Table	of	Contents

# UNITED	STATES	SECURITIES	AND	EXCHANGE	COMMISSION

(Mark	one)

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

# For	the	fiscal	year	ended	October	28,	2018

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

# Applied	Materials,	Inc.

(Exact	name	of	registrant	as	specified	in	its	charter)

Delaware

(State	or	other	jurisdiction	of incorporation	or	organization)

(Address	of	principal	executive	offices)

(I.R.S.	Employer Identification	No.)

(Zip	Code)

Registrant's	telephone	number,	including	area	code:

Securities	registered	pursuant	to	Section	12(b)	of	the	Act:

Title	of	Each	Class

Common	Stock,	par	value	$.01	per	share

Name	of	Each	Exchange	on	Which	Registered

The	NASDAQ	Stock	Market	LLC

# Securities	registered	pursuant	to	Section	12(g)	of	the	Act:	None

Indicate	by	check	mark	if	the	registrant	is	a	well-known	seasoned	issuer,	as	defined	in	Rule	405	of	the	Securities	Act.				Yes		þ								No		¨

Indicate	by	check	mark	if	the	registrant	is	not	required	to	file	reports	pursuant	to	Section	13	or	Section	15(d)	of	the	Act.				Yes		¨								No		þ

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

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

Indicate	by	check	mark	if	disclosure	of	delinquent	filers	pursuant	to	Item	405	of	Regulation	S-K	(§229.405	of	this	chapter)	is	not	contained	herein,	and	will	not	be contained,	to	the	best	of	registrant's	knowledge,	in	definitive	proxy	or	information	statements	incorporated	by	reference	in	Part	III	of	this	Form	10-K	or	any	amendment to	this	Form	10-K.				þ

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

Accelerated	filer	¨

Large	accelerated	filer	þ

Smaller	reporting	company	¨

Non-accelerated	filer	¨

Emerging	growth	company	¨

If	an	emerging	growth	company,	indicate	by	check	mark	if	the	registrant	has	elected	not	to	use	the	extended	transition	period	for	complying	with	any	new	or	revised financial	accounting	standards	provided	pursuant	to	Section	13(a)	of	the	Exchange	Act.	¨

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

Aggregate	market	value	of	the	voting	stock	held	by	non-affiliates	of	the	registrant	as	of	April	29,	2018,	based	upon	the	closing	sale	price	reported	by	the	NASDAQ Global	Select	Market	on	that	date:	$49,674,881,854

# DOCUMENTS	INCORPORATED	BY	REFERENCE:

Portions	of	Part	III	will	be	provided	in	accordance	with	Instruction	G(3)	to	Form	10-K	no	later	than	February	25,	2019.

# Caution	Regarding	Forward-Looking	Statements

This	Annual	Report	on	Form	10-K	of	Applied	Materials,	Inc.	and	its	subsidiaries,	including	"Management's	Discussion	and	Analysis	of	Financial	Condition	and Results	of	Operations"	in	Item	7,	contains	forward-looking	statements	that	involve	a	number	of	risks	and	uncertainties.

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

The	following	information	should	be	read	in	conjunction	with	the	Consolidated	Financial	Statements	and	the	accompanying	Notes	to	Consolidated	Financial Statements	included	in	this	report.

# PART	I

|  | PART	I |  |
| :--- | :--- | :--- |
| Item\t1: | Business | 4 |
| Item\t1A: | Risk\tFactors | 14 |
| Item\t1B: | Unresolved\tStaff\tComments | 24 |
| Item\t2: | Properties | 25 |
| Item\t3: | Legal\tProceedings | 26 |
| Item\t4: | Mine\tSafety\tDisclosures | 26 |
|  | PART\tII |  |
| Item\t5: | Market\tfor\tRegistrant's\tCommon\tEquity,\tRelated\tStockholder\tMatters\tand\tIssuer\tPurchases\tof\tEquity\tSecurities | 27 |
| Item\t6: | Selected\tFinancial\tData | 28 |
| Item\t7: | Management's\tDiscussion\tand\tAnalysis\tof\tFinancial\tCondition\tand\tResults\tof\tOperations | 29 |
| Item\t7A: | Quantitative\tand\tQualitative\tDisclosures\tAbout\tMarket\tRisk | 48 |
| Item\t8: | Financial\tStatements\tand\tSupplementary\tData | 48 |
| Item\t9: | Changes\tin\tand\tDisagreements\twith\tAccountants\ton\tAccounting\tand\tFinancial\tDisclosure | 48 |
| Item\t9A: | Controls\tand\tProcedures | 49 |
| Item\t9B: | Other\tInformation | 49 |
|  | PART\tIII |  |
| Item\t10: | Directors,\tExecutive\tOfficers\tand\tCorporate\tGovernance | 50 |
| Item\t11: | Executive\tCompensation | 50 |
| Item\t12: | Security\tOwnership\tof\tCertain\tBeneficial\tOwners\tand\tManagement\tand\tRelated\tStockholder\tMatters | 51 |
| Item\t13: | Certain\tRelationships\tand\tRelated\tTransactions,\tand\tDirector\tIndependence | 52 |
| Item\t14: | Principal\tAccounting\tFees\tand\tServices | 52 |
|  | PART\tIV |  |
| Item\t15: | Exhibits,\tFinancial\tStatement\tSchedules | 53 |
| Item\t16: | Form\t10-K\tSummary | 53 |
|  | Signatures | 102 |

# Item	1: Business

Incorporated	in	1967,	Applied	Materials,	Inc.	(Applied)	is	a	Delaware	corporation.	A	global	company	with	a	broad	set	of	capabilities	in	materials	engineering, Applied	provides	manufacturing	equipment,	services	and	software	to	the	semiconductor,	display	and	related	industries.	With	its	diverse	technology	capabilities,	Applied delivers	products	and	services	that	improve	device	performance,	yield	and	cost.	Applied's	customers	include	manufacturers	of	semiconductor	chips,	liquid	crystal	and organic	light-emitting	diode	(OLED)	displays,	and	other	electronic	devices.	These	customers	may	use	what	they	manufacture	in	their	own	end	products	or	sell	the	items to	other	companies	for	use	in	advanced	electronic	components.	Applied's	fiscal	year	ends	on	the	last	Sunday	in	October.

Applied	operates	in	three	reportable	segments:	Semiconductor	Systems,	Applied	Global	Services,	and	Display	and	Adjacent	Markets.	A	summary	of	financial information	for	each	reportable	segment	is	found	in	Note	15	of	Notes	to	Consolidated	Financial	Statements.	A	discussion	of	factors	that	could	affect	operations	is	set forth	under	"Risk	Factors"	in	Item	1A,	which	is	incorporated	herein	by	reference.

# Semiconductor	Systems

Applied's	Semiconductor	Systems	segment	develops,	manufactures	and	sells	a	wide	range	of	manufacturing	equipment	used	to	fabricate	semiconductor	chips,	also referred	to	as	integrated	circuits	(ICs).	The	Semiconductor	Systems	segment	includes	semiconductor	capital	equipment	used	for	many	steps	of	the	chip	making	process including	the	transfer	of	patterns	into	device	structures,	transistor	and	interconnect	fabrication,	metrology,	inspection	and	review,	and	packaging	technologies	for connecting	finished	IC	die.	Applied's	patterning	systems	and	technologies	address	challenges	resulting	from	shrinking	pattern	dimensions	and	the	growing	complexity	in vertical	stacking	found	in	today's	most	advanced	semiconductor	devices.	Applied's	transistor	and	interconnect	products	and	technologies	enable	continued	device scaling	of	3D	transistors.	Applied's	metrology,	inspection	and	review	systems'	imaging	capabilities	and	algorithms	employ	optical	and	e-beam	technologies	to	meet	the most	 advanced	 technical	 demands,	 such	 as	 self-aligned	 double	 and	 quad	 patterning,	 extreme	 ultraviolet	 layers,	 measurement-intensive	 optimal	 proximity correction	mask	qualification,	and	new	3D	architectures.	Applied's	packaging	technologies	address	challenges	resulting	from	the	increasing	integration	of	multiple	IC dies	in	a	single	package.	Applied	delivers	leading-edge	capabilities	that	enable	chipmakers	to	establish	accurate	statistical	process	control,	ramp	up	production	runs rapidly,	and	achieve	consistently	high	production	yields.	The	majority	of	Applied's	new	equipment	sales	are	to	leading	integrated	device	manufacturers	and	foundries worldwide.

# Applied	Global	Services

The	Applied	Global	Services	(AGS)	segment	provides	 integrated	solutions	 to	optimize	equipment	and	fab	performance	and	productivity,	 including	spares, upgrades,	services,	remanufactured	earlier	generation	equipment	and	factory	automation	software	for	semiconductor,	display	and	other	products.	Customer	demand	for products	and	services	is	fulfilled	through	a	global	distribution	system	with	93	locations	and	trained	service	engineers	located	in	close	proximity	to	customer	sites	in	more than	a	dozen	countries	to	support	over	40,000	installed	Applied	semiconductor,	display	and	other	manufacturing	systems	worldwide.	Applied	offers	the	following general	types	of	services	and	products	under	the	Applied	Global	Services	segment.

# AGS	Solutions	and	Technology

# Technology-enabled	Services

A	comprehensive	service	product	portfolio	that	combines	service	technology	and	tool	specific	performance	commitments	in	order	to	optimize	customer	factory productivity.

# Fab	Consulting

Experts	using	advanced	analytical	tools	to	solve	production	problems	that	have	the	greatest	impact	on	customer	fab	productivity.

# Supply	Chain	Assurance	Programs

Spare	parts	product	portfolio	offers	options	to	balance	inventory,	cost	and	risk	to	efficiently	meet	fab	requirements.

# Subfab	Equipment

Applied	SubFab	solutions	lower	costs,	save	energy,	reduce	environmental	impact,	and	meet	Environmental	Protection	Agency	reporting	regulations	for	greenhouse gas	emissions.

# Legacy	Equipment

Comprehensive	200mm	equipment	and	upgrades	portfolio	to	address	a	full	spectrum	of	production	needs	and	extend	tool	lifetime.	Applied	200mm	equipment supports	market	inflections	and	new	technology	for	a	broad	variety	of	devices	including	analog,	power,	and	MEMS.

# Automation	Software

Applied	SmartFactory	automation	software	portfolio	coordinates	and	streamlines	every	aspect	of	a	factory-the	processes,	equipment	and	people-to	provide competitive	advantage	to	customers.

# Display	and	Adjacent	Markets

The	Display	and	Adjacent	Markets	segment	is	comprised	of	products	for	manufacturing	liquid	crystal	displays	(LCDs),	organic	light-emitting	diodes	(OLEDs), and	other	display	technologies	for	TVs,	monitors,	laptops,	personal	computers	(PCs),	electronic	tablets,	smart	phones,	and	other	consumer-oriented	devices	as	well	as equipment	for	processing	flexible	substrates.	While	similarities	exist	between	the	technologies	utilized	in	semiconductor	and	display	fabrication,	the	most	significant differences	are	in	the	size	and	composition	of	the	substrate.	Substrates	used	to	manufacture	display	panels	and	other	devices	are	typically	glass,	although	newer	flexible materials	are	entering	the	market.	Display	and	Adjacent	Markets	industry	growth	depends	primarily	on	consumer	demand	for	increasingly	larger	and	more	advanced TVs	and	high	resolution	displays	for	mobile	devices	as	well	as	new	form	factors,	including	thin,	light	and	curved	displays,	and	new	applications	such	as	virtual	reality. The	Display	and	Adjacent	Markets	segment	offers	a	variety	of	technologies	and	products,	including:

# Backlog

Applied	manufactures	systems	to	meet	demand	represented	by	order	backlog	and	customer	commitments.	Backlog	as	of	October	29,	2017	consisted	of:	(1)	orders for	which	written	authorizations	have	been	accepted	and	assigned	shipment	dates	are	within	the	next	12	months,	or	shipment	has	occurred	but	revenue	has	not	been recognized;	and	(2)	contractual	service	revenue	and	maintenance	fees	to	be	earned	within	the	next	12	months.

Backlog	by	reportable	segment	as	of	October	29,	2017	was	as	follows:

|  | (In	millions,	except	percentages) |  |
| :--- | :--- | :--- |
| Semiconductor\tSystems | $2,991 | 49% |
| Applied\tGlobal\tServices | 1,130 | 19% |
| Display\tand\tAdjacent\tMarkets | 1,847 | 31% |
| Corporate\tand\tOther | 63 | 1% |
| Total | $6,031 | 100% |

In	anticipation	of	the	adoption	of	the	new	revenue	recognition	standard	in	the	first	quarter	of	fiscal	2019,	Applied	has	removed	the	12	month	threshold	in	relation	to backlog	in	order	to	more	closely	align	backlog	to	performance	obligations	as	defined	under	the	new	revenue	recognition	standard.	As	such,	backlog	as	of	October	28, 2018	consists	of:	(1)	orders	for	which	written	authorizations	have	been	accepted,	or	shipment	has	occurred	but	revenue	has	not	been	recognized;	and	(2)	contractual service	revenue	and	maintenance	fees.

|  | (In	millions,	except	percentages) |  |
| :--- | :--- | :--- |
| Semiconductor\tSystems | $2,479 | 41% |
| Applied\tGlobal\tServices | 1,751 | 29% |
| Display\tand\tAdjacent\tMarkets | 1,836 | 30% |
| Corporate\tand\tOther | 26 | —% |
| Total | $6,092 | 100% |

Of	the	total	backlog	as	of	October	28,	2018,	approximately	15%	is	not	reasonably	expected	to	be	filled	within	the	next	12	months.

Applied's	backlog	on	any	particular	date	is	not	necessarily	indicative	of	actual	sales	for	any	future	periods,	due	to	the	potential	for	customer	changes	in	delivery schedules	or	order	cancellations.	Customers	may	delay	delivery	of	products	or	cancel	orders	prior	to	shipment,	subject	to	possible	cancellation	penalties.	Delays	in delivery	schedules	or	a	reduction	of	backlog	during	any	particular	period	could	have	a	material	adverse	effect	on	Applied's	business	and	results	of	operations.

# Manufacturing,	Raw	Materials	and	Supplies

Applied's	manufacturing	activities	consist	primarily	of	assembly,	test	and	integration	of	various	proprietary	and	commercial	parts,	components	and	subassemblies that	are	used	to	manufacture	systems.	Applied	has	implemented	a	distributed	manufacturing	model	under	which	manufacturing	and	supply	chain	activities	are	conducted in	various	countries,	including	Germany,	Israel,	Italy,	Singapore,	Taiwan,	the	United	States	and	other	countries	in	Asia.	Applied	uses	numerous	vendors,	including contract	manufacturers,	to	supply	parts	and	assembly	services	for	the	manufacture	and	support	of	its	products,	including	some	systems	being	completed	at	customer sites.

Although	Applied	makes	reasonable	efforts	to	assure	that	parts	are	available	from	multiple	qualified	suppliers,	this	is	not	always	possible.	Accordingly,	some	key parts	may	be	obtained	from	only	a	single	supplier	or	a	limited	group	of	suppliers.	Applied	seeks	to	reduce	costs	and	to	lower	the	risks	of	manufacturing	and	service interruptions	by	selecting	and	qualifying	alternate	suppliers	for	key	parts;	monitoring	the	financial	condition	of	key	suppliers;	maintaining	appropriate	inventories	of	key parts;	qualifying	new	parts	on	a	timely	basis;	and	ensuring	quality	and	performance	of	parts.

# Research,	Development	and	Engineering

Applied's	long-term	growth	strategy	requires	continued	development	of	new	materials	engineering	capabilities,	including	products	and	platforms	that	enable expansion	into	new	and	adjacent	markets.	Applied's	significant	investments	in	research,	development	and	engineering	(RD&E)	must	generally	enable	it	to	deliver	new products	and	technologies	before	the	emergence	of	strong	demand,	thus	allowing	customers	to	incorporate	these	products	into	their	manufacturing	plans	during	early- stage	technology	selection.	Applied	works	closely	with	its	global	customers	and	ecosystem	partners	to	design	systems	and	processes	that	meet	planned	technical	and production	requirements.

Applied's	product	development	and	engineering	organizations	are	located	primarily	in	the	United	States,	as	well	as	in	Canada,	China,	Europe,	India,	Israel, Singapore	and	Taiwan.	In	addition,	certain	outsourced	RD&E	activities,	process	support	and	customer	demonstrations	are	performed	in	the	United	States,	India,	China, Singapore	and	Taiwan.

# Marketing	and	Sales

Because	of	the	highly	technical	nature	of	its	products,	Applied	markets	and	sells	products	worldwide	almost	entirely	through	a	direct	sales	force.

Applied	has	operations	 in	many	countries,	with	some	of	 its	business	activities	concentrated	 in	certain	geographic	areas,	and	global	and	regional	economic conditions	can	impact	the	company's	business	and	financial	results.	Applied's	business	is	based	on	capital	equipment	investments	by	major	semiconductor,	display	and other	manufacturers,	and	is	subject	to	significant	variability	in	customer	demand	for	Applied's	products.	Customers'	expenditures	depend	on	many	factors,	including: general	economic	conditions;	anticipated	market	demand	and	pricing	for	semiconductors,	display	technologies	and	other	electronic	devices;	the	development	of	new technologies;	 customers'	 factory	 utilization;	 capital	 resources	 and	 financing;	 and	 government	 policies	 and	 incentives.	 In	 addition,	 a	 significant	 driver	 in	 the semiconductor	 and	 display	 industries	 is	 end-demand	 for	 mobile	 consumer	 products,	 which	 is	 characterized	 by	 seasonality	 that	 impacts	 the	 timing	 of	 customer investments	in	manufacturing	equipment	and,	in	turn,	Applied's	business.

Information	 on	 net	 sales	 to	 unaffiliated	 customers	 and	 long-lived	 assets	 attributable	 to	 Applied's	 geographic	 regions	 is	 included	 in	Note	 15	 of	 Notes	 to Consolidated	Financial	Statements.	The	following	companies	accounted	for	at	least	10	percent	of	Applied's	net	sales	in	each	fiscal	year,	which	were	for	products	and services	in	multiple	reportable	segments.

|  | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| Samsung\tElectronics\tCo.,\tLtd. | 13% | 23% | 13% |
| Taiwan\tSemiconductor\tManufacturing\tCompany\tLimited | 11% | 15% | 16% |
| Micron\tTechnology,\tInc. | * | * | 11% |
| Intel\tCorporation | 11% | * | 11% |

# Competition

The	industries	in	which	Applied	operates	are	highly	competitive	and	characterized	by	rapid	technological	change.	Applied's	ability	to	compete	generally	depends on	its	ability	to	commercialize	its	technology	in	a	timely	manner,	continually	improve	its	products,	and	develop	new	products	that	meet	constantly	evolving	customer requirements.	Significant	competitive	factors	include	technical	capability	and	differentiation,	productivity,	cost-effectiveness	and	the	ability	to	support	a	global	customer base.	The	importance	of	these	factors	varies	according	to	customers'	needs,	including	product	mix	and	respective	product	requirements,	applications,	and	the	timing	and circumstances	of	purchasing	decisions.	Substantial	competition	exists	in	all	areas	of	Applied's	business.	Competitors	range	from	small	companies	that	compete	in	a single	region,	which	may	benefit	from	policies	and	regulations	that	favor	domestic	companies,	to	global,	diversified	companies.	Applied's	ability	to	compete	requires	a high	level	of	investment	in	RD&E,	marketing	and	sales,	and	global	customer	support	activities.	Management	believes	that	many	of	Applied's	products	have	strong competitive	positions.

# The	competitive	environment	for	each	segment	is	described	below.

The	semiconductor	industry	is	driven	by	demand	for	advanced	electronic	products,	including	smartphones	and	other	mobile	devices,	servers,	personal	computers, automotive	devices,	storage,	and	other	products.	The	growth	of	data	and	emerging	end-market	drivers	such	as	artificial	intelligence,	augmented	and	virtual	reality,	the Internet	of	Things	and	smart	vehicles	are	also	creating	new	opportunities	for	the	industry.	As	a	result,	products	within	the	Semiconductor	Systems	segment	are	subject	to significant	changes	in	customer	requirements,	including	transitions	to	smaller	dimensions,	increasingly	complex	chip	architectures,	new	materials	and	an	increasing number	 of	 applications.	 While	 certain	 existing	 technologies	 may	 be	 adapted	 to	 new	 requirements,	 some	 applications	 create	 the	 need	 for	 an	 entirely	 different technological	approach.	The	rapid	pace	of	technological	change	can	quickly	diminish	the	value	of	current	technologies	and	products	and	create	opportunities	for	existing and	new	competitors.	Applied	offers	a	variety	of	technologically-differentiated	products	that	must	continuously	evolve	to	satisfy	customers'	requirements	to	compete effectively	in	the	marketplace.	Applied	allocates	resources	among	its	numerous	product	offerings	and	therefore	may	decide	not	to	invest	in	an	individual	product	to	the same	degree	as	competitors	who	specialize	in	fewer	products.	There	are	a	number	of	competitors	serving	the	semiconductor	manufacturing	equipment	industry,	which has	experienced	increasing	consolidation.	Some	of	these	competitors	offer	a	single	product	line	and	others	offer	multiple	product	lines,	and	range	from	suppliers	serving a	single	region	to	global,	diversified	companies.

Products	and	services	within	the	Applied	Global	Services	segment	complement	Semiconductor	Systems	and	Display	and	Adjacent	Markets	segments'	products	in markets	that	are	characterized	by	demanding	worldwide	service	requirements	and	a	diverse	group	of	numerous	competitors.	To	compete	effectively,	Applied	offers products	and	services	to	improve	tool	performance,	lower	overall	cost	of	ownership,	and	increase	yields	and	productivity	of	customers'	fab	operations.	Significant competitive	 factors	 include	 productivity,	 cost-effectiveness,	 and	 the	 level	 of	 technical	 service	 and	 support.	 The	 importance	 of	 these	 factors	 varies	 according	 to customers'	needs	and	the	type	of	products	or	services	offered.

Products	in	the	Display	and	Adjacent	Markets	segment	are	generally	subject	to	strong	competition	from	a	number	of	major	competitors	primarily	in	Asia.	Applied holds	established	market	positions	with	its	technically-differentiated	LCD	and	OLED	manufacturing	solutions	for	PECVD,	color	filter	PVD,	PVD	array,	PVD	touch panel,	and	TFT	array	testing,	although	its	market	position	could	change	quickly	due	to	customers'	evolving	requirements.	Important	factors	affecting	the	competitive position	of	Applied's	Display	and	Adjacent	Markets	products	include:	industry	trends,	Applied's	ability	to	innovate	and	develop	new	products,	and	the	extent	to	which Applied's	products	are	technically-differentiated,	as	well	as	which	customers	within	a	highly	concentrated	customer	base	are	making	capital	equipment	investments	and Applied's	existing	position	at	these	customers.

# Patents	and	Licenses

Applied's	competitive	position	significantly	depends	upon	its	research,	development,	engineering,	manufacturing	and	marketing	capabilities,	as	well	as	its	patent position.	Protection	of	Applied's	technology	assets	through	enforcement	of	its	intellectual	property	rights,	including	patents,	is	important.	Applied's	practice	is	to	file patent	applications	in	the	United	States	and	other	countries	for	inventions	that	it	considers	significant.	Applied	has	approximately	12,500	patents	in	the	United	States	and other	countries,	and	additional	applications	are	pending	for	new	inventions.	Although	Applied	does	not	consider	its	business	materially	dependent	upon	any	one	patent, the	rights	of	Applied	and	the	products	made	and	sold	under	its	patents,	taken	as	a	whole,	are	a	significant	element	of	its	business.	In	addition	to	its	patents,	Applied possesses	other	intellectual	property,	including	trademarks,	know-how,	trade	secrets,	and	copyrights.

Applied	enters	into	patent	and	technology	licensing	agreements	with	other	companies	when	it	is	determined	to	be	in	its	best	interest.	Applied	pays	royalties	under existing	patent	license	agreements	for	the	use,	in	several	of	its	products,	of	certain	patented	technologies.	Applied	also	receives	royalties	from	licenses	granted	to	third parties.	Royalties	received	from	or	paid	to	third	parties	have	not	been	material	to	Applied's	consolidated	results	of	operations.

In	the	normal	course	of	business,	Applied	periodically	receives	and	makes	inquiries	regarding	possible	patent	infringement.	In	responding	to	such	inquiries,	it	may become	necessary	or	useful	for	Applied	to	obtain	or	grant	licenses	or	other	rights.	However,	there	can	be	no	assurance	that	such	licenses	or	rights	will	be	available	to Applied	on	commercially	reasonable	terms,	or	at	all.	If	Applied	is	not	able	to	resolve	or	settle	claims,	obtain	necessary	licenses	on	commercially	reasonable	terms,	or successfully	prosecute	or	defend	its	position,	Applied's	business,	financial	condition	and	results	of	operations	could	be	materially	and	adversely	affected.

# Environmental	Matters

Applied	maintains	a	number	of	environmental,	health,	and	safety	programs	that	are	primarily	preventative	in	nature.	As	part	of	these	programs,	Applied	regularly monitors	ongoing	compliance	with	applicable	laws	and	regulations.	In	addition,	Applied	has	trained	personnel	to	conduct	investigations	of	any	environmental,	health,	or safety	incidents,	including,	but	not	limited	to,	spills,	releases,	or	possible	contamination.

Compliance	with	federal,	state	and	local	environmental,	health	and	safety	laws	and	regulations,	including	those	regulating	the	discharge	of	materials	into	the environment,	remedial	agreements,	and	other	actions	relating	to	the	environment	have	not	had,	and	are	not	expected	to	have,	a	material	effect	on	Applied's	capital expenditures,	competitive	position,	financial	condition,	or	results	of	operations.

The	 most	 recent	 report	 on	 Applied's	 environmental,	 health	 and	 safety	 activities	 can	 be	 found	 in	 Applied's	 latest	 Citizenship	 Report	 on	 its	 website	 at http://www.appliedmaterials.com/news/citizenship_report.html.	The	Citizenship	Report	is	updated	periodically.	This	website	address	is	intended	to	be	an	inactive	textual reference	only.	None	of	the	information	on,	or	accessible	through,	Applied's	website	is	part	of	this	Form	10-K	or	is	incorporated	by	reference	herein.

# Employees

At	October	28,	2018,	Applied	employed	approximately	21,000	regular	employees.	In	the	high-technology	industry,	competition	for	highly-skilled	employees	is intense.	Applied	believes	that	its	future	success	is	highly	dependent	upon	its	continued	ability	to	attract,	retain	and	motivate	qualified	employees.

# Executive	Officers	of	the	Registrant

The	following	table	and	notes	set	forth	information	about	Applied's	executive	officers:

(1) Mr.	Dickerson,	age	61,	was	named	President	of	Applied	in	June	2012	and	appointed	Chief	Executive	Officer	and	a	member	of	the	Board	of	Directors	in September	2013.	Before	joining	Applied,	he	served	as	Chief	Executive	Officer	and	a	director	of	Varian	Semiconductor	Equipment	Associates,	Inc.	(Varian) from	2004	until	its	acquisition	by	Applied	in	November	2011.	Prior	to	Varian,	Mr.	Dickerson	served	18	years	with	KLA-Tencor	Corporation	(KLA-Tencor),	a supplier	of	process	control	and	yield	management	solutions	for	the	semiconductor	and	related	industries,	where	he	held	a	variety	of	operations	and	product development	 roles,	 including	 President	 and	 Chief	 Operating	 Officer.	 Mr.	 Dickerson	 started	 his	 semiconductor	 career	 in	 manufacturing	 and	 engineering management	at	General	Motors'	Delco	Electronics	Division	and	then	AT&T	Technologies.

