combination~~

During the three and nine months ended July 26, 2015, Applied recorded a loss of $3 million and a gain of $89 million, respectively, on the foreign exchanges option contracts associated with the then-anticipated business combination with TEL. Due to the termination of the then-anticipated business combination, the derivatives were sold during the third quarter of fiscal 2015. For further details, see Note 5 of Notes to Consolidated Condensed Financial Statements.

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

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


	Three Months Ended						Change					Nine Months Ended				Change		Three Months Ended						Change
	July 31, 2016		May 1, 2016		July 26, 2015		Q3 2016 over Q2 2016			Q3 2016 over Q3 2015		July 31, 2016		July 26, 2015		YTD Q3 2016 over YTD Q3 2015		January 29, 2017		October 30, 2016		January 31, 2016		Q1 2017 over Q4 2016		Q1 2017 over Q1 2016

	(In millions)																	(In millions)
Interest expense	$	38	$	37	$	24	$	1		$	14	$	117	$	71	$	46	$	38	$	38	$	42	$	—	$	(4	)
Interest and other income, net	$	6	$	7	$	3	$	(1	)	$	3	$	15	$	2	$	13	$	2	$	1	$	2	$	1	$	—

Interest expenses incurred were primarily associated with the senior unsecured notes issued in June 2011 and September 2015. Interest expense in the ~~third~~first quarter of fiscal ~~2016~~2017 compared to the prior quarter remained flat. Interest expense ~~increased~~decreased in the ~~third~~first quarter ~~and the first nine months~~ of fiscal ~~2016~~2017 compared to the same ~~periods~~period in ~~the prior year~~fiscal 2016 primarily due to the ~~issuance~~redemption of $400 million in principal amount of senior unsecured notes ~~in September 2015.~~and payment of other debt during the first quarter of fiscal 2016.

Interest and other income, net in the ~~third~~first quarter of fiscal ~~2016~~2017 compared to the prior quarter and the same period in the prior year remained relatively flat. Interest and other income, net in the first ~~nine months~~quarter of fiscal 2017 included a $7 million loss related to impairment of certain strategic investments, while the first quarter of fiscal 2016 ~~compared to the same period~~included a $5 million loss from redemption of $400 million in ~~the prior year increased primarily due to lower impairment~~principal amount of ~~strategic investments, net of realized gain and higher interest income from investments.~~senior unsecured notes.

Income Taxes

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


	Three Months Ended									Change					Nine Months Ended						Change		Three Months Ended									Change
	July 31, 2016			May 1, 2016			July 26, 2015			Q3 2016 over Q2 2016			Q3 2016 over Q3 2015		July 31, 2016			July 26, 2015			YTD Q3 2016 over YTD Q3 2015		January 29, 2017			October 30, 2016			January 31, 2016			Q1 2017 over Q4 2016			Q1 2017 over Q1 2016

	(In millions, except percentages)																						(In millions, except percentages)
Provision for income taxes	$	59		$	75		$	46		$	(16	)	$	13	$	162		$	160		$	2	$	68		$	130		$	28		$	(62	)	$	40
Effective tax rate	10.5		%	19.0		%	12.3		%	(8.5) points			(1.8) points		12.7		%	13.3		%	(0.6) points		8.8		%	17.6		%	8.9		%	(8.8) points			(0.1) 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, ~~income~~conditional reduced tax ~~holidays~~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.

The effective tax rate for the ~~third~~first quarter of fiscal ~~2016~~2017 was lower than in the prior quarter primarily due to ~~changes in the geographical composition of income and~~favorable resolutions and changes related to income tax liabilities for ~~prior years.~~

~~Applied’s effective~~uncertain tax ~~rates for~~positions during the third quarters of fiscal 2016 and 2015 were 10.5 percent and 12.3 percent, respectively. Applied's effective tax rates for the first nine months of fiscal 2016 and 2015 were 12.7 percent and 13.3 percent, respectively. The effective tax rates for the thirdfourth quarter of fiscal 2016 and expected changes in the geographical composition of income.

The effective tax rate for the first ~~nine months~~quarter of ~~2016 were lower than in~~fiscal 2017 remained relatively flat compared to the same ~~periods~~period in the prior year primarily due to ~~changes in the geographical composition of income, partially offset by~~favorable resolutions and changes related to income tax liabilities for ~~prior years. The effective~~uncertain tax ~~rate for~~positions during the first ~~nine months~~quarter of fiscal ~~2015 included the effect of an adjustment primarily to correct an error~~2017 and expected changes in the ~~recognition~~geographical composition of cost of sales in the U.S. related to intercompany sales. While this error had no impact on Applied’s consolidated cost of sales, it resulted in overstating profitability in the U.S. and the provision for income, taxes, income taxes payable and other tax balance sheet accounts in each year since fiscal 2010. The impact of the adjustment to the first nine months of fiscal 2015 was a decrease in provision for income taxes of $35 million which was determined to be immaterial on the originating periods and fiscal 2015. Accordingly, a restatement was not considered necessary. In addition, the effective tax rate for the first nine months of fiscal 2015 included the tax benefit from acquisition costs that became deductible as a result of the termination of the proposed business combination with TEL. The effective tax rates for the first nine months of fiscal 2016 and 2015 both included the tax benefit fromoffset by the reinstatement of the U.S. ~~federal research and development~~R&D tax credit during ~~these periods~~the first quarter of fiscal 2016 which was retroactive to its expiration in December of the prior ~~years.~~year.

Segment Information

Applied reports financial results in three segments: Semiconductor Systems, ~~(previously Silicon Systems),~~ Applied Global Services, and Display and Adjacent Markets. Effective in the third quarter of fiscal 2016, Applied began to account for its roll-to-roll web coating systems (previously included in the Energy and Environmental Solutions segment) and display upgrade equipment (previously included in the Applied Global Services segment) under the Display and Adjacent Markets segment (previously Display). As a result of the change, Applied's solar business (previously included in the Energy and Environmental Solutions segment) is included in Corporate and Other as it did not meet the threshold as a separate reportable segment. Results for prior periods have been recast to conform to the current presentation. A description of the products and services, as well as financial data, for each reportable segment can be found in Note 14 of Notes to Consolidated Condensed Financial Statements.

The Corporate and Other category includes revenues from products, as well as costs of products sold, for fabricating solar photovoltaic cells and modules and certain operating expenses that are not allocated to its reportable segments and are managed separately at the corporate level. These operating expenses include costs for share-based compensation; certain management, finance, legal, human resource, and RD&E functions provided at the corporate level; and unabsorbed information technology and occupancy. In addition, Applied does not allocate to its reportable segments restructuring and asset impairment charges and any associated adjustments related to restructuring actions, unless these actions pertain to a specific reportable segment.

The results for each reportable segment are discussed below.

Semiconductor Systems Segment

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

The market for Semiconductor Systems ~~in the first nine months of fiscal 2016 reflected~~has been characterized by continued investment by semiconductor manufacturers. ~~Memory~~During the first three months of fiscal 2017, memory manufacturers invested in technology upgrades and ~~additional~~new capacity, both of which were driven in part by the transition from planar NAND to 3D NAND. Foundry customers also invested in technology upgrades and new capacity to meet demand for advanced mobile chips.

