1
EXHIBIT 13
Selected Consolidated Financial Data
Fiscal year ended* 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
(Dollars in thousands,
except per share amounts)
Net sales $4,144,817 $3,061,881 $1,659,807 $1,080,047 $751,383
Gross margin $1,949,739 $1,409,848 $ 768,295 $ 475,684 $308,204
(% of net sales) 47.0 46.0 46.3 44.0 41.0
Research, development
and engineering $ 481,394 $ 329,676 $ 189,126 $ 140,161 $109,196
(% of net sales) 11.6 10.8 11.4 13.0 14.5
Marketing, selling and
administrative $ 539,694 $ 386,240 $ 239,932 $ 174,529 $130,632
(% of net sales) 13.0 12.6 14.4 16.2 17.4
Income from consolidated
companies before taxes
and cumulative effect of
accounting change** $ 922,436 $ 698,543 $ 334,497 $ 153,558 $ 58,925
(% of net sales) 22.3 22.8 20.2 14.2 7.8
Effective tax rate (%) 35.0 35.0 35.0 33.0 33.0
Net income $ 599,585 $ 454,053 $ 220,696 $ 99,695 $ 39,480
Earnings per share $ 3.27 $ 2.56 $ 1.30 $ .61 $ .27
Average common shares
and equivalents 183,607 177,348 170,042 164,588 145,360
- ------------------------------------------------------------------------------------------------------------
Order backlog $1,422,800 $1,508,800 $ 715,200 $ 365,800 $253,900
Working capital $1,757,842 $1,449,882 $ 734,104 $ 395,388 $333,590
Working capital ratio 2.9 2.7 2.5 2.0 2.3
Long-term debt $ 275,485 $ 279,807 $ 209,114 $ 121,076 $118,445
Stockholders' equity $2,370,425 $1,783,503 $ 966,264 $ 598,762 $474,111
Book value per share $ 13.15 $ 9.95 $ 5.74 $ 3.73 $ 3.03
Total assets $3,637,987 $2,965,379 $1,702,665 $1,120,152 $853,822
Capital expenditures, net $ 452,535 $ 265,557 $ 180,440 $ 95,351 $ 60,943
Regular full-time employees 11,403 10,537 6,497 4,739 3,909
- ------------------------------------------------------------------------------------------------------------
* The fiscal year ends on the last Sunday in October of each year. The fiscal
year ends for the periods presented are: October 27, 1996, October 29, 1995,
October 30, 1994, October 31, 1993 and October 25, 1992.
** Fiscal 1996 includes a restructuring charge of $25,100.
Graph One Graph Two Graph Three
Applied Materials
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2
Management's Discussion and Analysis
Results of Operations
During 1996, the semiconductor industry began a period of significant
transition, with reduced fab capacity investment driven by sharply lower memory
device prices. This transition resulted in equipment order pushouts and a
decrease of approximately 40 percent in new orders received by the Company
during the second half of fiscal 1996 when compared to the order level achieved
in the first half of fiscal 1996. Expecting the downturn in its business to
continue for some time, the Company determined that it needed to align its
employment level with the expected size of its operations. Accordingly, in the
fourth quarter of fiscal 1996, the Company reduced its workforce by
approximately 800 employees and developed plans to consolidate certain
facilities. In connection with these actions, a restructuring charge of $25
million was recorded during that period. The restructuring charge consisted of
$19 million for costs associated with the workforce reduction, and $6 million
for consolidation of facilities. During the fourth quarter of fiscal 1996,
approximately $14 million of cash was used for restructuring costs. The
remaining cash outlay is expected to occur primarily in the first quarter of
fiscal 1997 (see note 9).
The Company's net sales increased by 35 percent for fiscal 1996 compared to
fiscal 1995, notwithstanding the slowdown in the Company's business during the
second half of fiscal 1996, and net sales for fiscal 1995 increased 84 percent
compared to fiscal 1994. This growth was driven by strong worldwide demand for
the Company's advanced wafer processing technology, multi-chamber equipment and
installed base support services. The increased demand for the Company's advanced
equipment reflects the semiconductor industry's need for the technical
capability to fabricate advanced device structures and the continued investment
in systems capable of performing processes required for smaller device
geometries. The increases in installed base support services revenue are
attributable to a larger installed systems base and our global customers'
requirements for high reliability and uptime.
Information with respect to net sales by geographic region is as follows:
1996 1995 1994
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands)
$ % $ % $ %
North America 1,270,359 30.7 988,709 32.3 611,670 36.9
Europe 685,887 16.5 470,609 15.4 292,189 17.6
Japan 1,008,597 24.3 790,773 25.8 454,939 27.4
Korea 567,116 13.7 504,273 16.5 192,260 11.6
Asia-Pacific 612,858 14.8 307,517 10.0 108,749 6.5
- ---------------------------------------------------------------------------------------------------
4,144,817 100.0 3,061,881 100.0 1,659,807 100.0
- ---------------------------------------------------------------------------------------------------
Gross margin as a percentage of net sales was 47 percent in fiscal 1996 compared
to 46 percent in 1995 and 1994. Improvements in fiscal 1996 associated with
manufacturing efficiencies, reduced cycle times, material cost reductions and
increased unit volume were partially offset by product pricing pressures
associated with the decreased demand for the Company's equipment.
Operating expenses (excluding the restructuring charge) as a percentage of net
sales were 25 percent in fiscal 1996, compared to 23 percent and 26 percent in
fiscal 1995 and 1994, respectively. The Company's investments in strategic
facilities expansion, information systems technology and personnel are dependent
on many factors, including its current and future volumes of business. Thus,
Graph
Applied Materials
27
3
Graph
there can be no assurance that current operating expense levels as a percentage
of net sales are indicative of future operating expenses as a percentage of net
sales.
The Company's future operating results depend, to a considerable extent, on its
ability to maintain a competitive advantage in both the products and services it
provides. For this reason, Applied Materials believes it is critical to continue
to make substantial investments in research and development to ensure the flow
of innovative, productive, high-quality products and support services. Research,
development and engineering expenses were 12 percent of net sales in fiscal
1996, compared to 11 percent in fiscal 1995 and 1994. This considerable
investment reflects the Company's commitment to total product excellence and
leading-edge technology. During fiscal 1996, the Company introduced several new
products for the emerging 0.25 micron and below market: the high-throughput
Mirra CMP (chemical mechanical polishing) system, HDP-CVD (high density plasma
chemical vapor deposition) Centura, Metal Etch DPS (decoupled plasma source)
Centura and the Silicon Etch DPS Centura. The Company continued to add to its
family of compact, high-productivity implanters in 1996 with the introduction of
the Implant xR LEAP (low energy advanced processes) and Implant xR120. In
addition, the Company introduced the Liner TxZ Centura, which is an integrated
system capable of performing a key process sequence for the most advanced device
structures. The Company also enhanced a number of its existing products during
1996 through the application of new processes and technologies. The success of
these new and enhanced products in the market has yet to be determined (see
"Trends, Risks and Uncertainties").
Marketing, selling and administrative expenses as a percentage of net sales were
13 percent in fiscal 1996 and 1995, and 14 percent in fiscal 1994. During each
of these fiscal years, the Company increased spending in marketing and selling
programs to support the development of international markets , particularly in
the Korea and Asia-Pacific regions, and to increase the awareness of new
products. Administrative expenses have increased during each of the last three
fiscal years to support the Company's growth, improve information technology
capability and protect the Company's intellectual property rights. The growth
in spending for marketing, selling and administration has kept pace with the
revenue growth, and thus there has not been a significant change in spending as
a percentage of sales.
