News Release

Applied Materials Announces Fourth Quarter and Fiscal Year 2015 Results

Nov 12, 2015 at 1:01 PM PST
  • Company delivered year-over-year growth in orders, net sales and earnings per share
  • FY2015 cash returns to shareholders increased by $1.33 billion year over year to $1.81 billion

SANTA CLARA, Calif., Nov. 12, 2015 - Applied Materials, Inc. (NASDAQ:AMAT), the global leader in materials engineering solutions for the semiconductor, display and solar industries, today reported results for its fourth quarter and fiscal year ended October 25, 2015.

Fourth quarter orders were $2.42 billion, down 16 percent sequentially and up 7 percent year over year. Net sales were $2.37 billion, down 5 percent sequentially and up 5 percent year over year.

On a non-GAAP adjusted basis, the company reported fourth-quarter gross margin of 42.2 percent, operating margin of 19.3 percent, and net income of $347 million or $0.29 per diluted share. The company recorded GAAP gross margin of 40.5 percent, operating margin of 17.9 percent, and net income of $336 million or $0.28 per diluted share.

The company generated $471 million in cash from operations during the fourth quarter, paid dividends of $119 million and used $700 million to repurchase 44 million shares of common stock at an average price of $15.78.

Full Year Results

In fiscal 2015, orders grew 5 percent to $10.10 billion, net sales increased 6 percent to $9.66 billion, non-GAAP adjusted gross margin declined 1.2 percentage points to 42.9 percent, non-GAAP adjusted operating margin remained at 19.6 percent, and non-GAAP adjusted net income increased by 10.9 percent to $1.46 billion or $1.19 per diluted share. The company recorded GAAP gross margin of 40.9 percent, operating income of $1.69 billion or 17.5 percent of net sales, and net income of $1.38 billion or $1.12 per diluted share.

The company generated $1.16 billion in cash from operations in fiscal 2015, paid dividends of $487 million and used $1.33 billion to repurchase 76 million shares of common stock.

"In fiscal 2015, Applied Materials delivered year-over-year growth across our semiconductor, display and service businesses resulting in our highest earnings in four years," said Gary Dickerson, president and CEO. "We have positioned the company for sustainable profitable growth and we are winning share, growing our service business and expanding our available market."

Quarterly Results Summary

                Change
    Q4 FY2015   Q3 FY2015   Q4 FY2014   Q4 FY2015
vs.
Q3 FY2015
  Q4 FY2015
vs.

Q4 FY2014
    (In millions, except per share amounts and percentages)
New orders   $2,424   $2,892   $2,255   (16)%   7%
Net sales   $2,368   $2,490   $2,264   (5)%   5%
Gross margin   40.5%   40.9%   42.4%   (0.4) points   (1.9) points
Operating margin   17.9%   15.9%   18.2%   2.0 points   (0.3) points
Net income   $336   $329   $256   2%   31%
Diluted earnings per share (EPS)   $0.28   $0.27   $0.21   4%   33%

                Change
Non-GAAP Adjusted Results   Q4 FY2015   Q3 FY2015   Q4 FY2014   Q4 FY2015
vs.
Q3 FY2015
  Q4 FY2015
vs.
Q4 FY2014
    (In millions, except per share amounts and percentages)
Non-GAAP adjusted gross margin   42.2%   43.9%   44.2%   (1.7) points   (2.0) points
Non-GAAP adjusted operating margin   19.3%   20.8%   19.5%   (1.5) points   (0.2) points
Non-GAAP adjusted net income   $347   $410   $338   (15)%   3%
Non-GAAP adjusted diluted EPS   $0.29   $0.33   $0.27   (12)%   7%

Applied's non-GAAP adjusted results exclude the impact of the following, where applicable: 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; and certain discrete adjustments and tax items. A reconciliation of the GAAP and non-GAAP adjusted results is provided in the financial tables included in this release. See also "Use of Non-GAAP Adjusted Financial Measures" section.

Business Outlook

For the first quarter of fiscal 2016, Applied expects net sales to be down 2 percent to 9 percent sequentially. Non-GAAP adjusted diluted EPS is expected to be in the range of $0.23 to $0.27.