Certain significant measures for the periods indicated were as follows:


	Three Months Ended									Change						Three Months Ended									Change
	July 31, 2016			May 1, 2016			July 26, 2015			Q3 2016 over Q2 2016			Q3 2016 over Q3 2015			January 29, 2017			October 30, 2016			January 31, 2016			Q1 2017 over Q4 2016			Q1 2017 over Q1 2016

	(In millions, except percentages and ratios)															(In millions, except percentages and ratios)
New orders	$	2,215		$	1,966		$	2,007		$	249	13%	$	208	10%
Net sales	1,786			1,587			1,635			199		13%	151		9%	$	2,150		$	2,127		$	1,373		$	23	1%	$	777	57%
Book to bill ratio	1.2			1.2			1.2
Operating income	511			364			411			147		40%	100		24%	$	690		$	667		$	265		$	23	3%	$	425	160%
Operating margin	28.6		%	22.9		%	25.1		%			5.7 points			3.5 points	32.1		%	31.4		%	19.3		%			0.7 points			12.8 points
Non-GAAP Adjusted Results	Non-GAAP Adjusted Results															Non-GAAP Adjusted Results
Non-GAAP adjusted operating income	$	556		$	410		$	455		146		36%	101		22%	$	736		$	713		$	312		$	23	3%	$	424	136%
Non-GAAP adjusted operating margin	31.1		%	25.8		%	27.8		%			5.3 points			3.3 points	34.2		%	33.5		%	22.7		%			0.7 points			11.5 points

Nine Months Ended Change
July 31,
2016 July 26,
2015 YTD Q3 2016
over
YTD Q3 2015

(In millions, except percentages and ratios)
New orders $ 5,456
$ 5,137
$ 319
6%
Net sales 4,746
4,641
105
2%
Book to bill ratio 1.1
1.1

Operating income 1,140
1,092
48
4%
Operating margin 24.0 % 23.5 % 0.5 points
Non-GAAP Adjusted Results
Non-GAAP adjusted operating income $ 1,278
$ 1,223
55
4%
Non-GAAP adjusted operating margin 26.9 % 26.4 % 0.5 points

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

~~New orders for Semiconductor Systems by end use application for the periods indicated were as follows:~~

Three Months Ended Nine Months Ended
July 31,
2016 May 1,
2016 July 26,
2015 July 31,
2016 July 26,
2015
Foundry 57% 23% 32% 40% 34%
Memory 29% 66% 57% 47% 54%
Logic and other 14% 11% 11% 13% 12%
100% 100% 100% 100% 100%

New orders for the third quarter and first nine months of fiscal 2016 increased compared to the prior quarter and to the same period in the prior year primarily due to higher demand from foundry customers, partially offset by lower demand from memory customers. Net sales for the ~~third~~first quarter of fiscal ~~2016~~2017 increased compared to the prior quarter, primarily due to higher spending from ~~foundry~~memory customers, partially offset by lower spending from logic customers. ~~Approximately~~ 64 ~~percent of net sales in the~~ ~~third~~ ~~quarter of fiscal 2016 were for orders received and shipped within the quarter.~~ The increase in the operating income, non-GAAP adjusted operating income, operating margin and non-GAAP adjusted operating margin for the ~~third~~first quarter ~~and first nine months~~ of fiscal ~~2016~~2017 compared to the prior quarter ~~and the same periods~~primarily reflected favorable changes in ~~the prior year primarily reflected~~product mix and higher net sales. In the ~~third~~first quarter of fiscal ~~2016,~~2017, two customers accounted for approximately 5056 percent of this ~~segment's~~segment’s total ~~new orders~~net sales, with one customer accounting for approximately 4034 percent of this ~~segment's total new orders and three customers accounted for approximately 57 percent of this segment's~~segment’s total net sales.

Net sales for the ~~third~~first quarter ~~and first nine months~~ of fiscal ~~2016~~2017 increased compared to the same ~~periods~~period in the prior year primarily due to higher spending from foundry and memory customers.The increase in the operating income, non-GAAP adjusted operating income, operating margin and non-GAAP adjusted operating margin for the first quarter of fiscal 2017 compared to the same period in the prior year primarily due to favorable product mix and higher net sales.

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

Three Months Ended Change
July 31,
2016 May 1,
2016 July 26,
2015 Q3 2016
over
Q2 2016 Q3 2016
over
Q3 2015

(In millions, except percentages)
China $ 361
20% $ 588
37% $ 110
7% (39)% 228%
Taiwan $ 547
31% $ 169
11% $ 668
41% 224% (18)%



	Three Months Ended									Change
	January 29, 2017			October 30, 2016			January 31, 2016			Q1 2017 over Q4 2016	Q1 2017 over Q1 2016

	(In millions, except percentages)
Taiwan	$	945	44%	$	947	45%	$	502	37%	—%	88%

Nine Months Ended Change
July 31,
2016 July 26,
2015 YTD Q3 2016
over
YTD Q3 2015

(In millions, except percentages)
China $ 1,162
24% $ 385
8% 202%
Taiwan $ 1,218
26% $ 1,399
30% (13)%

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. Customer demand for products and services is fulfilled through a global distribution system with trained service engineers located in close proximity to customer sites.

Industry conditions that affected Applied Global ~~Services'~~Services’ sales of spares and services ~~during the first nine months of fiscal 2016~~ were principally semiconductor ~~manufacturers'~~manufacturers’ wafer starts, as well as utilization rates.

Certain significant measures for the periods indicated were as follows:


	Three Months Ended									Change							Three Months Ended									Change
	July 31, 2016			May 1, 2016			July 26, 2015			Q3 2016 over Q2 2016				Q3 2016 over Q3 2015			January 29, 2017			October 30, 2016			January 31, 2016			Q1 2017 over Q4 2016				Q1 2017 over Q1 2016

	(In millions, except percentages and ratios)																(In millions, except percentages and ratios)
New orders	$	590		$	636		$	543		$	(46	)	(7)%	$	47	9%
Net sales	657			633			646			24			4%	11		2%	$	676		$	693		$	606		$	(17	)	(2)%	$	70	12%
Book to bill ratio	0.9			1.0			0.8
Operating income	175			165			162			10			6%	13		8%	$	178		$	193		$	149		$	(15	)	(8)%	$	29	19%
Operating margin	26.6		%	26.1		%	25.1		%				0.5 points			1.5 points	26.3		%	27.8		%	24.6		%				(1.5) points			1.7 points
Non-GAAP Adjusted Results	Non-GAAP Adjusted Results																Non-GAAP Adjusted Results
Non-GAAP adjusted operating income	176			165			165			11			7%	11		7%	$	179		$	193		$	149		$	(14	)	(7)%	$	30	20%
Non-GAAP adjusted operating margin	26.8		%	26.1		%	25.5		%				0.7 points			1.3 points	26.5		%	27.8		%	24.6		%				(1.3) points			1.9 points

Nine Months Ended Change
July 31,
2016 July 26,
2015 YTD Q3 2016
over
YTD Q3 2015

(In millions, except percentages and ratios)
New orders $ 1,981
$ 1,839
$ 142
8%
Net sales 1,896
1,836
60
3%
Book to bill ratio 1.0
1.0

Operating income 489
470
19
4%
Operating margin 25.8 % 25.6 % 0.2 points
Non-GAAP Adjusted Results
Non-GAAP adjusted operating income $ 490
$ 474
16
3%
Non-GAAP adjusted operating margin 25.8 % 25.8 % —%

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

~~New orders for the third quarter of fiscal 2016 decreased compared to the prior quarter primarily due to lower demand for services.~~ Net sales for the ~~third~~first quarter of fiscal ~~2016~~2017 compared to the prior quarter slightly ~~increased~~decreased primarily due to ~~higher~~lower spending on semiconductor ~~spares~~services and ~~services.~~200mm equipment systems partially offset by higher investments in spares. Operating income, operating margin, non-GAAP adjusted operating income and non-GAAP adjusted operating margin for the ~~third~~first quarter of fiscal ~~2016 increased~~2017 decreased compared to the prior quarter primarily due to ~~higher~~lower net sales. In the first quarter of fiscal 2017, three customers accounted for approximately 35 percent of this segment’s total net sales.

New orders for the third quarter of fiscal 2016 increased compared to the same period in the prior year due to higher demand for spares. New orders for the first nine months of fiscal 2016 compared to the same period in the prior year reflected increased demand for spares and services, partially offset by lower demand for 200mm equipment systems. Net sales for the ~~third~~first quarter ~~and first nine months~~ of fiscal ~~2016~~2017 increased compared to the same periods in the prior year due to higher customer spending for semiconductor ~~services~~spares and ~~spares, partially offset by lower investments in 200mm equipment systems.~~services. Operating income and non-GAAP adjusted operating income, operating margin and non-GAAP adjusted operating margin for the ~~third~~first quarter of fiscal ~~2016~~2017 compared to the same period in the prior year increased due to higher net sales. Operating income and non-GAAP adjusted operating income for the first nine months of fiscal 2016 increased compared to the same periods in the prior, reflecting higher net sales, while operating margin and non-GAAP adjusted operating margin remained flat primarily due to increased headcount to support business growth.

There was no single ~~customer or~~ region that accounted for at least 30 percent of total net sales for the Applied Global Services segment for any of the periods presented.