Applied Materials' effective income tax rate was 35 percent for each of the last
three fiscal years. The Company adopted Statement of Financial Accounting
Standards No. 109 (SFAS 109), "Accounting for Income Taxes," at the beginning of
fiscal 1994 and recorded a one-time $7 million credit as the favorable impact
of the accounting change. In fiscal 1997, the Company's effective income tax
rate is expected to remain at 35 percent.
Financial Condition, Liquidity and Capital Resources
The Company's financial condition remained strong, with a ratio of current
assets to current liabilities of 2.9:1 at October 27, 1996, compared to 2.7:1 at
October 29, 1995. As of October 27, 1996, the Company had $1,038 million in
cash, cash equivalents and short-term investments, compared to $769 million at
October 29, 1995.
The Company generated $692 million of cash from operations in fiscal 1996. Net
income (plus non-cash depreciation and amortization charges) of $748 million and
an increase of $167 million in accounts payable and accrued expenses were
partially offset by changes in deferred taxes and income taxes payable of $160
million, and increased levels of accounts receivable and inventories. Accounts
receivable increased $44 million from October 29, 1995,
Graph
Applied Materials
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4
as geographic regions with longer collection times generated a larger percentage
of the Company's revenue in fiscal 1996, and inventories increased $60 million
primarily as a result of customers delaying receipt of certain orders at the end
of fiscal 1996.
Cash used for investing activities in fiscal 1996 of $603 million consisted of
capital expenditures for land, facilities expansion and other capital equipment,
and net purchases of short-term investments.
During fiscal 1996, the Company repurchased 1,185,000 shares of its common stock
in the open market at an average price of $31.27 per share, for a total cash
outlay of $37 million. As of October 27, 1996, the Company is authorized to
repurchase additional shares of its common stock in the open market through
February 1999 in amounts that will substantially offset the dilution that
results from the Company's stock-based employee benefit and incentive plans.
At October 27, 1996, the Company's principal sources of liquidity consisted of
$1,038 million of cash, cash equivalents and short-term investments, $194
million of unissued notes registered under the Company's medium-term notes
program and $303 million of available credit facilities. In 1996, the Company
increased its revolving line of credit agreement to $240 million from $125
million, and extended the agreement's expiration date to February 2000 from
September 1998. No amount is outstanding under this line of credit agreement.
The Company's liquidity is affected by many factors, some based on the normal
ongoing operations of the business and others related to the uncertainties of
the industry and global economies. Although the Company's cash requirements will
fluctuate based on the timing and extent of these factors, management believes
that cash generated from operations, together with the liquidity provided by
existing cash balances and borrowing capability, will be sufficient to satisfy
commitments for capital expenditures and other cash requirements for the next
fiscal year.
Facility improvement and expansion projects in Texas and California are being
scheduled for completion based on the Company's anticipated needs, which may
change from time to time based on market conditions. This flexibility allows the
Company to manage its manufacturing and applications lab capacity to ensure
that sufficient capacity will be available to meet customer demands. Capital
expenditures are expected to approximate $250 million during fiscal 1997. This
amount includes funds for the continuation and completion of facilities
expansion and investments in demonstration and test equipment, information
systems and other capital equipment.
During the first quarter of fiscal 1997, the Company entered into agreements to
acquire two companies for approximately $285 million, consisting primarily of
cash. These transactions are expected to be completed during the first quarter
of fiscal 1997 (see note 16). In the same quarter, the Company paid $56 million
in connection with the early retirement of its unsecured senior notes (see note
15).
Graph
Trends, Risks and Uncertainties
The semiconductor industry has historically been cyclical and subject to
periodic downturns associated with changes in supply and demand. During 1996,
the semiconductor industry weakened, principally as a result of excess memory
capacity and significant memory price reductions. This excess capacity and
weakness in memory pricing in turn led to product pricing pressures and reduced
demand for the Company's products and services. Semiconductor manufacturers
significantly reduced capital spending and investment, and new orders received
by the Company decreased significantly during the last half of the Company's
1996 fiscal year. The Company's ability to predict customer investment decisions
has been impaired by the uncertainty within the semiconductor industry. The
growth rates and results of operations achieved by the Company in fiscal 1996
and 1995 may not be indicative of 1997 growth rates and results of operations.
Applied Materials
29
5
Management's Discussion and Analysis
It is possible that a continued industry downturn and further reductions or
delays in semiconductor manufacturers' capital spending and investment could
increase pricing pressures, decrease orders and adversely affect the Company's
revenue and operating results.
The Company ended the year with a backlog of approximately $1.4 billion as of
October 27, 1996, compared to approximately $1.5 billion as of October 29, 1995.
The Company schedules production of its systems based upon order backlog and
customer commitments. The backlog includes orders for which written
authorizations have been accepted and shipment dates within 12 months have been
assigned. During the current industry downturn, semiconductor manufacturers have
rescheduled or canceled certain orders. Due to possible customer changes in
delivery schedules and cancellation of orders, the Company's backlog at any
particular date is not necessarily indicative of actual sales for any succeeding
period. A reduction of backlog during any particular period could adversely
affect the Company's results of operations.
The Company's results of operations are subject to significant fluctuations from
period to period, in part because of the cyclical nature of the semiconductor
industry and its changes in supply and demand. Moreover, each region in the
global semiconductor equipment market exhibits unique characteristics that
cause capital equipment investment patterns to vary from period to period. While
international markets provide the Company with significant growth opportunities,
periodic economic downturns, trade balance issues, political instability and
fluctuations in interest and foreign currency exchange rates are all risks that
could affect global product and service demand. Although the Company actively
manages its exposure to changes in foreign currency exchange rates, there can be
no assurance that future changes in foreign currency exchange rates will not
have a material effect on its results of operations or financial condition.
The Company operates in a highly competitive industry characterized by
increasingly rapid technological changes. The Company's competitive advantage
and future success are therefore dependent on its ability to develop new
products, to qualify these new products with its customers, to successfully
introduce these products to the marketplace on a timely basis, to commence
production to meet customer demands and to develop new markets in the
semiconductor industry for its products and services. The successful
introduction of new technology and products is increasingly complex. If the
Company is unable, for whatever reason, to develop and introduce new products in
a timely manner in response to changing market conditions or customer
requirements, its results of operations could be adversely impacted.
To better address the issues and opportunities presented by the current industry
slowdown, the Company has implemented a number of programs to reduce costs and
improve productivity, including focusing on manufacturing efficiencies, reduced
cycle times and material cost reductions. The inability to satisfactorily
achieve the goals of these cost reduction and productivity programs could
adversely affect the Company's results of operations.
The Company is currently involved in litigation regarding patents and other
intellectual property rights (see note 14 to the consolidated financial
statements) and could become involved in additional litigation in the future.
Also in the normal course of business, the Company from time to time receives
and makes inquiries with regard to possible patent infringement. There can be no
assurance about the outcome of current or future litigation or patent
infringement inquiries.
When used in this Annual Report, including this Management's Discussion and
Analysis, the words "anticipate," "estimate," "expect" and similar expressions
are intended to identify forward-looking statements. These statements are
subject to certain risks and uncertainties, including, but not limited to,
slowing growth in the demand for semiconductors and the Company's systems and
services, continuing semiconductor device price declines, semiconductor
manufacturers' reduced capital spending, product pricing pressures, challenges
from the Company's competition, insufficient cost reduction programs being
implemented by the Company and the successful development of new products,
services and markets, that could cause actual results to differ materially from
those projected. The Company undertakes no obligation to update the information,
including the forward-looking statements, in this Annual Report.