This outlook excludes known charges related to completed acquisitions of $0.04 per share and does not exclude other non-GAAP adjustments that may arise subsequent to this release.

Fourth Quarter and Fiscal Year Reportable Segment Information

Silicon Systems Q4 FY2015   Q3 FY2015   Q4 FY2014   FY2015   FY2014
                   
  (In millions, except percentages)
New orders $ 1,444     $ 2,007     $ 1,334     $ 6,581     $ 6,132  
  Foundry 35 %   32 %   50 %   34 %   52 %
  DRAM 21 %   18 %   20 %   25 %   14 %
  Flash 31 %   39 %   12 %   28 %   21 %
  Logic and other 13 %   11 %   18 %   13 %   13 %
Net sales 1,494     1,635     1,434     6,135     5,978  
Operating income 318     411     305     1,410     1,391  
Operating margin 21.3 %   25.1 %   21.3 %   23.0 %   23.3 %
Non-GAAP Adjusted Results                
Non-GAAP adjusted operating income $ 365     $ 455     $ 352     $ 1,588     $ 1,565  
Non-GAAP adjusted operating margin 24.4 %   27.8 %   24.5 %   25.9 %   26.2 %

Applied Global Services

 
Q4 FY2015   Q3 FY2015   Q4 FY2014   FY2015   FY2014
                   
  (In millions, except percentages)
New orders $ 761     $ 561     $ 747     $ 2,653     $ 2,433  
Net sales 637     665     592     2,531     2,200  
Operating income 171     170     146     664     573  
Operating margin 26.8 %   25.6 %   24.7 %   26.2 %   26.0 %
Non-GAAP Adjusted Results                
Non-GAAP adjusted operating income $ 170     $ 173     $ 146     $ 667     $ 576  
Non-GAAP adjusted operating margin 26.7 %   26.0 %   24.7 %   26.4 %   26.2 %

Display Q4 FY2015   Q3 FY2015   Q4 FY2014   FY2015   FY2014
                   
  (In millions, except percentages)
New orders $ 195     $ 295     $ 130     $ 717     $ 845  
Net sales 191     151     190     780     615  
Operating income 19     25     52     156     129  
Operating margin 9.9 %   16.6 %   27.4 %   20.0 %   21.0 %
Non-GAAP Adjusted Results                
Non-GAAP adjusted operating income $ 19     $ 26     $ 52     $ 158     $ 131  
Non-GAAP adjusted operating margin 9.9 %   17.2 %   27.4 %   20.3 %   21.3 %

Energy and Environmental Solutions Q4 FY2015   Q3 FY2015   Q4 FY2014   FY2015   FY2014
                   
  (In millions, except percentages)
New orders $ 24     $ 29     $ 44     $ 153     $ 238  
Net sales 46     39     48     213     279  
Operating income (loss) -     (52 )   (3 )   (61 )   15  
Operating margin - %   (133.3 )%   (6.3 )%   (28.6 )%   5.4 %
Non-GAAP Adjusted Results                
Non-GAAP adjusted operating income (loss) $ (1 )   $ (2 )   $ (1 )   $ (10 )   $ 21  
Non-GAAP adjusted operating margin (2.2 )%   (5.1 )%   (2.1 )%   (4.7 )%   7.5 %

Backlog Information

Applied's backlog remained essentially flat at $3.14 billion and included negative adjustments of $13 million. Backlog composition by reportable segment was as follows:

Silicon Systems 55 %
Applied Global Services 26 %
Display 16 %
Energy and Environmental Solutions 3 %

Use of Non-GAAP Adjusted Financial Measures

Management uses non-GAAP adjusted results to evaluate the company's operating and financial performance in light of business objectives and for planning purposes. These measures are not in accordance with GAAP and may differ from non-GAAP methods of accounting and reporting used by other companies. Applied believes these measures enhance investors' ability to review the company's business from the same perspective as the company's management and facilitate comparisons of this period's results with prior periods. The presentation of this additional information should not be considered a substitute for results prepared in accordance with GAAP.