Display and Adjacent Markets Segment

The Display and Adjacent Markets segment encompasses products for manufacturing liquid crystal displays (LCDs), organic light-emitting diodes (OLEDs), upgrades and ~~roll-to-roll web~~flexible coating systems and other display technologies for TVs, personal computers (PCs), tablets, smart phones, and other consumer-oriented devices. The segment is focused on expanding its presence through technologically-differentiated equipment for manufacturing large-scale TVs; emerging markets such as OLED, low temperature polysilicon (LTPS), metal oxide, and touch panel sectors; and development of products that provide customers with improved performance and yields. Display industry growth depends primarily on consumer demand for increasingly larger and more advanced TVs as well as larger and higher resolution displays for next generation mobile devices, including OLED.

The market environment for ~~Applied's~~Applied’s Display and Adjacent Markets segment ~~in the first nine months of fiscal 2016~~ has been characterized by increasing demand for manufacturing equipment for high-end mobile devices and ~~continued demand for~~ TV manufacturing equipment, although the TV manufacturing equipment sector remains susceptible to ~~highly~~ cyclical conditions. Uneven order and revenue patterns 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:



	Three Months Ended									Change
	January 29, 2017			October 30, 2016			January 31, 2016			Q1 2017 over Q4 2016				Q1 2017 over Q1 2016

	(In millions, except percentages and ratios)
Net sales	$	422		$	452		$	254		$	(30	)	(7)%	$	168	66%
Operating income	$	115		$	103		$	48		$	12		12%	$	67	140%
Operating margin	27.3		%	22.8		%	18.9		%				4.5 points			8.4 points
Non-GAAP Adjusted Results
Non-GAAP adjusted operating income	$	115		$	103		$	48		$	12		12%	$	67	140%
Non-GAAP adjusted operating margin	27.3		%	22.8		%	18.9		%				4.5 points			8.4 points

Three Months Ended Change
July 31,
2016 May 1,
2016 July 26,
2015 Q3 2016
over
Q2 2016 Q3 2016
over
Q3 2015

(In millions, except percentages and ratios)
New orders $ 803
$ 762
$ 318
$ 41
5% $ 485
153%
Net sales 313
187
185
126
67% 128
69%
Book to bill ratio 2.6
4.1
1.7

Operating income 63
31
35
32
103% 28
80%
Operating margin 20.1 % 16.6 % 18.9 % 3.5 points 1.2 points
Non-GAAP Adjusted Results
Non-GAAP adjusted operating income $ 63
$ 31
$ 36
32
103% 27
75%
Non-GAAP adjusted operating margin 20.1 % 16.6 % 19.5 % 3.5 points 0.6 points

Nine Months Ended Change
July 31,
2016 July 26,
2015 YTD Q3 2016
over
YTD Q3 2015

(In millions, except percentages and ratios)
New orders $ 1,773
$ 609
$ 1,164
191%
Net sales 754
709
45
6%
Book to bill ratio 2.4
0.9

Operating income 142
163
(21 ) (13)%
Operating margin 18.8 % 23.0 % (4.2) points
Non-GAAP Adjusted Results
Non-GAAP adjusted operating income $ 142
$ 166
(24 ) (14)%
Non-GAAP adjusted operating margin 18.8 % 23.4 % (4.6) points

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

New orders for the third quarter of fiscal 2016 increased compared to the prior quarter primarily due to increased orders for mobile display manufacturing equipment, reflecting increased demand for new technology, and TV manufacturing equipment. Net sales for the ~~third~~first quarter of fiscal ~~2016~~2017 were ~~higher~~lower compared to the prior quarter which reflected ~~higher~~lower customer investments for mobile display manufacturing equipment, partially offset by higher spending on TV display manufacturing equipment. Operating income, operating margin, non-GAAP adjusted operating income and non-GAAP adjusted operating margin for the ~~third~~first quarter of fiscal ~~2016~~2017 increased compared to the prior quarter primarily due to favorable changes in product mix and ~~the same period in the prior year, as a result of higher net sales,~~materials cost savings, partially offset by ~~unfavorable product mix. Two~~higher research and development spending. Three customers accounted for approximately 83 percent of new orders for this segment during the third quarter of fiscal 2016, accounting for approximately 45 percent and 38 percent of new orders, respectively. Two customers accounted for approximately 5477 percent of net sales for the Display and Adjacent Markets segment in the ~~third~~first quarter of fiscal ~~2016,~~2017, with one customer accounting for approximately 4250 percent of net sales for the Display and Adjacent Markets segment.

New orders for the third quarter and first nine months of fiscal 2016 increased compared to the same periods in the prior year primarily due to increased orders for mobile display and TV manufacturing equipment. In addition, new orders for the first nine months of fiscal 2016 reflected demand for new mobile display technology. Net sales for the ~~third~~first quarter ~~and first nine months~~ of fiscal ~~2016~~2017 increased compared to the same period in the prior year primarily due to higher customer investments in mobile display manufacturing equipment. Operating income, operating margin, non-GAAP adjusted operating income and non-GAAP adjusted operating margin for the first ~~nine~~three months of fiscal ~~2016 decreased~~2017 increased compared to the same period in the prior year, reflecting ~~unfavorable~~higher net sales and favorable changes in product mix, ~~and higher~~partially offset by increased research and ~~new product~~ development ~~costs.~~spending.

The following regions 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:



	Three Months Ended									Change
	January 29, 2017			October 30, 2016			January 31, 2016			Q1 2017 over Q4 2016	Q1 2017 over Q1 2016

	(In millions, except percentages)
China	$	286	68%	$	123	27%	$	195	77%	133%	47%
Korea	$	108	26%	$	227	50%	$	13	5%	(52)%	731%

Three Months Ended Change
July 31,
2016 May 1,
2016 July 26,
2015 Q3 2016
over
Q2 2016 Q3 2016
over
Q3 2015

(In millions, except percentages)
China $ 86
27% $ 46
25% $ 108
58% 87% (20)%
Korea $ 143
46% $ 109
58% $ 54
29% 31% 165%

Nine Months Ended Change
July 31,
2016 July 26,
2015 YTD Q3 2016
over
YTD Q3 2015

(In millions, except percentages)
China $ 326
43% $ 509
72% (36)%
Korea $ 265
35% $ 122
17% 117%

Financial Condition, Liquidity and Capital Resources

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


	July 31, 2016		October 25, 2015		January 29, 2017		October 30, 2016

	(In millions)				(In millions)
Cash and cash equivalents	$	2,828	$	4,797	$	3,491	$	3,406
Short-term investments	438		168		656		343
Long-term investments	960		946		909		929
Total cash, cash-equivalents and investments	$	4,226	$	5,911	$	5,056	$	4,678

Sources and Uses of Cash

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


	Nine Months Ended						Three Months Ended
	July 31, 2016			July 26, 2015			January 29, 2017			January 31, 2016

	(In millions)						(In millions)
Cash provided by operating activities	$	1,669		$	692		$	646		$	207
Cash used in investing activities	$	(436	)	$	(224	)	$	(367	)	$	(109	)
Cash used in financing activities	$	(3,202	)	$	(896	)	$	(194	)	$	(1,933	)

Operating Activities

Cash from operating activities for the ~~nine~~three months ended ~~July 31, 2016~~January 29, 2017 was $~~1.7 billion~~646 million, which reflects net income adjusted for the effect of non-cash charges and changes in working capital components. Non-cash charges included depreciation, amortization, share-based compensation and deferred income taxes. ~~The primary drivers of cash from~~Cash provided by operating activities ~~during~~increased from the first ~~nine months~~quarter of fiscal 2016 ~~included higher net income and increases in customer deposits and deferred revenue, partially offset by increases in accounts receivable and inventory. Cash from operating activities for~~to the ~~nine months ended July 31, 2016 increased compared to prior year~~first quarter of fiscal 2017 primarily due to ~~increases in customer deposits, deferred revenue and income taxes payable, lower increase in accounts receivable and~~ 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 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 ~~$57~~$63 million of accounts receivable during the three ~~and nine~~ months ended ~~July 31, 2016.~~January 29, 2017. Applied did not sell accounts receivable during the three ~~and nine~~ months ended ~~July 26, 2015.~~January 31, 2016. Applied did not discount promissory notes or utilize programs to discount letters of credit issued by customers during the ~~nine~~three months ended ~~July~~January 29, 2017 or January 31, ~~2016 or July 26, 2015.~~2016.