Applied Materials
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6
Consolidated Statements of Operations
Fiscal year ended 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Net sales $4,144,817 $3,061,881 $1,659,807
Cost of products sold 2,195,078 1,652,033 891,512
- ----------------------------------------------------------------------------------------------------
Gross margin 1,949,739 1,409,848 768,295
Operating expenses:
Research, development and engineering 481,394 329,676 189,126
Marketing and selling 313,631 223,296 157,303
General and administrative 226,063 162,944 82,629
Restructuring 25,100 -- --
- ----------------------------------------------------------------------------------------------------
Income from operations 903,551 693,932 339,237
Interest expense 20,733 21,401 15,962
Interest income 39,618 26,012 11,222
- ----------------------------------------------------------------------------------------------------
Income from consolidated companies before taxes
and cumulative effect of accounting change 922,436 698,543 334,497
Provision for income taxes 322,851 244,490 117,074
- ----------------------------------------------------------------------------------------------------
Income from consolidated companies before
cumulative effect of accounting change 599,585 454,053 217,423
Equity in net loss of joint venture -- -- 3,727
- ----------------------------------------------------------------------------------------------------
Income before cumulative effect of
accounting change 599,585 454,053 213,696
Cumulative effect of change in accounting
for income taxes -- -- 7,000
- ----------------------------------------------------------------------------------------------------
Net income $ 599,585 $ 454,053 $ 220,696
- ----------------------------------------------------------------------------------------------------
Earnings per share:
Before cumulative effect of accounting change $ 3.27 $ 2.56 $ 1.26
- ----------------------------------------------------------------------------------------------------
Net income $ 3.27 $ 2.56 $ 1.30
- ----------------------------------------------------------------------------------------------------
Average common shares and equivalents 183,607 177,348 170,042
- ----------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
Applied Materials
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Consolidated Balance Sheets
Fiscal year end 1996 1995
- --------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Assets
Current assets:
Cash and cash equivalents $ 403,888 $ 285,845
Short-term investments 633,744 483,487
Accounts receivable, less allowance for
doubtful accounts of $4,169 and $3,017 822,384 817,730
Inventories 478,552 427,413
Deferred income taxes 281,586 198,888
Other current assets 72,915 98,250
- --------------------------------------------------------------------------------------------
Total current assets 2,693,069 2,311,613
Property, plant and equipment, net of accumulated depreciation 919,038 630,746
Other assets 25,880 23,020
- --------------------------------------------------------------------------------------------
Total assets $3,637,987 $2,965,379
- --------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 77,522 $ 61,748
Current portion of long-term debt 22,640 21,064
Accounts payable and accrued expenses 791,897 659,572
Income taxes payable 43,168 119,347
- --------------------------------------------------------------------------------------------
Total current liabilities 935,227 861,731
Long-term debt 275,485 279,807
Deferred income taxes 11,607 11,612
Other non-current obligations 45,243 28,726
- --------------------------------------------------------------------------------------------
Total liabilities 1,267,562 1,181,876
- --------------------------------------------------------------------------------------------
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock; $.01 par value per share;
1,000 shares authorized; no shares issued -- --
Common stock; $.01 par value per share;
500,000 shares authorized; 180,235 and 179,278
shares outstanding 1,802 1,792
Additional paid-in capital 763,376 760,057
Retained earnings 1,599,564 999,979
Cumulative translation adjustments 5,683 21,675
- --------------------------------------------------------------------------------------------
Total stockholders' equity 2,370,425 1,783,503
- --------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $3,637,987 $2,965,379
- --------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements.
Applied Materials
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Consolidated Statements of Cash Flows
Fiscal year ended 1996 1995 1994
- ------------------------------------------------------------------------------------------------
(In thousands)
Cash flows from operating activities:
Net income $ 599,585 $ 454,053 $ 220,696
Adjustments required to reconcile net income
to cash provided by operations:
Depreciation and amortization 148,865 83,231 59,051
Equity in net loss of joint venture -- -- 3,727
Deferred income taxes (85,852) (99,345) (32,510)
Cumulative effect of change in accounting for
income taxes -- -- (7,000)
Changes in assets and liabilities:
Accounts receivable (43,789) (442,935) (135,851)
Inventories (60,036) (186,412) (80,507)
Other current assets 23,369 (43,097) (18,216)
Other assets (3,183) (3,462) (3,733)
Accounts payable and accrued expenses 167,346 304,807 83,119
Income taxes payable (73,938) 64,246 12,329
Other non-current obligations 19,662 11,613 9,919
- ------------------------------------------------------------------------------------------------
Cash provided by operations 692,029 142,699 111,024
- ------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures, net of retirements (452,535) (265,557) (180,440)
Investment in joint venture -- -- --
Proceeds from sales of short-term investments 707,620 351,230 151,305
Purchases of short-term investments (857,877) (572,712) (266,727)
- ------------------------------------------------------------------------------------------------
Cash used for investing (602,792) (487,039) (295,862)
- ------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Short-term borrowings, net 22,360 18,847 (1,420)
Long-term debt borrowings 29,832 134,992 98,594
Long-term debt repayments (25,164) (51,303) (7,256)
Issuances of common stock, net 40,381 370,353 134,263
Repurchases of common stock (37,052) -- --
- ------------------------------------------------------------------------------------------------
Cash provided by financing 30,357 472,889 224,181
- ------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (1,551) (3,024) 1,380
- ------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 118,043 125,525 40,723
Cash and cash equivalents at beginning of year 285,845 160,320 119,597
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 403,888 $ 285,845 $ 160,320
- ------------------------------------------------------------------------------------------------
Cash payments for interest were $23,708, $22,349 and $14,120 in 1996, 1995 and
1994, respectively.
Cash payments for income taxes were $429,651, $221,430 and $79,498 in 1996, 1995
and 1994, respectively.
See accompanying notes to the consolidated financial statements.
Applied Materials
33
9
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION The consolidated financial
statements include the accounts of the Company and its subsidiaries after
elimination of all significant intercompany balances and transactions. The
Company's 50 percent joint venture investment in Applied Komatsu Technology,
Inc. (AKT) is accounted for using the equity method and is included in other
long-term assets. The Company's fiscal years presented are the 52 week periods
that ended on the last Sunday of October.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ materially from those estimates.
CASH EQUIVALENTS All highly-liquid investments purchased with an original
maturity of three months or less are considered to be cash equivalents.
SHORT-TERM INVESTMENTS All of the Company's short-term investments are
classified as available-for-sale as of the balance sheet dates. Investments
classified as available-for-sale are recorded at fair value and any material
temporary difference between an investment's cost and its fair value is
presented as a separate component of stockholders' equity.
INVENTORY VALUATION Inventories are stated at the lower of cost or market, with
cost determined on a first-in, first-out (FIFO) basis.
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost.
Depreciation is provided using a straight-line method over the estimated useful
lives of the assets. Leasehold improvements are amortized over the useful life
of the improvement or the lease term, whichever is shorter. Gains and losses on
sales or retirements of property, plant and equipment are reflected in income.
Maintenance and repairs are charged to income as incurred. Improvements that
extend the useful life of property, plant and equipment are capitalized.