Webcast Information

Applied Materials will discuss these results during an earnings call that begins at 1:30 p.m. Pacific Time today. A live webcast will be available at www.appliedmaterials.com. A replay will be available on the website beginning at 5:00 p.m. Pacific Time today.

Forward-Looking Statements

This press release contains forward-looking statements, including those regarding anticipated growth and trends in our businesses and markets, industry outlooks, technology transitions, our financial performance and market share positions, our business outlook for the first quarter of fiscal 2016, and other statements that are not historical facts. These statements and their underlying assumptions are subject to risks and uncertainties and are not guarantees of future performance. Factors that could cause actual results to differ materially from those expressed or implied by such statements include, without limitation: the level of demand for our products; global economic and industry conditions; consumer demand for electronic products; the demand for semiconductors; customers' technology and capacity requirements; the introduction of new and innovative technologies, and the timing of technology transitions; our ability to develop, deliver and support new products and technologies; the concentrated nature of our customer base;  our ability to expand our current markets, increase market share and develop new markets; market acceptance of existing and newly developed products; our ability to obtain and protect intellectual property rights in key technologies; our ability to achieve the objectives of operational and strategic initiatives, align our resources and cost structure with business conditions, and attract, motivate and retain key employees; the variability of operating expenses and results among products and segments, and our ability to accurately forecast future results, market conditions, customer requirements and business needs; and other risks and uncertainties described in our SEC filings, including our most recent Forms 10-Q and 8-K. All forward-looking statements are based on management's current estimates, projections and assumptions, and we assume no obligation to update them.

About Applied Materials

Applied Materials, Inc. (Nasdaq:AMAT) is the global leader in materials engineering solutions for the semiconductor, flat panel display and solar photovoltaic industries. Our technologies help make innovations like smartphones, flat screen TVs and solar panels more affordable and accessible to consumers and businesses around the world. Learn more at www.appliedmaterials.com.

Contact:

Kevin Winston (editorial/media) 408.235.4498
Michael Sullivan (financial community) 408.986.7977

APPLIED MATERIALS, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

    Three Months Ended   Twelve Months Ended
(In millions, except per share amounts)   October 25,
 2015
  July 26,
 2015
  October 26,
 2014
  October 25,
 2015
  October 26,
 2014
Net sales   $ 2,368     $ 2,490     $ 2,264     $ 9,659     $ 9,072  
Cost of products sold   1,409     1,472     1,305     5,707     5,229  
Gross profit   959     1,018     959     3,952     3,843  
Operating expenses:                    
  Research, development and engineering   363     372     360     1,451     1,428  
  Marketing and selling   96     112     99     428     423  
  General and administrative   77     135     127     469     502  
  Loss (gain) on derivatives associated with
  terminated business combination
  -     3     (39 )   (89 )   (30 )
Total operating expenses   536     622     547     2,259     2,323  
Income from operations   423     396     412     1,693     1,520  
Interest expense   32     24     23     103     95  
Interest income and other income, net   6     3     9     8     23  
Income before income taxes   397     375     398     1,598     1,448  
Provision for income taxes   61     46     142     221     376  
Net income   $ 336     $ 329     $ 256     $ 1,377     $ 1,072  
Earnings per share:                    
  Basic   $ 0.28     $ 0.27     $ 0.21     $ 1.13     $ 0.88  
  Diluted   $ 0.28     $ 0.27     $ 0.21     $ 1.12     $ 0.87  
Weighted average number of shares:                    
  Basic   1,182     1,221     1,220     1,214     1,215  
  Diluted   1,190     1,231     1,236     1,226     1,231  