Applied’s working capital was ~~$4.4~~$5.3 billion at ~~July 31, 2016~~January 29, 2017 and ~~$5.5~~$4.7 billion at October 25, 2015. Applied’s working capital at July 31, 2016 includes the effects of the adoption of the authoritative guidance requiring all deferred tax assets and liabilities, and any related valuation allowance, to be classified as noncurrent on the balance sheet. Prior periods were not retrospectively adjusted.

30, 2016.

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


	July 31, 2016	May 1, 2016	July 26, 2015	January 29, 2017	October 30, 2016	January 31, 2016

Days sales outstanding	60	71	73	66	63	71
Days inventory outstanding	113	121	108	113	98	134
Days payable outstanding	40	41	43	43	39	40

Days sales outstanding varies due to the timing of shipments and payment terms. Days sales outstanding ~~decreased~~increased in the ~~third~~first quarter of fiscal ~~2016~~2017 compared to the prior quarter primarily due to slower collections partially offset by improved revenue linearity. Days inventory outstanding ~~decreased~~and days payable outstanding increased during the ~~third~~first quarter of fiscal ~~2016~~2017 compared to the prior quarter primarily due to higher ~~revenue and cost of products sold. The increase in days inventory outstanding during the current quarter compared to the same period in the prior year reflected higher~~ inventory balances at the end of the ~~third~~first quarter of fiscal ~~2016~~2017 due to higher expected ~~future~~ business volume. ~~Days payable outstanding decreased slightly during the third quarter of fiscal 2016 compared to the prior quarter primarily reflecting higher total cost of products sold due to higher business volume.~~

Investing Activities

Applied used $~~436~~367 million of cash in investing activities during the ~~nine~~three months ended ~~July 31, 2016~~January 29, 2017. Purchases of investments, net of proceeds from sales and maturities of investments, totaled $~~266~~303 million and capital expenditures were $~~165~~64 million during the ~~nine~~three months ended ~~July 31, 2016~~January 29, 2017.

Applied’s investment portfolio consists principally of investment grade money market mutual funds, U.S. Treasury and agency securities, municipal bonds, corporate bonds and mortgage-backed and asset-backed securities, as well as equity securities. Applied regularly monitors the credit risk in its investment portfolio and takes appropriate measures, which may include the sale of certain securities, to manage such risks prudently in accordance with its investment policies. During the three ~~and nine~~ months ended ~~July 31, 2016,~~January 29, 2017, Applied did not recognize any impairment of its fixed income ~~or publicly traded equity~~ securities. At ~~July 31, 2016,~~January 29, 2017, gross unrealized losses related to ~~Applied's~~Applied’s investment portfolio were not material.

Financing Activities

Applied used cash for financing activities in the amount of $~~3.2 billion~~194 million during the ~~nine~~three months ended ~~July 31, 2016~~January 29, 2017, consisting primarily of ~~$1.2 billion in debt repayments, $1.7 billion~~$130 million in repurchases of common stock and $~~336~~108 million in cash dividends to stockholders, offset by excess tax benefits from share-based compensation of ~~$18 million and proceeds from common stock issuances of~~ $44 million.

In ~~June~~December 2016, ~~March 2016 and December 2015, Applied's~~Applied’s Board of Directors declared a quarterly cash ~~dividends~~dividend in the amount of $0.10 per share. Applied currently anticipates that cash dividends will continue to be paid on a quarterly basis, although the declaration of any future cash dividend is at the discretion of the Board of Directors and will depend on Applied’s financial condition, results of operations, capital requirements, business conditions and other factors, as well as a determination by the Board of Directors that cash dividends are in the best interests of Applied’s stockholders.

Applied has credit facilities for unsecured borrowings in various currencies of up to $1.6 billion, of which $1.5 billion is comprised of a committed revolving credit agreement with a group of banks that is scheduled to expire in September 2020. 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 ~~July 31, 2016~~January 29, 2017. Remaining credit facilities in the amount of approximately $7670 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 ~~July 31, 2016~~January 29, 2017 and October ~~25, 2015,~~30, 2016, and Applied has not utilized these credit facilities.

In fiscal 2011, Applied established a short-term commercial paper program of up to $1.5 billion. At ~~July 31, 2016,~~January 29, 2017, Applied did not have any commercial paper outstanding, but may issue commercial paper notes under this program from time to time in the future.

Applied had senior unsecured notes in the aggregate principal amount of $3.4 billion outstanding as of ~~July 31, 2016.~~January 29, 2017. The indentures governing these notes include covenants with which Applied was in compliance at ~~July 31, 2016~~January 29, 2017. See Note 9 of Notes to 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~~Applied’s capital requirements and the availability of financing.

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 ~~July 31, 2016~~January 29, 2017, the maximum potential amount of future payments that Applied could be required to make under these guarantee agreements was approximately $50 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 ~~July 31, 2016~~January 29, 2017, Applied Materials, Inc. has provided parent guarantees to banks for approximately $100 million to cover these arrangements.

Others

During the three ~~and nine~~ months ended ~~July 31, 2016,~~January 29, 2017, Applied did not record a bad debt provision. While Applied believes that its allowance for doubtful accounts at ~~July 31, 2016~~January 29, 2017 is adequate, it will continue to closely monitor customer liquidity and economic conditions.

As of ~~July 31, 2016,~~January 29, 2017, approximately ~~$3.3~~$3.2 billion of cash, cash equivalents and marketable securities held by ~~non-U.S.~~foreign subsidiaries may be subject to U.S. income tax if repatriated for U.S. operations. ~~Of this amount,~~ Applied intends to indefinitely reinvest approximately ~~$2.8~~$2.1 billion of these funds outside of the U.S. and does not plan to repatriate these funds. Applied would need to accrue and pay U.S. income tax if these funds were repatriated. For the remaining cash, cash equivalents and marketable securities held by ~~non-U.S.~~foreign subsidiaries, U.S. income tax has been provided for in the financial statements.

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

Critical Accounting Policies and Estimates

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

A critical accounting policy is defined as one that is both material to the presentation of ~~Applied's~~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~~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~~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~~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~~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~~Applied’s financial condition and results of operations.

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

Revenue Recognition

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

Goodwill and Intangible Assets

Applied reviews goodwill and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable, and also annually reviews goodwill and intangibles with indefinite lives for impairment. Intangible assets, such as purchased technology, are generally recorded in connection with a business acquisition. The value assigned to intangible assets is usually based on estimates and judgments regarding expectations for the success and life cycle of products and technology acquired. If actual product acceptance differs significantly from the estimates, Applied may be required to record an impairment charge to reduce the carrying value of the reporting unit to its estimated fair value.

To test goodwill for impairment, Applied first performs a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, Applied then performs the two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. Under the two-step goodwill impairment test, Applied would in the first step compare the estimated fair value of each reporting unit to its carrying value. If the carrying value of a reporting unit exceeds its estimated fair value, Applied would then perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If Applied determines that the carrying value of a reporting unit’s goodwill exceeds its implied fair value, Applied would record an impairment charge equal to the difference.

Applied 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~~unit’s weighted average cost of capital. The weighted average cost of capital measures a reporting ~~unit's~~unit’s cost of debt and equity financing weighted by the percentage of debt and equity in a reporting ~~unit's~~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~~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~~unit’s size, growth and profitability relative to its comparable companies.

Management uses significant judgment when assessing goodwill for potential impairment, especially in emerging markets. Indicators of potential impairment include, but are not limited to, challenging economic conditions, an unfavorable industry or economic environment or other severe decline in market conditions. Such conditions could have the effect of changing one of the critical assumptions or estimates used for the fair value calculation, resulting in an unexpected goodwill impairment charge, which could have a material adverse effect on Applied’s business, financial condition and results of operations.

Income Taxes

Applied’s provision for income taxes and effective tax rate isare 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 ~~regulations in multiple jurisdictions.~~the resolution of prior years’ income tax filings.