(2) Dr.	Addiego,	age	59,	has	been	Senior	Vice	President,	Engineering,	Operations	and	Quality	since	June	2015.	He	served	as	Senior	Vice	President,	Engineering from	March	2014	to	June	2015.	He	previously	was	with	Applied	from	1996	to	2005,	leading	various	product	groups	as	well	as	global	organizations,	including Global	Operations,	Facilities	and	Real	Estate,	Foundation	Engineering,	and	Information	Technology.	From	March	2011	to	March	2014,	Dr.	Addiego	was President	and	Chief	Operating	Officer	of	Ultra	Clean	Technology	Corp.,	a	public	company	listed	on	NASDAQ	and	a	supplier	of	critical	subsystems	for	the semiconductor	capital	equipment,	medical	device,	energy,	research,	and	flat	panel	industries.	From	February	2005	to	March	2011,	Dr.	Addiego	worked	at Novellus	Systems,	Inc.,	a	provider	of	advanced	process	equipment	for	the	semiconductor	industry,	where	he	served	as	Executive	Vice	President	of	Corporate Global	Operations	responsible	for	Central	Engineering,	Facilities,	Real	Estate,	Human	Resources	and	Information	Technology,	and	Chief	Administrative Officer.

(3) Mr.	Durn,	age	52,	has	been	Senior	Vice	President	and	Chief	Financial	Officer	of	Applied	since	August	2017.	 Previously,	Mr.	Durn	was	Executive	Vice President	and	Chief	Financial	Officer	of	NXP	Semiconductors	N.V.,	a	semiconductor	manufacturer	(NXP),	from	December	2015	to	August	2017.	Mr.	Durn served	as	Senior	Vice	President	of	Finance	and	Chief	Financial	Officer	of	Freescale	Semiconductor,	Inc.,	from	June	2014	until	its	merger	with	NXP	in December	2015.	Prior	to	Freescale,	Mr.	Durn	was	Chief	Financial	Officer	and	Executive	Vice	President	of	Finance	and	Administration	at	GlobalFoundries,	a semiconductor	foundry,	which	he	joined	in	December	2011.

(4) Mr.	Ghanayem,	age	53,	has	been	Senior	Vice	President,	New	Markets	and	Alliances	Group	of	Applied	since	November	2017.		He	has	served	in	various	senior management,	product	development	and	operational	roles	since	joining	Applied	in	1989,	including	Group	Vice	President	and	General	Manager	of	the	Transistor and	Interconnect	Group.

(5) Mr.	Larkins,	age	57,	has	been	Senior	Vice	President,	General	Counsel	of	Applied	since	November	2012	and	was	Corporate	Secretary	from	November	2012	to March	2018.	Previously,	Mr.	Larkins	was	employed	by	Honeywell	International	Inc.,	a	diversified	global	technology	and	manufacturing	company,	where	he was	Vice	President,	Corporate	Secretary	and	Deputy	General	Counsel	from	2002	until	joining	Applied.		Mr.	Larkins	served	in	various	other	positions	at Honeywell	(formerly	AlliedSignal)	after	joining	the	company	in	1997.

(6) Dr.	Nalamasu,	age	60,	has	been	Senior	Vice	President,	Chief	Technology	Officer	since	June	2013,	and	President	of	Applied	Ventures,	LLC,	Applied's	venture capital	arm,	since	November	2013.	He	had	served	as	Group	Vice	President,	Chief	Technology	Officer	from	January	2012	to	June	2013,	and	as	Corporate	Vice President,	Chief	Technology	Officer	from	January	2011	to	January	2012.	Upon	joining	Applied	in	June	2006	until	January	2011,	Dr.	Nalamasu	was	an Appointed	Vice	President	of	Research	and	served	as	Deputy	Chief	Technology	Officer	and	General	Manager	for	the	Advanced	Technologies	Group.	From 2002	to	2006,	Dr.	Nalamasu	was	a	NYSTAR	distinguished	professor	of	Materials	Science	and	Engineering	at	Rensselaer	Polytechnic	Institute,	where	he	also served	as	Vice	President	of	Research	from	2005	to	2006.	Prior	to	Rensselaer,	Dr.	Nalamasu	served	in	several	leadership	roles	at	Bell	Laboratories.

(7) Dr.	Raja,	age	56,	has	been	Senior	Vice	President,	Semiconductor	Products	Group	of	Applied	since	November	2017.		He	previously	served	in	various	senior management,	product	development	and	operational	roles	since	joining	Applied	in	1995,	including	Group	Vice	President	and	General	Manager	of	the	Patterning and	Packaging	Group.

(8) Mr.	Salehpour,	age	57,	has	been	Senior	Vice	President,	Services,	Display	and	Flexible	Technology	since	September	2013.	He	previously	served	as	Group	Vice President,	General	Manager	Energy	and	Environmental	Solutions	and	Display	Business	Groups,	since	joining	Applied	in	November	2012.	Prior	to	Applied,	Mr. Salehpour	 worked	 at	 KLA-Tencor	 for	 16	 years,	 where	 he	 served	 as	 a	 Senior	Vice	 President	 and	 General	 Manager	 and	 worked	 for	 10	 years	 in	 senior management	positions	at	Schlumberger	Test	Systems.

(9) Mr.	Read,	age	52,	has	been	Corporate	Vice	President,	Corporate	Controller	and	Chief	Accounting	Officer	of	Applied	since	joining	the	Company	in	September 2013.	Prior	to	Applied,	Mr.	Read	worked	at	Brocade	Communications	Systems,	Inc.,	a	provider	of	semiconductor	and	software-based	network	solutions,	since October	2002,	where	he	most	recently	served	as	Vice	President,	Corporate	Controller.	Prior	to	Brocade,	Mr.	Read	worked	at	KPMG	LLP,	an	audit,	tax	and advisory	firm,	from	1996	to	2002.

# Available	Information

Applied's	website	is	http://www.appliedmaterials.com.	Applied	makes	available	free	of	charge,	on	or	through	its	website,	its	annual,	quarterly	and	current	reports, and	any	amendments	to	those	reports,	as	soon	as	reasonably	practicable	after	electronically	filing	such	reports	with,	or	furnishing	them	to,	the	SEC.	The	SEC's	website, www.sec.gov,	contains	reports,	proxy	and	information	statements,	and	other	information	regarding	issuers	that	file	electronically	with	the	SEC.	These	website	addresses are	intended	to	be	an	inactive	textual	references	only.	None	of	the	information	on,	or	accessible	through,	these	websites	is	part	of	this	Form	10-K	or	is	incorporated	by reference	herein.

# Item	1A: Risk	Factors

The	following	risk	factors	could	materially	and	adversely	affect	Applied's	business,	financial	condition	or	results	of	operations	and	cause	reputational	harm,	and should	be	carefully	considered	in	evaluating	the	Company	and	its	business,	in	addition	to	other	information	presented	elsewhere	in	this	report.

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

As	a	supplier	to	the	global	semiconductor	and	display	and	related	industries,	Applied	is	subject	to	variable	industry	conditions,	as	demand	for	manufacturing equipment	and	services	can	change	depending	on	several	factors,	including	the	nature	and	timing	of	technology	inflections	and	advances	in	fabrication	processes,	the timing	and	requirements	of	new	and	emerging	technologies	and	market	drivers,	production	capacity	relative	to	demand	for	chips	and	display	technologies,	end-user demand,	customers'	capacity	utilization,	production	volumes,	access	 to	affordable	capital,	consumer	buying	patterns	and	general	economic	conditions.	Applied's industries	historically	have	been	cyclical,	and	are	subject	to	volatility	and	sudden	changes	in	customer	requirements	for	new	manufacturing	capacity	and	advanced technology.	These	changes	can	affect	the	timing	and	amounts	of	customer	investments	in	technology	and	manufacturing	equipment,	and	can	have	a	significant	impact	on Applied's	net	sales,	operating	expenses,	gross	margins	and	net	income.	The	amount	and	mix	of	capital	equipment	spending	between	different	products	and	technologies can	have	a	significant	impact	on	the	Company's	results	of	operations.

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

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

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

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

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

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

Applied	has	product	development,	engineering,	manufacturing,	sales	and	other	operations	distributed	 throughout	many	countries,	and	some	of	 its	business activities	are	concentrated	in	certain	geographic	areas.	Moreover,	in	fiscal	2018,	approximately	91	percent	of	Applied's	net	sales	were	to	customers	in	regions	outside	the United	States.	As	a	result	of	the	global	nature	of	its	operations,	Applied's	business	performance	and	results	of	operations	may	be	adversely	affected	by	a	number	of factors,	including:

•uncertain	global	economic	and	political	business	conditions	and

demands;

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

•global	trade	issues	and	changes	in	and	uncertainties	with	respect	to	trade	policies,	including	the	ability	to	obtain	required	import	and	export	licenses,	trade sanctions,	tariffs,	and	international	trade	disputes;

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

•variations	among,	and	changes	in,	local,	regional,	national	or	international	laws	and	regulations,	including	contract,	intellectual	property,	cybersecurity,	data privacy,	labor,	tax,	and	import/export	laws,	and	the	interpretation	and	application	of	such	laws	and	regulations;

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

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

•fluctuating	raw	material,	commodity,	energy	and	shipping costs;

•delays	or	restrictions	in	shipping	materials	or	finished	products	between

countries;

•geographically	diverse	operations	and	projects,	and	our	ability	to	maintain	appropriate	business	processes,	procedures	and	internal	controls,	and	comply	with environmental,	health	and	safety,	anti-corruption	and	other	regulatory	requirements;

•supply	chain	interruptions,	and	service	interruptions	from	utilities,	transportation,	data	hosting	or	telecommunications	providers,	or	other	events	beyond	our control;

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

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

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

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

world;

•performance	of	third	party	providers	of	outsourced	functions,	including	certain	engineering,	software	development,	manufacturing,	information	technology	and other	activities;

•political	instability,	natural	disasters,	pandemics,	social	unrest,	terrorism	or	acts	of	war	in	locations	where	Applied	has	operations,	suppliers	or	sales,	or	that may	influence	the	value	chain	of	the	industries	that	Applied	serves;

•challenges	in	hiring	and	integration	of	an	increasing	number	of	workers	in	new countries;

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

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

# International	trade	disputes	could	result	in	increases	in	tariffs	and	other	trade	restrictions	and	protectionist	measures	that	could	have	an	adverse	impact	on	our operations.

We	sell	a	significant	majority	of	our	products	into	countries	outside	of	the	United	States	and	we	purchase	a	significant	portion	of	equipment	and	supplies	from suppliers	outside	of	the	United	States.	The	United	States	and	other	countries	have	levied	tariffs	and	taxes	on	certain	goods.	Increases	in	tariffs,	additional	taxes	or	other trade	restrictions	and	retaliatory	measures	may	impact	end-user	demand	and	customer	investment	in	manufacturing	equipment,	increase	our	manufacturing	costs, decrease	margins,	reduce	the	competitiveness	of	our	products,	or	inhibit	our	ability	to	sell	products	or	purchase	necessary	equipment	and	supplies,	which	could	have	a material	adverse	effect	on	our	business,	results	of	operations,	or	financial	condition.

Certain	international	sales	depend	on	our	ability	to	obtain	export	licenses,	and	our	inability	to	obtain	such	licenses	could	potentially	limit	our	markets	and	impact our	business.	In	addition,	government	authorities	may	impose	conditions	that	require	the	use	of	local	suppliers	or	partnerships	with	local	companies,	require	the	license or	other	transfer	of	intellectual	property,	or	engage	in	other	efforts	to	promote	local	businesses	and	local	competitors,	which	could	have	a	significant	adverse	impact	on Applied's	business.	Many	of	these	challenges	are	present	in	China	and	Korea,	markets	that	represent	significant	long-term	growth	opportunities	for	Applied	businesses.

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

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

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

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

•trade,	regulatory	or	tax	policies	impacting	the	timing	of	customers'	investment	in	new	or	expanded	fabrication plants;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

•the	increasing	frequency	and	complexity	of	technology	transitions	and	inflections,	and	Applied's	ability	to	timely	and	effectively	anticipate	and	adapt	to	these changes;

•the	increasing	cost	of	research	and	development	due	to	many	factors,	including	shrinking	geometries,	the	use	of	new	materials,	new	and	more	complex	device structures,	more	applications	and	process	steps,	increasing	chip	design	costs,	and	the	increasing	cost	and	complexity	of	integrated	manufacturing	processes;

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

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

sizes;

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

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

•the	 importance of increasing	 market positions in segments	 with growing demand;

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

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

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

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

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

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

•investment	in	semiconductor	manufacturing	capabilities	in	China,	which	may	be	affected	by	changes	in	economic	conditions	and	governmental	policies	in China;	and

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

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

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

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

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

•the	increasing	cost	of	research	and	development,	and	complexity	of	technology	transitions	and	inflections,	and	Applied's	ability	to	timely	and	effectively anticipate	and	adapt	to	these	changes;

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

•the	 importance	 of increasing	 market	 positions in	 products and technologies	 with	 growing demand;

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

•the	variability	in	demand	for	display	manufacturing	equipment,	concentration	of	display	manufacturer	customers	and	their	ability	to	successfully	commercialize new	products	and	technologies,	and	uncertainty	with	respect	to	future	display	technology	end-use	applications	and	growth	drivers.

If	Applied	does	not	successfully	develop	and	commercialize	products	to	meet	demand	for	new	and	emerging	display	technologies,	or	if	industry	demand	for	display manufacturing	equipment	and	technologies	slows,	Applied's	business	and	its	results	of	operations	may	be	adversely	impacted.

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

Applied	operates	in	a	highly	competitive	environment	in	which	innovation	is	critical,	and	its	future	success	depends	on	many	factors,	including	the	development of	new	technologies	and	effective	commercialization	and	customer	acceptance	of	its	equipment,	services	and	related	products,	and	its	ability	to	increase	its	position	in	its current	markets,	expand	into	adjacent	and	new	markets,	and	optimize	operational	performance.	The	development,	introduction	and	support	of	a	broadening	set	of products	in	a	geographically	diverse	and	competitive	environment,	and	that	may	require	greater	collaboration	with	customers	and	other	industry	participants,	have	grown more	complex	and	expensive	over	time.	Furthermore,	new	or	improved	products	may	entail	higher	costs	and	lower	profits.	To	compete	successfully,	Applied	must:

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

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

•differentiate its	 products from those	 of competitors,	 meet customers'	 performance specifications, appropriately	 price	 products, and achieve	 market acceptance;

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

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

•focus	 on	 product	 development and sales and	 marketing strategies that address customers'	 high	 value	 problems and strengthen customer relationships;

•effectively	allocate	resources	between	its	existing	products	and	markets,	the	development	of	new	products,	and	expanding	into	new	and	adjacent markets;

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

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

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

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

•qualify	products	for	evaluation	and	volume	manufacturing	with	its	customers;

•implement	changes	in	its	design	engineering	methodology	to	reduce	material	costs	and	cycle	time,	increase	commonality	of	platforms	and	types	of	parts	used in	different	systems,	and	improve	product	life	cycle	management.

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

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

Applied's	customer	base	is	highly	concentrated,	and	has	become	increasingly	concentrated	as	a	result	of	continued	consolidation.	Applied's	customer	base	is	also geographically	concentrated.	A	relatively	limited	number	of	manufacturers	account	for	a	substantial	portion	of	Applied's	business.	As	a	result,	the	actions	of	even	a single	customer	can	expose	Applied's	business	and	results	of	operations	to	greater	volatility.	The	mix	and	type	of	customers,	and	sales	to	any	single	customer,	including as	a	result	of	changes	in	government	policy,	may	vary	significantly	from	quarter	to	quarter	and	from	year	to	year,	and	have	a	significant	impact	on	Applied's	net	sales, gross	margins	and	net	income.	Applied's	products	are	configured	to	customer	specifications,	and	changing,	rescheduling	or	canceling	orders	may	result	in	significant, non-recoverable	costs.	If	customers	do	not	place	orders,	or	they	substantially	reduce,	delay	or	cancel	orders,	Applied	may	not	be	able	to	replace	the	business,	which	may have	a	significant	adverse	impact	on	its	results	of	operations	and	financial	condition.	The	concentration	of	Applied's	customer	base	increases	its	risks	related	to	the financial	condition	of	its	customers,	and	the	deterioration	in	financial	condition	of	a	single	customer	or	the	failure	of	a	single	customer	to	perform	its	obligations	could have	a	material	adverse	effect	on	Applied's	results	of	operations	and	cash	flow.	To	 the	extent	 its	customers	experience	 liquidity	constraints,	Applied	may	 incur additional	bad	debt	expense,	which	may	have	a	significant	impact	on	its	results	of	operations.	Major	customers	may	also	seek	pricing,	payment,	intellectual	property- related,	or	other	commercial	terms	that	are	less	favorable	to	Applied,	which	may	have	a	negative	impact	on	Applied's	business,	cash	flow,	revenue	and	gross	margins.

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

Applied	engages	in	acquisitions	of	or	investments	in	companies,	technologies	or	products	in	existing,	related	or	new	markets	for	Applied.	Business	combinations, acquisitions	and	investments	involve	numerous	risks	to	Applied's	business,	financial	condition	and	operating	results,	including	but	not	limited	to:

•diversion of management's attention and disruption of ongoing businesses;

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

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

•the	 failure to realize expected returns from acquired businesses;

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

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

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

•dependence on unfamiliar supply chains or relatively small supply partners;

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

•failure	 to retain and motivate key employees of acquired businesses;

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

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

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

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

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

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

•inadequacy	or	ineffectiveness	of	an	acquired	company's	internal	financial	controls,	disclosure	controls	and	procedures,	cybersecurity,	privacy	policies	and procedures,	or	environmental,	health	and	safety,	anti-corruption,	human	resource,	or	other	policies	or	practices;

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

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

•unknown,	 underestimated	 or	 undisclosed	 commitments	 or liabilities; and

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

Applied	also	makes	strategic	 investments	 in	other	companies,	 including	companies	formed	as	 joint	ventures,	which	may	decline	 in	value	or	not	meet	desired objectives.	The	success	of	these	investments	depends	on	various	factors	over	which	Applied	may	have	limited	or	no	control	and,	particularly	with	respect	to	joint ventures,	requires	ongoing	and	effective	cooperation	with	strategic	partners.	In	addition,	new	legislation	or	additional	regulations	may	affect	or	impair	our	ability	to invest	in	certain	countries	or	require	us	to	obtain	regulatory	approvals	to	do	so.	The	risks	to	Applied's	strategic	investment	portfolio	may	be	exacerbated	by	unfavorable financial	market	and	macroeconomic	conditions	and,	as	a	result,	the	value	of	the	investment	portfolio	could	be	negatively	impacted	and	lead	to	impairment	charges.

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

Applied	has	$5.4	billion	in	aggregate	principal	amount	of	senior	unsecured	notes	outstanding.	Under	the	indenture	governing	the	senior	unsecured	notes,	it	may	be required	to	offer	to	repurchase	the	notes	at	a	price	equal	to	101%	of	the	principal	amount,	plus	accrued	and	unpaid	interest,	upon	a	change	of	control	of	Applied	and	a contemporaneous	downgrade	of	the	notes	below	investment	grade.	Applied	also	has	in	place	a	$1.5	billion	committed	revolving	credit	agreement.	While	no	amounts were	outstanding	under	this	credit	agreement	at	October	28,	2018,	Applied	may	borrow	amounts	in	the	future	under	the	agreement.	Applied	may	also	enter	into	new financing	arrangements.	Applied's	ability	to	satisfy	its	debt	obligations	is	dependent	upon	the	results	of	its	business	operations	and	subject	to	other	risks	discussed	in	this section.	Significant	changes	in	Applied's	credit	rating	or	changes	in	the	interest	rate	environment	could	have	a	material	adverse	consequence	on	Applied's	access	to	and cost	of	capital	for	future	financings,	and	financial	condition.	If	Applied	fails	to	satisfy	its	debt	obligations,	or	comply	with	financial	and	other	debt	covenants,	it	may	be in	default	and	any	borrowings	may	become	immediately	due	and	payable,	and	such	default	may	also	constitute	a	default	under	other	of	Applied's	obligations.	There	can be	no	assurance	that	Applied	would	have	sufficient	financial	resources	or	be	able	to	arrange	financing	to	repay	any	borrowings	at	such	time.

# Applied	is	exposed	to	risks	associated	with	expanding	into	new	and	related	markets	and	industries.

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

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

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

•differing rates of profitability and growth among multiple businesses;

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

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

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

•the	 complexity of entering into and effectively managing strategic alliances or partnering opportunities;

•new materials, processes and technologies;

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

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

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

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

•third	parties'	intellectual	property	rights;	and

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

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

# Manufacturing	interruptions	or	delays,	or	the	failure	to	accurately	forecast	customer	demand,	could	affect	Applied's	ability	to	meet	customer	demand,	lead	to higher	costs,	or	result	in	excess	or	obsolete	inventory.

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

•the	failure	or	inability	to	accurately	forecast	demand	and	obtain	sufficient	quantities	of	quality	parts	on	a	cost-effective basis;

•volatility in the availability and cost of materials;

•difficulties or delays in obtaining required import or export approvals;

•shipment delays due to transportation interruptions or capacity constraints;

•information	technology	or	infrastructure	failures,	including	those	of	a	third	party	supplier	or	service	provider;

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

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

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

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

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

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

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

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

In	the	conduct	of	its	business,	Applied	collects,	uses,	transmits	and	stores	data	on	information	technology	systems,	including	systems	owned	and	maintained	by Applied	or	third	party	providers.	These	data	include	confidential	information	and	intellectual	property	belonging	to	Applied	or	its	customers	or	other	business	partners, as	well	as	personally-identifiable	information	of	individuals.	All	information	systems	are	subject	to	disruption,	breach	or	failure.	Applied	has	experienced,	and	expects	to continue	to	be	subject	to,	cybersecurity	threats	and	incidents	ranging	from	employee	error	or	misuse	 to	 individual	attempts	 to	gain	unauthorized	access	 to	 these information	systems,	to	sophisticated	and	targeted	measures	known	as	advanced	persistent	threats,	none	of	which	have	been	material	to	the	Company	to	date.	Applied devotes	significant	resources	to	network	security,	data	encryption	and	other	measures	to	protect	its	systems	and	data	from	unauthorized	access	or	misuse.	However, depending	on	their	nature	and	scope,	cybersecurity	incidents	could	result	in	business	disruption;	the	misappropriation	of	intellectual	property,	and	corruption	or	loss	of confidential	information	and	critical	data	(Applied's	and	that	of	third	parties);	reputational	damage;	litigation	with	third	parties;	diminution	in	the	value	of	Applied's investment	in	research,	development	and	engineering;	data	privacy	issues;	and	increased	cybersecurity	protection	and	remediation	costs.	Compliance	with,	and	changes to,	laws	and	regulations	concerning	privacy	and	information	security	could	result	in	significant	expense,	and	any	failure	to	comply	could	result	in	proceedings	against Applied	by	regulatory	authorities	or	other	third	parties.

# Applied	is	exposed	to	various	risks	related	to	legal	proceedings.

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

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

# The	failure	to	successfully	implement	enterprise	resource	planning	and	other	information	systems	changes	could	adversely	impact	Applied's	business	and	results of	operations.

Applied	periodically	implements	new	or	enhanced	enterprise	resource	planning	and	related	information	systems	in	order	to	better	manage	its	business	operations, align	its	global	organizations	and	enable	future	growth.	Implementation	of	new	business	processes	and	information	systems	requires	the	commitment	of	significant personnel,	training	and	financial	resources,	and	entails	risks	to	Applied's	business	operations.	If	Applied	does	not	successfully	implement	enterprise	resource	planning and	related	information	systems	improvements,	or	if	there	are	delays	or	difficulties	in	implementing	these	systems,	Applied	may	not	realize	anticipated	productivity improvements	or	cost	efficiencies,	and	may	experience	interruptions	in	service	and	operational	difficulties,	such	as	its	ability	to	track	orders,	timely	manufacture	and ship	products,	project	inventory	requirements,	effectively	manage	its	supply	chain	and	allocate	human	resources,	aggregate	financial	data	and	report	operating	results, and	otherwise	effectively	manage	its	business,	all	of	which	could	result	in	quality	issues,	reputational	harm,	lost	market	and	revenue	opportunities,	and	otherwise adversely	affect	Applied's	business,	financial	condition	and	results	of	operations.

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

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

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

Applied	is	subject	to	income	taxes	in	the	United	States	and	foreign	jurisdictions.	Significant	judgment	is	required	to	determine	and	estimate	worldwide	tax liabilities.	Applied's	provision	for	income	taxes	and	effective	tax	rates	could	be	affected	by	numerous	factors,	including	changes	in	applicable	tax	laws,	interpretations	of applicable	tax	laws,	amount	and	composition	of	pre-tax	income	in	jurisdictions	with	differing	tax	rates,	and	valuation	of	deferred	tax	assets.	An	increase	in	Applied's provision	for	income	taxes	and	effective	tax	rate	could	have	a	material	adverse	impact	on	Applied's	results	of	operations	and	financial	condition.

On	December	22,	2017,	the	U.S.	government	enacted	tax	legislation	referred	to	as	the	Tax	Cuts	and	Jobs	Act	(the	"Tax	Act").	The	U.S.	government	may	issue regulations	that	significantly	affect	how	the	Tax	Act	is	interpreted.	The	U.S.	Securities	and	Exchange	Commission	issued	Staff	Accounting	Bulletin	No.	118	(SAB	118), which	provides	guidance	on	accounting	for	income	tax	effects	of	the	Tax	Act.	SAB	118	provides	a	measurement	period	for	companies	to	complete	this	accounting, which	will	not	extend	beyond	one	year	from	the	Tax	Act	enactment	date.	Pursuant	to	SAB	118,	provisional	adjustments	were	recorded	when	reasonable	estimates	could be	determined.	No	adjustments	were	recorded	when	reasonable	estimates	could	not	be	determined.	These	provisional	estimates	will	be	revised	as	information	becomes available	and	guidance	is	issued	by	the	Internal	Revenue	Service,	and	changes	in	Applied's	provision	for	income	taxes	and	effective	tax	rates	could	have	a	material impact	on	Applied's	results	of	operations	and	financial	condition.

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

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

# Applied	is	subject	to	risks	associated	with	environmental	and	safety	regulations.

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

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

As	a	public	company	with	global	operations,	Applied	is	subject	to	the	laws	of	the	United	States	and	multiple	foreign	jurisdictions	and	the	rules	and	regulations	of various	governing	bodies,	which	may	differ	among	jurisdictions,	including	those	related	to	financial	and	other	disclosures,	accounting	standards,	corporate	governance, intellectual	property,	tax,	trade,	antitrust,	employment,	immigration	and	travel	regulations,	privacy,	and	anti-corruption.	Changing,	inconsistent	or	conflicting	laws,	rules and	regulations,	and	ambiguities	in	their	interpretation	and	application	create	uncertainty	and	challenges,	and	compliance	with	laws,	rules	and	regulations	may	be onerous	and	expensive,	divert	management	 time	and	attention	from	revenue-generating	activities,	and	otherwise	adversely	 impact	Applied's	business	operations. Violations	of	law,	rules	and	regulations	could	result	in	fines,	criminal	sanctions,	restrictions	on	Applied's	business,	and	damage	to	its	reputation,	and	could	have	an adverse	impact	on	its	business	operations,	financial	condition	and	results	of	operations.

# Item	1B: Unresolved	Staff	Comments

None.

# Item	2: Properties

Information	concerning	Applied's	properties	is	set	forth	below:

| (Square	feet	in	thousands) | United	States | Other	Countries | Total |
| :--- | :--- | :--- | :--- |
| Owned | 4,530 | 2,417 | 6,947 |
| Leased | 1,037 | 1,341 | 2,378 |
| Total | 5,567 | 3,758 | 9,325 |

Because	of	the	interrelation	of	Applied's	operations,	properties	within	a	country	may	be	shared	by	the	segments	operating	within	that	country.	The	Company's headquarters	 offices	 are	 in	 Santa	 Clara,	 California.	 Products	 in	 Semiconductor	 Systems	 are	 manufactured	 in	 Santa	 Clara,	 California;	Austin,	Texas;	 Gloucester, Massachusetts;	 Kalispell,	 Montana;	 Rehovot,	 Israel;	 and	 Singapore.	 Remanufactured	 equipment	 products	 in	 the	Applied	 Global	 Services	 segment	 are	 produced primarily	in	Austin,	Texas.	Products	in	the	Display	and	Adjacent	Markets	segment	are	manufactured	in	Alzenau,	Germany	and	Tainan,	Taiwan.	Other	products	are manufactured	in	Treviso,	Italy.