APPLIED MATERIALS, INC.
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS

(In millions)   October 25,
 2015
  July 26,
 2015
  October 26,
 2014
ASSETS            
Current assets:            
  Cash and cash equivalents   $ 4,797     $ 2,574     $ 3,002  
  Short-term investments   168     169     160  
  Accounts receivable, net   1,739     1,991     1,670  
  Inventories   1,833     1,739     1,567  
  Other current assets   724     570     568  
Total current assets   9,261     7,043     6,967  
Long-term investments   946     958     935  
Property, plant and equipment, net   892     882     861  
Goodwill   3,302     3,304     3,304  
Purchased technology and other intangible assets, net   762     811     951  
Deferred income taxes and other assets   145     155     156  
Total assets   $ 15,308     $ 13,153     $ 13,174  
LIABILITIES AND STOCKHOLDERS' EQUITY            
Current liabilities:            
  Short-term debt   $ 1,200     $ 400     $ -  
  Accounts payable and accrued expenses   1,833     1,762     1,883  
  Customer deposits and deferred revenue   765     858     940  
Total current liabilities   3,798     3,020     2,823  
Long-term debt   3,342     1,547     1,947  
Other liabilities   555     609     536  
Total liabilities   7,695     5,176     5,306  
Total stockholders' equity   7,613     7,977     7,868  
Total liabilities and stockholders' equity   $ 15,308     $ 13,153     $ 13,174  

APPLIED MATERIALS, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In millions) Three Months Ended   Twelve Months Ended
October 25,
 2015
  July 26,
 2015
  October 26,
 2014
October 25,
 2015
  October 26,
 2014
Cash flows from operating activities:                  
  Net income $ 336     $ 329     $ 256     $ 1,377     $ 1,072  
  Adjustments required to reconcile net income to cash
  provided by operating activities:
                 
    Depreciation and amortization 96     93     94     371     375  
    Share-based compensation 46     46     45     187     177  
    Excess tax benefits from share-based compensation (2 )   (3 )   (4 )   (56 )   (30 )
    Deferred income taxes (159 )   18     15     (134 )   58  
    Other (11 )   43     (14 )   53     13  
    Net change in operating assets and liabilities 165     (192 )   15     (635 )   135  
Cash provided by operating activities 471     334     407     1,163     1,800  
Cash flows from investing activities:                  
  Capital expenditures (53 )   (49 )   (63 )   (215 )   (241 )
  Cash paid for acquisitions, net of cash acquired (2 )   (2 )   (12 )   (4 )   (12 )
  Proceeds from sale of facility -     -     25     -     25  
  Proceeds from sales and maturities of investments 200     583     176     1,100     878  
  Purchases of investments (202 )   (616 )   (179 )   (1,162 )   (811 )
Cash used in investing activities (57 )   (84 )   (53 )   (281 )   (161 )
Cash flows from financing activities:                  
  Debt borrowings, net of issuance costs 2,581     -     -     2,581     -  
  Proceeds from common stock issuances and others, net 45     1     40     88     107  
  Common stock repurchases (700 )   (625 )   -     (1,325 )   -  
  Excess tax benefits from share-based compensation 2     3     4     56     30  
  Payments of dividends to stockholders (119 )   (123 )   (122 )   (487 )   (485 )
Cash provided by (used in) financing activities 1,809     (744 )   (78 )   913     (348 )
Effect of exchange rate changes on cash and cash equivalents -     1     -     -     -  
Increase (decrease) in cash and cash equivalents 2,223     (493 )   276     1,795     1,291  
Cash and cash equivalents - beginning of period 2,574     3,067     2,726     3,002     1,711  
Cash and cash equivalents - end of period $ 4,797     $ 2,574     $ 3,002     $ 4,797     $ 3,002  
Supplemental cash flow information:                  
  Cash payments for income taxes $ 149     $ 51     $ 87     $ 407     $ 195  
  Cash refunds from income taxes $ 2     $ 5     $ 78     $ 12     $ 111  
  Cash payments for interest $ 7     $ 39     $ 7     $ 92     $ 92  

APPLIED MATERIALS, INC.
UNAUDITED SUPPLEMENTAL INFORMATION

Corporate Unallocated Expenses

(In millions)   Q4 FY2015   Q3 FY2015   Q4 FY2014   FY 2015   FY 2014
Share-based compensation   $ 46     $ 46     $ 45     $ 187     $ 177  
Certain items associated with terminated business combination   -     1     23     50     73  
Loss (gain) on derivatives associated with terminated business combination, net   -     3     (39 )   (89 )   (30 )
Other unallocated expenses   39     108     59     328     368  
Total corporate   $ 85     $ 158     $ 88     $ 476     $ 588  