Applied ~~accounts~~recognizes a current tax liability for the estimated amount of income ~~taxes by recognizing deferred~~tax payable on tax returns for the current fiscal year. Deferred tax assets and liabilities ~~using statutory tax rates~~are recognized for the ~~effect~~estimated future tax effects of temporary differences between the book and tax bases of ~~recorded~~ assets and ~~liabilities, net operating losses and tax credit carryovers.~~liabilities. Deferred tax assets are also ~~reduced~~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 ~~a portion~~the tax position will be sustained upon examination by the taxing authorities based on the technical merits of the ~~deferred~~position. The tax ~~asset will not be realized. Management~~benefits recognized from such positions are estimated based on the largest benefit that has ~~determined that it is more likely~~a greater than ~~not that~~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 ~~future taxable~~provision for income ~~will be sufficient to realize its deferred tax assets, net of existing valuation allowance.~~taxes.

The calculation of Applied’s provision for income taxes and effective tax ~~liabilities~~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 aan adverse material impact on Applied’s results of operations and financial condition.

Non-GAAP Adjusted Financial Results

Applied provides investors with certain non-GAAP adjusted financial measures, which are adjusted to exclude the impact of certain costs, expenses, gains and losses, including certain items related to mergers and acquisitions; restructuring charges and any associated adjustments; impairments of assets, or investments; gain or loss on sale of strategic investments; certain other discrete adjustments and income tax items. 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.

Management uses these non-GAAP adjusted financial measures to evaluate the ~~Company's~~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 our performance and investors’ ability to review the Company’s business from the same perspective as the ~~Company's~~Company’s management and facilitate comparisons of this period’s results with prior periods on a consistent basis by excluding items that we do not believe are indicative of our ongoing operating performance. 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.

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

APPLIED MATERIALS, INC.

UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS


	Three Months Ended									Nine Months Ended						Three Months Ended
(In millions, except percentages)	July 31, 2016			May 1, 2016			July 26, 2015			July 31, 2016			July 26, 2015			January 29, 2017			October 30, 2016			January 31, 2016
Non-GAAP Adjusted Gross Profit
Reported gross profit - GAAP basis	$	1,192		$	1,004		$	1,018		$	3,112		$	2,993		$	1,445		$	1,399		$	916
Certain items associated with acquisitions¹	42			41			41			125			120			42			42			42
Inventory charges (reversals) related to restructuring^3,5	(1		)	—			34			(2		)	34
Inventory reversals related to restructuring²																—			—			(1		)
Non-GAAP adjusted gross profit	$	1,233		$	1,045		$	1,093		$	3,235		$	3,147		$	1,487		$	1,441		$	957
Non-GAAP adjusted gross margin	43.7		%	42.7		%	43.9		%	43.0		%	43.2		%	45.4		%	43.7		%	42.4		%
Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis	$	596		$	425		$	396		$	1,375		$	1,270		$	807		$	777		$	354
Certain items associated with acquisitions¹	47			46			47			141			138			47			47			48
Acquisition integration and deal costs	2			—			1			2			2
Loss (gain) on derivatives associated with terminated business combination, net	—			—			3			—			(89		)
Certain items associated with terminated business combination²	—			—			1			—			50
Inventory charges (reversals) related to restructuring and asset impairments, net^3,4,5	(1		)	(1		)	50			(3		)	50
Foreign exchange loss due to functional currency change⁶	—			—			19			—			19
Acquisition integration costs																1			—			—
Inventory reversals related to restructuring²																—			—			(1		)
Other gains, losses or charges, net³																(3		)	8			—
Non-GAAP adjusted operating income	$	644		$	470		$	517		$	1,515		$	1,440		$	852		$	832		$	401
Non-GAAP adjusted operating margin	22.8		%	19.2		%	20.8		%	20.1		%	19.8		%	26.0		%	25.2		%	17.8		%
Non-GAAP Adjusted Net Income
Reported net income - GAAP basis⁷	$	505		$	320		$	329		$	1,111		$	1,041
Reported net income - GAAP basis																$	703		$	610		$	286
Certain items associated with acquisitions¹	47			46			47			141			138			47			47			48
Acquisition integration and deal costs	2			—			1			2			2
Loss (gain) on derivatives associated with terminated business combination, net	—			—			3			—			(89		)
Certain items associated with terminated business combination²	—			—			1			—			50
Inventory charges (reversals) related to restructuring and asset impairments, net^3,4,5	(1		)	(1		)	50			(3		)	50
Acquisition integration costs																1			—			—
Inventory reversals related to restructuring²																—			—			(1		)
Impairment (gain on sale) of strategic investments, net	—			(1		)	(1		)	(3		)	6			5			6			(2		)
Foreign exchange loss due to functional currency change⁶	—			—			19			—			19
Loss on early extinguishment of debt	—			—			—			5			—			—			—			5
Reinstatement of federal R&D tax credit, resolution of prior years’ income tax filings and other tax items⁷	1			16			(21		)	(12		)	(92		)
Income tax effect of non-GAAP adjustments⁸	(4		)	(4		)	(18		)	(13		)	(15		)
Other gains, losses or charges, net³																(3		)	8			—
Reinstatement of federal R&D tax credit, resolution of prior years’ income tax filings and other tax items																(16		)	57			(29		)
Income tax effect of non-GAAP adjustments⁴																(5		)	(6		)	(5		)
Non-GAAP adjusted net income	$	550		$	376		$	410		$	1,228		$	1,110		$	732		$	722		$	302



1	These items are incremental charges attributable to completed acquisitions, consisting of amortization of purchased intangible assets.
2	~~These items are incremental charges related to the terminated business combination agreement with Tokyo Electron Limited, consisting of acquisition-related and integration planning costs.~~
3	Results for the three ~~and nine~~ months ended ~~July~~January 31, 2016 ~~primarily~~ included a benefit from sales of solar equipment tools for which inventory had been previously ~~reserved related to the cost reductions in the solar business.~~reserved.
43	Results for the three months ended ~~May 1,~~October 30, 2016 included a $1loss of $8 million ~~favorable adjustment~~due to discontinuance of ~~employee-related costs associated with~~cash flow hedges that were probable not to occur by the ~~cost reductions in~~end of the ~~solar business.~~originally specified time period.
5	Results for the three and nine months ended July 26, 2015 primarily included $34 million of inventory charges and $17 million of restructuring charges and asset impairments related to cost reductions in the solar business.
6	~~Results for the three and nine months ended July 26, 2015 included a $19 million foreign exchange loss due to an immaterial correction of an error related to functional currency change.~~
7	Amounts for nine months ended July 26, 2015 included an adjustment to decrease the provision for income taxes by $35 million with a corresponding increase in net income, resulting in an increase in diluted earnings per share of $0.03. The adjustment was excluded in Applied's non-GAAP adjusted results and was made primarily to correct an error in the recognition of cost of sales in the U.S. related to intercompany sales, which resulted in overstating profitability in the U.S. and the provision for income taxes in immaterial amounts in each year since fiscal 2010.
84	These amounts represent non-GAAP adjustments above multiplied by the effective tax rate within the jurisdictions the adjustments affect.

APPLIED MATERIALS, INC.

UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS

Three Months Ended Nine Months Ended
(In millions, except per share amounts) July 31,
2016 May 1,
2016 July 26,
2015 July 31,
2016 July 26,
2015

Non-GAAP Adjusted Earnings Per Diluted Share
Reported earnings per diluted share - GAAP basis¹
$ 0.46
$ 0.29
$ 0.27
$ 0.99
$ 0.84
Certain items associated with acquisitions 0.04
0.04
0.03
0.11
0.10
Certain items associated with terminated business combination —
—
—
—
0.03
Gain on derivative associated with terminated business combination, net —
—
—
—
(0.05 )
Restructuring, inventory charges and asset impairments —
—
0.03
—
0.03
Reinstatement of federal R&D tax credit, resolution of prior years’ income tax filings and other tax items¹
—
0.01
(0.02 ) (0.01 ) (0.07 )
Foreign exchange loss due to functional currency change —
—
0.02
—
0.02
Non-GAAP adjusted earnings per diluted share 0.50
0.34
0.33
1.09
0.90
Weighted average number of diluted shares 1,093
1,119
1,231
1,123
1,238



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



	Three Months Ended
(In millions, except per share amounts)	January 29, 2017			October 30, 2016		January 31, 2016

Non-GAAP Adjusted Earnings Per Diluted Share
Reported earnings per diluted share - GAAP basis	$	0.65		$	0.56	$	0.25
Certain items associated with acquisitions	0.04			0.04		0.04
Reinstatement of federal R&D tax credit, resolution of prior years’ income tax filings and other tax items	(0.02		)	0.05		(0.03		)
Other gains, losses or charges, net	—			0.01		—
Non-GAAP adjusted earnings per diluted share	$	0.67		$	0.66	$	0.26
Weighted average number of diluted shares	1,089			1,093		1,154

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

APPLIED MATERIALS, INC.

UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS


	Three Months Ended									Nine Months Ended						Three Months Ended
(In millions, except percentages)	July 31, 2016			May 1, 2016			July 26, 2015			July 31, 2016			July 26, 2015			January 29, 2017			October 30, 2016			January 31, 2016

Semiconductor Systems Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis	$	511		$	364		$	411		$	1,140		$	1,092		$	690		$	667		$	265
Certain items associated with acquisitions¹	45			46			44			138			131			46			46			47
Non-GAAP adjusted operating income	$	556		$	410		$	455		$	1,278		$	1,223		$	736		$	713		$	312
Non-GAAP adjusted operating margin	31.1		%	25.8		%	27.8		%	26.9		%	26.4		%	34.2		%	33.5		%	22.7		%
AGS Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis	$	175		$	165		$	162		$	489		$	470		$	178		$	193		$	149
Certain items associated with acquisitions¹	1			—			—			1			1
Inventory charges related to restructuring²	—			—			3			$	—		$	3
Acquisition integration costs																1			—			—
Non-GAAP adjusted operating income	$	176		$	165		$	165		$	490		$	474		$	179		$	193		$	149
Non-GAAP adjusted operating margin	26.8		%	26.1		%	25.5		%	25.8		%	25.8		%	26.5		%	27.8		%	24.6		%
Display and Adjacent Markets Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis	$	63		$	31		$	35		$	142		$	163		$	115		$	103		$	48
Certain items associated with acquisitions¹	—			—			1			—			3			—			—			—
Non-GAAP adjusted operating income	$	63		$	31		$	36		$	142		$	166		$	115		$	103		$	48
Non-GAAP adjusted operating margin	20.1		%	16.6		%	19.5		%	18.8		%	23.4		%	27.3		%	22.8		%	18.9		%



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

2	~~Results for the three and nine months ended July 26, 2015 included $3 million of inventory charges related to cost reduction in the solar business.~~

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.


Item 3:	Quantitative and Qualitative Disclosures About Market Risk

Applied is exposed to interest rate risk related to its investment portfolio and debt issuances. Applied’s investment portfolio includes fixed-income securities with a fair value of approximately $~~1.3~~1.4 billion at ~~July 31, 2016~~January 29, 2017. These securities are subject to interest rate risk and will decline in value if interest rates increase. Based on Applied’s investment portfolio at ~~July 31, 2016~~January 29, 2017, an immediate 100 basis point increase in interest rates would result in a decrease in the fair value of the portfolio of approximately ~~$18~~$17 million. While an increase in interest rates reduces the fair value of the investment portfolio, Applied will not realize the losses in the consolidated statement of operations unless the individual fixed-income securities are sold prior to recovery or the loss is determined to be other-than-temporary. At ~~July 31, 2016~~January 29, 2017, the carrying amount of long-term debt issued by Applied was ~~$3.3~~$3.1 billion with an estimated fair value of $~~3.8~~3.4 billion. A hypothetical decrease in interest rates of 100 basis points would result in an increase in the fair value of Applied’s long-term debt issuances of approximately ~~$329~~$292 million at ~~July 31, 2016~~January 29, 2017.

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

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

During the ~~third~~first quarter of fiscal ~~2016,~~2017, there were no changes in the internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act, that materially affected, or are reasonably likely to materially affect, Applied’s internal control over financial reporting.

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information set forth under “Legal Matters” in Note 13 in Notes to Consolidated Condensed Financial Statements is incorporated herein by reference.


Item 1A:	Risk Factors

The risk factors set forth below include any material changes to, and supersede the description of, the risk factors disclosed in Part I, Item 1A of Applied’s ~~2015~~2016 Form 10-K. These factors could materially and adversely affect Applied’s business, financial condition or results of operations and cause reputational harm, and ~~they~~ should be carefully considered in evaluating the Company and its business, in addition to other information presented elsewhere in this report.

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

As a supplier to the global semiconductor and display and related industries, Applied is subject to business cycles, the timing, length and volatility of which can be difficult to predict and which vary ~~by reportable segment.~~among its businesses. These industries historically have been cyclical ~~due~~and are subject to volatility and sudden changes in ~~customers’~~customer requirements for new manufacturing capacity and advanced technology, which depend ~~in part~~ on several factors, including general economic conditions, end-user demand, customers’ capacity utilization, production volumes, access to affordable capital, ~~end-use demand,~~ consumer buying patterns, ~~and~~ inventory levels relative to demand, ~~as well as the rate of~~and technology ~~transitions and general economic conditions.~~transitions. These changes ~~have affected~~can affect the timing and amounts of ~~customers’ purchases and~~customer investments in technology and ~~continue to affect~~manufacturing equipment, and can have a significant impact on Applied’s ~~orders,~~ net sales, operating expenses, gross margins and net income. ~~In particular, the~~The amount and mix of capital equipment spending between ~~foundry, memory~~different products and ~~logic customers~~technologies can have a significant impact on the results of operations of ~~our~~Applied’s Semiconductor Systems segment, which is the largest contributor to ~~Applied’s~~its consolidated net ~~sales and total new orders.~~sales.

To meet rapidly changing demand in the industries it serves, Applied must accurately forecast demand and effectively manage its resources and production capacity ~~for each of~~across its ~~segments as well as across multiple segments,~~businesses, and may incur unexpected or additional costs to align its business operations. During periods of increasing demand for its products, Applied must have sufficient manufacturing capacity and inventory to meet customer demand; effectively manage its supply chain; attract, retain and motivate a sufficient number of qualified employees; and continue to control costs. During periods of decreasing demand, Applied must reduce costs and align its cost structure with prevailing market conditions; effectively manage its supply chain; and motivate and retain key employees. If Applied does not effectively manage these challenges during periods of changing demand, its business performance and results of operations may be adversely impacted. Even with effective allocation of resources and management of costs, during periods of decreasing demand, ~~Applied's~~Applied’s gross margins and earnings may be adversely impacted.

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

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

~~Uncertainty about future~~Uncertain economic and industry conditions also ~~makes~~make it more challenging for Applied to forecast its operating results, make business decisions, and identify and prioritize the risks that may affect its businesses, sources and uses of cash, financial condition and results of operations. If Applied does not appropriately manage its business operations, it could have a significant negative impact on its business performance and financial condition. Applied may be required to implement additional cost reduction efforts, including restructuring activities, which may adversely affect Applied’s ability to capitalize on opportunities. ~~In addition,~~ Even during periods of economic uncertainty or lower revenues, Applied must continue to invest in research and development and maintain a global business infrastructure to compete effectively and support its customers, which can have a negative impact on its operating margins and earnings.

Applied maintains an investment portfolio that is subject to general credit, liquidity, ~~foreign exchange,~~ market and interest rate risks. The risks to Applied’s investment portfolio may be exacerbated if financial market conditions deteriorate and, as a result, the value and liquidity of the investment portfolio, as well as returns on pension assets, could be negatively impacted and lead to impairment charges. Applied also maintains cash balances in various bank accounts globally in order to fund normal operations. If any of these financial institutions becomes insolvent, it could limit Applied’s ability to access cash in the affected ~~accounts.~~

accounts, which could affect its ability to manage its operations.

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

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

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

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

regulatory or tax policies impacting the timing of customers’ investment in new or expanded fabrication plants;

differences in growth rates among the semiconductor, display and other industries in which Applied operates;

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

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

the need for customers to continually reduce the total cost of manufacturing system ownership;

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

manufacturers’ ability to reconfigure and re-use fabrication ~~systems;~~systems which can reduce demand for new equipment;

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

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

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

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

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

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

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

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

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

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

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

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

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

the importance of increasing market positions in ~~under-penetrated~~ segments ~~such as etch and inspection;~~with growing demand;

semiconductor ~~manufacturer's~~manufacturer’s ability to reconfigure and re-use equipment, and the resulting effect on their need to purchase new equipment and services;

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

shorter cycle times between order placements by customers and product shipment require greater reliance on forecasting of customer investment, which may lead to inventory write-offs and manufacturing inefficiencies that decrease gross margin;

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

consolidation in the semiconductor industry, including among semiconductor manufacturers and among manufacturing equipment suppliers;

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

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

~~the potential increasing~~ investment in semiconductor manufacturing capabilities in China, and its effect on the demand for semiconductor manufacturing equipment; and

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

If Applied ~~must~~does not accurately forecast, and allocate appropriate resources and investment towards addressing, key technology changes and inflections, ~~in order~~successfully develop and commercialize products to ~~enable opportunities~~meet demand for ~~gains.~~new technologies, and effectively address industry trends, its business and results of operations may be adversely impacted.