Applied	also	owns	and	 leases	offices,	plants	and	warehouse	 locations	 in	many	 locations	 throughout	 the	world,	 including	 in	Europe,	Japan,	North	America (principally	the	United	States),	Israel,	China,	India,	Korea,	Southeast	Asia	and	Taiwan.	These	facilities	are	principally	used	for	manufacturing;	research,	development and	engineering;	and	marketing,	sales	and	customer	support.

Applied	also	owns	a	total	of	approximately	269	acres	of	buildable	land	in	Montana,	Texas,	California,	Israel	and	Italy	that	could	accommodate	additional	building space.

Applied	considers	the	properties	that	it	owns	or	leases	as	adequate	to	meet	its	current	and	future	requirements.	Applied	regularly	assesses	the	size,	capability	and location	of	its	global	infrastructure	and	periodically	makes	adjustments	based	on	these	assessments.

# Item	3: Legal	Proceedings

The	information	set	forth	under	"Legal	Matters"	in	Note	14	of	Notes	to	Consolidated	Financial	Statements	is	incorporated	herein	by	reference.

# Item	4: Mine	Safety	Disclosures

# PART	II

# Item	5: Market for	 Registrant's	 Common	 Equity,	 Related	 Stockholder	 Matters and Issuer	 Purchases of	 Equity Securities

# Market	Information

Applied's	common	stock	is	traded	on	the	NASDAQ	Global	Select	Market	under	the	symbol	AMAT.	As	of	December	7,	2018,	there	were	2,854	registered	holders of	Applied	common	stock.

# Performance	Graph

The	performance	graph	below	shows	the	five-year	cumulative	total	stockholder	return	on	Applied	common	stock	during	the	period	from	October	27,	2013	through October	28,	2018.	This	is	compared	with	the	cumulative	total	return	of	the	Standard	&	Poor's	500	Stock	Index	and	the	RDG	Semiconductor	Composite	Index	over	the same	period.	The	comparison	assumes	$100	was	invested	on	October	27,	2013	in	Applied	common	stock	and	in	each	of	the	foregoing	indices	and	assumes	reinvestment of	dividends,	if	any.	Dollar	amounts	in	the	graph	are	rounded	to	the	nearest	whole	dollar.	The	performance	shown	in	the	graph	represents	past	performance	and	should not	be	considered	an	indication	of	future	performance.

# COMPARISON	OF	5	YEAR	CUMULATIVE	TOTAL	RETURN*

Among	Applied	Materials,	Inc.,	the	S&P	500	Index

and	the	RDG	Semiconductor	Composite	Index

# amatfy18performancegraph.jpg

Indexes	calculated	on	month-end	basis.

Copyright©	2018	Standard	&	Poor's,	a	division	of	S&P	global.	All	rights	reserved.

|  | 10/27/2013 | 10/26/2014 | 10/25/2015 | 10/30/2016 | 10/29/2017 | 10/28/2018 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Applied\tMaterials | 100.00 | 121.04 | 96.67 | 171.69 | 343.16 | 198.27 |
| S&P\t500\tIndex | 100.00 | 117.27 | 123.37 | 128.93 | 159.40 | 171.11 |
| RDG\tSemiconductor\tComposite\tIndex | 100.00 | 128.42 | 126.26 | 154.41 | 232.29 | 221.61 |

# Issuer	Purchases	of	Equity	Securities

The	following	table	provides	information	as	of	October	28,	2018	with	respect	to	the	shares	of	common	stock	repurchased	by	Applied	during	the	fourth	quarter	of fiscal	2018	pursuant	to	a	publicly	announced	stock	repurchase	program	approved	by	the	Board	of	Directors	in	February	2018,	which	authorized	up	to	an	aggregate	of $6.0	billion	in	repurchases.

| Period | Total	Number	of<br>Shares		Purchased | Average<br>Price	Paid<br>per	Share | Aggregate<br>Price	Paid | Total	Number	of<br>Shares	Purchased	as<br>Part	of	Publicly<br>Announced	Programs	* | Maximum	Dollar<br>Value	of	Shares<br>That	May	Yet	be<br>Purchased	Under<br>the	Programs |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | (In\tmillions,\texcept\tper\tshare\tamounts) |  |  |
| Month\t#1 |  |  |  |  |  |
| (July\t30,\t2018\tto\tAugust\t26,\t2018) | 7.9 | $46.69 | $369 | 7.9 | $4,709 |
| Month\t#2 |  |  |  |  |  |
| (August\t27,\t2018\tto\tSeptember\t23,\t2018) | 3.7 | $40.13 | 148 | 3.7 | $4,561 |
| Month\t#3 |  |  |  |  |  |
| (September\t24,\t2018\tto\tOctober\t28,\t2018) | 6.5 | $35.78 | 234 | 6.5 | $4,327 |
| Total | 18.1 | $41.43 | $751 | 18.1 |  |

# Item	6: Selected	Financial	Data

The	 following	 selected	 financial	 information	 has	 been	 derived	 from	Applied's	 historical	 audited	 consolidated financial	 statements	 and	 should	 be read in conjunction	with	the	consolidated	financial	statements	and	the	accompanying	notes	for	the	corresponding	fiscal	years:

| Fiscal	Year(1) | 2018 | 2017 | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  | (In\tmillions,\texcept\tpercentages\tand\tper\tshare\tamounts) | (In\tmillions,\texcept\tpercentages\tand\tper\tshare\tamounts) | (In\tmillions,\texcept\tpercentages\tand\tper\tshare\tamounts) |  |
| Net\tsales | $17,253 | $14,537 | $10,825 | $9,659 | $9,072 |
| Gross\tprofit | $7,817 | $6,532 | $4,511 | $3,952 | $3,843 |
| Gross\tmargin | 45.3% | 44.9% | 41.7% | 40.9% | 42.4% |
| Research,\tdevelopment\tand\tengineering | $2,019 | $1,774 | $1,540 | $1,451 | $1,428 |
| Operating\tincome | $4,796 | $3,868 | $2,152 | $1,693 | $1,520 |
| Operating\tmargin | 27.8% | 26.6% | 19.9% | 17.5% | 16.8% |
| Income\tbefore\tincome\ttaxes | $4,694 | $3,731 | $2,013 | $1,598 | $1,448 |
| Net\tincome | $3,313 | $3,434 | $1,721 | $1,377 | $1,072 |
| Earnings\tper\tdiluted\tshare | $3.23 | $3.17 | $1.54 | $1.12 | $0.87 |
| Long-term\tdebt | $5,309 | $5,304 | $3,143 | $3,342 | $1,947 |
| Cash\tdividends\tdeclared\tper\tcommon\tshare | $0.70 | $0.40 | $0.40 | $0.40 | $0.40 |
| Total\tassets | $17,773 | $19,419 | $14,588 | $15,308 | $13,174 |

# Item	7: Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of Operations

# Introduction

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

•Overview: a summary of Applied's business and measurements

•Results	of	Operations:	a	discussion	of	operating	results

•Segment Information: a discussion of segment operating results

•Recent	 Accounting	 Pronouncements:	 a	 discussion	 of	 new	 accounting	 pronouncements	 and its impact to	 Applied's consolidated financial statements

•Financial	Condition,	Liquidity	and	Capital	Resources:	an	analysis	of	cash	flows,	sources	and	uses	of cash

•Off-Balance Sheet Arrangements and Contractual Obligations

•Critical	Accounting	 Policies	 and	 Estimates:	 a	 discussion	 of	 critical	 accounting	 policies that require the	 exercise	 of judgments	 and estimates

•Non-GAAP	 Adjusted	 Results: a presentation of results reconciling	 GAAP to non-GAAP adjusted measures

# Overview

Applied	 provides	 manufacturing	 equipment,	 services	 and	 software	 to	 the	 semiconductor,	 display,	 and	 related	 industries.	 Applied's	 customers	 include manufacturers	of	semiconductor	wafers	and	chips,	liquid	crystal	and	organic	light-emitting	diode	(OLED)	displays,	and	other	electronic	devices.	These	customers	may use	what	they	manufacture	in	their	own	end	products	or	sell	the	items	to	other	companies	for	use	in	advanced	electronic	components.	Each	of	Applied's	businesses	is subject	 to	 variable	 industry	 conditions,	 as	 demand	 for	 manufacturing	 equipment	 and	 services	 can	 change	 depending	 on	 supply	 and	 demand	 for	 chips,	 display technologies,	and	other	electronic	devices,	as	well	as	other	factors,	such	as	global	economic	and	market	conditions,	and	the	nature	and	timing	of	technological	advances in	fabrication	processes.

Applied	operates	in	three	reportable	segments:	Semiconductor	Systems,	Applied	Global	Services,	and	Display	and	Adjacent	Markets.	A	summary	of	financial information	 for	 each	 reportable	 segment	 is	 found	 in	Note	15	of	Notes	 to	Consolidated	Financial	Statements.	A	discussion	of	factors	 that	could	affect	Applied's operations	is	set	forth	under	"Risk	Factors"	in	Part	I,	Item	1A,	which	is	incorporated	herein	by	reference.	Product	development	and	manufacturing	activities	occur primarily	in	the	United	States,	Europe,	Israel,	and	Asia.	Applied's	broad	range	of	equipment	and	service	products	are	highly	technical	and	are	sold	primarily	through	a direct	sales	force.

Applied's	results	are	driven	primarily	by	customer	spending	on	capital	equipment	and	services	to	support	key	technology	transitions	or	to	increase	production volume	in	response	to	worldwide	demand	for	semiconductors	and	displays.	Spending	by	semiconductor	customers,	which	include	companies	that	operate	in	the	foundry, memory	and	logic	markets,	is	driven	by	demand	for	advanced	electronic	products,	including	smartphones	and	other	mobile	devices,	servers,	personal	computers, automotive	devices,	storage,	and	other	products.	The	growth	of	data	and	emerging	end-market	drivers	such	as	artificial	intelligence,	augmented	and	virtual	reality,	the Internet	of	Things	and	smart	vehicles	are	also	creating	new	opportunities	for	the	industry.	As	a	result,	products	within	the	Semiconductor	Systems	segment	are	subject	to significant	changes	in	customer	requirements,	including	transitions	to	smaller	dimensions,	increasingly	complex	chip	architectures,	new	materials	and	an	increasing number	of	applications.	Demand	for	display	manufacturing	equipment	spending	depends	primarily	on	consumer	demand	for	increasingly	larger	and	more	advanced	TVs as	well	as	larger	and	higher	resolution	displays	for	next-generation	mobile	devices,	and	investments	in	new	types	of	display	technologies.	While	certain	existing technologies	may	be	adapted	to	new	requirements,	some	applications	create	the	need	for	an	entirely	different	technological	approach.	The	timing	of	customer	investment in	manufacturing	equipment	is	also	affected	by	the	timing	of	next-generation	process	development	and	the	timing	of	capacity	expansion	to	meet	end-market	demand.	In light	of	these	conditions,	Applied's	results	can	vary	significantly	year-over-year,	as	well	as	quarter-over-quarter.

Applied's	 strategic	 priorities	 include	 developing	 products	 that	 help	 solve	 customers'	 challenges	 at	 technology	 inflections;	 expanding	 its	 served	 market opportunities	in	the	semiconductor	and	display	industries;	and	growing	its	services	business.	Applied's	long-term	growth	strategy	requires	continued	development	of new	materials	engineering	capabilities,	including	products	and	platforms	that	enable	expansion	into	new	and	adjacent	markets.	Applied's	significant	investments	in research,	development	and	engineering	must	generally	enable	it	to	deliver	new	products	and	technologies	before	the	emergence	of	strong	demand,	thus	allowing customers	to	incorporate	these	products	into	their	manufacturing	plans	during	early-stage	technology	selection.	Applied	works	closely	with	its	global	customers	to design	systems	and	processes	that	meet	their	planned	technical	and	production	requirements.

The	following	table	presents	certain	significant	measurements	for	the	past	three	fiscal	years:

|  |  | (In	millions,	except	per	share	amounts	and	percentages) | (In	millions,	except	per	share	amounts	and	percentages) | (In	millions,	except	per	share	amounts	and	percentages) |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Net\tsales | $17,253 | $14,537 | $10,825 | $2,716 | $3,712 |
| Gross\tmargin | 45.3% | 44.9% | 41.7% | 0.4\tpoints | 3.2\tpoints |
| Operating\tincome | $4,796 | $3,868 | $2,152 | $928 | $1,716 |
| Operating\tmargin | 27.8% | 26.6% | 19.9% | 1.2\tpoints | 6.7\tpoints |
| Net\tincome | $3,313 | $3,434 | $1,721 | $(121) | $1,713 |
| Earnings\tper\tdiluted\tshare | $3.23 | $3.17 | $1.54 | $0.06 | $1.63 |

Fiscal	2018	included	a	one-time	expense	related	to	the	enactment	of	recent	U.S.	tax	legislation	that	reduced	diluted	earnings	per	share	by	$1.08.

Investment	in	semiconductor	and	display	manufacturing	equipment	and	services	continued	to	be	a	strong	driver	of	revenue	during	fiscal	2018.	Semiconductor equipment	customers	made	investments	in	new	capacity	and	technology	transitions,	and	Applied's	overall	semiconductor	systems	revenue	increased	as	compared	to	the prior	year.	Demand	for	dynamic	random-access	memory	(DRAM)	and	NAND	increased	in	fiscal	2018	although	overall	spending	by	memory	customers	was	lower towards	the	second	half	of	the	year.	Logic	customers'	spending	remained	strong	while	foundry	customers'	spending	decreased	compared	to	the	prior	year	and	Applied continues	to	see	these	customers	optimize	existing	capacity	and	re-prioritize	their	capital	spending	plans	on	longer	lead-time	equipment	not	in	Applied's	product portfolio.	Display	equipment	spending	during	fiscal	2018	reflected	continued	investment	in	new	technology	and	manufacturing	equipment	for	producing	larger	LCD TVs	and	in	new	equipment	for	mobile	devices.	Applied	also	continued	to	see	strong	growth	in	demand	for	spares	and	services	from	customers	as	compared	to	the	prior year.

While	Applied	anticipates	major	technology	trends	to	continue	driving	long-term	growth	in	the	semiconductor	industry,	the	trends	characterizing	the	second	half	of 2018	are	 likely	 to	continue	 into	early	fiscal	2019,	with	 lower	spending	by	memory	customers,	and	foundry	customers	prioritizing	spending	on	 longer	 lead-time equipment	not	in	Applied's	product	portfolio.	Applied	also	expects	lower	spending	for	display	manufacturing	equipment	in	fiscal	2019,	although	long-term	demand drivers	remain	in	place.	Applied	anticipates	continued	growth	in	semiconductor	spares	and	services	spending	in	fiscal	2019.

# Results	of	Operations

# Net	Sales

Net	sales	for	the	periods	indicated	were	as	follows:

|  |  | 2018 |  | 2017 |  | 2016 | 2018	over	2017 | 2017	over	2016 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  |  | (In\tmillions,\texcept\tpercentages) | (In\tmillions,\texcept\tpercentages) |  |  |  |
| Semiconductor\tSystems | $10,903 | 63% | $9,517 | 65% | $6,873 | 64% | 15% | 38% |
| Applied\tGlobal\tServices | 3,754 | 22% | 3,017 | 21% | 2,589 | 24% | 24% | 17% |
| Display\tand\tAdjacent\tMarkets | 2,498 | 14% | 1,900 | 13% | 1,206 | 11% | 31% | 58% |
| Corporate\tand\tOther | 98 | 1% | 103 | 1% | 157 | 1% | (5)% | (34)% |
| Total | $17,253 | 100% | $14,537 | 100% | $10,825 | 100% | 19% | 34% |

Net	sales	in	fiscal	2018	compared	to	fiscal	2017	increased	due	to	increased	customer	investments	across	all	segments.	The	Semiconductor	Systems	segment continued	to	represent	the	largest	contributor	of	net	sales	and	to	the	increase	in	net	sales.

Net	sales	in	fiscal	2017	compared	to	fiscal	2016	increased	due	to	increased	customer	investments	in	all	segments,	with	the	majority	of	the	increases	resulting	from investments	in	semiconductor	equipment.

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

|  |  | 2018 |  | 2017 |  | 2016 | 2018	over<br>2017 | 2017	over<br>2016 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  |  | (In\tmillions,\texcept\tpercentages) | (In\tmillions,\texcept\tpercentages) |  |  |  |
| China | $5,113 | 30% | $2,746 | 19% | $2,259 | 21% | 86% | 22% |
| Korea | 3,603 | 21% | 4,052 | 28% | 1,883 | 17% | (11)% | 115% |
| Taiwan | 2,732 | 16% | 3,291 | 23% | 2,843 | 26% | (17)% | 16% |
| Japan | 2,405 | 14% | 1,518 | 10% | 1,279 | 12% | 58% | 19% |
| Southeast\tAsia | 802 | 4% | 640 | 4% | 803 | 7% | 25% | (20)% |
| Asia\tPacific | 14,655 | 85% | 12,247 | 84% | 9,067 | 83% | 20% | 35% |
| United\tStates | 1,532 | 9% | 1,474 | 10% | 1,143 | 11% | 4% | 29% |
| Europe | 1,066 | 6% | 816 | 6% | 615 | 6% | 31% | 33% |
| Total | $17,253 | 100% | $14,537 | 100% | $10,825 | 100% | 19% | 34% |

The	changes	in	net	sales	in	all	regions	other	than	Korea	for	fiscal	2018	compared	to	fiscal	2017	primarily	reflected	changes	in	semiconductor	equipment	spending, including	product	and	customer	mix,	and	increased	spending	in	semiconductor	spares	and	services.	The	increase	in	net	sales	to	customers	in	China	also	reflected increased	 investments	 in	display	manufacturing	equipment.	The	decrease	 in	net	sales	 to	customers	 in	Korea	primarily	reflected	decreased	 investments	 in	display manufacturing	equipment.

The	changes	in	net	sales	from	customers	in	all	regions	for	fiscal	2017	compared	to	fiscal	2016	primarily	reflected	increased	investments	in	semiconductor equipment	and	changes	in	semiconductor	equipment	customer	mix.	In	addition,	the	increase	in	net	sales	from	customers	in	China	also	reflected	increased	investments from	display	manufacturing	equipment	customers.

# Gross	Margin

Gross	margins	for	the	periods	indicated	were	as	follows:

Gross	margin	in	fiscal	2018	increased	slightly	compared	to	fiscal	2017,	primarily	due	to	higher	net	sales	and	materials	cost	savings.	Gross	margin	in	fiscal	2017 increased	compared	to	fiscal	2016,	primarily	due	to	higher	net	sales,	favorable	product	mix	and	materials	cost	savings.

Gross	margin	during	fiscal	2018,	2017	and	2016	included	$87	million,	$69	million	and	$62	million,	respectively,	of	share-based	compensation	expense.

Research,	Development	and	Engineering	(RD&E)	expenses	for	the	periods	indicated	were	as	follows:

|  |  |  |  | Change |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2018 | 2017 | 2016 | 2018\tover\t2017 | 2017\tover\t2016 |
|  |  |  | (In\tmillions) |  |  |
| Research,\tdevelopment\tand\tengineering | $2,019 | $1,774 | $1,540 | $245 | $234 |

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

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

In	fiscal	2018,	Applied	increased	its	RD&E	investments	across	Semiconductor	Systems	and	Display	and	Adjacent	Markets,	including	etch,	e-beam	inspection	and other	materials	engineering	solutions	to	improve	chip	performance	and	enable	advanced	displays.	Applied's	investments	in	etch	were	focused	on	supporting	the	adoption of	precision	etch	technology	for	enabling	continued	scaling	of	3D	logic	and	memory	chips.	The	investment	in	e-beam	inspection	was	in	support	of	strengthening	our	e- beam	portfolio,	which	helps	achieve	higher	yields	at	advanced	nodes	by	detecting	the	most	challenging	defects	and	monitoring	and	controlling	process	marginality. Applied	also	invested	in	materials	engineering	solutions	to	support	patterning	applications	as	well	as	to	improve	transistor	performance	and	device	power	efficiency.	In Display	and	Adjacent	Markets,	RD&E	investments	were	focused	on	expanding	the	company's	market	opportunity	with	new	display	technologies.

RD&E	expenses	increased	in	fiscal	2018	compared	to	the	prior	year	and	also	in	fiscal	2017	compared	to	fiscal	2016,	primarily	due	to	additional	headcount	and increased	research	and	development	spending	 in	Semiconductor	Systems	and	Display	and	Adjacent	Market	segments.	These	 increases	reflect	Applied's	ongoing investments	in	product	development	initiatives,	consistent	with	the	Company's	growth	strategy.	Applied	continued	to	prioritize	existing	RD&E	investments	in	technical capabilities	and	critical	research	and	development	programs	in	current	and	new	markets,	with	a	focus	on	semiconductor	technologies.

RD&E	expense	during	fiscal	2018,	2017	and	2016	included	$96	million,	$83	million	and	$76	million,	respectively,	of	share-based	compensation	expense.

# Marketing	and	Selling

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

|  |  |  |  | Change |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2018 | 2017 | 2016 | 2018\tover\t2017 | 2017\tover\t2016 |
|  |  |  | (In\tmillions) |  |  |
| Marketing\tand\tselling | $521 | $456 | $429 | $65 | $27 |

Marketing	and	selling	expenses	increased	in	fiscal	2018	compared	to	fiscal	2017	primarily	due	to	additional	headcount.	Marketing	and	selling	expenses	increased in	fiscal	2017	compared	to	fiscal	2016,	primarily	due	to	additional	headcount,	partially	offset	by	the	reduction	in	bad	debt	provision	recorded	during	fiscal	2017.

Marketing	and	selling	expenses	for	fiscal	years	2018,	2017	and	2016	included	$31	million,	$28	million	and	$26	million,	respectively,	of	share-based	compensation expense.

# General	and	Administrative

|  |  |  |  | Change |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2018 | 2017 | 2016 | 2018\tover\t2017 | 2017\tover\t2016 |
|  |  |  | (In\tmillions) |  |  |
| General\tand\tadministrative | $481 | $434 | $390 | $47 | $44 |

General	and	administrative	expenses	in	fiscal	2018	increased	compared	to	fiscal	2017	primarily	due	to	additional	headcount	and	unfavorable	impact	from	foreign exchange	fluctuation,	partially	offset	by	lower	variable	compensation	expense.	General	and	administrative	expenses	in	fiscal	2017	increased	compared	to	fiscal	2016, primarily	due	to	higher	variable	compensation	and	additional	headcount.

G&A	expenses	during	fiscal	2018,	2017	and	2016	included	$44	million,	$40	million	and	$37	million,	respectively,	of	share-based	compensation	expense.

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

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

|  | 2018 | 2017 | 2016 | 2018	over	2017 | 2017	over	2016 |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | (In\tmillions) |  |  |
| Interest\texpense | $234 | $198 | $155 | $36 | $43 |
| Interest\tand\tother\tincome,\tnet | $132 | $61 | $16 | $71 | $45 |

Interest	expenses	incurred	were	primarily	associated	with	the	senior	unsecured	notes	issued	in	June	2011,	September	2015,	and	March	2017.	Interest	expense increased	in	fiscal	2018	compared	to	the	prior	year	and	also	in	fiscal	2017	compared	to	fiscal	2016	due	to	the	issuance	of	senior	unsecured	notes	in	March	2017.

Interest	and	other	income,	net	primarily	includes	interest	earned	on	cash	and	investments,	realized	gains	or	losses	on	sales	of	securities	and	impairment	of	strategic investments.	Interest	and	other	income,	net	in	fiscal	2018	increased	compared	to	fiscal	2017	primarily	driven	by	realized	gains	on	sales	of	securities	and	higher	interest income	from	investments.	Interest	and	other	income,	net	in	fiscal	2017	increased	compared	to	the	prior	year	primarily	due	to	higher	interest	income	from	investments, partially	offset	by	higher	impairment	of	strategic	investments	in	fiscal	2017.

# Income	Taxes

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

|  | 2018 | 2017 | 2016 | 2018	over	2017 | 2017	over	2016 |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | (In\tmillions,\texcept\tpercentages) | (In\tmillions,\texcept\tpercentages) |  |
| Provision\tfor\tincome\ttaxes | $1,381 | $297 | $292 | $1,084 | $5 |
| Effective\tincome\ttax\trate | 29.4% | 8.0% | 14.5% | 21.4\tpoints | (6.5)\tpoints |

Applied's	provision	for	income	taxes	and	effective	tax	rate	are	affected	by	the	geographical	composition	of	pre-tax	income	which	includes	jurisdictions	with differing	tax	rates,	conditional	reduced	tax	rates	and	other	income	tax	incentives.	It	is	also	affected	by	events	that	are	not	consistent	from	period	to	period,	such	as changes	in	income	tax	laws	and	the	resolution	of	prior	years'	income	tax	filings.

On	December	22,	2017,	the	U.S.	government	enacted	the	Tax	Cuts	and	Jobs	Act	(the	"Tax	Act").	The	Tax	Act	includes	a	reduction	to	the	U.S.	federal	corporate tax	rate	from	35.0	percent	to	21.0	percent	and	requires	a	one-time	transition	tax	on	certain	unrepatriated	earnings	of	foreign	subsidiaries	payable	over	eight	years.	U.S. deferred	tax	assets	and	liabilities	were	subject	to	remeasurement	due	to	the	reduction	of	the	U.S.	federal	corporate	tax	rate.	Applied	has	a	blended	U.S.	federal	corporate tax	rate	of	23.4	percent	for	fiscal	2018	based	on	the	number	of	days	before	and	after	the	effective	date	of	the	Tax	Act.

The	U.S.	Securities	and	Exchange	Commission	issued	Staff	Accounting	Bulletin	No.	118	(SAB	118),	which	provides	guidance	on	accounting	for	the	income	tax effects	of	the	Tax	Act.	SAB	118	provides	a	measurement	period	for	companies	to	complete	this	accounting.	Pursuant	to	SAB	118,	provisional	adjustments	were recorded	when	reasonable	estimates	could	be	determined.	These	provisional	estimates	will	be	revised	as	information	becomes	available	and	as	guidance	is	issued	by	the Internal	Revenue	Service.	The	accounting	for	the	income	tax	effects	of	the	Tax	Act	will	be	completed	during	the	measurement	period,	which	will	not	extend	beyond	one year	from	the	Tax	Act	enactment	date.	Applied	continues	to	evaluate	certain	unrepatriated	earnings	of	foreign	subsidiaries	used	to	calculate	the	transition	tax.	The remeasurement	of	U.S.	deferred	tax	assets	and	liabilities	is	complete.

The	effective	tax	rate	for	fiscal	2018	was	higher	than	fiscal	2017	primarily	due	to	tax	expense	of	$1.1	billion	for	the	transition	tax	and	remeasurement	of	deferred tax	assets	as	a	result	of	the	Tax	Act,	partially	offset	by	changes	in	the	geographical	composition	of	income,	tax	benefits	from	the	lower	U.S.	federal	corporate	tax	rate, adoption	of	authoritative	guidance	for	share-based	compensation,	and	the	resolution	of	tax	liabilities	for	uncertain	tax	positions.	In	addition,	fiscal	2017	included	tax benefits	from	the	recognition	of	previously	unrecognized	foreign	tax	credits.

The	effective	tax	rate	for	fiscal	2017	was	lower	than	fiscal	2016	primarily	due	to	the	recognition	of	previously	unrecognized	foreign	tax	credits	and	changes	in	the geographical	composition	of	income.	In	addition,	fiscal	2016	included	unfavorable	resolutions	and	changes	related	to	income	tax	liabilities	for	uncertain	tax	positions	as well	as	the	reinstatement	of	the	U.S.	federal	R&D	tax	credit	retroactive	to	its	expiration	in	December	of	2015	which	did	not	reoccur	in	fiscal	2017.

# Segment	Information

Applied	reports	financial	results	in	three	segments:	Semiconductor	Systems,	Applied	Global	Services,	and	Display	and	Adjacent	Markets.	A	description	of	the products	and	services,	as	well	as	financial	data,	for	each	reportable	segment	can	be	found	in	Note	15	of	Notes	to	Consolidated	Financial	Statements.