REVENUE RECOGNITION Revenue related to systems is generally recognized upon
shipment, which usually precedes customer acceptance. A provision for the
estimated future cost of system installation and warranty is recorded at the
time of revenue recognition. Service revenue is generally recognized ratably
over the period of the related contract.
DERIVATIVE FINANCIAL INSTRUMENTS The Company enters into derivative financial
instruments such as forward exchange contracts to hedge certain firm commitments
denominated in foreign currencies and currency option contracts to hedge certain
anticipated, but not yet committed, transactions expected to be denominated in
foreign currencies. The purpose of the Company's foreign currency management
activity is to protect the Company from the risk that eventual cash flows from
foreign currency denominated transactions may be adversely affected by changes
in exchange rates. The terms of the currency instruments used are consistent
with the timing of the committed or anticipated transactions being hedged. The
Company does not use financial instruments for trading or speculative purposes.
Deferred results of forward and option contracts are recognized in income when
the related transactions being hedged are recognized.
Applied Materials
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FOREIGN CURRENCY TRANSLATION The Company's subsidiaries located in Japan and
Europe operate primarily using local functional currencies. Accordingly, all
assets and liabilities of these subsidiaries are translated using exchange rates
in effect at the end of the period, and revenues and costs are translated using
average exchange rates for the period. The resulting cumulative translation
adjustments are presented as a separate component of stockholders' equity.
Subsidiaries in the Korea and Asia-Pacific regions use the U.S. dollar as the
functional currency. Accordingly, assets and liabilities are translated using
period-end exchange rates, except for inventories and property, plant and
equipment, which are translated using historical rates. Revenues and costs are
translated using average exchange rates for the period, except for costs related
to those balance sheet items that are translated using historical rates. The
resulting translation gains and losses are included in income as they are
incurred.
EMPLOYEE STOCK PLANS The Company accounts for its stock option and employee
stock purchase plans in accordance with provisions of the Accounting Principle
Board's Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." In
1995, the Financial Accounting Standards Board released Statement of Financial
Accounting Standard No. 123 (SFAS 123), "Accounting for Stock Based
Compensation." SFAS 123 provides an alternative to APB 25 and is effective for
fiscal years beginning after December 15, 1995. The Company will continue to
account for its employee stock plans in accordance with the provisions of APB
25, and therefore will be required to disclose certain pro-forma information in
the notes to its financial statements. SFAS 123 is not expected to have an
effect on the Company's financial condition or results of operations.
EARNINGS PER SHARE Earnings per share is computed using the weighted average
number of common shares and equivalents outstanding during the period.
RECLASSIFICATIONS Certain amounts in fiscal years prior to 1996 have been
reclassified to conform to the 1996 financial statement presentation.
2. Financial Instruments
INVESTMENTS At October 27, 1996 and October 29, 1995, the fair value of the
Company's short-term investments approximated cost. Accordingly, temporary
differences between the short-term investment portfolio's fair value and its
cost have not been presented as a separate component of stockholders' equity.
Information about short-term investments is as follows:
1996 1995
- --------------------------------------------------------------------------------
(In thousands)
Obligations of states and political subdivisions $189,566 $120,708
U.S. commercial paper, corporate bonds and
medium-term notes 159,929 110,740
Bank certificates of deposit 134,078 97,101
U.S. treasury securities 121,840 137,215
Other debt securities 28,331 17,723
- --------------------------------------------------------------------------------
$633,744 $483,487
================================================================================
$233,485,000 and $201,684,000 of investments in debt and equity securities are
included in cash and cash equivalents at October 27, 1996 and October 29, 1995,
respectively.
Applied Materials
35
11
Notes to Consolidated Financial Statements
Information about the contractual maturities of short-term investments at
October 27, 1996 is as follows:
Due After One
Due in One Year Through Due After
Year or Less Three Years Three Years
- -----------------------------------------------------------------------------------------------
(In thousands)
Obligations of states and political subdivisions $ 95,510 $ 50,857 $ 43,199
U.S. commercial paper, corporate bonds
and medium-term notes 90,182 19,241 50,506
Bank certificates of deposit 134,078 -- --
U.S. treasury securities 97,747 1,507 22,586
Other debt securities 826 16,299 11,206
- -----------------------------------------------------------------------------------------------
$418,343 $ 87,904 $127,497
===============================================================================================
Gross unrealized holding gains and losses and gross realized gains and losses on
sales of short-term investments were not material as of or for the years ended
October 27, 1996 and October 29, 1995. The Company manages its cash equivalents
and short-term investments as a single portfolio of highly marketable securities
which is intended to be available to meet the Company's current cash
requirements.
DERIVATIVE FINANCIAL INSTRUMENTS The notional amounts of derivative financial
instruments as of October 27, 1996 and October 29, 1995 were as follows:
1996 1995
- --------------------------------------------------------------------------------
(In thousands)
Forward exchange contracts to sell U.S. dollars
for foreign currency $330,093 $308,879
Forward exchange contracts to sell foreign
currency for U.S. dollars $504,612 $460,721
Currency option contracts to sell foreign
currency for U.S. dollars $250,000 $400,000
================================================================================
All currency forward and option contracts outstanding at October 27, 1996 have
maturities of less than one year and are primarily to buy or sell Japanese yen
in exchange for U.S. dollars. Management believes that these contracts should
not subject the Company to undue risk from foreign exchange movements because
gains and losses on these contracts generally offset gains and losses on the
assets, liabilities and transactions being hedged.
CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the
Company to significant concentrations of credit risk consist principally of cash
equivalents, short-term investments, trade accounts receivable and derivative
financial instruments used in hedging activities.
The Company invests in a variety of financial instruments such as certificates
of deposit, municipal bonds and treasury bills, and, by policy, limits the
amount of credit exposure to any one financial institution or commercial issuer.
Applied Materials
36
12
The Company's customers consist of semiconductor manufacturers located
throughout the world. The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral to secure
the receivables. The Company maintains an allowance for doubtful accounts based
upon the expected collectibility of all accounts receivable.
The Company is exposed to credit-related losses in the event of nonperformance
by counterparties to derivative financial instruments, but does not expect any
counterparties to fail to meet their obligations.
FAIR VALUE OF FINANCIAL INSTRUMENTS For certain of the Company's financial
instruments, including cash and cash equivalents, short-term investments,
accounts receivable, notes payable, accounts payable and accrued expenses, the
carrying amounts approximate fair value due to their short maturities.
Consequently, such instruments are not included in the following table that
provides information regarding the carrying amounts and estimated fair values of
other financial instruments, both on and off the balance sheets:
1996 1995
-------------------------- --------------------------
Carrying Estimated Fair Carrying Estimated Fair
Amount Value Amount Value
- -------------------------------------------------------------------------------------------------------
(In thousands)
Long-term debt, including current portion $298,125 $305,593 $300,871 $316,599
Forward exchange contracts:
Sell foreign currency $533,893 $534,993 $408,200 $409,397
Buy foreign currency $318,261 $318,182 $282,978 $283,770
Currency option contracts $ 2,475 $ 3,344 $ 4,682 $ 29,400
- -------------------------------------------------------------------------------------------------------
The estimated fair value of long-term debt is based primarily on quoted market
prices for the same or similar issues. The fair value of forward exchange and
currency option contracts is based on quoted market prices of comparable
instruments.