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

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

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

the timing and extent of an expansion of manufacturing facilities in China, which may be affected by changes in economic conditions in China;

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

the variability in demand for display manufacturing equipment, and uncertainty with respect to future display technology end-use applications and growth drivers.

If Applied ~~must continually innovate,~~does not successfully develop and commercialize ~~its~~ products to meet demand for new and ~~adapt its~~emerging display technologies, or if industry demand for display manufacturing equipment and technologies slows, Applied’s business and ~~product offerings~~its results of operations may be adversely impacted.

The industries in which Applied operates are highly competitive and subject to ~~respond to competition and~~ rapid technological and market changes.

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

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

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

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

maintain operating flexibility to enable ~~different~~ responses to ~~different~~changing markets, applications, customers and ~~applications;~~customer requirements;

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

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

effectively allocate resources ~~including people and R&D funding, among Applied’s~~between its existing products and ~~between~~markets, the development of new products, and ~~the enhancement of existing products, as most appropriate~~expanding into new and ~~effective for future growth;~~adjacent markets;

improve the productivity of capital invested in R&D activities;

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

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

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

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

implement changes in its design engineering methodology ~~including those that enable reduction of~~to reduce material costs and cycle time, ~~greater~~increase commonality of platforms and types of parts used in different systems, ~~greater effectiveness of~~and improve product life cycle ~~management,~~management.

If Applied does not successfully anticipate technology inflections, develop and ~~reduced energy usage~~commercialize new products and ~~environmental impact.~~technologies, and respond to changes in customer requirements and market trends, its business performance and results of operations may be adversely impacted.

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

Applied’s ~~semiconductor~~ customer base ~~historically~~is highly concentrated, and has ~~been, and is becoming even more, highly~~become increasingly concentrated as a result of economic and industry conditions. In the first nine months of fiscal 2016, four semiconductor manufacturers accounted for approximately 58 percent of the Semiconductor Systems segment's net sales and four customers accounted for 49 percent of Applied’s consolidated net sales. Applied’s display customer base is also highly concentrated.continued consolidation. Applied’s customer base is also ~~geographically-concentrated. See Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for tabular presentations of net sales by geographic region.~~

In addition, certain customers have experienced significant ownership or management changes, consolidated with other manufacturers, outsourced manufacturing activities, or engaged in collaboration or cooperation arrangements with other manufacturers. Customers have entered into strategic alliances or industry consortia that have increased the influence of key industry participants in technology decisions made by their partners. Also, certain customers are making an increasingly greater percentage of their respective industry’s capital equipment investments. Further, claims or litigation involving key industry participants have resulted and may continue to result in changes in their sourcing strategies and other outcomes. In this environment, contracts or orders from ageographically concentrated. A relatively limited number of manufacturers ~~have accounted for, and are expected to continue to~~ account for a substantial portion of Applied’s business. As a result, the actions of even a single customer can expose Applied’s business and results of operations to greater volatility. The mix and type of customers, and sales to any single customer, may vary significantly from quarter to quarter and from year to ~~year. As~~year, and have a significant impact on Applied’s net sales, gross margins and net income. Applied’s products are configured to customer specifications, and changing, rescheduling or canceling orders may result in significant, non-recoverable costs. If customers do not place orders, or they substantially reduce, delay or cancel orders, Applied may not be able to replace the ~~business.~~business, which may have a significant adverse impact on its results of operations and financial condition. The concentration of ~~our~~Applied’s customer base ~~may increase our~~increases its risks related to the financial condition of ~~our~~its customers, and the deterioration in financial condition of a single customer or the failure of a single customer to perform its obligations could have a material adverse effect on Applied’s results of operations and cash flow. To the ~~Company’s~~extent its customers experience liquidity constraints, Applied may incur additional bad debt expense, which may have a significant impact on its results of operations. Major customers may also seek ~~and on occasion receive,~~ pricing, payment, intellectual property-related, or other commercial terms that are less favorable to ~~Applied.~~Applied, which may have a negative impact on Applied’s business, revenue and gross margins.

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

InApplied has product development, engineering, manufacturing, sales and other operations in many countries, and some of its business activities are concentrated in certain geographic areas. Moreover, in the ~~third~~first quarter of fiscal ~~2016,~~2017, approximately 90 percent of Applied’s net sales were to customers in regions outside the United States. ~~Moreover, China now represents~~As a result of the largest market for various electronic products, such as TVs, PCs, and smartphones. Certain of Applied’s R&D and manufacturing facilities, as well as suppliers to Applied, are also located outside the United States, including in Singapore, Taiwan, China, Korea, Israel, Germany and Italy. Applied is also expanding its business and operations in new countries. The global nature of its operations, Applied’s business performance and results of operations ~~combined with the need to continually improve the Company’s operating cost structure, presents challenges, including but not limited to those arising from:~~may be adversely affected by a number of factors, including:

varying regional economic and geopolitical business conditions and demands;

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

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

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

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

ineffective or inadequate legal protection of intellectual property rights in certain countries;

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

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

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

supply chain interruptions, and service interruptions from utilities, transportation, data hosting or telecommunications providers;

a ~~more~~ diverse workforce with different experience levels, languages, cultures, customs, business practices and worker ~~expectations;~~expectations, and differing employment practices and labor issues;

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

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

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

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

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

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

~~cultural and language differences;~~

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

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

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

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

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

Many of these challenges are present in China and Korea, which are experiencing significant growth of customers, suppliers and competitors to Applied. Applied further believes that China and Korea present large potential markets for its products and opportunity for growth over the long term, although at lower projected levels of profitability and margins for certain products than historically have been achieved in other regions. In addition, government authorities may impose conditions that require the use of local suppliers or partnerships with local companies, require the license or other transfer of intellectual property, or engage in other efforts to promote local businesses and local competitors, which could have a significant adverse impact on Applied’s business.

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

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

diversion of management’s attention ~~from other operational matters;~~and disruption of ongoing businesses;

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

inability to complete proposed transactions ~~as anticipated~~due to the failure to obtain regulatory or ~~at all~~other approvals, litigation or other disputes, and any ensuing obligation to pay a termination fee;

the failure ofto realize expected returns from acquired ~~businesses to meet or exceed expected returns;~~businesses;

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

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

failure to commercialize ~~purchased technologies;~~technologies from acquired businesses or developed through strategic investments;

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

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

failure to ~~attract,~~ retain and motivate key ~~employees;~~employees of acquired businesses;

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

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

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

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

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

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

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

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

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

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

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

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

Applied’s indebtedness and debt covenants could adversely affect its financial condition and business.

Applied has ~~$3.35~~$3.4 billion in aggregate principal amount of senior unsecured notes outstanding. Under the indenture governing the senior unsecured notes, it may be required to offer to repurchase the notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest, upon a change of control of Applied and a contemporaneous downgrade of the notes below investment grade. Applied also has in place a $1.5 billion committed revolving credit agreement. While no amounts were outstanding under this credit agreement at ~~July 31, 2016,~~January 29, 2017, Applied may borrow amounts in the future under the agreement. Applied may also enter into new financing arrangements. Applied’s ability to satisfy its debt obligations is dependent upon the results of its business operations and subject to other risks discussed in this section. Significant changes in Applied’s credit rating or changes in the interest rate environment could have a material adverse consequence on Applied’s access to and cost of capital for future financings, and financial condition. If Applied fails to satisfy its debt obligations, or comply with financial and other debt covenants, it may be in default and any borrowings may become immediately due and payable, and such default may also constitute a default under other of Applied’s obligations. There can be no assurance that Applied would have sufficient financial resources or be able to arrange financing to repay any borrowings at such time.