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

The	results	for	each	reportable	segment	are	discussed	below.

# Semiconductor	Systems	Segment

The	Semiconductor	Systems	segment	is	comprised	primarily	of	capital	equipment	used	to	fabricate	semiconductor	chips.	Semiconductor	industry	spending	on capital	equipment	is	driven	by	demand	for	advanced	electronic	products,	including	smartphones	and	other	mobile	devices,	servers,	personal	computers,	automotive devices,	storage,	and	other	products,	and	the	nature	and	timing	of	technological	advances	in	fabrication	processes,	and	as	a	result	is	subject	to	variable	industry conditions.	Development	efforts	are	focused	on	solving	customers'	key	technical	challenges	in	transistor,	interconnect,	patterning	and	packaging	performance	as	devices scale	to	advanced	technology	nodes.

Investment	in	semiconductor	manufacturing	equipment	continued	to	be	a	strong	driver	of	revenue	during	fiscal	2018.	Semiconductor	equipment	customers	made investments	in	new	capacity	and	technology	transitions,	and	overall	semiconductor	systems	revenue	increased.	Demand	for	logic,	DRAM,	and	NAND	increased	during fiscal	2018.	Foundry	customers'	spending	decreased	compared	to	the	prior	year	and	Applied	continues	to	see	these	customers	optimize	existing	capacity	and	re-prioritize their	capital	spending	plans	on	longer	lead-time	equipment	not	in	Applied's	product	portfolio.

Certain	significant	measures	for	the	periods	indicated	were	as	follows:

Net	sales	for	fiscal	2018	increased	compared	to	fiscal	2017	primarily	due	to	higher	spending	from	memory	and	logic	customers,	offset	by	lower	spending	from foundry	customers.	Although	operating	margin	remained	flat,	operating	income	for	fiscal	2018	increased	compared	to	fiscal	2017	primarily	due	to	favorable	changes	in product	mix	and	higher	net	sales,	partially	offset	by	higher	RD&E	expenses.	Six	customers	represented	at	least	10	percent	of	this	segment's	net	sales,	and	together	they accounted	for	approximately	76	percent	of	this	segment's	net	sales	for	fiscal	2018.

Net	sales	for	fiscal	2017	increased	compared	to	fiscal	2016	primarily	due	to	higher	spending	from	foundry	and	memory	customers.	Operating	income	and operating	margin	for	fiscal	2017	increased	compared	to	prior	year	primarily	due	to	favorable	changes	in	product	mix	and	higher	net	sales,	partially	offset	by	higher RD&E	expenses.

The	following	regions	accounted	for	at	least	30	percent	of	total	net	sales	for	the	Semiconductor	Systems	segment	for	one	or	more	of	past	three	fiscal	years:

|  | 2018 |  | 2017 |  | 2016 |  | 2018	over	2017 | 2018	over	2017 | 2017	over	2016 | 2017	over	2016 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  |  |  | (In\tmillions,\texcept\tpercentages) | (In\tmillions,\texcept\tpercentages) |  |  |  |  |
| Korea | $2,886 | 26% | $2,962 | 31% | $1,177 | 17% | $(76) | (3)% | $1,785 | 152% |
| Taiwan | $1,895 | 17% | $2,638 | 28% | $2,165 | 32% | $(743) | (28)% | $473 | 22% |

# Applied	Global	Services	Segment

The	Applied	Global	Services	segment	provides	integrated	solutions	to	optimize	equipment	and	fab	performance	and	productivity,	including	spares,	upgrades, services,	certain	remanufactured	earlier	generation	equipment	and	factory	automation	software	for	semiconductor,	display	and	solar	products.	Customer	demand	for products	and	services	is	fulfilled	through	a	global	distribution	system	with	trained	service	engineers	located	in	close	proximity	to	customer	sites.

Demand	for	Applied	Global	Services'	service	solutions	are	driven	by	Applied's	large	and	growing	installed	base	of	manufacturing	systems,	and	customers'	needs to	shorten	ramp	times,	improve	device	performance	and	yield,	and	optimize	factory	output	and	operating	costs.	Industry	conditions	that	affect	Applied	Global	Services' sales	of	spares	and	services	are	primarily	characterized	by	increases	in	semiconductor	manufacturers'	wafer	starts	and	continued	strong	utilization	rates,	growth	of	the installed	base	of	equipment,	growing	service	intensity	of	newer	tools,	and	the	company's	ability	to	sell	more	comprehensive	service	agreements.

|  | 2018 | 2017 | 2016 | 2018	over	2017 | 2018	over	2017 | 2017	over	2016 |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | (In\tmillions,\texcept\tpercentages\tand\tratios) | (In\tmillions,\texcept\tpercentages\tand\tratios) | (In\tmillions,\texcept\tpercentages\tand\tratios) |  |  |
| Net\tsales | $3,754 | $3,017 | $2,589 | $737 | 24% | $428 | 17% |
| Operating\tincome | $1,102 | $817 | $682 | $285 | 35% | $135 | 20% |
| Operating\tmargin | 29.4% | 27.1% | 26.3% | 2.3\tpoints | 2.3\tpoints | 0.8\tpoints | 0.8\tpoints |

There	was	no	single	region	that	accounted	for	at	least	30	percent	of	total	net	sales	for	the	Applied	Global	Services	segment	for	any	of	the	past	three	fiscal	years.

Net	sales	increased	in	fiscal	2018	compared	to	the	prior	year	and	also	in	fiscal	2017	compared	to	fiscal	2016	primarily	due	to	higher	customer	spending	for	spares and	services.	Two	customers	represented	at	least	10	percent	of	this	segment's	net	sales,	and	together	they	accounted	for	approximately	23	percent	of	this	segment's	net sales	for	fiscal	2018.

Operating	income	and	operating	margin	for	fiscal	2018	increased	compared	to	the	prior	year	and	also	in	fiscal	2017	compared	to	fiscal	2016,	reflecting	higher	net sales	partially	offset	by	increased	headcount	to	support	business	growth.

# Display	and	Adjacent	Markets	Segment

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

The	market	environment	for	Applied's	Display	and	Adjacent	Markets	segment	in	fiscal	2018	was	characterized	by	increased	demand	for	manufacturing	equipment for	TV	and	mobile	devices.	Uneven	demand	patterns	in	the	Display	and	Adjacent	Markets	segment	can	cause	significant	fluctuations	quarter-over-quarter,	as	well	as year-over-year.

Certain	significant	measures	for	the	periods	presented	were	as	follows:

|  | 2018 | 2017 | 2016 | 2018	over	2017 | 2018	over	2017 |  | 2017	over	2016 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | (In\tmillions,\texcept\tpercentages\tand\tratios) | (In\tmillions,\texcept\tpercentages\tand\tratios) | (In\tmillions,\texcept\tpercentages\tand\tratios) |  |  |
| Net\tsales | $2,498 | $1,900 | $1,206 | $598 | 31% | $694 | 58% |
| Operating\tincome | $679 | $502 | $245 | $177 | 35% | $257 | 105% |
| Operating\tmargin | 27.2% | 26.4% | 20.3% | 0.8\tpoints | 0.8\tpoints |  | 6.1\tpoints |

Net	sales	for	fiscal	2018	increased	compared	to	fiscal	2017	primarily	due	to	higher	customer	investments	in	TV	display	manufacturing	equipment.	Operating income	and	operating	margin	for	fiscal	2018	increased	compared	fiscal	2017,	reflecting	higher	net	sales	and	favorable	product	mix,	partially	offset	by	higher	RD&E spending.	Three	customers,	that	represented	at	least	10	percent	of	this	segment's	net	sales,	accounted	for	approximately	58	percent	of	net	sales	for	this	segment	in	fiscal 2018,	with	one	customer	accounting	for	approximately	33	percent	of	net	sales.

Net	sales	for	fiscal	2017	increased	compared	to	prior	year	primarily	due	to	higher	customer	investments	in	mobile	and	TV	display	manufacturing	equipment. Operating	income	and	operating	margin	for	fiscal	2017	increased	compared	to	the	prior	year,	reflecting	higher	net	sales	and	favorable	product	mix,	partially	offset	by increased	RD&E	spending.

The	following	regions	accounted	for	at	least	30	percent	of	total	net	sales	for	the	Display	and	Adjacent	Markets	segment	for	one	or	more	of	the	periods	presented:

|  | 2018 |  | 2017 |  | 2016 |  | 2018	over	2017 | 2018	over	2017 | 2017	over	2016 | 2017	over	2016 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  |  |  | (In\tmillions,\texcept\tpercentages) | (In\tmillions,\texcept\tpercentages) |  |  |  |  |
| China | $2,004 | 80% | $961 | 51% | $449 | 37% | $1,043 | 109% | $512 | 114% |
| Korea | $211 | 8% | $750 | 39% | $492 | 41% | $(539) | (72)% | $258 | 52% |

# Recent	Accounting	Pronouncements

For	a	description	of	recent	accounting	pronouncements,	including	the	expected	dates	of	adoption	and	estimated	effects,	if	any,	on	Applied's	consolidated	financial statements,	see	Note	1,	"Summary	of	Significant	Accounting	Policies,"	of	the	Notes	to	Consolidated	Financial	Statements.

# Financial	Condition,	Liquidity	and	Capital	Resources

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

|  | October	28,<br>2018 | October	29,<br>2017 |
| :--- | :--- | :--- |
|  | (In\tmillions) |  |
| Cash\tand\tcash\tequivalents | $3,440 | $5,010 |
| Short-term\tinvestments | 590 | 2,266 |
| Long-term\tinvestments | 1,568 | 1,143 |
| Total\tcash,\tcash-equivalents\tand\tinvestments | $5,598 | $8,419 |

# Sources	and	Uses	of	Cash

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

| Cash	provided	by	operating	activities | $3,787 | $3,789 | $2,566 |
| :--- | :--- | :--- | :--- |
| Cash\tprovided\tby\t(used\tin)\tinvesting\tactivities | $571 | $(2,526) | $(425) |
| Cash\tprovided\tby\t(used\tin)\tfinancing\tactivities | $(5,928) | $341 | $(3,532) |

In	March	2016,	the	Financial	Accounting	Standards	Board	issued	authoritative	guidance	that	simplifies	several	aspects	of	the	accounting	for	share-based	payment transactions,	including	forfeitures,	income	tax,	and	classification	on	the	statement	of	cash	flows.	Applied	adopted	this	guidance	in	the	first	quarter	of	fiscal	2018.	Upon adoption,	 Applied	 elected	 to	 apply	 the	 presentation	 requirements	 for	 cash	 flows	 related	 to	 excess	 tax	 benefits	 and	 employee	 taxes	 paid	 for	 withheld	 shares retrospectively.	Adopting	this	guidance	increased	cash	provided	by	operating	activities	by	$180	million	 and	$100	million	with	corresponding	net	decreases	in	cash provided	by	financing	activities	for	fiscal	2017	and	2016,	respectively.	See	Note	1	of	Notes	to	Consolidated	Financial	Statements	for	additional	discussion	of	this adoption.

# Operating	Activities

Cash	from	operating	activities	for	fiscal	2018	 was	$3.8	billion,	which	reflects	net	income	adjusted	for	the	effect	of	non-cash	charges	and	changes	in	working capital	 components.	 Non-cash	 charges	 included	 depreciation,	 amortization,	 share-based	 compensation	 and	 deferred	 income	 taxes.	 Cash	 provided	 from	 operating activities	remained	flat	from	fiscal	2017	to	fiscal	2018	due	to	the	increase	in	income	taxes	payable,	offset	by	lower	deferred	revenue	and	higher	increase	in	accounts receivable.	Cash	provided	by	operating	activities	increased	from	fiscal	2016	to	fiscal	2017	primarily	due	to	higher	net	income,	offset	by	a	smaller	increase	in	customer deposits	and	a	greater	increase	in	inventory	in	fiscal	2017.

Applied	has	agreements	with	various	financial	institutions	to	sell	accounts	receivable	and	discount	promissory	notes	from	selected	customers.	Applied	sells	its accounts	receivable	without	recourse.	Applied,	from	 time	 to	 time,	also	discounts	 letters	of	credit	 issued	by	customers	 through	various	financial	 institutions.	The discounting	of	 letters	of	credit	depends	on	many	factors,	 including	 the	willingness	of	financial	 institutions	 to	discount	 the	 letters	of	credit	and	 the	cost	of	such arrangements.	Applied	sold	$1.6	billion,	$746	million	and	$75	million	of	accounts	receivable	during	fiscal	2018,	2017	and	2016,	respectively.	Applied	discounted	letters of	credit	issued	by	customers	of	$37	million	in	fiscal	2018.	There	was	no	discounting	of	promissory	notes	in	fiscal	2018.	Applied	did	not	discount	letters	of	credit	issued by	customers	or	discount	promissory	notes	during	fiscal	2017	or	2016.

Days	sales	outstanding	at	the	end	of	fiscal	2018,	2017	and	2016	was	58	days,	54	days,	and	63	days,	respectively.	Days	sales	outstanding	varies	due	to	the	timing	of shipments	and	payment	terms,	and	the	increase	from	fiscal	2017	to	fiscal	2018	was	primarily	due	to	better	revenue	linearity	in	fiscal	2017.	Days	sales	outstanding decreased	from	fiscal	2016	to	fiscal	2017	primarily	due	to	better	collections	performance	and	increase	in	factoring	of	accounts	receivable.

# Investing	Activities

Applied	generated	$571	million	in	cash	from	investing	activities	in	fiscal	2018.	Applied	used	$2.5	billion	of	cash	in	investing	activities	in	fiscal	2017	and	$425 million	in	fiscal	2016.	Capital	expenditures	in	fiscal	2018,	2017	and	2016	were	$622	million,	$345	million	and	$253	million,	respectively.	Capital	expenditures	in	fiscal 2018	were	primarily	for	real	property	acquisitions	and	improvements	in	North	America	and	Taiwan,	as	well	as	investments	in	demonstration,	testing	and	laboratory tools.	Capital	expenditures	in	fiscal	2017	and	fiscal	2016	were	primarily	for	demonstration	and	test	equipment	and	laboratory	tools	in	North	America.	Proceeds	from sales	and	maturities	of	investments,	net	of	purchase	of	investments	was	$1.2	billion	for	fiscal	2018.	Purchases	of	investments,	net	of	proceeds	from	sales	and	maturities of	investments	were	$2.1	billion	and	$156	million	for	fiscal	2017	and	2016,	respectively.	Investing	activities	also	included	investments	in	technology	to	allow	Applied	to access	new	market	opportunities	or	emerging	technologies.

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

# Financing	Activities

Applied	used	$5.9	billion	of	cash	in	financing	activities	in	fiscal	2018,	consisting	primarily	of	repurchases	of	common	stock	of	$5.3	billion,	cash	dividends	to stockholders	of	$605	million	and	tax	withholding	payments	for	vested	equity	awards	of	$164	million,	offset	by	proceeds	from	common	stock	issuances	of	$124	million.

Applied	 generated	$341	million	 of	 cash	 from	 financing	 activities	 in	 fiscal	2017,	consisting	primarily	of	net	proceeds	received	from	 the	 issuance	of	senior unsecured	notes	of	$2.2	billion,	proceeds	from	common	stock	issuances	of	$97	million,	partially	offset	by	cash	used	for	repurchases	of	common	stock	of	$1.2	billion, cash	dividends	to	stockholders	of	$430	million	and	debt	repayments	of	$205	million.

Applied	 used	$3.5	billion	of	cash	in	financing	activities	in	fiscal	2016,	consisting	primarily	$1.2	billion	 in	debt	repayments,	$1.9	billion	in	repurchases	of	its common	stock,	and	$444	million	in	cash	dividends	to	stockholders,	offset	by	proceeds	from	common	stock	issuances	of	$88	million.

In	September	2017,	Applied's	Board	of	Directors	approved	a	common	stock	repurchase	program	authorizing	up	to	$3.0	billion	in	repurchases.	In	February	2018, the	Board	of	Directors	approved	a	new	common	stock	repurchase	program	authorizing	up	to	an	additional	$6.0	billion	in	repurchases.	At	October	28,	2018,	$4.3	billion remained	available	for	future	stock	repurchases	under	this	repurchase	program.

During	fiscal	2018,	Applied's	Board	of	Directors	declared	three	quarterly	cash	dividends	of	$0.20	per	share	and	one	quarterly	cash	dividend	of	$0.10	per	share. During	each	of	fiscal	2017	and	2016,	Applied's	Board	of	Directors	declared	four	quarterly	cash	dividends	in	the	amount	of	$0.10	per	share.	Applied	currently	anticipates that	cash	dividends	will	continue	to	be	paid	on	a	quarterly	basis,	although	the	declaration	of	any	future	cash	dividend	is	at	the	discretion	of	the	Board	of	Directors	and will	depend	on	Applied's	financial	condition,	results	of	operations,	capital	requirements,	business	conditions	and	other	factors,	as	well	as	a	determination	by	the	Board	of Directors	that	cash	dividends	are	in	the	best	interests	of	Applied's	stockholders.

Applied	has	credit	facilities	for	unsecured	borrowings	in	various	currencies	of	up	to	$1.6	billion,	of	which	$1.5	billion	is	comprised	of	a	committed	revolving credit	agreement	with	a	group	of	banks	that	is	scheduled	to	expire	in	September	2021.	This	agreement	provides	for	borrowings	in	United	States	dollars	at	interest	rates keyed	to	one	of	two	rates	selected	by	Applied	for	each	advance	and	includes	financial	and	other	covenants	with	which	Applied	was	in	compliance	at	October	28,	2018. Remaining	credit	facilities	in	the	amount	of	approximately	$71	million	are	with	Japanese	banks.	Applied's	ability	to	borrow	under	these	facilities	is	subject	to	bank approval	at	the	time	of	the	borrowing	request,	and	any	advances	will	be	at	rates	indexed	to	the	banks'	prime	reference	rate	denominated	in	Japanese	yen.	No	amounts were	outstanding	under	any	of	these	facilities	at	both	October	28,	2018	and	October	29,	2017,	and	Applied	has	not	utilized	these	credit	facilities.

In	fiscal	2011,	Applied	established	a	short-term	commercial	paper	program	of	up	to	$1.5	billion.	At	October	28,	2018	and	October	29,	2017,	Applied	did	not	have any	commercial	paper	outstanding,	but	may	issue	commercial	paper	notes	under	this	program	from	time	to	time	in	the	future.

In	March	2017,	Applied	issued	senior	unsecured	notes	in	the	aggregate	principal	amount	of	$2.2	billion.	Applied	had	senior	unsecured	notes	in	the	aggregate principal	amount	of	$5.4	billion	outstanding	as	of	October	28,	2018.	The	indentures	governing	these	notes	include	covenants	with	which	Applied	was	in	compliance	at October	28,	2018.	In	May	2017,	Applied	completed	the	redemption	of	the	entire	outstanding	$200	million	in	principal	amount	of	senior	notes	due	in	October	2017.	See Note	10	of	Notes	to	Consolidated	Financial	Statements	for	additional	discussion	of	existing	debt.	Applied	may	seek	to	refinance	its	existing	debt	and	may	incur additional	indebtedness	depending	on	Applied's	capital	requirements	and	the	availability	of	financing.

# Others

During	2018	and	2017,	Applied	reduced	$1	million	and	$17	million,	respectively,	of	its	allowance	for	doubtful	accounts	as	a	result	of	an	overall	lower	risk	profile of	Applied's	customers.	Applied	recorded	a	bad	debt	provision	of	$3	million	 in	 fiscal	 2016.	While	Applied	believes	 that	 its	allowance	for	doubtful	accounts	at October	28,	2018	is	adequate,	it	will	continue	to	closely	monitor	customer	liquidity	and	economic	conditions.

On	December	22,	2017,	the	U.S.	government	enacted	the	Tax	Cuts	and	Jobs	Act.	The	Tax	Act	requires	a	one-time	transition	tax	on	certain	unrepatriated	earnings of	foreign	subsidiaries	payable	over	eight	years,	with	eight	percent	due	in	each	of	the	first	five	years	starting	with	fiscal	2018.	For	fiscal	2018,	Applied	realized	tax expense	of	$1.1	billion	associated	with	the	Tax	Act,	primarily	due	to	the	transition	tax.	The	transition	tax	eliminated	the	requirement	that	cash,	cash	equivalents	and marketable	securities	held	by	certain	foreign	subsidiaries	be	subject	to	U.S	income	taxes	if	repatriated	for	U.S.	operations.	Accordingly,	cash,	cash	equivalents	and marketable	securities	held	by	all	foreign	subsidiaries	may	be	repatriated	for	U.S.	operation	without	being	subject	to	further	U.S.	income	taxes.

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

For	details	on	standby	letters	of	credit	and	other	agreements	with	banks,	see	Off-Balance	Sheet	Arrangements	below.

# Off-Balance	Sheet	Arrangements

In	the	ordinary	course	of	business,	Applied	provides	standby	letters	of	credit	or	other	guarantee	instruments	to	third	parties	as	required	for	certain	transactions initiated	by	either	Applied	or	its	subsidiaries.	As	of	October	28,	2018,	the	maximum	potential	amount	of	future	payments	that	Applied	could	be	required	to	make	under these	guarantee	agreements	was	approximately	$58	million.	Applied	has	not	recorded	any	liability	in	connection	with	these	guarantee	agreements	beyond	that	required to	appropriately	account	for	the	underlying	transaction	being	guaranteed.	Applied	does	not	believe,	based	on	historical	experience	and	information	currently	available, that	it	is	probable	that	any	amounts	will	be	required	to	be	paid	under	these	guarantee	agreements.

Applied	also	has	agreements	with	various	banks	 to	facilitate	subsidiary	banking	operations	worldwide,	 including	overdraft	arrangements,	 issuance	of	bank guarantees,	and	letters	of	credit.	As	of	October	28,	2018,	Applied	has	provided	parent	guarantees	to	banks	for	approximately	$149	million	to	cover	these	arrangements.

Applied	 also	 has	 operating leases for	 various facilities.	 Total rent	 expense for fiscal	2018,	2017 and	2016	 was	$50	 million,	$34	 million and	$38	 million, respectively.

# Contractual	Obligations

The	following	table	summarizes	Applied's	contractual	obligations	as	of	October	28,	2018:

| Contractual	Obligations | Total | 1	Year | Years | Years | More	Than<br>5	Years |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | (In\tmillions) |  |  |
| Debt\tobligations | $5,350 | $— | $1,350 | $— | $4,000 |
| Interest\texpense\tassociated\twith\tdebt\tobligations | 3,137 | 219 | 422 | 342 | 2,154 |
| Operating\tlease\tobligations | 173 | 50 | 68 | 33 | 22 |
| Income\ttax\tfrom\tchange\tin\tU.S.\ttax\tlaws1 | 1,001 | 80 | 160 | 160 | 601 |
| Purchase\tobligations2 | 2,044 | 1,914 | 115 | 15 | — |
| Other\tlong-term\tliabilities3,4 | 20 | — | 2 | 2 | 16 |
| Total | $11,725 | $2,263 | $2,117 | $552 | $6,793 |

1 Represents	an	estimate	of	a	provisional	tax	amount	for	the	transition	tax	liability	associated	with	the	deemed	repatriation	of	accumulated	foreign	earnings	as	a	result from	the	enactment	of	the	Tax	Cuts	and	Jobs	Act	into	law	on	December	22,	2017.

2 Represents	Applied's	 agreements	 to	 purchase	 goods	 and	 services	 consisting	 of	Applied's	 outstanding	 purchase	 orders	 for	 goods	 and services.

3 Other	long-term	liabilities	in	the	table	do	not	include	pension,	post-retirement	and	deferred	compensation	plans	due	to	the	uncertainty	in	the	timing	of	future payments.	Applied	evaluates	 the	need	 to	make	contributions	 to	 its	pension	and	post-retirement	benefit	plans	after	considering	 the	funded	status	of	 the	plans, movements	in	the	discount	rate,	performance	of	the	plan	assets	and	related	tax	consequences.	Payments	to	the	plans	would	be	dependent	on	these	factors	and	could vary	across	a	wide	range	of	amounts	and	time	periods.	Payments	for	deferred	compensation	plans	are	dependent	on	activity	by	participants,	making	the	timing	of payments	uncertain.	Information	on	Applied's	pension,	post-retirement	benefit	and	deferred	compensation	plans	is	presented	in	Note	12,	Employee	Benefit	Plans,	of the	consolidated	financial	statements.

4 Applied's	other	long-term	liabilities	in	the	Consolidated	Balance	Sheets	include	deferred	tax	liabilities,	gross	unrecognized	tax	benefits	and	related	gross	interest	and penalties.	As	of	October	28,	2018,	the	gross	liability	for	unrecognized	tax	benefits	that	was	not	expected	to	result	in	payment	of	cash	within	one	year	was	$374 million.	Interest	and	penalties	related	to	uncertain	tax	positions	that	were	not	expected	to	result	in	payment	of	cash	within	one	year	of	October	28,	2018	 was	$26 million.	At	this	time,	Applied	is	unable	to	make	a	reasonably	reliable	estimate	of	the	timing	of	payments	due	to	uncertainties	in	the	timing	of	tax	audit	outcomes; therefore,	such	amounts	are	not	included	in	the	above	contractual	obligation	table.

# Critical	Accounting	Policies	and	Estimates

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

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

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

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

# Revenue	Recognition

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

# Warranty	Costs

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

# Allowance	for	Doubtful	Accounts

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

# Inventory	Valuation

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

# Goodwill	and	Intangible	Assets

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

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

Applied	determines	the	fair	value	of	each	reporting	unit	based	on	a	weighting	of	an	income	and	a	market	approach.	Applied	bases	the	fair	value	estimates	on assumptions	that	it	believes	to	be	reasonable	but	that	are	unpredictable	and	inherently	uncertain.	Under	the	income	approach,	Applied	estimates	the	fair	value	based	on discounted	cash	flow	method.

The	estimates	used	in	the	impairment	testing	are	consistent	with	the	discrete	forecasts	that	Applied	uses	to	manage	its	business,	and	considers	any	significant developments	during	the	period.	Under	the	discounted	cash	flow	method,	cash	flows	beyond	the	discrete	forecasts	are	estimated	using	a	terminal	growth	rate,	which considers	the	long-term	earnings	growth	rate	specific	to	the	reporting	units.	The	estimated	future	cash	flows	are	discounted	to	present	value	using	each	reporting	unit's weighted	average	cost	of	capital.	The	weighted	average	cost	of	capital	measures	a	reporting	unit's	cost	of	debt	and	equity	financing	weighted	by	the	percentage	of	debt and	equity	in	a	reporting	unit's	target	capital	structure.	In	addition,	the	weighted	average	cost	of	capital	is	derived	using	both	known	and	estimated	market	metrics,	and	is adjusted	to	reflect	both	the	timing	and	risks	associated	with	the	estimated	cash	flows.	The	tax	rate	used	in	the	discounted	cash	flow	method	is	the	median	tax	rate	of comparable	companies	and	reflects	Applied's	current	international	structure,	which	is	consistent	with	the	market	participant	perspective.	Under	the	market	approach, Applied	uses	the	guideline	company	method	which	applies	market	multiples	to	forecasted	revenues	and	earnings	before	interest,	taxes,	depreciation	and	amortization. Applied	uses	market	multiples	that	are	consistent	with	comparable	publicly-traded	companies	and	considers	each	reporting	unit's	size,	growth	and	profitability	relative to	its	comparable	companies.

Management	uses	significant	judgment	when	assessing	goodwill	for	potential	impairment,	especially	in	emerging	markets.	Indicators	of	potential	impairment include,	but	are	not	limited	to,	challenging	economic	conditions,	an	unfavorable	industry	or	economic	environment	or	other	severe	decline	in	market	conditions.	Such conditions	could	have	the	effect	of	changing	one	of	the	critical	assumptions	or	estimates	used	for	the	fair	value	calculation,	resulting	in	an	unexpected	goodwill impairment	charge,	which	could	have	a	material	adverse	effect	on	Applied's	business,	financial	condition	and	results	of	operations.	See	Note	9	of	Notes	to	Consolidated Financial	Statements	for	additional	discussion	of	goodwill	impairment.