3. Inventories
1996 1995
- --------------------------------------------------------------------------------
(In thousands)
Customer service spares $182,320 $131,411
Raw materials 70,959 118,627
Work-in-process 140,964 139,537
Finished goods 84,309 37,838
- --------------------------------------------------------------------------------
$478,552 $427,413
================================================================================
Applied Materials
37
13
Notes to Consolidated Financial Statements
4. Property, Plant and Equipment
Useful Life
In Years 1996 1995
- -------------------------------------------------------------------------------------------------
(In thousands)
Land $ 95,739 $ 62,710
Buildings and leasehold improvements 2-65 438,276 342,629
Demonstration and manufacturing equipment 3-5 292,136 174,956
Furniture, fixtures and other equipment 3-20 277,199 176,408
Construction in progress 162,296 102,960
- -------------------------------------------------------------------------------------------------
1,265,646 859,663
Accumulated depreciation (346,608) (228,917)
- -------------------------------------------------------------------------------------------------
$ 919,038 $ 630,746
- -------------------------------------------------------------------------------------------------
5. Applied Komatsu Technology Joint Venture
In September 1993, the Company entered into an agreement with Komatsu, Ltd. to
form Applied Komatsu Technology, Inc. (AKT), a joint venture corporation that
develops, manufactures and markets systems used to produce flat panel displays.
The Company's initial investment in AKT aggregated $6,916,000, which included
contributed cash, the net book value of certain tangible and intangible assets
and costs of formation. Komatsu, Ltd. contributed $35,000,000 of cash to AKT.
The difference between the Company's investment and its interest in the book
value of AKT's net assets will be amortized when AKT achieves sustained
profitability. The Company's investment in AKT has been reduced to zero as a
result of its share of AKT's net losses since formation. Royalties received by
the Company on AKT sales did not materially affect the Company's results of
operations in fiscal 1996, 1995 or 1994.
6. Notes Payable
The Company has credit facilities for borrowings in various currencies up to
$380,699,000 on an unsecured basis; $240,000,000 represents a revolving credit
agreement in the United States with a group of 9 banks. This agreement includes
facility fees, allows for borrowings at various rates including the lead bank's
prime reference rate, requires compliance with certain covenants and expires in
February 2000. The remaining $140,699,000 of credit facilities are primarily
with Japanese and European banks at rates indexed to their prime reference rate.
At October 27, 1996, $77,522,000 was outstanding under Japanese credit
facilities at an average annual interest rate of .8 percent.
Applied Materials
38
14
7. Long-Term Debt
Interest Maturity
Rate Date 1996 1995
- ----------------------------------------------------------------------------------------
(In thousands)
Secured Japanese debt 1.55-5.55% 1997-2011 $ 72,625 $ 60,371
Unsecured senior notes 9.62% 1997-1999 52,500 67,500
Noncallable unsecured
senior notes 8.00% 2004 100,000 100,000
Medium-term notes 6.65-7.00% 2000-2005 73,000 73,000
- ----------------------------------------------------------------------------------------
298,125 300,871
Current portion (22,640) (21,064)
- ----------------------------------------------------------------------------------------
$275,485 $279,807
- ----------------------------------------------------------------------------------------
Japanese debt is due in equal periodic installments and is secured by property
and equipment having an approximate net book value of $78,700,000 at October 27,
1996.
The unsecured senior notes are fixed-rate and require annual principal payments
each April 1 until maturity. The notes agreement allows the Company to prepay
the notes, subject to certain penalties. The notes agreement requires compliance
with certain financial tests and ratios, and limits additional borrowings,
liens placed on assets, dividends and certain other major transactions. At the
beginning of fiscal 1997, the Company elected to prepay these notes prior to
their scheduled maturities (see note 15).
The noncallable unsecured senior notes are fixed-rate and require interest
payments on March 1 and September 1 of each year, with the principal payable in
2004. The notes contain covenants that limit additional borrowings by U.S.
subsidiaries, liens placed on assets and sale and leaseback transactions.
On August 24, 1995, the Company commenced a program to offer from time to time
up to $266,931,000 in medium-term notes, at fixed or variable rates as
determined at the time of issuance. The notes contain covenants that limit
additional borrowings by U.S. subsidiaries, liens placed on assets and sale and
leaseback transactions.
Aggregate principal payments required for long-term debt are:
(In thousands)
1997 $ 22,640
1998 $ 26,317
1999 $ 30,262
2000 $ 36,396
2001 $ 10,998
Thereafter $171,512
Applied Materials
39
15
Notes to Consolidated Financial Statements
8. Accounts Payable and Accrued Expenses
1996 1995
- --------------------------------------------------------------------------------
(In thousands)
Accounts payable $192,607 $244,014
Compensation and employee benefits 170,881 109,388
Installation and warranty 187,873 133,035
Other 240,536 173,135
- --------------------------------------------------------------------------------
$791,897 $659,572
9. Restructuring
During the fourth quarter of fiscal 1996, the Company recorded a restructuring
charge of $25,100,000 in connection with a reduction of its workforce and
related consolidation of facilities. These actions reduced the Company's cost
structure and were taken in response to an industry downturn that resulted in a
significant reduction in new orders received by the Company.
Restructuring activity in fiscal 1996 was as follows:
Reduction In
Workforce Facilities
- --------------------------------------------------------------------------------
(In thousands)
Provision $ 19,329 $5,771
Amount utilized (13,238) (348)
- --------------------------------------------------------------------------------
Balance, October 27, 1996 $ 6,091 $5,423
- --------------------------------------------------------------------------------
The provision for the reduction in workforce includes severance and other
benefits for approximately 800 employees, the majority of whom were based in
Santa Clara, California and Austin, Texas. In addition, approximately 870
temporary and contractor positions were eliminated as part of the restructuring.
The provision for facilities includes lease obligations relating to idle or
subleased buildings and write-offs of related facility improvements.
The remaining cash outlays of approximately $7,500,000 are expected to occur
primarily in the first quarter of fiscal 1997.
Applied Materials
40
16
10. Stockholders' Equity
During fiscal 1996, the stockholders approved an increase in the authorized
number of shares of common stock to 500,000,000.
Additional Cumulative
Common Stock Paid-in Retained Translation
Shares Amount Capital Earnings Adjustments
- ------------------------------------------------------------------------------------------------------
(In thousands)
Balance at October 31, 1993 160,756 $1,608 $255,625 $ 325,230 $ 16,299
Net issuance under stock plans* 2,852 28 23,562 -- --
Stock offering 4,600 46 110,627 -- --
Translation adjustments -- -- -- -- 12,543
Net income -- -- -- 220,696 --
- -------------------------------------------------------------------------------------------------------
Balance at October 30, 1994 168,208 1,682 389,814 545,926 28,842
Net issuance under stock plans* 3,020 30 49,132 -- --
Stock offering 8,050 80 321,111 -- --
Translation adjustments -- -- -- -- (7,167)
Net income -- -- -- 454,053 --
- -------------------------------------------------------------------------------------------------------
Balance at October 29, 1995 179,278 1,792 760,057 999,979 21,675
Net issuance under stock plans* 2,142 21 40,360 -- --
Stock repurchases (1,185) (11) (37,041) -- --
Translation adjustments -- -- -- -- (15,992)
Net income -- -- -- 599,585 --
- -------------------------------------------------------------------------------------------------------
Balance at October 27, 1996 180,235 $1,802 $763,376 $1,599,564 $ 5,683
- -------------------------------------------------------------------------------------------------------
* Includes 619 and 200 shares of treasury stock issued under stock plans in 1996
and 1994, respectively. Includes tax benefits of $11,894, $36,940 and $27,402
for 1996, 1995 and 1994, respectively.