Additional Information

    Q4 FY2015   Q3 FY2015   Q4 FY2014
New Orders and Net Sales by Geography                        
(In $ millions)   New
Orders
  Net
Sales
  New
Orders
  Net
Sales
  New
Orders
  Net
Sales
United States   282     524     262     650     596     633  
  % of Total   12 %   22 %   9 %   26 %   26 %   28 %
Europe   155     140     142     134     198     178  
  % of Total   6 %   6 %   5 %   6 %   9 %   8 %
Japan   452     256     727     271     287     209  
  % of Total   19 %   11 %   25 %   11 %   13 %   9 %
Korea   207     216     349     308     251     187  
  % of Total   8 %   9 %   12 %   12 %   11 %   8 %
Taiwan   846     651     828     751     599     618  
  % of Total   35 %   27 %   29 %   30 %   27 %   27 %
Southeast Asia   100     131     142     94     113     136  
  % of Total   4 %   6 %   5 %   4 %   5 %   6 %
China   382     450     442     282     211     303  
  % of Total   16 %   19 %   15 %   11 %   9 %   14 %
                         
Employees (In thousands)                        
Regular Full Time   14.6     14.5     14.0  

    FY 2015   FY 2014
New Orders and Net Sales by Geography                
(In $ millions)   New
Orders
  Net
Sales
  New
Orders
  Net
Sales
United States   1,323     2,335     2,200     1,966  
  % of Total   13 %   24 %   23 %   22 %
Europe   576     567     662     658  
  % of Total   6 %   6 %   7 %   7 %
Japan   1,786     1,015     1,031     817  
  % of Total   18 %   10 %   11 %   9 %
Korea   1,709     1,437     1,086     965  
  % of Total   17 %   15 %   11 %   10 %
Taiwan   2,808     2,376     2,740     2,702  
  % of Total   28 %   25 %   28 %   30 %
Southeast Asia   430     397     412     356  
  % of Total   4 %   4 %   4 %   4 %
China   1,472     1,532     1,517     1,608  
  % of Total   14 %   16 %   16 %   18 %

APPLIED MATERIALS, INC.
UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS

    Three Months Ended   Twelve Months Ended
(In millions, except percentages)   October 25,
 2015
  July 26,
 2015
  October 26,
 2014
  October 25,
 2015
  October 26,
 2014
Non-GAAP Adjusted Gross Profit                    
Reported gross profit - GAAP basis   $ 959     $ 1,018     $ 959     $ 3,952     $ 3,843  
Certain items associated with acquisitions1   42     41     42     162     158  
Inventory charges related to restructuring3, 4   1     34     -     35     -  
Acquisition integration costs   -     -     -     -     1  
Other significant gains, losses or charges, net 7   (2 )   -     -     (2 )   -  
Non-GAAP adjusted gross profit   $ 1,000     $ 1,093     $ 1,001     $ 4,147     $ 4,002  
Non-GAAP adjusted gross margin   42.2 %   43.9 %   44.2 %   42.9 %   44.1 %
Non-GAAP Adjusted Operating Income                    
Reported operating income - GAAP basis   $ 423     $ 396     $ 412     $ 1,693     $ 1,520  
Certain items associated with acquisitions1   47     47     48     185     183  
Acquisition integration costs   -     1     4     2     34  
Loss (gain) on derivatives associated with terminated business combination, net   -     3     (39 )   (89 )   (30 )
Certain items associated with terminated business combination2   -     1     23     50     73  
Restructuring, inventory charges and asset impairments3, 4, 5   (1 )   50     (2 )   49     5  
Foreign exchange loss due to functional currency change6   -     19     -     19     -  
Other significant gains, losses or charges, net 7   (13 )   -     (4 )   (13 )   (4 )
Non-GAAP adjusted operating income   $ 456     $ 517     $ 442     $ 1,896     $ 1,781  
Non-GAAP adjusted operating margin   19.3 %   20.8 %   19.5 %   19.6 %   19.6 %
Non-GAAP Adjusted Net Income                    
Reported net income - GAAP basis8   $ 336     $ 329     $ 256     $ 1,377     $ 1,072  
Certain items associated with acquisitions1   47     47     48     185     183  
Acquisition integration costs   -     1     4     2     34  
Loss (gain) on derivatives associated with terminated business combination, net   -     3     (39 )   (89 )   (30 )
Certain items associated with terminated business combination2   -     1     23     50     73  
Restructuring, inventory charges and asset impairments3, 4, 5   (1 )   50     (2 )   49     5  
Impairment (gain on sale) of strategic investments, net   (2 )   (1 )   (5 )   4     (9 )
Foreign exchange loss due to functional currency change6   -     19     -     19     -  
Other significant gains, losses or charges, net 7   (13 )   -     (4 )   (13 )   (4 )
Reinstatement of federal R&D tax credit, resolution of prior years' income tax filings and other tax items8   (18 )   (21 )   50     (110 )   28  
Income tax effect of non-GAAP adjustments   (2 )   (18 )   7     (17 )   (38 )
Non-GAAP adjusted net income   $ 347     $ 410     $ 338     $ 1,457     $ 1,314  