Applied's	provision	for	income	taxes	and	effective	tax	rate	are	affected	by	the	geographical	composition	of	pre-tax	income	which	includes	jurisdictions	with differing	tax	rates,	conditional	reduced	tax	rates	and	other	income	tax	incentives.	It	is	also	affected	by	events	that	are	not	consistent	from	period	to	period,	such	as changes	to	income	tax	laws	and	the	resolution	of	prior	years'	income	tax	filings.

Applied	recognizes	a	current	tax	liability	for	the	estimated	amount	of	income	tax	payable	on	tax	returns	for	the	current	fiscal	year.	Deferred	tax	assets	and liabilities	are	recognized	for	the	estimated	future	tax	effects	of	temporary	differences	between	the	book	and	tax	bases	of	assets	and	liabilities.	Deferred	tax	assets	are	also recognized	for	net	operating	loss	and	tax	credit	carryforwards.	Deferred	tax	assets	are	offset	by	a	valuation	allowance	to	the	extent	it	is	more	likely	than	not	that	they	are not	expected	to	be	realized.

Applied	recognizes	tax	benefits	from	uncertain	tax	positions	only	if	it	is	more	likely	than	not	that	the	tax	position	will	be	sustained	upon	examination	by	the	taxing authorities	based	on	the	technical	merits	of	the	position.	The	tax	benefits	recognized	from	such	positions	are	estimated	based	on	the	largest	benefit	that	has	a	greater	than 50%	likelihood	of	being	realized	upon	ultimate	settlement.	Any	changes	in	judgment	related	to	uncertain	tax	positions	are	recognized	in	Applied's	provision	for	income taxes	in	the	quarter	in	which	such	change	occurs.	Interest	and	penalties	related	to	uncertain	tax	positions	are	recognized	in	Applied's	provision	for	income	taxes.

The	calculation	of	Applied's	provision	for	income	taxes	and	effective	tax	rate	involves	significant	judgment	in	estimating	the	impact	of	uncertainties	in	the application	of	complex	tax	laws.	Resolution	of	these	uncertainties	in	a	manner	inconsistent	with	Applied's	expectations	could	have	an	adverse	material	impact	on Applied's	results	of	operations	and	financial	condition.

# Non-GAAP	Adjusted	Financial	Results

Management	uses	non-GAAP	adjusted	financial	measures	to	evaluate	the	Company's	operating	and	financial	performance	and	for	planning	purposes,	and	as performance	measures	in	its	executive	compensation	program.	Applied	believes	these	measures	enhance	an	overall	understanding	of	its	performance	and	investors' ability	to	review	the	Company's	business	from	the	same	perspective	as	the	Company's	management	and	facilitate	comparisons	of	this	period's	results	with	prior	periods on	a	consistent	basis	by	excluding	items	that	management	does	not	believe	are	indicative	of	Applied's	ongoing	operating	performance.

The	non-GAAP	adjusted	financial	measures	presented	below	are	adjusted	to	exclude	the	impact	of	certain	costs,	expenses,	gains	and	losses,	including	certain	items related	to	mergers	and	acquisitions;	restructuring	charges	and	any	associated	adjustments;	impairments	of	assets,	or	investments;	gain	or	loss	on	sale	of	strategic investments;	certain	income	tax	items	and	other	discrete	adjustments.	Additionally,	fiscal	2018	non-GAAP	results	exclude	estimated	discrete	income	tax	expense	items associated	with	recent	U.S.	tax	legislation.	Reconciliations	of	these	non-GAAP	measures	to	the	most	directly	comparable	financial	measures	calculated	and	presented	in accordance	with	GAAP	are	provided	in	the	financial	tables	presented	below.	There	are	limitations	in	using	non-GAAP	financial	measures	because	the	non-GAAP financial	measures	are	not	prepared	in	accordance	with	generally	accepted	accounting	principles,	may	be	different	from	non-GAAP	financial	measures	used	by	other companies,	and	may	exclude	certain	items	that	may	have	a	material	impact	upon	our	reported	financial	results.	The	presentation	of	this	additional	information	is	not meant	to	be	considered	in	isolation	or	as	a	substitute	for	the	directly	comparable	financial	measures	prepared	in	accordance	with	GAAP.

The	following	tables	present	a	reconciliation	of	the	GAAP	and	non-GAAP	adjusted	consolidated	results	for	the	past	three	fiscal	years:

# UNAUDITED	RECONCILIATION	OF	GAAP	TO	NON-GAAP	ADJUSTED	RESULTS

| (In	millions,	except	percentages) | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| Non-GAAP\tAdjusted\tGross\tProfit |  |  |  |
| Reported\tgross\tprofit\t-\tGAAP\tbasis | $7,817 | $6,532 | $4,511 |
| Certain\titems\tassociated\twith\tacquisitions1 | 179 | 172 | 167 |
| Inventory\treversals\trelated\tto\trestructuring2 | — | — | (2) |
| Non-GAAP\tadjusted\tgross\tprofit | $7,996 | $6,704 | $4,676 |
| Non-GAAP\tadjusted\tgross\tmargin | 46.3% | 46.1% | 43.2% |
| Non-GAAP\tAdjusted\tOperating\tIncome |  |  |  |
| Reported\toperating\tincome\t-\tGAAP\tbasis | $4,796 | $3,868 | $2,152 |
| Certain\titems\tassociated\twith\tacquisitions1 | 197 | 191 | 188 |
| Acquisition\tintegration\tand\tdeal\tcosts | 5 | 3 | 2 |
| Reversals\trelated\tto\trestructuring,\tnet2 | — | — | (3) |
| Other\tgains,\tlosses\tor\tcharges,\tnet | — | (12) | 8 |
| Non-GAAP\tadjusted\toperating\tincome | $4,998 | $4,050 | $2,347 |
| Non-GAAP\tadjusted\toperating\tmargin | 29.0% | 27.9% | 21.7% |
| Non-GAAP\tAdjusted\tNet\tIncome |  |  |  |
| Reported\tnet\tincome\t-\tGAAP\tbasis4 | $3,313 | $3,434 | $1,721 |
| Certain\titems\tassociated\twith\tacquisitions1 | 197 | 191 | 188 |
| Acquisition\tintegration\tand\tdeal\tcosts | 5 | 3 | 2 |
| Reversals\trelated\tto\trestructuring,\tnet2 | — | — | (3) |
| Loss\ton\tearly\textinguishment\tof\tdebt | — | 5 | 5 |
| Impairment\t(gain\ton\tsale)\tof\tstrategic\tinvestments,\tnet | (25) | (3) | 3 |
| Other\tgains,\tlosses\tor\tcharges,\tnet | — | (12) | 8 |
| Income\ttax\teffect\tof\tchanges\tin\tapplicable\tU.S.\ttax\tlaws3 | 1,112 | — | — |
| Resolution\tof\tprior\tyears'\tincome\ttax\tfilings,\treinstatement\tof\tfederal\tR&amp;D\ttax\tcredit\tand\tother\ttax\titems | (26) | (79) | 45 |
| Income\ttax\teffect\tof\tnon-GAAP\tadjustments5 | (7) | (14) | (19) |
| Non-GAAP\tadjusted\tnet\tincome | $4,569 | $3,525 | $1,950 |

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

2 Results	for	fiscal	2016	included	adjustments	associated	with	the	cost	reductions	in	the	solar	business.

3 Charges	to	income	tax	provision	related	to	a	one-time	transition	tax	and	a	decrease	in	U.S.	deferred	tax	assets	as	a	result	of	the	recent	U.S.	tax	legislation.

4 Amounts	for	fiscal	2017	included	the	recognition	of	the	previously	unrecognized	foreign	tax	credits.

5 Adjustment	to	provision	for	income	taxes	related	to	non-GAAP	adjustments	reflected	in	income	before	income	taxes.

| (In	millions,	except	per	share	amounts) | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| Non-GAAP\tAdjusted\tEarnings\tPer\tDiluted\tShare |  |  |  |
| Reported\tearnings\tper\tdiluted\tshare\t-\tGAAP\tbasis | $3.23 | $3.17 | $1.54 |
| Certain\titems\tassociated\twith\tacquisitions | 0.18 | 0.16 | 0.16 |
| Impairment\t(gain\ton\tsale)\tof\tstrategic\tinvestments,\tnet | (0.02) | — | — |
| Income\ttax\teffect\tof\tchange\tin\tapplicable\tU.S.\ttax\tlaws | 1.08 | — | — |
| Other\tgains,\tlosses\tor\tcharges,\tnet | — | (0.01) | 0.01 |
| Resolution\tof\tprior\tyears'\tincome\ttax\tfilings\tand\tother\ttax\titems | (0.02) | (0.07) | 0.04 |
| Non-GAAP\tadjusted\tearnings\tper\tdiluted\tshare | $4.45 | $3.25 | $1.75 |
| Weighted\taverage\tnumber\tof\tdiluted\tshares | 1,026 | 1,084 | 1,116 |

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

| (In	millions,	except	percentages) | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| Semiconductor\tSystems\tNon-GAAP\tAdjusted\tOperating\tIncome |  |  |  |
| Reported\toperating\tincome\t-\tGAAP\tbasis | $3,634 | $3,173 | $1,807 |
| Certain\titems\tassociated\twith\tacquisitions1 | 183 | 184 | 184 |
| Non-GAAP\tadjusted\toperating\tincome | $3,817 | $3,357 | $1,991 |
| Non-GAAP\tadjusted\toperating\tmargin | 35.0% | 35.3% | 29.0% |
| AGS\tNon-GAAP\tAdjusted\tOperating\tIncome |  |  |  |
| Reported\toperating\tincome\t-\tGAAP\tbasis | $1,102 | $817 | $682 |
| Certain\titems\tassociated\twith\tacquisitions1 | — | 1 | 1 |
| Acquisition\tintegration\tcosts | 2 | 3 | — |
| Non-GAAP\tadjusted\toperating\tincome | $1,104 | $821 | $683 |
| Non-GAAP\tadjusted\toperating\tmargin | 29.4% | 27.2% | 26.4% |
| Display\tand\tAdjacent\tMarkets\tNon-GAAP\tAdjusted\tOperating\tIncome |  |  |  |
| Reported\toperating\tincome\t-\tGAAP\tbasis | $679 | $502 | $245 |
| Certain\titems\tassociated\twith\tacquisitions1 | 14 | 5 | — |
| Acquisition\tintegration\tcosts | 1 | — | — |
| Non-GAAP\tadjusted\toperating\tincome | $694 | $507 | $245 |
| Non-GAAP\tadjusted\toperating\tmargin | 27.8% | 26.7% | 20.3% |

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

# Item	7A: Quantitative	and	Qualitative	Disclosures	About	Market

Applied	is	exposed	to	interest	rate	risk	related	to	its	investment	portfolio	and	debt	issuances.	Applied's	investment	portfolio	includes	fixed-income	securities	with a	fair	value	of	approximately	$2.0	billion	at	October	28,	2018.	These	securities	are	subject	to	interest	rate	risk	and	will	decline	in	value	if	interest	rates	increase.	Based	on Applied's	investment	portfolio	at	October	28,	2018,	an	immediate	100	basis	point	increase	in	interest	rates	would	result	in	a	decrease	in	the	fair	value	of	the	portfolio	of approximately	$26	million.	While	an	increase	in	interest	rates	reduces	the	fair	value	of	the	investment	portfolio,	Applied	will	not	realize	the	losses	in	the	consolidated statement	of	operations	unless	the	individual	fixed-income	securities	are	sold	prior	to	recovery	or	the	loss	is	determined	to	be	other-than-temporary.	At	October	28,	2018, the	aggregate	principal	and	estimated	fair	values	amounts	of	long-term	debt	issued	by	Applied	were	both	$5.4	billion.	A	hypothetical	decrease	in	interest	rates	of	100 basis	points	would	result	in	an	increase	in	the	fair	value	of	Applied's	long-term	debt	issuances	of	approximately	$497	million	at	October	28,	2018.

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

# Item	8: Financial	Statements	and	Supplementary

The	consolidated	financial	statements	required	by	this	Item	are	set	forth	on	the	pages	indicated	at	Item	15(a).

# Item	9: Changes	in	and	Disagreements	with	Accountants	on	Accounting	and	Financial

# Disclosure

# Item	9A: Controls	and	Procedures

# Disclosure	Controls	and	Procedures

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

# Management's	Report	on	Internal	Control	over	Financial	Reporting

Applied's	management	is	responsible	for	establishing	and	maintaining	adequate	internal	control	over	financial	reporting,	as	such	term	is	defined	in	Rule	13a-15(f) of	the	Exchange	Act.	Under	the	supervision	and	with	the	participation	of	Applied's	Chief	Executive	Officer	and	Chief	Financial	Officer,	management	of	Applied conducted	an	evaluation	of	 the	effectiveness	of	Applied's	 internal	control	over	financial	reporting	based	upon	 the	framework	 in	"Internal	Control	—	Integrated Framework	(2013)"	issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission.	Based	on	that	evaluation,	Applied's	management	concluded that	Applied's	internal	control	over	financial	reporting	was	effective	as	of	October	28,	2018.

KPMG	LLP,	an	independent	registered	public	accounting	firm,	has	audited	the	consolidated	financial	statements	included	in	this	Form	10-K	and,	as	part	of	the audit,	has	issued	a	report,	included	herein,	on	the	effectiveness	of	Applied's	internal	control	over	financial	reporting	as	of	October	28,	2018.

# Changes	in	Internal	Control	over	Financial	Reporting

During	the	fourth	quarter	of	fiscal	2018,	there	were	no	changes	in	the	internal	control	over	financial	reporting	that	materially	affected,	or	are	reasonably	likely	to materially	affect,	Applied's	internal	control	over	financial	reporting.

# Inherent	Limitations	of	Disclosure	Controls	and	Procedures	and	Internal	Control	over	Financial	Reporting

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

# Item	9B: Other	Information

# PART	III

# Item	10: Directors,	Executive	Officers	and	Corporate

# Governance

Except	for	the	information	regarding	executive	officers	required	by	Item	401	of	Regulation	S-K	(which	is	included	in	Part	I,	Item	1	of	this	Annual	Report	on Form	10-K,	under	"Executive	Officers	of	the	Registrant")	and	code	of	ethics	(which	is	set	forth	below),	the	information	required	by	this	item	will	be	provided	in accordance	with	Instruction	G(3)	to	Form	10-K	no	later	than	February	25,	2019.

Applied	has	implemented	the	Standards	of	Business	Conduct,	a	code	of	ethics	with	which	every	person	who	works	for	Applied	and	every	member	of	the	Board	of Directors	is	expected	to	comply.	If	any	substantive	amendments	are	made	to	the	Standards	of	Business	Conduct	or	any	waiver	is	granted,	including	any	implicit	waiver, from	a	provision	of	the	code	to	Applied's	Chief	Executive	Officer,	Chief	Financial	Officer	or	Chief	Accounting	Officer,	Applied	will	disclose	the	nature	of	such amendment	or	waiver	on	its	website	or	in	a	report	on	Form	8-K.	The	above	information,	including	the	Standards	of	Business	Conduct,	is	available	on	Applied's	website under	the	Corporate	Governance	section	at	http://www.appliedmaterials.com/company/investor-relations/governance.	This	website	address	is	intended	to	be	an	inactive, textual	reference	only.	None	of	the	materials	on,	or	accessible	through,	this	website	is	part	of	this	report	or	is	incorporated	by	reference	herein.

# Item	11: Executive	Compensation

The	information	required	by	this	Item	will	be	provided	in	accordance	with	Instruction	G(3)	to	Form	10-K	no	later	than	February	25,	2019.

# Item	12: Security	Ownership	of	Certain	Beneficial	Owners	and	Management	and	Related	Stockholder Matters

Except	for	the	information	regarding	securities	authorized	for	issuance	under	equity	compensation	plans	(which	is	set	forth	below),	the	information	required	by this	Item	will	be	provided	in	accordance	with	Instruction	G(3)	to	Form	10-K	no	later	than	February	25,	2019.

The	following	table	summarizes	information	with	respect	to	equity	awards	under	Applied's	equity	compensation	plans	as	of	October	28,	2018:

# Equity	Compensation	Plan	Information

| Plan	Category | (a)<br>Number	of<br>Securities	to	be<br>Issued	Upon	Exercise<br>of	Outstanding	Options,<br>Warrants	and<br>Rights(1) |  | (b)<br>Weighted	Average<br>Exercise	Price	of<br>Outstanding	Options,<br>Warrants	and<br>Rights(2) | (c)<br>Number	of	Securities<br>Available	for	Future<br>Issuance	Under	Equity<br>Compensation	Plans<br>(Excluding	Securities<br>Reflected	in<br>Column(a)) |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | (In\tmillions,\texcept\tprices) |  |  |
| Equity\tcompensation\tplans\tapproved\tby\tsecurity\tholders | 20 |  | $15.06 | 94 | (3) |
| Equity\tcompensation\tplans\tnot\tapproved\tby\tsecurity\nholders | — | (4) | $7.27 | 4 | (5) |
| Total | 20 |  | $15.02 | 98 |  |

(1) Includes	only	options,	restricted	stock	units	and	performance	shares	outstanding	under	Applied's	equity	compensation	plans,	as	no	stock	warrants	or	other rights	were	outstanding	as	of	October	28,	2018.

(2) The	weighted	average	exercise	price	calculation	does	not	take	into	account	any	restricted	stock	units	or	performance shares.

(3) Includes	13	million	shares	of	Applied	common	stock	available	for	future	issuance	under	the	Applied	Materials,	Inc.	Employees'	Stock	Purchase	Plan.	Of	these 13	million	shares,	1	million	are	subject	to	purchase	during	the	purchase	period	in	effect	as	of	October	28,	2018.

(4) Includes	options	 to	purchase	5	 thousand	shares	of	Applied	common	stock	assumed	 through	various	mergers	and	acquisitions,	after	giving	effect	 to	 the applicable	exchange	ratios.	The	assumed	options	had	a	weighted	average	exercise	price	of	$7.27	per	share.	No	further	shares	are	available	for	issuance	under the	plans	under	which	these	assumed	awards	were	granted.

(5) Includes	4	 million	 shares	 of	Applied	 common	 stock	 available	 for	 future	 issuance	 under	 the	Applied	 Materials,	 Inc.	 Stock	 Purchase	 Plan for	 Offshore Employees.	Of	these	4	million	shares,	1	million	are	subject	to	purchase	during	the	purchase	period	in	effect	as	of	October	28,	2018.

Applied	has	the	following	equity	compensation	plans	that	have	not	been	approved	by	stockholders:

Stock	Purchase	Plan	for	Offshore	Employees.	The	Stock	Purchase	Plan	for	Offshore	Employees	(the	Offshore	ESPP)	was	adopted	effective	as	of	October	16,	1995 for	the	benefit	of	employees	of	Applied's	participating	affiliates.	The	Offshore	ESPP	provides	for	the	grant	of	options	to	purchase	shares	of	Applied	common	stock through	payroll	deductions	pursuant	to	one	or	more	offerings.	The	administrator	of	the	Offshore	ESPP	(the	Board	of	Directors	of	Applied	or	a	committee	appointed	by the	Board)	determines	the	terms	and	conditions	of	all	options	prior	to	the	start	of	an	offering,	including	the	purchase	price	of	shares,	the	number	of	shares	covered	by	the option	and	when	the	option	may	be	exercised.	All	options	granted	as	part	of	an	offering	must	be	granted	on	the	same	date.	As	of	October	28,	2018,	a	total	of	36	million shares	have	been	authorized	for	issuance	under	the	Offshore	ESPP,	and	4	million	shares	remain	available	for	issuance.

Applied	Materials	Profit	Sharing	Scheme.	The	Applied	Materials	Profit	Sharing	Scheme	was	adopted	effective	July	3,	1996	to	enable	employees	of	Applied Materials	Ireland	Limited	and	its	participating	subsidiaries	to	purchase	Applied	common	stock	at	100%	of	fair	market	value	on	the	purchase	date.	Under	this	plan, eligible	employees	may	elect	to	forego	a	certain	portion	of	their	base	salary	and	certain	bonuses	they	have	earned	and	that	otherwise	would	be	payable	in	cash	to purchase	shares	of	Applied	common	stock	at	full	fair	market	value.	Since	the	eligible	employees	pay	full	fair	market	value	for	the	shares,	there	is	no	reserved	amount	of shares	under	this	plan	and,	accordingly,	the	table	above	does	not	include	any	set	number	of	shares	available	for	future	issuance	under	the	plan.

# Item	13: Certain	Relationships	and	Related	Transactions,	and	Director

# Independence

# Item	14: Principal	Accounting	Fees	and	Services

# PART	IV

# Item	15: Exhibits,	Financial	Statement

# Schedules

(a)	The	following	documents	are	filed	as	part	of	this	Annual	Report	on	Form	10-K:

| (1) | Financial	Statements: |  |
| :--- | :--- | :--- |
|  | Reports\tof\tIndependent\tRegistered\tPublic\tAccounting\tFirm | 54 |
|  | Consolidated\tStatements\tof\tOperations | 56 |
|  | Consolidated\tStatements\tof\tComprehensive\tIncome | 57 |
|  | Consolidated\tBalance\tSheets | 58 |
|  | Consolidated\tStatements\tof\tStockholders'\tEquity | 59 |
|  | Consolidated\tStatements\tof\tCash\tFlows | 60 |
|  | Notes\tto\tConsolidated\tFinancial\tStatements | 61 |
| (2) | Exhibits: |  |
|  | The\texhibits\tlisted\tin\tthe\taccompanying\tIndex\tto\tExhibits\tare\tfiled\tor\tincorporated\tby\treference\tas\tpart\tof\tthis\tAnnual\tReport\ton\tForm\t10-K | 99 |

All	other	schedules	are	omitted	because	they	are	not	applicable	or	the	required	information	is	shown	in	the	Consolidated	Financial	Statements	or	Notes	thereto.

# Summary

# REPORT	OF	INDEPENDENT	REGISTERED	PUBLIC	ACCOUNTING	FIRM

# The	Board	of	Directors	and	Stockholders

# Opinion	on	the	Consolidated	Financial	Statements

We	have	audited	the	accompanying	consolidated	balance	sheets	of	Applied	Materials,	Inc.	and	subsidiaries	(the	Company)	as	of	October	28,	2018	and	October	29, 2017,	the	related	consolidated	statements	of	operations,	comprehensive	income,	stockholders'	equity,	and	cash	flows	for	each	of	the	years	in	the	three-year	period	ended October	28,	2018,	and	the	related	notes	(collectively,	the	consolidated	financial	statements).	In	our	opinion,	the	consolidated	financial	statements	present	fairly,	in	all material	respects,	the	financial	position	of	the	Company	as	of	October	28,	2018	and	October	29,	2017,	and	the	results	of	its	operations	and	its	cash	flows	for	each	of	the years	in	the	three-year	period	ended	October	28,	2018,	in	conformity	with	U.S.	generally	accepted	accounting	principles.

We	also	have	audited,	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States)	(PCAOB),	the	Company's	internal control	over	financial	reporting	as	of	October	28,	2018,	based	on	criteria	established	in	Internal	Control	-	Integrated	Framework	(2013)	issued	by	the	Committee	of Sponsoring	 Organizations	 of	 the	 Treadway	 Commission,	 and	 our	 report	 dated	December	13,	2018	 expressed	 an	 unqualified	 opinion	 on	 the	 effectiveness	 of	 the Company's	internal	control	over	financial	reporting.

# Basis	for	Opinion

These	consolidated	financial	statements	are	the	responsibility	of	the	Company's	management.	Our	responsibility	is	to	express	an	opinion	on	these	consolidated financial	statements	based	on	our	audits.	We	are	a	public	accounting	firm	registered	with	the	PCAOB	and	are	required	to	be	independent	with	respect	to	the	Company	in accordance	with	the	U.S.	federal	securities	laws	and	the	applicable	rules	and	regulations	of	the	Securities	and	Exchange	Commission	and	the	PCAOB.

We	conducted	our	audits	in	accordance	with	the	standards	of	the	PCAOB.	Those	standards	require	that	we	plan	and	perform	the	audit	to	obtain	reasonable assurance	 about	 whether	 the	 consolidated	 financial	 statements	 are	 free	 of	 material	 misstatement,	 whether	 due	 to	 error	 or	 fraud.	 Our	 audits	 included	 performing procedures	to	assess	the	risks	of	material	misstatement	of	the	consolidated	financial	statements,	whether	due	to	error	or	fraud,	and	performing	procedures	that	respond	to those	risks.	Such	procedures	included	examining,	on	a	test	basis,	evidence	regarding	the	amounts	and	disclosures	in	the	consolidated	financial	statements.	Our	audits	also included	evaluating	the	accounting	principles	used	and	significant	estimates	made	by	management,	as	well	as	evaluating	the	overall	presentation	of	the	consolidated financial	statements.	We	believe	that	our	audits	provide	a	reasonable	basis	for	our	opinion.

KPMG	LLP

We	have	served	as	the	Company's	auditor	since	2004.

Santa	Clara,	California

# Opinion	on	Internal	Control	Over	Financial	Reporting

We	have	audited	Applied	Materials,	Inc.	and	subsidiaries	(the	Company)	 internal	control	over	financial	reporting	as	of	October	28,	2018,	 based	 on	 criteria established	in	Internal	Control	-	Integrated	Framework	(2013)	issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission.	In	our	opinion,	the Company	maintained,	in	all	material	respects,	effective	internal	control	over	financial	reporting	as	of	October	28,	2018,	based	on	criteria	established	in	Internal	Control	- Integrated	Framework	(2013)	issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission.

We	also	have	audited,	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States)	(PCAOB),	the	consolidated	balance sheets	of	the	Company	as	of	October	28,	2018	and	October	29,	2017,	the	related	consolidated	statements	of	operations,	comprehensive	income,	stockholders'	equity,	and cash	flows	for	each	of	the	years	in	the	three-year	period	ended	October	28,	2018,	and	the	related	notes	(collectively,	the	consolidated	financial	statements),	and	our	report dated	December	13,	2018	expressed	an	unqualified	opinion	on	those	consolidated	financial	statements.

The	Company's	management	is	responsible	for	maintaining	effective	internal	control	over	financial	reporting	and	for	its	assessment	of	the	effectiveness	of	internal control	over	financial	reporting,	included	in	the	accompanying	Management's	Report	on	Internal	Control	over	Financial	Reporting	in	Item	9A.	Our	responsibility	is	to express	an	opinion	on	the	Company's	internal	control	over	financial	reporting	based	on	our	audit.	We	are	a	public	accounting	firm	registered	with	the	PCAOB	and	are required	to	be	independent	with	respect	to	the	Company	in	accordance	with	the	U.S.	federal	securities	laws	and	the	applicable	rules	and	regulations	of	the	Securities	and Exchange	Commission	and	the	PCAOB.

We	conducted	our	audit	in	accordance	with	the	standards	of	the	PCAOB.	Those	standards	require	that	we	plan	and	perform	the	audit	to	obtain	reasonable assurance	about	whether	effective	internal	control	over	financial	reporting	was	maintained	in	all	material	respects.	Our	audit	of	internal	control	over	financial	reporting included	obtaining	an	understanding	of	internal	control	over	financial	reporting,	assessing	the	risk	that	a	material	weakness	exists,	and	testing	and	evaluating	the	design and	operating	effectiveness	of	internal	control	based	on	the	assessed	risk.	Our	audit	also	included	performing	such	other	procedures	as	we	considered	necessary	in	the circumstances.	We	believe	that	our	audit	provides	a	reasonable	basis	for	our	opinion.

# Definition	and	Limitations	of	Internal	Control	Over	Financial	Reporting

A	company's	internal	control	over	financial	reporting	is	a	process	designed	to	provide	reasonable	assurance	regarding	the	reliability	of	financial	reporting	and	the preparation	of	financial	statements	for	external	purposes	in	accordance	with	generally	accepted	accounting	principles.	A	company's	internal	control	over	financial reporting	includes	those	policies	and	procedures	that	(1)	pertain	to	the	maintenance	of	records	that,	in	reasonable	detail,	accurately	and	fairly	reflect	the	transactions	and dispositions	of	the	assets	of	the	company;	(2)	provide	reasonable	assurance	that	transactions	are	recorded	as	necessary	to	permit	preparation	of	financial	statements	in accordance	with	generally	accepted	accounting	principles,	and	that	receipts	and	expenditures	of	the	company	are	being	made	only	in	accordance	with	authorizations	of management	 and	 directors	 of	 the	 company;	 and	 (3)	 provide	 reasonable	 assurance	 regarding	 prevention	 or	 timely	 detection	 of	 unauthorized	 acquisition,	 use,	 or disposition	of	the	company's	assets	that	could	have	a	material	effect	on	the	financial	statements.