In fiscal 1995, the Company sold 8,050,000 shares of common stock in a public
offering at a price of $41.38 per share prior to underwriters' commissions.
Proceeds net of underwriters' commissions and other offering costs were
$321,191,000. In fiscal 1994, the Company sold 4,600,000 shares of common stock
in a public offering at a price of $25.13 per share prior to underwriters'
commissions. Proceeds net of underwriters' commissions and other offering costs
were $110,673,000.
STOCK REPURCHASE PROGRAM In March 1996, the Board of Directors authorized a plan
that allows the Company to repurchase shares of its common stock in the open
market prior to March 1999. The purpose of this plan is to acquire shares to
fund the Company's stock-based benefit and incentive plans. In fiscal 1996,
985,000 shares were repurchased under this plan at an average price of $29.95
per share.
In January 1996, the Board of Directors authorized the Company to repurchase
200,000 shares of its common stock in the open market to fund certain
stock-based employee benefit plans. All shares under this authorization were
purchased in fiscal 1996 at an average price of $37.76 per share.
Applied Materials
41
17
Notes to Consolidated Financial Statements
11. Employee Benefit Plans
STOCK OPTIONS The Company grants options to key employees and non-employee
directors to purchase shares of its common stock at the fair market value on the
date of grant. Options generally vest over a four-year period. There were
6,277,000, 9,454,000 and 7,310,000 shares available for grant at the end of
fiscal 1996, 1995 and 1994, respectively. Stock option activity was as follows:
1996 1995 1994
- --------------------------------------------------------------------------------
(In thousands, except per share data)
Outstanding, beginning of year 13,969 11,538 10,926
Granted 8,447 5,808 4,582
Exercised (1,537) (3,049) (3,522)
Canceled (5,597) (328) (448)
- --------------------------------------------------------------------------------
Outstanding, end of year 15,282 13,969 11,538
- --------------------------------------------------------------------------------
Exercisable, end of year 4,792 3,846 3,744
- --------------------------------------------------------------------------------
Consideration received for options
exercised during the year
(ranging from $2.41 to $26.19
per share in 1996, $2.41 to $23.00
per share in 1995 and $1.44 to
$18.06 per share in 1994) $ 10,564 $ 13,545 $ 12,556
- --------------------------------------------------------------------------------
Aggregate purchase price of options
outstanding at the end of the year
(ranging from $2.41 to $52.50 per
share in 1996, $2.41 to $52.50 per
share in 1995 and $2.38 to $25.50
per share in 1994) $305,036 $294,585 $112,114
- --------------------------------------------------------------------------------
During 1996, the Company canceled options to purchase 4,901,364 shares. The
canceled options were originally granted between June 15, 1995 and May 21, 1996
at exercise prices ranging from $26.19 to $52.50 per share. New options to
purchase 4,901,364 shares at exercise prices ranging from $23.87 to $28.50 per
share were then granted. Executive officers of the Company were not permitted to
cancel options.
At October 27, 1996, 21,559,000 common shares were reserved for issuance upon
the exercise of outstanding stock options and shares available for future
grants.
EMPLOYEE STOCK PURCHASE PLAN On December 1, 1995, the Company established an
employee stock purchase plan. Under this plan, substantially all employees may
purchase the Company's common stock through payroll deductions at a price equal
to 85 percent of the lower of the fair market value as of the beginning or end
of each six-month offering period. Stock purchases under this plan are limited
to 10 percent of an employee's compensation, up to a maximum of $15,000, in any
calendar year. During fiscal 1996, 385,673 shares were issued under this plan,
and 3,614,327 shares were reserved for future issuance under the plan as of
October 27, 1996.
Applied Materials
42
18
EMPLOYEE BONUS PLANS The Company has various employee bonus plans. A profit
sharing plan provides for the distribution of a percentage of pretax profits to
substantially all of the Company's employees, up to a maximum percentage of
compensation. Another plan awards annual bonuses to the Company's executive
staff based on the achievement of profitability and other specific performance
criteria. The Company also has agreements with certain key technical employees
that provide for additional compensation related to the success of new product
development and achievement of specified profitability criteria. Charges to
expense under these plans were $112,806,000, $55,805,000 and $31,166,000 in
fiscal 1996, 1995 and 1994, respectively.
EMPLOYEE SAVINGS AND RETIREMENT PLAN The Employee Savings and Retirement Plan is
qualified under Section 401(k) of the Internal Revenue Code. The Company
contributes a percentage of the amount of salary deferral contributions made by
each participating employee. Company contributions are invested in the
Company's common stock and become 20 percent vested after an employee's third
year of service, and fully vest after seven years of service. Expenses
associated with this plan were $26,095,000, $14,837,000 and $6,417,000 for
fiscal 1996, 1995 and 1994, respectively.
DEFINED BENEFIT PLANS OF FOREIGN SUBSIDIARIES Certain of the Company's foreign
subsidiaries have defined benefit pension plans covering substantially all of
their eligible employees. The benefits under these plans are based on years of
service and final average compensation levels. Funding is limited by the local
statutory requirements of the countries in which the subsidiaries are located.
Expenses under these plans were $6,709,000, $4,240,000 and $3,344,000,
consisting principally of service cost, for fiscal 1996, 1995 and 1994,
respectively. The aggregate accumulated benefit obligation, projected benefit
obligation and fair value of plan assets at October 27, 1996 were $18,626,000,
$32,097,000 and $6,703,000, respectively.
12. Income Taxes
Effective the beginning of fiscal 1994, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for
Income Taxes." The cumulative effect of adopting SFAS 109 resulted in a one-time
credit of $7,000,000, or $.04 per share, and is presented separately in the
consolidated statement of operations.
U.S. income taxes have not been provided for approximately $41,000,000 of
cumulative undistributed earnings of certain non-U.S. subsidiaries. The Company
intends to reinvest these earnings indefinitely in operations outside the United
States.
Applied Materials
43
19
Notes to Consolidated Financial Statements
The components of income from consolidated companies before taxes and
cumulative effect of accounting change were as follows:
1996 1995 1994
- --------------------------------------------------------------------------------
(In thousands)
U.S. $697,659 $584,804 $276,483
Foreign 224,777 113,739 58,014
- --------------------------------------------------------------------------------
Income from consolidated companies
before taxes and cumulative
effect of accounting change $922,436 $698,543 $334,497
- --------------------------------------------------------------------------------
The components of the provision for income taxes were as follows:
1996 1995 1994
- --------------------------------------------------------------------------------
(In thousands)
Current:
U.S. $266,693 $243,576 $ 96,106
Foreign 99,739 62,627 32,343
State 39,122 37,378 17,083
- --------------------------------------------------------------------------------
405,554 343,581 145,532
- --------------------------------------------------------------------------------
Deferred:
U.S. (70,382) (90,264) (21,672)
Foreign (6,289) (4,179) (4,555)
State (6,032) (4,648) (2,231)
- --------------------------------------------------------------------------------
(82,703) (99,091) (28,458)
- --------------------------------------------------------------------------------
Provision for income taxes $322,851 $244,490 $117,074*
- --------------------------------------------------------------------------------
*Before cumulative effect of accounting change.