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 months ended October 25, 2015 included a $2 million favorable adjustment of restructuring reserves related to prior restructuring plans and $1 million of inventory charges related to cost reductions in the solar business. Results for the three months ended July 26, 2015 primarily included $34 million of inventory charges and $17 million of restructuring charges and asset impairments related to the solar business.
   
4 Results for fiscal 2015 primarily included $35 million of inventory charges, $17 million of restructuring charges and asset impairments related to cost reductions in the solar business, and a $2 million favorable adjustment of restructuring reserves related to prior restructuring plans.
   
5 Results for the three months ended October 26, 2014 included a $2 million favorable adjustment of restructuring reserve, and results for the twelve months ended October 26, 2014 included $5 million of employee-related costs related to the restructuring program announced on October 3, 2012.
   
6 Results for the three months ended July 26, 2015 and fiscal 2015 included a $19 million foreign exchange loss due to an immaterial correction of an error related to functional currency change.
   
7 These items are significant gains, losses, or charges during a period that are the result of isolated events or transactions which have not occurred frequently in the past and are not expected to occur regularly or be repeated in the future.
   
8 Amounts for fiscal 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.

APPLIED MATERIALS, INC.
UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS

    Three Months Ended   Twelve Months Ended
(In millions except per share amounts)   October 25,
 2015
  July 26,
 2015
  October 26,
 2014
  October 25,
 2015
  October 26,
 2014
Non-GAAP Adjusted Earnings Per Diluted Share                    
Reported earnings per diluted share - GAAP basis1   $ 0.28     $ 0.27     $ 0.21     $ 1.12     $ 0.87  
Certain items associated with acquisitions   0.04     0.03     0.04     0.14     0.13  
Acquisition integration costs   -     -     -     -     0.02  
Certain items associated with terminated business combination   -     -     0.01     0.03     0.05  
Gain on derivatives associated with terminated business combination, net   -     -     (0.02 )   (0.05 )   (0.02 )
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   (0.02 )   (0.02 )   0.03     (0.09 )   0.02  
Other significant gains, losses or charges, net   (0.01 )   -     -     (0.01 )   -  
Foreign exchange loss due to functional currency change   -     0.02     -     0.02     -  
Non-GAAP adjusted earnings per diluted share   $ 0.29     $ 0.33     $ 0.27     $ 1.19     $ 1.07  
Weighted average number of diluted shares   1,190     1,231     1,236     1,226     1,231  