~~Operating in multiple industries, and the entry~~Applied is exposed to risks associated with expanding into new and related markets and ~~industries, entail additional challenges and obligations.~~industries.

As part of its growth strategy, Applied must successfully expand into related or new markets and industries, either with its existing products or with new products developed internally, or those developed in collaboration with third parties, or obtained through acquisitions. ~~The entry~~Applied’s ability to successfully expand its business into ~~different~~new and related markets ~~involves additional challenges, including those arising from:~~and industries may be adversely affected by a number of factors, including:

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

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

differing rates of profitability and growth among multiple businesses;

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

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

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

~~Applied’s ability to rapidly expand~~the complexity of entering into and effectively managing strategic alliances or ~~reduce its operations to meet increased or decreased demand, respectively, and the associated effect on working capital;~~partnering opportunities;

new materials, processes and technologies;

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

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

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

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

third parties’ intellectual property rights; and

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

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

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

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

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

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

difficulties or delays in obtaining required import or export approvals;

shipment delays due to transportation interruptions or capacity constraints;

information technology or infrastructure failures; and

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

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

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

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

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

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

Third parties may also assert claims against Applied and its products. Claims that Applied’s products infringe the rights of others, whether or not meritorious, can be expensive and time-consuming to defend and resolve, and may divert the efforts and attention of management and personnel. The inability to obtain rights to use third party intellectual property on commercially reasonable terms could have an adverse impact on Applied’s business. In addition, Applied may face claims based on the theft or unauthorized use or disclosure of third-party trade secrets and other confidential business information. Any such incidents and claims could severely harm Applied’s business and reputation, result in significant expenses, harm its competitive position, and prevent Applied from selling certain products, all of which could have a significant adverse impact on Applied’s business and results of operations.

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

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

Applied is exposed to various risks related to legal proceedings.

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

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

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

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

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

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

resources, all of which could adversely affect Applied’s business, financial condition and results of operations.

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

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

Applied is exposed to risks associated with operating in jurisdictions with complex and changing tax laws.

Applied is subject to ~~taxation~~income taxes in the United States and ~~various other~~foreign jurisdictions. Significant judgment is required to determine and estimate worldwide tax liabilities. Applied’s ~~future~~ provision for income taxes and effective tax rates could be affected by numerous factors, including changes in: (1) applicable tax laws; (2) amount and composition of pre-tax income in jurisdictions with differing tax rates; (3) plans to indefinitely reinvest certain funds held outside of the U.S.; and (4) valuation of deferred tax assets and liabilities. An increase in Applied’s provision for income taxes and effective tax rate could have a material adverse impact on Applied’s results of operations and financial condition. As of ~~July 31, 2016,~~January 29, 2017, Applied intends to indefinitely reinvest approximately ~~$2.8~~$2.1 billion of cash, cash equivalents and marketable securities held by ~~non-U.S.~~foreign subsidiaries and does not plan to repatriate these funds. Applied would need to accrue and pay U.S. taxes if these funds were repatriated.

Consistent with the international nature of its business, Applied conducts certain manufacturing, supply chain, and other operations in Asia, bringing these activities closer to customers and reducing operating costs. In certain foreign jurisdictions, ~~outside the United States, tax holidays or~~conditional reduced income tax rates have been granted to Applied. To obtain the benefit of these tax incentives, Applied must meet requirements relating to various activities. Applied’s ability to realize benefits from these incentives could be materially affected if, among other things, applicable requirements are not met or Applied incurs net losses ~~for which it cannot claim a deduction.~~in these jurisdictions.

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

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

Applied is subject to environmental and safety regulations in connection with its global business operations, including but not limited to: regulations related to the development, manufacture and use of its products; handling, discharge, recycling and disposal of hazardous materials used in its products or in producing its products; the operation of its facilities; and the use of its real property. The failure or inability to comply with existing or future environmental and safety regulations ~~such as those related to climate change,~~ could result in: ~~(1)~~ significant remediation or other legal liabilities; ~~(2)~~ the imposition of penalties and fines; ~~(3) the suspension or termination of~~restrictions on the development, manufacture, sale or use of certain of its products; ~~(4)~~ limitations on the operation of its facilities or ability to use its real property; ~~and/or (5)~~and a decrease in the value of its real property. Applied could be required to alter its manufacturing and operations and incur substantial expense in order to comply with environmental and safety regulations. Any failure to comply with environmental and safety regulations could subject Applied to significant costs and liabilities that could adversely affect Applied’s business, financial condition and results of operations.

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

Applied is subject to various risks related to: (1) new, different, inconsistent or conflicting laws, rules and regulations that may be enacted by executive order, legislative bodies or regulatory agencies in the countries in which Applied operates; (2) disagreements or disputes between national or regional regulatory agencies related to international trade; and (3) the interpretation and application of laws, rules and regulations. As a public company with global operations, Applied is subject to the laws of the United States and multiple foreign jurisdictions and the rules and regulations of various governing bodies, which may differ among jurisdictions, including those related to financial and other disclosures, corporate governance, intellectual property, tax, trade, anti-competition, employment, immigration, privacy, and anti-corruption. ~~Changes~~Changing, inconsistent or conflicting laws, rules and regulations, and ambiguities in ~~laws, regulations~~their interpretation and ~~standards~~application, create uncertainty and challenges, ~~regarding~~and compliance ~~matters. Efforts to comply~~ with ~~new~~laws, rules and ~~changing~~ regulations ~~have resulted in,~~may be onerous and ~~are likely to continue to result in, increased general and administrative expenses and a diversion of~~expensive, divert management time and attention from revenue-generating activities, and otherwise adversely impact Applied’s business operations. Violations of law, rules and regulations could result in fines, criminal sanctions, restrictions on Applied’s business, and damage to ~~compliance activities.~~

its reputation, and could have an adverse impact on its business operations, financial condition and results of operations.

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

Issuer Purchases of Equity Securities

The following table provides information as of ~~July 31, 2016~~January 29, 2017 with respect to the shares of common stock repurchased by Applied during the ~~third~~first quarter of fiscal ~~2016.~~2017.


Period	Total Number of Shares Purchased	Average Price Paid per Share		Aggregate Price Paid		Total Number of Shares Purchased as Part of Publicly Announced Program*	Maximum Dollar Value of Shares That May Yet be Purchased Under the Program*		Total Number of Shares Purchased	Average Price Paid per Share		Aggregate Price Paid		Total Number of Shares Purchased as Part of Publicly Announced Program*	Maximum Dollar Value of Shares That May Yet be Purchased Under the Program*

	(In millions, except per share amounts)								(In millions, except per share amounts)
Month #1
(May 2, 2016 to May 29, 2016)	5.9	$	20.60	$	120	5.9	$	30
(October 31, 2016 to November 27, 2016)									1.1	$	29.73	$	33	1.1	$	1,749
Month #2
(May 30, 2016 to June 26, 2016)	1.2	$	24.32	29		1.2	$	2,000
(November 28, 2016 to December 25, 2016)									1.5	$	32.11	47		1.5	$	1,702
Month #3
(June 27, 2016 to July 31, 2016)	1.9	$	24.29	47		1.9	$	1,953
(December 26, 2016 to January 29, 2017)									1.5	$	33.00	50		1.5	$	1,652
Total	9.0	$	21.88	$	196	9.0			4.1	$	31.80	$	130	4.1


*	On June 9, 2016, ~~Applied's~~Applied’s Board of Directors approved a ~~new $2.0 billion~~ common stock repurchase program authorizing up to $2.0 billion in ~~repurchases, which followed the completion of a $3.0 billion common stock repurchase program approved on April 26, 2015.~~repurchases.

Item 6. Exhibits

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



		Incorporated by Reference
Exhibit No.	Description	Form	File No.	Exhibit No.	Filing Date
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002†
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002†
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002‡
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002‡
101.INS	XBRL Instance Document‡
101.SCH	XBRL Taxonomy Extension Schema Document‡
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document‡
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document‡
101.LAB	XBRL Taxonomy Extension Label Linkbase Document‡
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document‡


†	Filed herewith.


‡	Furnished herewith.

SIGNATURES

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



APPLIED MATERIALS, INC.

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

~~August 25, 2016~~February 23, 2017



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

~~August 25, 2016~~February 23, 2017

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