Applied Materials
44
20
The provision for income taxes differs from the amount computed by applying the
statutory U.S. federal income tax rate of 35 percent as follows:
1996 1995 1994
- --------------------------------------------------------------------------------
(In thousands)
Tax provision at U.S. statutory rate $322,851 $244,490 $117,074
Effect of foreign operations taxed
at various rates 18,261 16,457 7,480
State income taxes, net of federal
benefit 21,509 21,274 9,654
Research tax credits (3,624) (4,273) (3,063)
FSC benefit (24,266) (14,770) (6,900)
Tax exempt interest (2,674) (2,514) (1,600)
Foreign tax credits (17,264) (18,352) (6,808)
Other 8,058 2,178 1,237
- --------------------------------------------------------------------------------
Provision for income taxes $322,851 $244,490 $117,074*
- --------------------------------------------------------------------------------
* Before cumulative effect of accounting change.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the net
deferred income tax assets were as follows:
1996 1995
- --------------------------------------------------------------------------------
(In thousands)
Deferred income tax assets:
Inventory reserves and basis difference $ 58,576 $ 41,203
Warranty and installation reserves 75,264 51,594
Accrued liabilities 113,323 85,152
Other 34,423 20,939
Deferred income tax liabilities:
Depreciation (11,063) (9,636)
Other (544) (1,976)
- --------------------------------------------------------------------------------
Net deferred income tax assets $269,979 $187,276
- --------------------------------------------------------------------------------
Applied Materials
45
21
Notes to Consolidated Financial Statements
13. Industry Segment and Foreign Operations
The Company operates exclusively in the semiconductor wafer fabrication
equipment industry. The Company's selling and support services operations are
its principal revenue-producing activities. For geographical reporting, revenues
are attributed to the geographic location of the sales and service
organizations, and costs directly and indirectly incurred in generating revenues
are similarly attributed. Corporate assets consist primarily of cash, cash
equivalents and short-term investments. Corporate operating expenses consist
primarily of general and administrative expenses not allocable to specific
geographic regions.
During fiscal years 1996, 1995 and 1994, no sales to individual customers were
greater than 10 percent of net sales.
Income from Total
Net Sales Operations Assets
- -----------------------------------------------------------------------------------------
(In thousands)
1996:
North America $1,270,359 $344,343 $1,566,000
Europe 685,887 113,865 291,223
Japan 1,008,597 288,853 614,805
Korea 567,116 124,866 118,159
Asia-Pacific 612,858 189,092 180,571
Corporate -- (157,468) 867,229
- -----------------------------------------------------------------------------------------
Consolidated $4,144,817 $903,551 $3,637,987
- -----------------------------------------------------------------------------------------
1995:
North America $ 988,709 $228,247 $1,226,231
Europe 470,609 103,617 249,216
Japan 790,773 150,893 574,914
Korea 504,273 205,766 46,557
Asia-Pacific 307,517 120,002 183,290
Corporate -- (114,593) 685,171
- -----------------------------------------------------------------------------------------
Consolidated $3,061,881 $693,932 $2,965,379
- -----------------------------------------------------------------------------------------
1994:
North America $ 611,670 $139,562 $ 724,093
Europe 292,189 77,956 121,822
Japan 454,939 75,324 378,571
Korea 192,260 57,374 30,996
Asia-Pacific 108,749 38,101 52,809
Corporate -- (49,080) 394,374
- -----------------------------------------------------------------------------------------
Consolidated $1,659,807 $339,237 $1,702,665
- -----------------------------------------------------------------------------------------
Intercompany transfers of products from North America to other regions were
$1,789,000,000, $1,267,077,000 and $538,442,000 in fiscal years 1996, 1995 and
1994, respectively, and from Europe were $122,000,000, $81,429,000 and
$67,934,000 in 1996, 1995 and 1994, respectively. Transfers and commission
arrangements between geographic areas are at prices sufficient to recover a
reasonable profit. At October 27, 1996, net accounts receivable from customers
located in North America were $116,016,000, while net accounts receivable from
customers located in Europe, Japan, Korea and Asia-Pacific were $167,942,000,
$383,047,000, $37,396,000 and $117,983,000, respectively.
Applied Materials
46
22
14. Commitments and Contingencies
The Company leases certain of its facilities and equipment under noncancelable
operating leases and has options to renew most leases, with rentals to be
negotiated. The Company also leases certain office and general operating
facilities in Santa Clara, California, under agreements that provide for monthly
payments based on the London interbank offering rate (LIBOR). In accordance with
these agreements, the Company must maintain compliance with covenants similar to
those contained in its credit facilities. At the end of these leases, the
Company has to acquire the properties at their original cost or arrange for
these properties to be acquired. The Company is contingently liable under 85
percent first-loss clauses for up to approximately $53,000,000 at October 27,
1996. Management believes that these contingent liabilities should not have a
material adverse effect on the Company's financial condition or results of
operations.
Total rent expense in fiscal 1996, 1995 and 1994 was $66,227,000, $41,672,000
and $28,083,000, respectively. Aggregate minimum future rental commitments are:
- --------------------------------------------------------------------------------
(In thousands)
1997 $40,892
1998 $30,197
1999 $22,839
2000 $16,185
2001 $11,697
Thereafter $66,757
- --------------------------------------------------------------------------------
Trade notes and accounts receivable from certain Japanese customers are sold
with recourse and at a discount to financial institutions. As of October 27,
1996, $161,325,000 of such receivables were outstanding.
The Company is the plaintiff in two patent infringement lawsuits against another
company. The defendant has filed a counterclaim in one of these lawsuits and has
other claims against the Company in three other patent infringement lawsuits.
The Company has also filed a declaratory judgment action against the
aforementioned company which has been consolidated with one of the three suits.
Trials have been successfully completed in the two lawsuits initiated by the
Company, in which the Court found certain of the Company's patents to be valid
and infringed. The Company has also obtained summary judgment in its favor
dismissing the first of the three other suits. In the second of such suits, the
Company has obtained partial rulings in its favor, though additional proceedings
are ongoing. The third suit is continuing through pre-trial discovery. The
Company has also initiated another patent infringement suit on these patents
against another company. An appeal of the Company's first successful trial has
been decided in the Company's favor, resulting in the accused infringer's
products being permanently enjoined from sale in the United States. An appeal
from the Company's second successful trial is still pending. The Company has
recently agreed to stay these litigation proceedings to engage in negotiations
with said company. The Company is also involved in two lawsuits including
multiple claims and counterclaims for patent infringement with a third company.
Discovery is complete d in the first and is commencing in the second, with
trials scheduled for March 1997 and August 1997, respectively. Finally, the
Company is named as a defendant in a lawsuit in which the plaintiff alleges the
Company infringes five patents. This lawsuit is proceeding through active
discovery, and a trial date has been set for January 21, 1997. The Company is
also named as a defendant in other litigation arising in the normal course of
business. Also in the normal course of business, the Company from time to time
receives and makes inquiries with regard to possible patent infringement.
Management believes it has meritorious defenses and intends to vigorously pursue
these matters.
Applied Materials
47
23
Notes to Consolidated Financial Statements
15. Subsequent Event
On November 18, 1996, the Company notified its unsecured senior noteholders of
its intention to repay the notes prior to their scheduled maturities, as
provided under the terms of the agreement. The noteholders received
approximately $56,000,000, representing principal, accrued interest and
prepayment charges, on December 19, 1996.
16. Unaudited Subsequent Event
On November 24, 1996, the Company announced that it entered into an agreement to
acquire Opal, Inc., a supplier of CD-SEM (critical dimension scanning electron
microscope) systems for use in semiconductor manufacturing, for approximately
$175,000,000. The Company will tender an offer for any and all outstanding
shares of Opal's common stock at $18.50 per share net to the seller in cash.