Because	of	its	inherent	limitations,	internal	control	over	financial	reporting	may	not	prevent	or	detect	misstatements.	Also,	projections	of	any	evaluation	of effectiveness	to	future	periods	are	subject	to	the	risk	that	controls	may	become	inadequate	because	of	changes	in	conditions,	or	that	the	degree	of	compliance	with	the policies	or	procedures	may	deteriorate.

# CONSOLIDATED	STATEMENTS	OF	OPERATIONS

# (In	millions,	except	per	share	amounts)

| Fiscal	Year | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| Net\tsales | $17,253 | $14,537 | $10,825 |
| Cost\tof\tproducts\tsold | 9,436 | 8,005 | 6,314 |
| Gross\tprofit | 7,817 | 6,532 | 4,511 |
| Operating\texpenses: |  |  |  |
| Research,\tdevelopment\tand\tengineering | 2,019 | 1,774 | 1,540 |
| Marketing\tand\tselling | 521 | 456 | 429 |
| General\tand\tadministrative | 481 | 434 | 390 |
| Total\toperating\texpenses | 3,021 | 2,664 | 2,359 |
| Income\tfrom\toperations | 4,796 | 3,868 | 2,152 |
| Interest\texpense | 234 | 198 | 155 |
| Interest\tand\tother\tincome,\tnet | 132 | 61 | 16 |
| Income\tbefore\tincome\ttaxes | 4,694 | 3,731 | 2,013 |
| Provision\tfor\tincome\ttaxes | 1,381 | 297 | 292 |
| Net\tincome | $3,313 | $3,434 | $1,721 |
| Earnings\tper\tshare: |  |  |  |
| Basic | $3.27 | $3.20 | $1.56 |
| Diluted | $3.23 | $3.17 | $1.54 |
| Weighted\taverage\tnumber\tof\tshares: |  |  |  |
| Basic | 1,013 | 1,073 | 1,107 |
| Diluted | 1,026 | 1,084 | 1,116 |

See	accompanying	Notes	to	Consolidated	Financial	Statements.

# CONSOLIDATED	STATEMENTS	OF	COMPREHENSIVE	INCOME

# (In	millions)

| Fiscal	Year | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| Net\tincome | $3,313 | $3,434 | $1,721 |
| Other\tcomprehensive\tincome\t(loss),\tnet\tof\ttax: |  |  |  |
| Change\tin\tunrealized\tnet\tgain\ton\tinvestments | (51) | 23 | 16 |
| Change\tin\tunrealized\tnet\tloss\ton\tderivative\tinstruments | 4 | 7 | (3) |
| Change\tin\tdefined\tand\tpostretirement\tbenefit\tplans | (17) | 21 | (36) |
| Other\tcomprehensive\tincome\t(loss),\tnet\tof\ttax | (64) | 51 | (23) |
| Comprehensive\tincome | $3,249 | $3,485 | $1,698 |

# CONSOLIDATED	BALANCE	SHEETS

| ASSETS | October	28,<br>2018 | October	29,<br>2017 |
| :--- | :--- | :--- |
| Current\tassets: |  |  |
| Cash\tand\tcash\tequivalents | $3,440 | $5,010 |
| Short-term\tinvestments | 590 | 2,266 |
| Accounts\treceivable,\tnet | 2,565 | 2,338 |
| Inventories | 3,722 | 2,930 |
| Other\tcurrent\tassets | 430 | 374 |
| Total\tcurrent\tassets | 10,747 | 12,918 |
| Long-term\tinvestments | 1,568 | 1,143 |
| Property,\tplant\tand\tequipment,\tnet | 1,407 | 1,066 |
| Goodwill | 3,368 | 3,368 |
| Purchased\ttechnology\tand\tother\tintangible\tassets,\tnet | 213 | 412 |
| Deferred\tincome\ttaxes\tand\tother\tassets | 470 | 512 |
| Total\tassets | $17,773 | $19,419 |
| LIABILITIES\tAND\tSTOCKHOLDERS'\tEQUITY |  |  |
| Current\tliabilities: |  |  |
| Accounts\tpayable\tand\taccrued\texpenses | $2,721 | $2,450 |
| Customer\tdeposits\tand\tdeferred\trevenue | 1,347 | 1,665 |
| Total\tcurrent\tliabilities | 4,068 | 4,115 |
| Long-term\tdebt | 5,309 | 5,304 |
| Income\ttaxes\tpayable | 1,254 | 392 |
| Other\tliabilities | 303 | 259 |
| Total\tliabilities | 10,934 | 10,070 |
| Commitments\tand\tcontingencies\t(Note\t14) |  |  |
| Stockholders'\tequity: |  |  |
|  | — | — |
| respectively | 10 | 11 |
| Additional\tpaid-in\tcapital | 7,274 | 7,056 |
| Retained\tearnings | 20,874 | 18,258 |
| Treasury\tstock:\t1,019\tand\t917\tshares\tat\t2018\tand\t2017,\trespectively | (21,194) | (15,912) |
| Accumulated\tother\tcomprehensive\tloss | (125) | (64) |
| Total\tstockholders'\tequity |  |  |
|  | 6,839 | 9,349 |
| Total\tliabilities\tand\tstockholders'\tequity | $17,773 | $19,419 |

# CONSOLIDATED	STATEMENTS	OF	STOCKHOLDERS'	EQUITY

|  | Common	Stock<br>Shares | Amount | Additional<br>Paid-In<br>Capital | Retained<br>Earnings | Treasury	Stock<br>Shares | Amount | Accumulated<br>Other<br>Comprehensive<br>Income	(Loss) | Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Balance\tat\tOctober\t25,\t2015 | 1,160 | $11 | $6,575 | $13,967 | 793 | $(12,848) | $(92) | $7,613 |
| Net\tincome | — | — | — | 1,721 | — | — | — | 1,721 |
| Other\tcomprehensive\tloss,\tnet\tof\ttax | — | — | — | — | — | — | (23) | (23) |
| Dividends | — | — | — | (436) | — | — | — | (436) |
| Share-based\tcompensation | — | — | 201 | — | — | — | — | 201 |
| Issuance\tunder\tstock\tplans,\tnet\tof\ta\ttax |  |  |  |  |  |  |  |  |
| benefit\tof\t$23\tand\tother | 14 | — | 33 | — | — | — | — | 33 |
| Common\tstock\trepurchases | (96) | — | — | — | 96 | (1,892) | — | (1,892) |
| Balance\tat\tOctober\t30,\t2016 | 1,078 | $11 | $6,809 | $15,252 | 889 | $(14,740) | $(115) | $7,217 |
| Net\tincome | — | — | — | 3,434 | — | — | — | 3,434 |
| Other\tcomprehensive\tincome,\tnet\tof\ttax | — | — | — | — | — | — | 51 | 51 |
| Dividends | — | — | — | (428) | — | — | — | (428) |
| Share-based\tcompensation | — | — | 220 | — | — | — | — | 220 |
| Issuance\tunder\tstock\tplans,\tnet\tof\ta\ttax\nbenefit\tof\t$55\tand\tother | 10 | — | 27 | — | — | — | — | 27 |
| Common\tstock\trepurchases | (28) | — | — | — | 28 | (1,172) | — | (1,172) |
| Balance\tat\tOctober\t29,\t2017 | 1,060 | $11 | $7,056 | $18,258 | 917 | $(15,912) | $(64) | $9,349 |
| Adoption\tof\tnew\taccounting\tstandard\t(a) | — | — | — | (3) | — | — | 3 | — |
| Net\tincome | — | — | — | 3,313 | — | — | — | 3,313 |
| Other\tcomprehensive\tloss,\tnet\tof\ttax | — | — | — | — | — | — | (64) | (64) |
| Dividends | — | — | — | (694) | — | — | — | (694) |
| Share-based\tcompensation | — | — | 258 | — | — | — | — | 258 |
| Issuance\tunder\tstock\tplans | 9 | — | (40) | — | — | — | — | (40) |
| Common\tstock\trepurchases | (102) | (1) | — | — | 102 | (5,282) | — | (5,283) |
| Balance\tat\tOctober\t28,\t2018 | 967 | $10 | $7,274 | $20,874 | 1,019 | $(21,194) | $(125) | $6,839 |

(a)	-	Represents	the	reclassification	adjustment	related	to	the	early	adoption	of	Accounting	Standards	Update	(ASU)	2018-02	 Reclassification	of	Certain	Tax	Effects	from	Accumulated	Other Comprehensive	Income.	See	Note	1.

# CONSOLIDATED	STATEMENTS	OF	CASH	FLOWS

| Fiscal	Year | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| Cash\tflows\tfrom\toperating\tactivities: |  |  |  |
| Net\tincome | $3,313 | $3,434 | $1,721 |
| Adjustments\trequired\tto\treconcile\tnet\tincome\tto\tcash\tprovided\tby\toperating\tactivities: |  |  |  |
| Depreciation\tand\tamortization | 457 | 407 | 389 |
| Deferred\tincome\ttaxes | 94 | (11) | 21 |
| Other | 4 | (9) | 38 |
| Share-based\tcompensation | 258 | 220 | 201 |
| Changes\tin\toperating\tassets\tand\tliabilities,\tnet\tof\tamounts\tacquired: |  |  |  |
| Accounts\treceivable | (226) | (37) | (542) |
| Inventories | (792) | (879) | (216) |
| Other\tcurrent\tand\tnon-current\tassets | (93) | (157) | 30 |
| Accounts\tpayable\tand\taccrued\texpenses | 179 | 370 | 184 |
| Customer\tdeposits\tand\tdeferred\trevenue | (318) | 289 | 611 |
| Income\ttaxes\tpayable | 886 | 121 | 173 |
| Other\tliabilities | 25 | 41 | (44) |
| Cash\tprovided\tby\toperating\tactivities | 3,787 | 3,789 | 2,566 |
| Cash\tflows\tfrom\tinvesting\tactivities: |  |  |  |
| Capital\texpenditures | (622) | (345) | (253) |
| Cash\tpaid\tfor\tacquisitions,\tnet\tof\tcash\tacquired | (6) | (68) | (16) |
| Proceeds\tfrom\tsales\tand\tmaturities\tof\tinvestments | 3,276 | 2,743 | 1,234 |
| Purchases\tof\tinvestments | (2,077) | (4,856) | (1,390) |
| Cash\tprovided\tby\t(used\tin)\tinvesting\tactivities | 571 | (2,526) | (425) |
| Cash\tflows\tfrom\tfinancing\tactivities: |  |  |  |
| Debt\tborrowings,\tnet\tof\tissuance\tcosts | — | 2,176 | — |
| Debt\trepayments | — | (205) | (1,207) |
| Proceeds\tfrom\tcommon\tstock\tissuances | 124 | 97 | 88 |
| Common\tstock\trepurchases | (5,283) | (1,172) | (1,892) |
| Tax\twithholding\tpayments\tfor\tvested\tequity\tawards | (164) | (125) | (77) |
| Payments\tof\tdividends\tto\tstockholders | (605) | (430) | (444) |
| Cash\tprovided\tby\t(used\tin)\tfinancing\tactivities | (5,928) | 341 | (3,532) |
| Increase\t(decrease)\tin\tcash\tand\tcash\tequivalents | (1,570) | 1,604 | (1,391) |
| Cash\tand\tcash\tequivalents\t—\tbeginning\tof\tyear | 5,010 | 3,406 | 4,797 |
| Cash\tand\tcash\tequivalents\t—\tend\tof\tyear | $3,440 | $5,010 | $3,406 |
| Supplemental\tcash\tflow\tinformation: |  |  |  |
| Cash\tpayments\tfor\tincome\ttaxes | $300 | $194 | $157 |
| Cash\trefunds\tfrom\tincome\ttaxes | $63 | $61 | $113 |
| Cash\tpayments\tfor\tinterest | $219 | $186 | $151 |

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS

# Note	1 Summary	of	Significant	Accounting	Policies

# Principles	of	Consolidation	and	Basis	of	Presentation

The	 consolidated	 financial	 statements	 include	 the	 accounts	 of	Applied	 Materials,	 Inc.	 and	 its	 subsidiaries	 (Applied	 or	 the	 Company)	 after	 elimination	 of intercompany	balances	and	transactions.	All	references	to	a	fiscal	year	apply	to	Applied's	fiscal	year	which	ends	on	the	last	Sunday	in	October.	Fiscal	 2018,	2017	and 2016	contained	52,	52,	and	53	weeks,	respectively.	Each	fiscal	quarter	of	2018	and	2017	contained	13	weeks.	The	first	fiscal	quarter	of	2016	contained	14	weeks,	while the	second,	third	and	fourth	quarters	of	fiscal	2016	contained	13	weeks.

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

# Use	of	Estimates

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

# Cash	Equivalents

All	highly-liquid	investments	with	a	remaining	maturity	of	three	months	or	less	at	the	time	of	purchase	are	considered	to	be	cash	equivalents.	Cash	equivalents consist	primarily	of	investments	in	institutional	money	market	funds.

# Investments

All	of	Applied's	investments,	except	equity	investments	held	in	privately-held	companies,	are	classified	as	available-for-sale	at	the	respective	balance	sheet	dates. Investments	classified	as	available-for-sale	are	recorded	at	fair	value	based	upon	quoted	market	prices,	and	any	temporary	difference	between	the	cost	and	fair	value	of an	investment	is	presented	as	a	separate	component	of	accumulated	other	comprehensive	income	(loss).	The	specific	identification	method	is	used	to	determine	the	gains and	losses	on	investments.	Interest	earned	on	cash	and	investments,	as	well	as	realized	gains	and	losses	on	sale	of	securities,	are	included	in	interest	and	other	income, net	in	the	accompanying	Consolidated	Statements	of	Operations.

Equity	investments	in	privately-held	companies	are	generally	accounted	for	under	the	cost	method	of	accounting	and	are	periodically	assessed	for	other-than- temporary	impairment	when	an	event	or	circumstance	indicates	that	an	other-than-temporary	decline	in	value	may	have	occurred.

Applied	maintains	an	allowance	for	doubtful	accounts	for	estimated	losses	resulting	from	the	inability	of	its	customers	to	make	required	payments.	This	allowance is	 based	 on	 historical	 experience,	 credit	 evaluations,	 specific	 customer	 collection	 history	 and	 any	 customer-specific	 issues	 Applied	 has	 identified.	 Changes	 in circumstances,	such	as	an	unexpected	material	adverse	change	in	a	major	customer's	ability	to	meet	its	financial	obligation	to	Applied	or	its	payment	trends,	may	require Applied	to	further	adjust	its	estimates	of	the	recoverability	of	amounts	due	to	Applied.	Bad	debt	expense	and	any	reversals	are	recorded	in	marketing	and	selling expenses	in	the	Consolidated	Statement	of	Operations.

# Inventories

Inventories	are	stated	at	the	lower	of	cost	or	net	realizable	value,	with	cost	determined	on	a	first-in,	first-out	(FIFO)	basis.	Applied	adjusts	inventory	carrying	value for	estimated	obsolescence	equal	to	the	difference	between	the	cost	of	inventory	and	the	estimated	net	realizable	value	based	upon	assumptions	about	future	demand	and market	conditions.	Applied	fully	writes	down	inventories	and	noncancelable	purchase	orders	for	inventory	deemed	obsolete.	Applied	performs	periodic	reviews	of inventory	items	to	identify	excess	inventories	on	hand	by	comparing	on-hand	balances	to	anticipated	usage	using	recent	historical	activity	as	well	as	anticipated	or forecasted	demand.	If	estimates	of	customer	demand	diminish	further	or	market	conditions	become	less	favorable	than	those	projected	by	Applied,	additional	inventory adjustments	may	be	required.

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS	—	(Continued)

# Property,	Plant	and	Equipment

Property,	plant	and	equipment	is	stated	at	cost.	Depreciation	is	provided	over	the	estimated	useful	lives	of	the	assets	using	the	straight-line	method.	Estimated useful	lives	for	financial	reporting	purposes	are	as	follows:	buildings	and	improvements,	3	 to	30	years;	demonstration	and	manufacturing	equipment,	3	 to	5	years; software,	3	to	5	years;	and	furniture,	fixtures	and	other	equipment,	3	to	5	years.	Land	improvements	are	amortized	over	the	shorter	of	15	years	or	the	estimated	useful life.	Leasehold	improvements	are	amortized	over	the	shorter	of	five	years	or	the	lease	term.

# Intangible	Assets

Goodwill	and	indefinite-lived	assets	are	not	amortized,	but	are	reviewed	for	impairment	annually	during	the	fourth	quarter	of	each	fiscal	year	and	whenever	events or	changes	in	circumstances	indicate	that	the	carrying	value	of	an	asset	may	not	be	recoverable.	Purchased	technology	and	other	intangible	assets	are	presented	at	cost, net	of	accumulated	amortization,	and	are	amortized	over	their	estimated	useful	lives	of	1	to	15	years	using	the	straight-line	method.

# Long-Lived	Assets

Applied	reviews	long-lived	assets	for	impairment	whenever	events	or	changes	in	circumstances	indicate	that	the	carrying	amount	of	these	assets	or	asset	group may	not	be	recoverable.	Applied	assesses	these	assets	for	impairment	based	on	estimated	future	cash	flows	from	these	assets.

# Research,	Development	and	Engineering	Costs

Research,	development	and	engineering	costs	are	expensed	as	incurred.

# Sales	and	Value	Added	Taxes

Taxes	collected	from	customers	and	remitted	to	governmental	authorities	are	presented	on	a	net	basis	in	the	accompanying	Consolidated	Statements	of	Operations.

# Warranty

Applied	provides	for	the	estimated	cost	of	warranty	when	revenue	is	recognized.	Estimated	warranty	costs	are	determined	by	analyzing	specific	product,	current and	historical	configuration	statistics	and	regional	warranty	support	costs.	Applied's	warranty	obligation	is	affected	by	product	and	component	failure	rates,	material usage	and	labor	costs	incurred	in	correcting	product	failures	during	the	warranty	period.	If	actual	warranty	costs	differ	substantially	from	Applied's	estimates,	revisions to	the	estimated	warranty	liability	would	be	required.

Applied	recognizes	a	current	tax	liability	for	the	estimated	amount	of	income	tax	payable	on	tax	returns	for	the	current	fiscal	year.	Deferred	tax	assets	and liabilities	are	recognized	for	the	estimated	future	tax	effects	of	temporary	differences	between	the	book	and	tax	bases	of	assets	and	liabilities.	Deferred	tax	assets	are	also recognized	for	net	operating	loss	and	tax	credit	carryovers.	Deferred	tax	assets	are	offset	by	a	valuation	allowance	to	the	extent	it	is	more	likely	than	not	that	they	are	not expected	to	be	realized.

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

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

# Derivative	Financial	Instruments

Applied	uses	financial	instruments,	such	as	forward	exchange	and	currency	option	contracts,	to	hedge	a	portion	of,	but	not	all,	existing	and	anticipated	foreign currency	denominated	transactions	typically	expected	to	occur	within	24	months.	The	purpose	of	Applied's	foreign	currency	management	is	to	mitigate	the	effect	of exchange	rate	fluctuations	on	certain	foreign	currency	denominated	revenues,	costs	and	eventual	cash	flows.	In	certain	cases,	Applied	also	uses	interest	rate	swap	or	lock agreements	to	hedge	against	the	variability	of	cash	flows	due	to	changes	in	the	benchmark	interest	rate	of	fixed	rate	debt.	The	terms	of	derivative	financial	instruments used	for	hedging	purposes	are	generally	consistent	with	the	timing	of	the	transactions	being	hedged.	All	of	Applied's	derivative	financial	instruments	are	recorded	at	fair value	based	upon	quoted	market	prices	for	comparable	instruments.	For	derivative	instruments	designated	and	qualifying	as	cash	flow	hedges,	the	effective	portion	of the	gain	or	loss	on	these	hedges	is	reported	as	a	component	of	accumulated	other	comprehensive	income	(loss)	in	stockholders'	equity,	and	is	reclassified	into	earnings when	the	hedged	transaction	affects	earnings.	If	the	transaction	being	hedged	fails	to	occur,	or	if	a	portion	of	any	derivative	is	ineffective,	the	gain	or	loss	on	the associated	financial	instrument	is	recorded	promptly	in	earnings.	For	derivative	instruments	used	to	hedge	existing	foreign	currency	denominated	assets	or	liabilities,	the gain	or	loss	on	these	hedges	is	recorded	promptly	in	earnings	to	offset	the	changes	in	the	fair	value	of	the	assets	or	liabilities	being	hedged.	Applied	does	not	use derivative	financial	instruments	for	trading	or	speculative	purposes.

# Foreign	Currencies

As	 of	October	28,	2018,	all	of	Applied's	subsidiaries	use	 the	United	States	dollar	as	 their	functional	currency.	Accordingly,	assets	and	 liabilities	of	 these subsidiaries	are	remeasured	using	exchange	rates	 in	effect	at	 the	end	of	 the	period,	except	for	non-monetary	assets,	such	as	 inventories	and	property,	plant	and equipment,	which	are	remeasured	using	historical	exchange	rates.	Foreign	currency-denominated	revenues	and	costs	are	remeasured	using	average	exchange	rates	for	the period,	except	for	costs	related	to	those	balance	sheet	items	that	are	remeasured	using	historical	exchange	rates.	The	resulting	remeasurement	gains	and	losses	are included	in	general	and	administrative	expenses	in	the	Consolidated	Statements	of	Operations	as	incurred.

# Concentrations	of	Credit	Risk

Financial	 instruments	 that	potentially	subject	Applied	 to	significant	concentrations	of	credit	risk	consist	principally	of	cash	equivalents,	 investments,	 trade accounts	receivable	and	derivative	financial	instruments	used	in	hedging	activities.	Applied	invests	in	a	variety	of	financial	instruments,	such	as,	but	not	limited	to, commercial	paper,	corporate	and	municipal	bonds,	United	States	Treasury	and	agency	securities,	and	asset-backed	and	mortgage-backed	securities,	and,	by	policy,	limits the	amount	of	credit	exposure	with	any	one	financial	institution	or	commercial	issuer.	Applied	performs	ongoing	credit	evaluations	of	its	customers'	financial	condition and	generally	requires	no	collateral	to	secure	accounts	receivable.	Applied	maintains	an	allowance	reserve	for	potentially	uncollectible	accounts	receivable	based	on	its assessment	of	the	collectability	of	accounts	receivable.	Applied	regularly	reviews	the	allowance	by	considering	factors	such	as	historical	experience,	credit	quality,	age of	the	accounts	receivable	balances,	and	current	economic	conditions	that	may	affect	a	customer's	ability	to	pay.	In	addition,	Applied	utilizes	letters	of	credit	to	mitigate credit	risk	when	considered	appropriate.	Applied	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.	 In	 some	 instances,	Applied	 has	 entered	 into	 security	 arrangements	 which	 require	 the counterparties	to	post	collateral	to	further	mitigate	credit	exposure.

# Accounting	Standards	Adopted

Inventory	Measurement.	In	July	2015,	the	Financial	Accounting	Standard	Board	(FASB)	issued	authoritative	guidance	that	requires	inventory	to	be	measured	at the	lower	of	cost	and	net	realizable	value	instead	of	at	lower	of	cost	or	market.	This	guidance	does	not	apply	to	inventory	that	is	measured	using	last-in,	first	out	(LIFO) or	the	retail	inventory	method	but	applies	to	all	other	inventory	including	those	measured	using	first-in,	first-out	(FIFO)	or	the	average	cost	method.	Applied	adopted	this authoritative	guidance	in	the	first	quarter	of	fiscal	2018	prospectively	to	the	measurement	of	inventory	after	the	effective	date.	The	adoption	of	this	guidance	did	not	have a	material	impact	on	Applied's	consolidated	financial	statements.

Share-Based	Compensation.	In	March	2016,	the	FASB	issued	authoritative	guidance	that	simplifies	several	aspects	of	the	accounting	for	share-based	payment transactions,	including	forfeitures,	income	tax,	and	classification	on	the	statement	of	cash	flows.	Applied	adopted	this	guidance	in	the	first	quarter	of	fiscal	2018.	Upon adoption,	Applied	elected	to	continue	to	estimate	forfeitures	expected	to	occur	to	determine	the	amount	of	compensation	costs	to	be	recognized	in	each	period.	The	new standard	also	required	recognition	of	excess	tax	benefits	in	the	provision	for	income	taxes	rather	than	additional	paid-in	capital	prospectively.	In	fiscal	2018,	Applied recognized	an	excess	 tax	benefit	of	$51	million	in	the	Consolidated	Condensed	Statements	of	Operations.	Additionally,	Applied	elected	to	apply	the	presentation requirements	for	cash	flows	related	to	excess	tax	benefits	and	employee	taxes	paid	for	withheld	shares	retrospectively.	Adopting	this	guidance	increased	cash	provided by	operating	activities	by	$180	million	and	$100	million	with	corresponding	net	decreases	in	cash	provided	by	financing	activities	for	fiscal	2017	and	2016,	respectively.

Reclassification	of	Certain	Tax	Effects	from	Accumulated	Other	Comprehensive	Income.	In	February	2018,	the	FASB	issued	authoritative	guidance	that	allows stranded	tax	effects	of	the	Tax	Cuts	and	Jobs	Act	(the	"Tax	Act")	to	be	reclassified	from	accumulated	other	comprehensive	income	to	retained	earnings.	Applied	adopted this	guidance	at	the	beginning	of	the	third	quarter	of	fiscal	2018.	The	stranded	income	tax	effects	related	to	the	Tax	Act	were	reclassified	from	accumulated	other comprehensive	income	to	retained	earnings	in	the	consolidated	statements	of	stockholders'	equity	as	of	October	28,	2018.

Share-Based	Compensation:	Modification	Accounting.	In	May	2017,	the	FASB	issued	an	update	to	clarify	when	to	account	for	a	change	to	the	terms	or	conditions of	a	share-based	payment	award	as	a	modification.	Under	the	new	guidance,	modification	accounting	is	required	only	if	the	fair	value,	the	vesting	conditions,	or	the classification	of	the	award	changes	as	a	result	of	the	change	in	terms	or	conditions.	Applied	adopted	this	guidance	in	the	third	quarter	of	fiscal	2018	on	a	prospective basis.	The	impact	of	the	adoption	of	this	guidance	will	depend	on	whether	the	Company	makes	any	future	modifications	of	share-based	payment	awards.

# Accounting	Standards	Not	Yet	Adopted

Retirement	Benefits:	Changes	to	the	Disclosure	Requirements	for	Defined	Benefit	and	other	Postretirement	Plans.	In	August	2018,	the	FASB	issued	authoritative guidance	that	adds,	removes,	and	clarifies	disclosure	requirements	for	defined	benefit	and	other	postretirement	plans.	This	authoritative	guidance	will	be	effective	for Applied	in	fiscal	2021	on	a	retrospective	basis,	with	early	adoption	permitted.	Applied	is	currently	evaluating	the	effect	of	this	new	guidance	on	Applied's	consolidated financial	statements.

Fair	Value	Measurement:	Changes	to	the	Disclosure	Requirements	for	Fair	Value	Measurement.	In	August	2018,	the	FASB	issued	authoritative	guidance	that eliminates,	amends,	and	adds	disclosure	requirements	for	fair	value	measurements.	While	the	amended	and	new	disclosure	requirements	primarily	relate	to	Level	3	fair value	measurements,	the	authoritative	guidance	also	eliminates	disclosure	requirements	related	to	the	amount	and	reasons	for	transfer	between	Level	1	and	Level	2	of fair	value	hierarchy,	policy	for	timing	of	transfer	between	levels,	and	the	valuation	processes	for	Level	3	fair	value	measurements.	The	authoritative	guidance	will	be effective	for	Applied	in	the	first	quarter	of	fiscal	2020.	Early	adoption	is	permitted	only	for	the	removal	and	amendment	of	certain	disclosures,	while	the	new	disclosures requirements	are	to	be	applied	prospectively.	Applied	is	currently	evaluating	the	effect	of	this	new	guidance	on	Applied's	consolidated	financial	statements.