1 Amounts for fiscal 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.

APPLIED MATERIALS, INC.
UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS

    Three Months Ended   Twelve Months Ended
(In millions, except percentages)   October 25,
 2015
  July 26,
 2015
  October 26,
 2014
  October 25,
 2015
  October 26,
 2014
Silicon Systems Non-GAAP Adjusted Operating Income                    
Reported operating income - GAAP basis   $ 318     $ 411     $ 305     $ 1,410     $ 1,391  
Certain items associated with acquisitions1   47     44     46     178     172  
Acquisition integration costs   -     -     1     -     2  
Non-GAAP adjusted operating income   $ 365     $ 455     $ 352     $ 1,588     $ 1,565  
Non-GAAP adjusted operating margin   24.4 %   27.8 %   24.5 %   25.9 %   26.2 %
AGS Non-GAAP Adjusted Operating Income                    
Reported operating income - GAAP basis   $ 171     $ 170     $ 146     $ 664     $ 573  
Certain items associated with acquisitions1   -     -     -     1     3  
Inventory charges related to restructuring2, 3   -     3     -     3     -  
Other significant gains, losses or charges, net4   (1 )   -     -     (1 )   -  
Non-GAAP adjusted operating income   $ 170     $ 173     $ 146     $ 667     $ 576  
Non-GAAP adjusted operating margin   26.7 %   26.0 %   24.7 %   26.4 %   26.2 %
Display Non-GAAP Adjusted Operating Income                    
Reported operating income - GAAP basis   $ 19     $ 25     $ 52     $ 156     $ 129  
Certain items associated with acquisitions1   -     1     -     2     2  
Non-GAAP adjusted operating income   $ 19     $ 26     $ 52     $ 158     $ 131  
Non-GAAP adjusted operating margin   9.9 %   17.2 %   27.4 %   20.3 %   21.3 %
EES Non-GAAP Adjusted Operating Income (Loss)                    
Reported operating income (loss) - GAAP basis   $ -     $ (52 )   $ (3 )   $ (61 )   $ 15  
Certain items associated with acquisitions1   -     2     2     4     6  
Restructuring, inventory charges and asset impairments2, 3   (1 )   48     -     47     -  
Non-GAAP adjusted operating income (loss)   $ (1 )   $ (2 )   $ (1 )   $ (10 )   $ 21  
Non-GAAP adjusted operating margin   (2.2 )%   (5.1 )%   (2.1 )%   (4.7 )%   7.5 %

1 These items are incremental charges attributable to completed acquisitions, consisting of amortization of purchased intangible assets.
   
2 Results for the three months ended October 25, 2015 included a $2 million favorable adjustment of restructuring reserves related to prior restructuring plans and $1 million of inventory charges related to cost reductions in the solar business. Results for the three months ended July 26, 2015 primarily included $34 million of inventory charges and $17 million of restructuring charges and asset impairments related to the solar business.
   
3 Results for fiscal 2015 primarily included $35 million of inventory charges, $17 million of restructuring charges and asset impairments related to cost reductions in the solar business, and a $2 million favorable adjustment of restructuring reserves related to prior restructuring plans.
   
4 These items are significant gains, losses, or charges during a period that are the result of isolated events or transactions which have not occurred frequently in the past and are not expected to occur regularly or be repeated in the future.

APPLIED MATERIALS, INC.
UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED OPERATING EXPENSES

  Three Months Ended
(In millions) October 25, 2015   July 26, 2015
       
Operating expenses - GAAP basis $ 536     $ 622  
Loss on derivatives associated with terminated business combination -     (3 )
Restructuring charges and asset impairments 2     (16 )
Certain items associated with acquisitions (5 )   (6 )
Acquisition integration costs -     (1 )
Certain items associated with terminated business combination -     (1 )
Foreign exchange loss due to functional currency change -     (19 )
Other significant gains, losses or charges, net 11     -  
Non-GAAP adjusted operating expenses $ 544     $ 576  

UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED EFFECTIVE INCOME TAX RATE

  Three Months Ended
(In millions, except percentages) October 25, 2015
   
Provision for income taxes - GAAP basis (a) $ 61  
Reinstatement of federal R&D tax credit, resolutions of prior years' income tax filings and other tax items 18  
Income tax effect of non-GAAP adjustments 2  
Non-GAAP adjusted provision for income taxes (b) $ 81  
   
Income before income taxes - GAAP basis (c) $ 397  
Certain items associated with acquisitions 47  
Restructuring, inventory charges and asset impairments (1 )
Gain on sale of strategic investments, net (2 )
Other significant gains, losses or charges, net (13 )
Non-GAAP adjusted income before income taxes (d) $ 428  
   
Effective income tax rate - GAAP basis (a/c) 15.4 %
   
Non-GAAP adjusted effective income tax rate (b/d) 18.9 %

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