Opal's revenues for the 12-month period ended September 30, 1996 were
$62,000,000.
On the same day, the Company also announced that it entered into an agreement to
acquire Orbot Instruments, Ltd., a supplier of wafer and reticle inspection
systems for use in the production of semiconductors, for approximately
$110,000,000 in cash. Orbot's revenues for the 12-month period ended September
30, 1996 were $36,000,000.
These two acquisitions would mark the Company's entry into the metrology and
inspection semiconductor equipment market. Each acquisition has been approved by
the boards of directors of the respective companies, and both transactions are
expected to be completed during the Company's first fiscal quarter of 1997
ending January 26, 1997.
17. Unaudited Quarterly Consolidated Financial Data
Quarter
------------------------------------------------------- Fiscal
First Second Third Fourth Year
- --------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
1996:
Net sales $1,040,580 $1,127,855 $1,115,424 $860,958 $4,144,817
Gross margin $ 496,800 $ 541,291 $ 531,976 $379,672 $1,949,739
Net income* $ 171,626 $ 185,821 $ 169,066 $ 73,072 $ 599,585
Earnings per share $ .93 $ 1.01 $ .92 $ .40 $ 3.27
- --------------------------------------------------------------------------------------------------
* Included in the fourth quarter is a pre-tax restructuring charge of $25,100.
Quarter
------------------------------------------------------- Fiscal
First Second Third Fourth Year
- --------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
1995:
Net sales $506,108 $675,439 $897,684 $982,650 $3,061,881
Gross margin $238,012 $305,010 $408,428 $458,398 $1,409,848
Net income $ 65,808 $ 93,635 $139,212 $155,398 $ 454,053
Earnings per share $ .38 $ .54 $ .78 $ .84 $ 2.56
- --------------------------------------------------------------------------------------------------
Applied Materials
48
24
Report of Independent Accountants
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF APPLIED MATERIALS, INC.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and cash flows present fairly, in all
material respects, the financial position of Applied Materials, Inc. and its
subsidiaries at October 27, 1996 and October 29, 1995 and the results of their
operations and their cash flows for each of the three years in the period ended
October 27, 1996, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in note 12 to the consolidated financial statements, the Company
changed its method of accounting for income taxes effective November 1, 1993.
/s/ Price Waterhouse LLP
San Jose, California
November 20, 1996
STOCKHOLDERS' INFORMATION
LEGAL COUNSEL
Orrick, Herrington & Sutcliffe
San Francisco, California
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
San Jose, California
Number of Registered Stockholders: 3,770
STOCK LISTING
Applied Materials, Inc. is traded on the Nasdaq National Market, Nasdaq
Symbol:AMAT
TRANSFER AGENT
Harris Trust Company of California Los Angeles, California
FORM 10-K
A copy of Applied Materials' Annual Report on Form 10-K, filed with the
Securities and Exchange Commission, contains additional information relating to
the Company, and is available without charge. We welcome questions from
potential and existing stockholders.
PLEASE CONTACT:
Investor Relations
Applied Materials, Inc.
3050 Bowers Avenue
Santa Clara, California 95054-3299
(800) 882-0373
STOCK PRICE HISTORY
Fiscal Year 1996 1995
- --------------------------------------------------------------------------
High Low High Low
First quarter 55 3/8 31 3/8 26 1/4 19 1/2
Second quarter 44 1/8 32 30 13/16 19 1/4
Third quarter 40 1/2 22 1/2 53 11/16 30 1/16
Fourth quarter 29 3/4 23 59 1/8 45 3/8
- --------------------------------------------------------------------------
The preceding table sets forth the high and low closing sale prices as reported
on the Nasdaq National Market during the last two years.
Applied Materials
50
25
APPENDIX TO 1996 ANNUAL REPORT
DESCRIPTION OF GRAPHS
In this Appendix, the following descriptions of certain graphs in the
Company's 1996 Annual Report that are omitted from the EDGAR version are more
specific with respect to the actual numbers, amounts and percentages than is
determinable from the graphs themselves. The Company submits such more specific
descriptions only for the purpose of complying with the requirements for
transmitting this Annual Report on Form 10-K electronically via EDGAR; such more
specific descriptions are not intended in any way to provide information that is
additional to the information otherwise provided in the Annual Report.
Page Number 26
Graph Title: REVENUE PER EMPLOYEE
(Dollars in thousands)
Bar graph with horizontal axis containing years 1996, 1995, 1994, 1993, and 1992
and vertical axis containing thousands of dollars. Revenue per employee is $363,
$291, $255, $228, and $192 thousand for 1996, 1995, 1994, 1993, and 1992,
respectively.
Page Number 26
Graph Title: RETURN ON ASSETS
(Dollars in millions)
Bar graph with horizontal axis containing years 1996, 1995, 1994, 1993, and 1992
and vertical axis containing percent. Return on assets is 18%, 19%, 16%, 11% and
11% for 1996, 1995, 1994, 1993 and 1992, respectively.
Page Number 26
Graph Title: DEBT TO EQUITY RATIO
(Percent)
Bar graph with horizontal axis containing years 1996, 1995, 1994, 1993, and 1992
and vertical axis containing percent. Debt to equity ratio is 14%, 17%, 22%,
22%, and 24%, for 1996, 1995, 1994, 1993, and 1992, respectively.
Page Number 27
Graph Title: SALES BY GEOGRAPHIC REGION
(Dollars in millions)
Bar graph with horizontal axis containing years 1996, 1995, 1994, 1993, and 1992
and vertical axis containing dollars in millions. Each bar is split by North
America, Japan, Europe, Korea, and Asia-Pacific. The following table lists the
amount of net sales by geographic region in millions of dollars:
26
SALES BY GEOGRAPHIC REGION 1992 1993 1994 1995 1996
---- ---- ---- ---- ----
North America $296.7 $406.0 $611.7 $988.7 $1,270.4
Japan 227.3 269.6 455.0 790.8 1,008.6
Europe 136.1 218.7 292.1 470.6 685.9
Korea 46.7 105.4 192.2 504.2 567.1
Asia-Pacific 44.6 80.3 108.8 307.5 612.8
---- ---- ----- ----- -----
Total $751.4 $1,080.0 $1,659.8 $3,061.8 $4,144.8
====== ======== ======== ======== ========
Page Number 28
Graph Title: R D & E EXPENSES
(Dollars in millions)
Bar graph with horizontal axis containing years 1996, 1995, 1994, 1993, and 1992
and vertical axis containing dollars in millions. Data contained in the graph is
located on page 26 of the 1996 Annual Report in the Selected Consolidated
Financial Data Table on the Research, development and engineering line item.
Page Number 28
Graph Title: WORKING CAPITAL
(Dollars in millions)
Bar graph with horizontal axis containing years 1996, 1995, 1994, 1993, and
1992, and vertical axis containing dollars in millions. Data contained in the
graph is located on page 26 of the 1996 Annual Report in the Selected
Consolidated Financial Data Table on the Working capital line item.
Page Number 29
Graph Title: CAPITAL EXPENDITURES
(Dollars in millions)
Bar graph with horizontal axis containing years 1996, 1995, 1994, 1993, and 1992
and vertical axis containing dollars in millions. Capital expenditures are split
by Land, Buildings and Improvements and Other. Land, Buildings and Improvements
are $227, $118, $107, $49, and $33 million for 1996, 1995, 1994, 1993, and 1992,
respectively. Other is $225, $148, $73, $46, and $28 million for 1996, 1995,
1994, 1993, and 1992, respectively.