Derivatives	and	Hedging.	In	August	2017,	the	FASB	issued	authoritative	guidance	that	modifies	the	recognition	and	presentation	of	hedge	accounting	to	better align	an	entity's	risk	management	strategies	and	financial	reporting	for	hedging	relationships.	The	authoritative	guidance	expands	the	application	of	hedge	accounting for	non-financial	and	financial	risk	components	and	eases	certain	hedge	effectiveness	assessment	requirements.	The	authoritative	guidance	will	be	effective	for	Applied in	the	first	quarter	of	fiscal	2020,	with	early	adoption	permitted.	Applied	is	currently	evaluating	the	effect	of	this	new	guidance	on	Applied's	consolidated	financial statements.

Receivables:	Nonrefundable	Fees	and	Other	Costs.	In	March	2017,	the	FASB	issued	authoritative	guidance	that	will	shorten	the	amortization	period	for	certain callable	debt	securities	held	at	a	premium	to	the	earliest	call	date	to	more	closely	align	with	expectations	incorporated	in	market	pricing.	This	authoritative	guidance	will be	effective	for	Applied	in	the	first	quarter	of	fiscal	2020	on	a	modified	retrospective	basis,	with	early	adoption	permitted.	Applied	is	currently	evaluating	the	impact	of adopting	this	new	accounting	guidance	on	Applied's	consolidated	financial	statements.

Retirement	Benefits.	In	March	2017,	the	FASB	issued	authoritative	guidance	which	requires	companies	to	present	the	service	cost	component	of	net	benefit	cost	in the	same	line	items	in	which	they	report	compensation	cost.	The	other	components	of	net	benefit	cost	are	required	to	be	presented	in	the	income	statement	separately from	the	service	cost	component	and	outside	a	subtotal	of	income	from	operations,	if	one	is	presented.	The	authoritative	guidance	will	be	effective	for	Applied	in	the first	quarter	of	fiscal	2019	on	a	retrospective	basis.	The	adoption	of	this	guidance	is	only	expected	to	result	in	reclassification	of	other	components	of	net	benefit	costs outside	of	income	from	operations	and	is	not	expected	to	have	a	significant	impact	on	Applied's	consolidated	financial	statements.

Goodwill Impairment.	In	 January	 2017,	 the	 FASB	 issued	 authoritative	 guidance	 that	 simplifies	 the	 process	 required	 to	 test	 goodwill	 for	 impairment.	 The authoritative	guidance	will	be	effective	for	Applied	in	the	first	quarter	of	fiscal	2021.	Early	adoption	is	permitted.	The	adoption	of	this	guidance	is	not	expected	to	have	a significant	impact	on	Applied's	consolidated	financial	statements.

Business	Combinations.	In	January	2017,	the	FASB	issued	authoritative	guidance	that	clarifies	the	definition	of	a	business	to	help	companies	evaluate	whether acquisition	or	disposal	transactions	should	be	accounted	for	as	asset	groups	or	as	businesses.	The	authoritative	guidance	will	be	effective	for	Applied	in	the	first	quarter of	fiscal	2019	on	a	prospective	basis.	The	impact	of	the	adoption	depends	on	the	facts	and	circumstances	of	future	acquisition	or	disposal	transactions.

Income	Taxes:	Intra-Entity	Asset	Transfers.	In	October	2016,	the	FASB	issued	authoritative	guidance	that	requires	entities	to	recognize	at	the	transaction	date	the income	tax	consequences	of	intercompany	asset	transfers	other	than	inventory.	Applied	will	adopt	this	standard	in	the	first	quarter	of	fiscal	2019	using	a	modified- retrospective	approach	resulting	in	a	cumulative-effect	adjustment	to	retained	earnings.	Applied	estimates	an	increase	in	deferred	tax	assets	of	approximately	$1.6	billion with	a	corresponding	increase	in	retained	earnings	related	to	the	recognition	of	income	tax	effects	of	intra-entity	asset	transfers	that	occurred	prior	to	the	adoption	date.

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

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

Leases.	In	February	2016,	the	FASB	issued	authoritative	guidance	for	lease	accounting,	which	requires	lessees	to	recognize	lease	assets	and	liabilities	on	the balance	sheet	for	certain	lease	arrangements	that	are	classified	as	operating	leases	under	the	previous	standard,	and	to	provide	for	enhanced	disclosures.	The	authoritative guidance	will	be	effective	for	Applied	in	the	first	quarter	of	fiscal	2020	and	should	be	applied	using	a	modified	retrospective	approach.	Early	adoption	is	permitted. Applied	is	currently	evaluating	the	effect	of	this	new	guidance	on	Applied's	consolidated	financial	statements.

Financial	Instruments:	Classification	and	Measurement.	In	January	2016,	the	FASB	issued	authoritative	guidance	that	requires	equity	investments	that	do	not result	in	consolidation,	and	are	not	accounted	for	under	the	equity	method,	to	be	measured	at	fair	value,	and	requires	recognition	of	any	changes	in	fair	value	in	net income	unless	the	investments	qualify	for	a	new	practicability	exception.	For	financial	liabilities	measured	at	fair	value,	the	change	in	fair	value	caused	by	a	change	in instrument-specific	credit	risk	will	be	required	to	be	presented	separately	in	other	comprehensive	income.	Applied	will	adopt	this	standard	in	the	first	quarter	of	fiscal year	2019.	Applied	will	make	elections	on	whether	to	apply	fair	value	or	the	measurement	alternative	for	equity	investments	without	readily	determinable	fair	value	on an	investment-by-investment	basis.	For	the	equity	securities	without	readily	determinable	fair	values,	fair	value	will	be	applied	prospectively	to	all	equity	investments that	exist	as	of	adoption.	Upon	adoption,	Applied	will	record	a	cumulative-effect	adjustment	to	retained	earnings	for	the	unrealized	gains	and	losses	associated	with equity	 investments	 with	 readily	 determinable	 fair	 values.	Applied	 currently	 estimates	 a	 net	 increase	 to	 retained	 earnings	 of	 approximately	$21	million	 with	 the corresponding	net	decrease	in	accumulated	other	comprehensive	income.

Revenue	Recognition.	In	May	2014,	the	FASB	issued	authoritative	guidance	that	requires	revenue	recognition	to	depict	the	transfer	of	promised	goods	or	services to	a	customer	in	an	amount	that	reflects	the	consideration	to	which	the	entity	expects	to	be	entitled	in	exchange	for	those	goods	or	services	and	requires	certain	additional disclosures.	This	new	standard	will	supersede	most	current	revenue	recognition	guidance,	including	industry-specific	guidance.	Entities	will	have	the	option	of	using either	a	full	retrospective	or	modified	retrospective	approach	to	adopting	the	guidance.	In	August	2015,	the	FASB	issued	an	amendment	to	defer	the	effective	date	by one	year	and	allow	entities	to	early	adopt	no	earlier	than	the	original	effective	date.	With	this	amendment,	the	guidance	will	be	effective	for	Applied	in	the	first	quarter	of fiscal	2019,	which	is	the	Company's	planned	adoption	date.	Applied	currently	anticipates	adopting	this	new	guidance	using	the	full	retrospective	approach.

In	fiscal	2016,	Applied	established	a	project	steering	committee	and	cross-functional	implementation	team	that	has	identified	potential	differences	that	would result	from	applying	the	requirements	of	the	new	standard	to	Applied's	revenue	contracts.	In	addition,	the	implementation	team	has	identified	and	is	now	implementing changes	to	business	processes,	systems	and	controls	to	support	recognition	and	disclosure	under	the	new	standard.

While	the	Company's	evaluation	of	the	impact	of	this	new	guidance	is	not	complete,	Applied	currently	expects	that	the	new	standard	will	have	the	following impacts:

•Revenue	related	to	the	sale	of	equipment	and	spares	will	generally	continue	to	be	recognized	at	a	point	in	time	upon	the	transfer	of	control.	Under	this	new guidance,	the	point	of	time	at	which	revenue	is	recognized	for	certain	of	these	products	is	expected	to	be	earlier	than	under	current	revenue	recognition guidance	as	there	will	be	fewer	constraints	related	to	customer	acceptance.

•Revenue related to the	 sale	 of	 services	 will	 generally	 continue to	 be recognized	 over time	 as the	 services	 are performed.

•Disclosures related to revenue recognition, including contract balances and revenue disaggregation,	 will be expanded.

•Applied	continues	to	evaluate	the	effect	that	this	new	guidance	will	have	on	the	financial	position	and	results	of	operations	for	fiscal	2018.	However,	for	fiscal 2017,	Applied	expects	an	increase	of	our	net	sales	between	$140	million	and	$180	million,	or	approximately	1%.

Applied	is	nearing	completion	of	retrospectively	adjusting	financial	information	and	will	continue	to	evaluate	the	effect	that	the	standard	will	have	on	its consolidated	financial	statements,	including	disclosures,	and	its	preliminary	assessments	are	subject	to	change.

# Note	2 Earnings	Per

# Share

Basic	earnings	per	share	is	determined	using	the	weighted	average	number	of	common	shares	outstanding	during	the	period.	Diluted	earnings	per	share	is determined	using	the	weighted	average	number	of	common	shares	and	potential	common	shares	(representing	the	dilutive	effect	of	stock	options,	restricted	stock	units, and	employee	stock	purchase	plan	shares)	outstanding	during	the	period.	Applied's	net	income	has	not	been	adjusted	for	any	period	presented	for	purposes	of	computing basic	or	diluted	earnings	per	share	due	to	the	Company's	non-complex	capital	structure.

| Net	income | $3,313 | $3,434 | $1,721 |
| :--- | :--- | :--- | :--- |
| Denominator: |  |  |  |
| Weighted\taverage\tcommon\tshares\toutstanding | 1,013 | 1,073 | 1,107 |
| Effect\tof\tdilutive\tstock\toptions,\trestricted\tstock\tunits\tand\temployee\tstock\tpurchase\tplan\tshares | 13 | 11 | 9 |
| Denominator\tfor\tdiluted\tearnings\tper\tshare | 1,026 | 1,084 | 1,116 |
| Basic\tearnings\tper\tshare | $3.27 | $3.20 | $1.56 |
| Diluted\tearnings\tper\tshare | $3.23 | $3.17 | $1.54 |
| Potentially\tdilutive\tsecurities | — | — | — |

Potentially	dilutive	securities	attributable	to	outstanding	stock	options	and	restricted	stock	units	are	excluded	from	the	calculation	of	diluted	earnings	per	share where	the	combined	exercise	price	and	average	unamortized	fair	value	are	greater	than	the	average	market	price	of	Applied	common	stock,	and	therefore	their	inclusion would	be	anti-dilutive.	Prior	 to the	adoption	of	Accounting	Standards	Update	(ASU)	2016-09	Compensation—Stock	Compensation	(Topic	718):	Improvements	to Employee	Share-Based	Payment	Accounting	in	the	first	quarter	of	fiscal	2018,	the	assumed	tax	benefits	upon	the	exercise	of	options	and	vesting	of	restricted	stock	units were	also	included	in	this	calculation.

# Note	3 Cash,	Cash	Equivalents	and	Investments

# Summary	of	Cash,	Cash	Equivalents	and	Investments

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

| October	28,	2018 | Cost | Gross<br>Unrealized<br>Gains | Gross<br>Unrealized<br>Losses | Estimated<br>Fair	Value |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (In\tmillions) | (In\tmillions) |  |
| Cash | $1,489 | $— | $— | $1,489 |
| Cash\tequivalents: |  |  |  |  |
| Money\tmarket\tfunds | 1,599 | — | — | 1,599 |
| Commercial\tpaper,\tcorporate\tbonds\tand\tmedium-term\tnotes | 352 | — | — | 352 |
| Total\tCash\tequivalents | 1,951 | — | — | 1,951 |
| Total\tCash\tand\tCash\tequivalents | $3,440 | $— | $— | $3,440 |
| Short-term\tand\tlong-term\tinvestments: |  |  |  |  |
| U.S.\tTreasury\tand\tagency\tsecurities | $335 | $— | $2 | $333 |
| Non-U.S.\tgovernment\tsecurities* | 10 | — | — | 10 |
| Municipal\tsecurities | 399 | — | 4 | 395 |
| Commercial\tpaper,\tcorporate\tbonds\tand\tmedium-term\tnotes | 705 | — | 3 | 702 |
| Asset-backed\tand\tmortgage-backed\tsecurities | 595 | — | 4 | 591 |
| Total\tfixed\tincome\tsecurities | 2,044 | — | 13 | 2,031 |
| Publicly\ttraded\tequity\tsecurities | 17 | 25 | 4 | 38 |
| Equity\tinvestments\tin\tprivately-held\tcompanies | 89 | — | — | 89 |
| Total\tshort-term\tand\tlong-term\tinvestments | $2,150 | $25 | $17 | $2,158 |
| Total\tCash,\tCash\tequivalents\tand\tInvestments | $5,590 | $25 | $17 | $5,598 |

*	Includes	agency	debt	securities	guaranteed	by	Canada.

| October	29,	2017 | Cost | Gross<br>Unrealized<br>Gains | Gross<br>Unrealized<br>Losses | Estimated<br>Fair	Value |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (In\tmillions) | (In\tmillions) |  |
| Cash | $1,346 | $— | $— | $1,346 |
| Cash\tequivalents: |  |  |  |  |
| Money\tmarket\tfunds | 2,658 | — | — | 2,658 |
| U.S.\tTreasury\tand\tagency\tsecurities | 15 | — | — | 15 |
| Non-U.S.\tgovernment\tsecurities | 55 | — | — | 55 |
| Municipal\tsecurities | 341 | — | — | 341 |
| Commercial\tpaper,\tcorporate\tbonds\tand\tmedium-term\tnotes | 595 | — | — | 595 |
| Total\tCash\tequivalents | 3,664 | — | — | 3,664 |
| Total\tCash\tand\tCash\tequivalents | $5,010 | $— | $— | $5,010 |
| Short-term\tand\tlong-term\tinvestments: |  |  |  |  |
| U.S.\tTreasury\tand\tagency\tsecurities | $667 | $— | $1 | $666 |
| Non-U.S.\tgovernment\tsecurities* | 161 | — | — | 161 |
| Municipal\tsecurities | 1,007 | — | — | 1,007 |
| Commercial\tpaper,\tcorporate\tbonds\tand\tmedium-term\tnotes | 1,024 | 1 | 1 | 1,024 |
| Asset-backed\tand\tmortgage-backed\tsecurities | 379 | — | 1 | 378 |
| Total\tfixed\tincome\tsecurities | 3,238 | 1 | 3 | 3,236 |
| Publicly\ttraded\tequity\tsecurities | 22 | 78 | 1 | 99 |
| Equity\tinvestments\tin\tprivately-held\tcompanies | 74 | — | — | 74 |
| Total\tshort-term\tand\tlong-term\tinvestments | $3,334 | $79 | $4 | $3,409 |
| Total\tCash,\tCash\tequivalents\tand\tInvestments | $8,344 | $79 | $4 | $8,419 |

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

# Maturities	of	Investments

The	following	table	summarizes	the	contractual	maturities	of	Applied's	investments	at	October	28,	2018:

|  | Cost | Estimated<br>Fair	Value |
| :--- | :--- | :--- |
|  | (In\tmillions) |  |
| Due\tin\tone\tyear\tor\tless | $503 | $502 |
| Due\tafter\tone\tthrough\tfive\tyears | 946 | 938 |
| No\tsingle\tmaturity\tdate** | 701 | 718 |
| Total | $2,150 | $2,158 |

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

# Gains	and	Losses	on	Investments

Gross	realized	gains	and	losses	on	sales	of	investments	for	each	fiscal	year	were	as	follows:

| Gross	realized	gains | $29 | $14 | $10 |
| :--- | :--- | :--- | :--- |
| Gross\trealized\tlosses | $3 | $1 | $2 |

At	October	28,	2018,	gross	unrealized	losses	related	to	Applied's	investment	portfolio	were	not	material.	Applied	regularly	reviews	its	investment	portfolio	to identify	and	evaluate	investments	that	have	indications	of	possible	impairment.	Factors	considered	in	determining	whether	an	unrealized	loss	is	considered	to	be temporary,	or	other-than-temporary	and	therefore	impaired,	include:	the	length	of	time	and	extent	to	which	fair	value	has	been	lower	than	the	cost	basis;	the	financial condition,	credit	quality	and	near-term	prospects	of	the	investee;	and	whether	it	is	more	likely	than	not	that	Applied	will	be	required	to	sell	the	security	prior	to	recovery. Generally,	the	contractual	terms	of	investments	in	marketable	securities	do	not	permit	settlement	at	prices	less	than	the	amortized	cost	of	the	investments.	Applied determined	that	the	gross	unrealized	losses	on	its	marketable	fixed	income	securities	at	October	28,	2018,	October	29,	2017	and	October	30,	2016	were	temporary	in nature	and	therefore	it	did	not	recognize	any	impairment	of	its	marketable	fixed	income	securities	for	fiscal	2018,	2017	or	2016.	During	fiscal	2018,	2017	 and	2016, Applied	determined	that	certain	of	its	equity	investments	were	other-than-temporarily	impaired	and,	accordingly,	recognized	impairment	charges	of	$5	million,	$10 million	and	$8	million,	respectively.	These	impairment	charges	are	included	in	interest	and	other	income,	net	in	the	Consolidated	Statement	of	Operations.

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

# Note	4 Fair	Value

# Measurements

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

# Fair	Value	Hierarchy

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

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

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

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

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

Investments	with	remaining	effective	maturities	of	12	months	or	less	from	the	balance	sheet	date	are	classified	as	short-term	investments.	Investments	with remaining	effective	maturities	of	more	than	12	months	from	the	balance	sheet	date	are	classified	as	long-term	investments.	As	of	October	28,	2018,	substantially	all	of Applied's	available-for-sale,	short-term	and	long-term	investments	were	recognized	at	fair	value	that	was	determined	based	upon	observable	inputs.

# Assets	Measured	at	Fair	Value	on	a	Recurring	Basis

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

|  |  | October	28,	2018 |  |  | October	29,	2017 |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Level\t1 | Level\t2 | Total | Level\t1 | Level\t2 | Total |
|  |  |  | (In\tmillions) | (In\tmillions) |  |  |
| Assets: |  |  |  |  |  |  |
| Money\tmarket\tfunds | $1,599 | $— | $1,599 | $2,658 | $— | $2,658 |
| U.S.\tTreasury\tand\tagency\tsecurities | 297 | 36 | 333 | 192 | 489 | 681 |
| Non-U.S.\tgovernment\tsecurities | — | 10 | 10 | — | 216 | 216 |
| Municipal\tsecurities | — | 395 | 395 | — | 1,348 | 1,348 |
| Commercial\tpaper,\tcorporate\tbonds\tand\tmedium-term\tnotes | — | 1,054 | 1,054 | — | 1,619 | 1,619 |
| Asset-backed\tand\tmortgage-backed\tsecurities | — | 591 | 591 | — | 378 | 378 |
| Publicly\ttraded\tequity\tsecurities | 38 | — | 38 | 99 | — | 99 |
| Total | $1,934 | $2,086 | $4,020 | $2,949 | $4,050 | $6,999 |

There	 were	no	transfers	between	Level	1	and	Level	2	fair	value	measurements	during	fiscal	2018	 and	2017,	and	Applied	did	not	have	any	financial	assets measured	at	fair	value	on	a	recurring	basis	within	Level	3	fair	value	measurements	as	of	October	28,	2018	or	October	29,	2017.

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

Equity	investments	in	privately-held	companies	are	generally	accounted	for	under	the	cost	method	of	accounting	and	are	periodically	assessed	for	other-than- temporary	impairment	when	an	event	or	circumstance	indicates	that	an	other-than-temporary	decline	in	value	may	have	occurred.	If	Applied	determines	that	an	other- than-temporary	impairment	has	occurred,	the	investment	will	be	written	down	to	its	estimated	fair	value	based	on	available	information,	such	as	pricing	in	recent	rounds of	financing,	current	cash	positions,	earnings	and	cash	flow	forecasts,	recent	operational	performance	and	any	other	readily	available	market	data.	Equity	investments	in privately-held	companies	totaled	$89	million	at	October	28,	2018,	of	which	$72	million	of	investments	were	accounted	for	under	the	cost	method	of	accounting	and	$17 million	of	investments	had	been	measured	at	fair	value	on	a	non-recurring	basis	within	Level	3	fair	value	measurements	due	to	an	other-than-temporary	decline	in	value. Equity	investments	in	privately-held	companies	totaled	$74	million	at	October	29,	2017,	of	which	$65	million	of	investments	were	accounted	for	under	the	cost	method of	accounting	and	$9	million	of	investments	had	been	measured	at	fair	value	on	a	non-recurring	basis	within	Level	3	fair	value	measurements	due	to	an	other-than- temporary	decline	in	value.

During	fiscal	2018,	2017	and	2016,	Applied	determined	that	certain	of	its	equity	investments	were	other-than-temporarily	impaired	and,	accordingly,	recognized impairment	charges	of	$5	million,	$10	million	and	$8	million,	respectively.

# Other

The	carrying	amounts	of	Applied's	financial	instruments,	including	cash	and	cash	equivalents,	accounts	receivable,	notes	payable	-	short	term,	and	accounts payable	and	accrued	expenses,	approximate	fair	value	due	to	their	short	maturities.	At	October	28,	2018,	the	aggregate	principal	and	estimated	fair	value	amounts	of long-term	debt	were	both	$5.4	billion.	At	October	29,	2017,	the	aggregate	principal	amount	of	long-term	debt	was	$5.4	billion,	and	the	estimated	fair	value	was	$5.8 billion.	The	estimated	fair	value	of	long-term	debt	is	determined	by	Level	2	inputs	and	is	based	primarily	on	quoted	market	prices	for	the	same	or	similar	issues.	See Note	10	of	the	Notes	to	the	Consolidated	Financial	Statements	for	further	detail	of	existing	debt.

# Note	5 Derivative	Instruments	and	Hedging	Activities

Applied	conducts	business	in	a	number	of	foreign	countries,	with	certain	transactions	denominated	in	local	currencies,	such	as	the	Japanese	yen,	euro,	Israeli shekel	 and	Taiwanese	 dollar.	Applied	 uses	 derivative	 financial	 instruments,	 such	 as	 forward	 exchange	 contracts	 and	 currency	 option	 contracts,	 to	 hedge	 certain forecasted	foreign	currency	denominated	transactions	expected	to	occur	typically	within	the	next	24	months.	The	purpose	of	Applied's	foreign	currency	management	is to	mitigate	the	effect	of	exchange	rate	fluctuations	on	certain	foreign	currency	denominated	revenues,	costs	and	eventual	cash	flows.	The	terms	of	currency	instruments used	for	hedging	purposes	are	generally	consistent	with	the	timing	of	the	transactions	being	hedged.

During	fiscal	2017,	Applied	entered	into	and	settled	interest	rate	lock	agreements,	with	a	total	notional	amount	of	$700	million	to	hedge	against	the	variability	of benchmark	interest	rates	prior	to	the	issuance	of	the	debt.	These	instruments	were	designated	as	cash	flow	hedges	at	inception	and	settled	in	conjunction	with	the issuance	of	debt	in	March	2017.	The	$14	million	loss	from	the	settlement	of	the	interest	rate	lock	agreement,	which	was	included	in	AOCI	in	stockholders'	equity,	is being	amortized	to	interest	expense	over	the	term	of	the	senior	unsecured	10-year	notes	issued	in	March	2017.

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

Hedges	related	to	anticipated	transactions	are	designated	and	documented	at	the	inception	of	the	hedge	as	cash	flow	hedges	and	foreign	exchange	derivatives	are typically	entered	into	once	per	month.	Cash	flow	hedges	are	evaluated	for	effectiveness	quarterly.	The	effective	portion	of	the	gain	or	loss	on	these	hedges	is	reported	as a	component	of	AOCI	in	stockholders'	equity	and	is	reclassified	into	earnings	when	the	hedged	transaction	affects	earnings.	The	majority	of	the	after-tax	net	income	or loss	related	to	foreign	exchange	derivative	instruments	included	in	AOCI	at	October	28,	2018	is	expected	to	be	reclassified	into	earnings	within	12	months.	Changes	in the	fair	value	of	currency	forward	exchange	and	option	contracts	due	to	changes	in	time	value	are	excluded	from	the	assessment	of	effectiveness.	Both	ineffective	hedge amounts	and	hedge	components	excluded	from	the	assessment	of	effectiveness	are	recognized	in	earnings.	If	the	transaction	being	hedged	is	no	longer	probable	to	occur, or	if	a	portion	of	any	derivative	is	deemed	to	be	ineffective,	Applied	promptly	recognizes	the	gain	or	loss	on	the	associated	financial	instrument	in	earnings.	The	amount recognized	due	to	discontinuance	of	cash	flow	hedges	that	were	probable	not	to	occur	by	the	end	of	the	originally	specified	time	period	were	not	significant	for	fiscal years	2018	and	2017	and	was	a	loss	of	$8	million	for	fiscal	2016.

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

The	fair	values	of	foreign	exchange	derivative	instruments	at	October	28,	2018	and	October	29,	2017	were	not	material.

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

| Derivatives	in	Cash	Flow	Hedging	Relationships | Location	of	Gain	or<br>(Loss) | Gain	or<br>(Loss) | Reclassified<br>from	AOCI	into<br>Income | Gain	or	(Loss)<br>Recognized	in<br>Income |
| :--- | :--- | :--- | :--- | :--- |
|  |  |  | (In\tmillions) |  |
| 2018 |  |  |  |  |
| Foreign\texchange\tcontracts | AOCI | $3 | $— | $— |
| Foreign\texchange\tcontracts | Cost\tof\tproducts\tsold | — | 4 | 19 |
| Foreign\texchange\tcontracts | General\tand\tadministrative | — | (3) | (7) |
| Interest\trate\tcontracts | Interest\texpense | — | (3) | — |
| Total |  | $3 | $(2) | $12 |
| 2017 |  |  |  |  |
| Foreign\texchange\tcontracts | AOCI | $35 | $— | $— |
| Foreign\texchange\tcontracts | Cost\tof\tproducts\tsold | — | 7 | (3) |
| Foreign\texchange\tcontracts | General\tand\tadministrative | — | 7 | (2) |
| Interest\trate\tcontracts | AOCI | (14) | — | — |
| Interest\trate\tcontracts | Interest\texpense | — | (3) | — |
| Total |  | $21 | $11 | $(5) |
| 2016 |  |  |  |  |
| Foreign\texchange\tcontracts | AOCI | $(53) | $— | $— |
| Foreign\texchange\tcontracts | Cost\tof\tproducts\tsold | — | (46) | 2 |
| Foreign\texchange\tcontracts | General\tand\tadministrative | — | — | (11) |
| Interest\trate\tcontracts | Interest\texpense | — | (2) | — |
| Total |  | $(53) | $(48) | $(9) |

| Derivatives	Not	Designated	as	Hedging	Instruments | in	Income | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- | :--- |
|  |  |  | (In\tmillions) |  |
| Foreign\texchange\tcontracts | General\tand\tadministrative | $(5) | $39 | $(75) |
| Total |  | $(5) | $39 | $(75) |

# Credit	Risk	Contingent	Features

If	Applied's	credit	rating	were	to	fall	below	investment	grade,	it	would	be	in	violation	of	credit	risk	contingent	provisions	of	the	derivative	instruments	discussed above,	and	certain	counterparties	to	the	derivative	instruments	could	request	immediate	payment	on	derivative	instruments	in	net	liability	positions.	The	aggregate	fair value	of	all	derivative	instruments	with	credit-risk	related	contingent	features	that	were	in	a	net	liability	position	was	immaterial	as	of	October	28,	2018	and	October	29, 2017.

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

# Note	6 Accounts	Receivable,

Applied	has	agreements	with	various	financial	institutions	to	sell	accounts	receivable	and	discount	promissory	notes	from	selected	customers.	Applied	sells	its accounts	receivable	without	recourse.	Applied,	from	 time	 to	 time,	also	discounts	 letters	of	credit	 issued	by	customers	 through	various	financial	 institutions.	The discounting	of	 letters	of	credit	depends	on	many	factors,	 including	 the	willingness	of	financial	 institutions	 to	discount	 the	 letters	of	credit	and	 the	cost	of	such arrangements.

Applied	sold	$1.6	billion,	$746	million	and	$75	million	of	accounts	receivable	during	fiscal	2018,	2017	and	2016,	respectively.	Applied	discounted	letters	of	credit issued	by	customers	of	$37	million	in	fiscal	2018.	There	was	no	discounting	of	promissory	notes	in	fiscal	2018.	Applied	did	not	discount	letters	of	credit	issued	by customers	or	discount	promissory	notes	during	fiscal	2017	or	2016.	Financing	charges	on	the	sale	of	receivables	and	discounting	of	letters	of	credit	are	included	in interest	expense	in	the	accompanying	Consolidated	Statements	of	Operations	and	were	not	material	for	all	years	presented.

Accounts	receivable	are	presented	net	of	allowance	for	doubtful	accounts	of	$33	million	and	$34	million	at	October	28,	2018	and	October	29,	2017,	respectively. Changes	in	allowance	for	doubtful	accounts	in	each	fiscal	year	were	as	follows:

| Beginning	balance | $34 | $51 | $49 |
| :--- | :--- | :--- | :--- |
| Provision | — | — | 3 |
| Deductions1 | (1) | (17) | (1) |
| Ending\tbalance | $33 | $34 | $51 |

1	Fiscal	2018,	2017	and	2016	deductions	primarily	represent	releases	of	allowance	for	doubtful	accounts	credited	to	expense	as	a	result	of	an	overall	lower	risk	profile	of	Applied's customers	and	cash	collections.

	Applied	sells	its	products	principally	to	manufacturers	within	the	semiconductor	and	display	industries.	While	Applied	believes	that	its	allowance	for	doubtful accounts	is	adequate	and	represents	its	best	estimate	as	of	October	28,	2018,	it	continues	to	closely	monitor	customer	liquidity	and	industry	and	economic	conditions, which	may	result	in	changes	to	Applied's	estimates.

Included	in	finished	goods	inventory	is	$19	million	at	October	28,	2018	and	$331	million	at	October	29,	2017,	of	newly-introduced	systems	at	customer	locations where	the	sales	transaction	did	not	meet	Applied's	revenue	recognition	criteria	as	set	forth	in	Note	1.	Finished	goods	inventory	includes	$350	million	and	$281	million of	evaluation	inventory	at	October	28,	2018	and	October	29,	2017,	respectively.

|  | (In	years) | (In	millions) | (In	millions) |
| :--- | :--- | :--- | :--- |
| Property,\tPlant\tand\tEquipment,\tNet |  |  |  |
| Land\tand\timprovements |  | $245 | $160 |
| Buildings\tand\timprovements | 3-30 | 1,448 | 1,315 |
| Demonstration\tand\tmanufacturing\tequipment | 3-5 | 1,282 | 1,129 |
| Furniture,\tfixtures\tand\tother\tequipment | 3-5 | 634 | 572 |
| Construction\tin\tprogress |  | 203 | 135 |
| Gross\tproperty,\tplant\tand\tequipment |  | 3,812 | 3,311 |
| Accumulated\tdepreciation |  | (2,405) | (2,245) |
|  |  | $1,407 | $1,066 |

| Accounts	payable | $996 | $945 |
| :--- | :--- | :--- |
| Compensation\tand\temployee\tbenefits | 639 | 666 |
| Warranty | 209 | 199 |
| Dividends\tpayable | 193 | 106 |
| Income\ttaxes\tpayable | 136 | 112 |
| Other\taccrued\ttaxes | 112 | 70 |
| Interest\tpayable | 38 | 38 |
| Other | 398 | 314 |
|  | $2,721 | $2,450 |

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

# Note	8 Business	Combinations

During	fiscal	2017,	Applied	completed	three	acquisitions	to	complement	Applied's	existing	product	offerings	and	to	provide	opportunities	for	future	growth	within Applied's	Display	and	Adjacent	Markets	and	Applied	Global	Services	segments.

Pro	forma	results	of	operations	for	these	acquisitions	have	not	been	presented	because	they	are	not	material	to	Applied's	consolidated	results	of	operations.	The acquired	businesses	are	included	in	the	results	for	the	Display	and	Adjacent	Markets	and	Applied	Global	Services	segments.

The	following	table	represents	the	final	aggregated	purchase	price	allocation	for	acquisitions	completed	in	fiscal	year	2017:

|  | Estimated	Fair	Values |
| :--- | :--- |
|  | (In\tmillions) |
| Fair\tvalue\tof\tnet\tassets\tacquired | $23 |
| Goodwill | 55 |
| Purchased\ttechnology | 31 |
| Purchase\tprice\tallocated | $109 |

Intangible	assets	are	being	amortized	on	a	straight-line	basis	over	an	estimated	weighted-average	useful	life	of	3.5	years.	Total	transaction	costs	related	to	these acquisitions	were	not	material	and	were	expensed	as	incurred	in	general	and	administrative	expenses	in	the	Consolidated	Statement	of	Operations.

# Note	9 Goodwill,	Purchased	Technology	and	Other	Intangible

# Assets

# Goodwill	and	Purchased	Intangible	Assets

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

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

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

As	of	October	28,	2018,	Applied's	reporting	units	include	Semiconductor	Product	Group	and	Imaging	and	Process	Control	Group,	which	combine	to	form	the Semiconductor	Systems	reporting	segment,	Applied	Global	Services,	and	Display	and	Adjacent	Markets.

In	the	fourth	quarter	of	fiscal	2018,	Applied	performed	a	qualitative	assessment	to	test	goodwill	for	all	of	its	reporting	units	for	impairment.	Applied	determined that	it	was	more	likely	than	not	that	each	of	its	reporting	units'	fair	values	exceeded	their	respective	carrying	values	and	that	it	was	not	necessary	to	perform	the	two-step goodwill	impairment	test	for	any	of	its	reporting	units.

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

Details	of	goodwill	were	as	follows:

|  | October	28,	2018 | October	29,	2017 |
| :--- | :--- | :--- |
|  | (In\tmillions) | (In\tmillions) |
| Semiconductor\tSystems | $2,151 | $2,151 |
| Applied\tGlobal\tServices | 1,018 | 1,018 |
| Display\tand\tAdjacent\tMarkets | 199 | 199 |
| Carrying\tamount | $3,368 | $3,368 |

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

|  | October	28,<br>2018 | October	29,<br>2017 |
| :--- | :--- | :--- |
|  | (In\tmillions) | (In\tmillions) |
| Purchased\ttechnology,\tnet | $109 | $288 |
| Intangible\tassets\t-\tfinite-lived,\tnet | 104 | 124 |
|  | $213 | $412 |

# Finite-Lived	Purchased	Intangible	Assets

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

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

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

Details	of	finite-lived	intangible	assets	were	as	follows:

|  | Purchased<br>Technology | October	28,	2018<br>Other<br>Intangible<br>Assets | Total | Purchased<br>Technology | October	29,	2017<br>Other<br>Intangible<br>Assets | Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | (In\tmillions) |  |  |  |
| Gross\tcarrying\tamount: |  |  |  |  |  |  |
| Semiconductor\tSystems | $1,449 | $252 | $1,701 | $1,449 | $252 | $1,701 |
| Applied\tGlobal\tServices | 33 | 44 | 77 | 33 | 44 | 77 |
| Display\tand\tAdjacent\tMarkets | 163 | 38 | 201 | 163 | 38 | 201 |
| Corporate\tand\tOther | — | 9 | 9 | — | 9 | 9 |
| Gross\tcarrying\tamount | $1,645 | $343 | $1,988 | $1,645 | $343 | $1,988 |
| Accumulated\tamortization: |  |  |  |  |  |  |
| Semiconductor\tSystems | $(1,375) | $(150) | $(1,525) | $(1,210) | $(131) | $(1,341) |
| Applied\tGlobal\tServices | (29) | (44) | (73) | (28) | (44) | (72) |
| Display\tand\tAdjacent\tMarkets | (132) | (36) | (168) | (119) | (35) | (154) |
| Corporate\tand\tOther | — | (9) | (9) | — | (9) | (9) |
| Accumulated\tamortization | $(1,536) | $(239) | $(1,775) | $(1,357) | $(219) | $(1,576) |
| Carrying\tamount | $109 | $104 | $213 | $288 | $124 | $412 |

Details	of	amortization	expense	for	each	fiscal	year	by	segment	were	as	follows:

| Semiconductor	Systems | $184 | $185 | $185 |
| :--- | :--- | :--- | :--- |
| Applied\tGlobal\tServices | 1 | 1 | 1 |
| Display\tand\tAdjacent\tMarkets | 14 | 7 | — |
| Corporate\tand\tOther | — | — | 3 |
| Total | $199 | $193 | $189 |

Amortization	expense	for	each	fiscal	year	was	charged	to	the	following	categories:

| Cost	of	products	sold | $180 | $173 | $167 |
| :--- | :--- | :--- | :--- |
| Research,\tdevelopment\tand\tengineering | 1 | 1 | 2 |
| Marketing\tand\tselling | 18 | 19 | 20 |
| Total | $199 | $193 | $189 |

      As	of	October	28,	2018,	future	estimated	amortization	expense	is	expected	to	be	as	follows:

| As	of	October	28,	2018,	future	estimated	amortization	expense	is	expected	to	be	as	follows: |  |
| :--- | :--- |
|  | Amortization\nExpense |
|  | (In\tmillions) |
| 2019 | $57 |
| 2020 | 52 |
| 2021 | 39 |
| 2022 | 65 |
| Total | $213 |

# Note	10 Borrowing	Facilities	and	Debt

Applied	has	credit	facilities	for	unsecured	borrowings	in	various	currencies	of	up	to	$1.6	billion,	of	which	$1.5	billion	is	comprised	of	a	committed	revolving credit	agreement	with	a	group	of	banks	that	is	scheduled	to	expire	in	September	2021.	This	agreement	provides	for	borrowings	in	United	States	dollars	at	interest	rates keyed	to	one	of	various	benchmark	rates	selected	by	Applied	for	each	advance,	plus	a	margin	based	on	Applied's	public	debt	rating	and	includes	financial	and	other covenants.	Remaining	credit	facilities	in	the	amount	of	approximately	$71	million	are	with	Japanese	banks.	Applied's	ability	to	borrow	under	these	facilities	is	subject	to bank	approval	at	the	time	of	the	borrowing	request,	and	any	advances	will	be	at	rates	indexed	to	the	banks'	prime	reference	rate	denominated	in	Japanese	yen.	No amounts	were	outstanding	under	any	of	these	facilities	at	both	October	28,	2018	and	October	29,	2017,	and	Applied	has	not	utilized	these	credit	facilities.	In	fiscal	2011, Applied	established	a	short-term	commercial	paper	program	of	up	to	$1.5	billion.	At	October	28,	2018	and	October	29,	2017,	Applied	did	not	have	any	commercial paper	outstanding.

In	March	2017,	Applied	issued	senior	unsecured	notes	in	the	aggregate	principal	amount	of	$2.2	billion	and	in	May	2017,	used	a	portion	of	the	net	proceeds	to redeem	the	outstanding	$200	million	in	principal	amount	of	its	7.125%	senior	notes	due	in	October	2017.

|  | Principal	Amount |  |  |  |
| :--- | :--- | :--- | :--- | :--- |
|  | October\t28,\n2018 | October\t29,\n2017 | Effective\nInterest\tRate | Interest\nPay\tDates |
|  | (In\tmillions) |  |  |  |
| Long-term\tdebt: |  |  |  |  |
| 2.625%\tSenior\tNotes\tDue\t2020 | $600 | $600 | 2.640% | April\t1,\tOctober\t1 |
| 4.300%\tSenior\tNotes\tDue\t2021 | 750 | 750 | 4.326% | June\t15,\tDecember\t15 |
| 3.900%\tSenior\tNotes\tDue\t2025 | 700 | 700 | 3.944% | April\t1,\tOctober\t1 |
| 3.300%\tSenior\tNotes\tDue\t2027 | 1,200 | 1,200 | 3.342% | April\t1,\tOctober\t1 |
| 5.100%\tSenior\tNotes\tDue\t2035 | 500 | 500 | 5.127% | April\t1,\tOctober\t1 |
| 5.850%\tSenior\tNotes\tDue\t2041 | 600 | 600 | 5.879% | June\t15,\tDecember\t15 |
| 4.350%\tSenior\tNotes\tDue\t2047 | 1,000 | 1,000 | 4.361% | April\t1,\tOctober\t1 |
|  | 5,350 | 5,350 |  |  |
| Total\tunamortized\tdiscount | (11) | (12) |  |  |
| Total\tunamortized\tdebt\tissuance\tcosts | (30) | (34) |  |  |
| Total\tlong-term\tdebt | $5,309 | $5,304 |  |  |

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

# Accumulated	Other	Comprehensive	Income	(Loss)

Changes	in	the	components	of	accumulated	other	comprehensive	income	(AOCI),	net	of	tax,	were	as	follows:

|  | Unrealized	Gain<br>(Loss)	on<br>Investments,	Net | Unrealized	Gain	(Loss)<br>on	Derivative<br>Instruments<br>Qualifying	as	Cash<br>Flow	Hedges | Defined	and<br>Postretirement<br>Benefit	Plans | Cumulative<br>Translation<br>Adjustments | Total |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | (In\tmillions) |  |  |
| Balance\tat\tOctober\t25,\t2015 | $14 | $(15) | $(105) | $14 | (92) |
| Other\tcomprehensive\tincome\t(loss)\tbefore\treclassifications | 14 | (33) | (42) | — | (61) |
| Amounts\treclassified\tout\tof\tAOCI | 2 | 30 | 6 | — | 38 |
| Other\tcomprehensive\tincome\t(loss),\tnet\tof\ttax | 16 | (3) | (36) | — | (23) |
| Balance\tat\tOctober\t30,\t2016 | $30 | $(18) | $(141) | $14 | $(115) |
| Other\tcomprehensive\tincome\t(loss)\tbefore\treclassifications | 24 | 13 | 29 | — | 66 |
| Amounts\treclassified\tout\tof\tAOCI | (1) | (6) | (8) | — | (15) |
| Other\tcomprehensive\tincome,\tnet\tof\ttax | 23 | 7 | 21 | — | 51 |
| Balance\tat\tOctober\t29,\t2017 | $53 | $(11) | $(120) | $14 | $(64) |
| Adoption\tof\tnew\taccounting\tstandards\t(a) | 5 | (2) | — | — | 3 |
| Other\tcomprehensive\tincome\t(loss)\tbefore\treclassifications | (66) | 5 | (23) | — | (84) |
| Amounts\treclassified\tout\tof\tAOCI | 15 | (1) | 6 | — | 20 |
| Other\tcomprehensive\tincome\t(loss),\tnet\tof\ttax | (51) | 4 | (17) | — | (64) |
| Balance\tat\tOctober\t28,\t2018 | $7 | $(9) | $(137) | $14 | $(125) |

The	tax	effects	on	net	income	of	amounts	reclassified	from	AOCI	for	fiscal	2016	was	$22	million.	The	tax	effects	on	net	income	of	amounts	reclassified	from AOCI	for	the	fiscal	years	2018	and	2017,	were	not	material.

# Stock	Repurchase	Programs

The	following	table	summarizes	Applied's	stock	repurchases	for	each	fiscal	year:

|  | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
|  |  | (In\tmillions,\texcept\tper\tshare\tamounts) | (In\tmillions,\texcept\tper\tshare\tamounts) |
| Shares\tof\tcommon\tstock\trepurchased | 102 | 28 | 96 |
| Cost\tof\tstock\trepurchased | $5,283 | $1,172 | $1,892 |
| Average\tprice\tpaid\tper\tshare | $51.55 | $42.08 | $19.82 |

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

# Dividends

During	fiscal	2018,	Applied's	Board	of	Directors	declared	three	quarterly	cash	dividends	of	$0.20	per	share	and	one	quarterly	cash	dividend	of	$0.10	per	share. During	each	of	fiscal	2017	and	2016,	Applied's	Board	of	Directors	declared	four	quarterly	cash	dividends	in	the	amount	of	$0.10	per	share.	Dividends	paid	during	fiscal 2018,	2017	and	2016	amounted	to	$605	million,	$430	million	and	$444	million,	respectively.	Applied	currently	anticipates	that	cash	dividends	will	continue	to	be	paid on	a	quarterly	basis,	although	the	declaration	of	any	future	cash	dividend	is	at	the	discretion	of	the	Board	of	Directors	and	will	depend	on	Applied's	financial	condition, results	of	operations,	capital	requirements,	business	conditions	and	other	factors,	as	well	as	a	determination	by	the	Board	of	Directors	that	cash	dividends	are	in	the	best interests	of	Applied's	stockholders.

# Share-Based	Compensation

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

Applied	recognized	share-based	compensation	expense	related	to	stock	options,	ESPP	shares,	restricted	stock,	restricted	stock	units,	performance	shares	and performance	units,	and	related	tax	benefits	for	each	fiscal	year	as	follows:

| Share-based	compensation | $258 | $220 | $201 |
| :--- | :--- | :--- | :--- |
| Tax\tbenefit\trecognized | $45 | $60 | $63 |

The	effect	of	share-based	compensation	on	the	results	of	operations	for	each	fiscal	year	was	as	follows:

| Cost	of	products	sold | $87 | $69 | $62 |
| :--- | :--- | :--- | :--- |
| Research,\tdevelopment,\tand\tengineering | 96 | 83 | 76 |
| Marketing\tand\tselling | 31 | 28 | 26 |
| General\tand\tadministrative | 44 | 40 | 37 |
| Total\tshare-based\tcompensation | $258 | $220 | $201 |

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

At	October	28,	2018,	Applied	had	$368	million	in	total	unrecognized	compensation	expense,	net	of	estimated	forfeitures,	related	to	grants	of	share-based	awards and	shares	issued	under	Applied's	ESPP,	which	will	be	recognized	over	a	weighted	average	period	of	2.4	years.	At	October	28,	2018,	there	were	81	million	shares available	for	grants	of	share-based	awards	under	the	Employee	Stock	Incentive	Plan,	and	an	additional	17	million	shares	available	for	issuance	under	the	ESPP.

# Stock	Options

Stock	options	are	rights	to	purchase,	at	future	dates,	shares	of	Applied	common	stock.	The	exercise	price	of	each	stock	option	equals	the	fair	market	value	of Applied	common	stock	on	the	date	of	grant.	Options	typically	vest	over	three	to	four	years,	subject	to	the	grantee's	continued	service	with	Applied	through	the	scheduled vesting	date,	and	expire	no	later	than	seven	years	from	the	grant	date.	There	were	no	stock	options	granted	during	fiscal	2018,	2017	and	2016.	Outstanding	stock	options at	the	end	of	fiscal	2018	were	not	material	to	the	consolidated	financial	statements.

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

Restricted	stock	units	are	converted	into	shares	of	Applied	common	stock	upon	vesting	on	a	one-for-one	basis.	Restricted	stock	has	the	same	rights	as	other	issued and	outstanding	shares	of	Applied	common	stock	except	these	shares	generally	have	no	right	to	dividends	and	are	held	in	escrow	until	the	award	vests.	Performance shares	and	performance	units	are	awards	that	result	in	a	payment	to	a	grantee,	generally	in	shares	of	Applied	common	stock	on	a	one-for-one	basis,	if	performance	goals and/or	other	vesting	criteria	established	by	the	Human	Resources	and	Compensation	Committee	of	Applied's	Board	of	Directors	are	achieved	or	the	awards	otherwise vest.	Restricted	stock	units,	restricted	stock,	performance	shares	and	performance	units	typically	vest	over	four	years	and	vesting	is	usually	subject	to	the	grantee's continued	service	with	Applied	and,	in	some	cases,	achievement	of	specified	performance	goals.	The	compensation	expense	related	to	the	service-based	awards	is determined	using	the	fair	market	value	of	Applied	common	stock	on	the	date	of	the	grant,	and	the	compensation	expense	is	recognized	over	the	vesting	period.

Certain	executive	officers	were	granted	awards	that	are	subject	to	the	achievement	of	specified	performance	goals	(performance-based	awards).	These	awards become	eligible	to	vest	only	if	performance	goals	are	achieved	and	will	vest	only	if	the	grantee	remains	employed	by	Applied	through	each	applicable	vesting	date.	The fair	value	of	these	awards	is	estimated	on	the	date	of	grant.	If	the	goals	are	achieved,	the	awards	will	vest,	provided	that	the	grantee	remains	employed	by	Applied through	each	scheduled	vesting	date.	If	the	performance	goals	are	not	met	as	of	the	end	of	the	performance	period,	no	compensation	expense	is	recognized	and	any previously	recognized	compensation	expense	is	reversed.	The	expected	cost	is	based	on	the	awards	that	are	probable	to	vest	and	is	reflected	over	the	service	period	and reduced	for	estimated	forfeitures.

For	performance-based	awards	granted	in	fiscal	2018	and	2017,	certain	awards	require	the	achievement	of	positive	adjusted	operating	profit	and	vest	ratably	over three	years.	Other	awards	require	the	achievement	of	targeted	levels	of	adjusted	operating	profit	margin	and	wafer	fabrication	equipment	market	share,	and	the	number of	shares	that	may	vest	in	full	after	three	years	ranges	from	0%	to	200%	of	the	target	amount.	Performance-based	awards	granted	in	fiscal	2016	require	the	achievement of	targeted	levels	of	adjusted	annual	operating	profit	margin,	and	additional	shares	become	eligible	for	time-based	vesting	if	Applied	achieves	certain	levels	of	total shareholder	return	relative	to	a	peer	group,	comprised	of	companies	in	the	Standard	&	Poor's	500	Information	Technology	Index,	measured	at	the	end	of	a	two-year period.

A	summary	of	the	changes	in	restricted	stock	units,	restricted	stock,	performance	shares	and	performance	units	outstanding	under	Applied's	equity	compensation plans	is	presented	below:

|  | Shares | Weighted<br>Average<br>Grant	Date<br>Fair	Value | Weighted<br>Average<br>Remaining<br>Contractual	Term | Aggregate<br>Intrinsic<br>Value |
| :--- | :--- | :--- | :--- | :--- |
|  |  | (In\tmillions,\texcept\tper\tshare\tamounts) | (In\tmillions,\texcept\tper\tshare\tamounts) |  |
| Non-vested\trestricted\tstock\tunits,\trestricted\tstock,\tperformance\tshares\tand\tperformance\nunits\tat\tOctober\t25,\t2015 | 27 | $16.41 | 2.2\tyears | $440 |
| Granted | 11 | $18.54 |  |  |
| Vested | (11) | $14.25 |  |  |
| Canceled | (2) | $17.57 |  |  |
| Non-vested\trestricted\tstock\tunits,\trestricted\tstock,\tperformance\tshares\tand\tperformance\nunits\tat\tOctober\t30,\t2016 | 25 | $18.28 | 2.3\tyears | $718 |
| Granted | 8 | $31.79 |  |  |
| Vested | (10) | $16.50 |  |  |
| Canceled | (1) | $21.25 |  |  |
| Non-vested\trestricted\tstock\tunits,\trestricted\tstock,\tperformance\tshares\tand\tperformance\nunits\tat\tOctober\t29,\t2017 | 22 | $23.96 | 2.2\tyears | $1,239 |
| Granted | 6 | $50.62 |  |  |
| Vested | (9) | $22.15 |  |  |
| Canceled | (1) | $30.19 |  |  |
| Non-vested\trestricted\tstock\tunits,\trestricted\tstock,\tperformance\tshares\tand\tperformance\nunits\tat\tOctober\t28,\t2018 | 18 | $32.64 | 2.0\tyears | $600 |
| Non-vested\trestricted\tstock\tunits,\trestricted\tstock,\tperformance\tshares\tand\tperformance\nunits\texpected\tto\tvest | 16 | $31.11 | 1.9\tyears | $523 |

At	October	28,	2018,	1	million	additional	performance-based	awards	could	be	earned	based	upon	achievement	of	certain	levels	of	specified	performance	goals.

# Employee	Stock	Purchase	Plans

Under	the	ESPP,	substantially	all	employees	may	purchase	Applied	common	stock	through	payroll	deductions	at	a	price	equal	to	85	percent	of	the	lower	of	the	fair market	value	of	Applied	common	stock	at	the	beginning	or	end	of	each	6-month	purchase	period,	subject	to	certain	limits.	Applied	issued	3	million	shares	in	each	of fiscal	2018	and	2017,	and	6	million	shares	during	fiscal	2016,	under	the	ESPP.	Compensation	expense	is	calculated	using	the	fair	value	of	the	employees'	purchase	rights under	the	Black-Scholes	model.	Underlying	assumptions	used	in	the	model	are	outlined	in	the	following	table:

|  | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| ESPP: |  |  |  |
| Dividend\tyield | 1.68% | 0.99% | 1.76% |
| Expected\tvolatility | 34.4% | 26.3% | 29.3% |
| Risk-free\tinterest\trate | 2.09% | 0.92% | 0.47% |
| Expected\tlife\t(in\tyears) | 0.5 | 0.5 | 0.5 |
| Weighted\taverage\testimated\tfair\tvalue | $12.02 | $9.14 | $5.48 |

# Note	12				Employee	Benefit	Plans

# Employee	Bonus	Plans

Applied	has	various	employee	bonus	plans.	A	discretionary	bonus	plan	provides	for	the	distribution	of	a	percentage	of	pre-tax	income	to	Applied	employees	who are	not	participants	in	other	performance-based	incentive	plans,	up	to	a	maximum	percentage	of	eligible	compensation.	Other	plans	provide	for	bonuses	to	Applied's executives	and	other	key	contributors	based	on	the	achievement	of	profitability	and/or	other	specified	performance	criteria.	Charges	under	these	plans	for	fiscal	2018, 2017	and	2016	were	$382	million,	$449	million	and	$312	million,	respectively.

# Employee	Savings	and	Retirement	Plan

Applied's	Employee	Savings	and	Retirement	Plan	(the	401(k)	Plan)	is	qualified	under	Sections	401(a)	and	(k)	of	the	Internal	Revenue	Code	(the	Code).	Eligible employees	may	make	salary	deferral	and	catch-up	contributions	under	 the	401(k)	Plan	on	a	pre-tax	basis	and	on	a	Roth	basis,	subject	 to	an	annual	dollar	 limit established	by	the	Code.	Applied	matches	100%	of	participant	salary	and/or	Roth	deferral	contributions	up	to	the	first	3%	of	eligible	contribution	and	then	50%	of	every dollar	between	4%	and	6%	of	eligible	contribution.	Applied	does	not	make	matching	contributions	on	any	catch-up	contributions	made	by	participants.	Plan	participants who	were	employed	by	Applied	or	any	of	its	affiliates	became	100%	vested	in	their	Applied	matching	contribution	account	balances.	Applied's	matching	contributions under	the	401(k)	Plan	were	approximately	$45	million	for	fiscal	2018	and	$38	million	for	each	of	fiscal	2017	and	2016.

# Defined	Benefit	Pension	Plans	of	Foreign	Subsidiaries	and	Other	Post-Retirement	Benefits

Several	of	Applied's	foreign	subsidiaries	have	defined	benefit	pension	plans	covering	substantially	all	of	their	eligible	employees.	Benefits	under	these	plans	are typically	based	on	years	of	service	and	final	average	compensation	levels.	The	plans	are	managed	in	accordance	with	applicable	local	statutes	and	practices.	Applied deposits	funds	for	certain	of	these	plans	with	insurance	companies,	pension	trustees,	government-managed	accounts,	and/or	accrues	the	expense	for	the	unfunded	portion of	the	benefit	obligation	on	its	Consolidated	Financial	Statements.	Applied's	practice	is	to	fund	the	various	pension	plans	in	amounts	sufficient	to	meet	the	minimum requirements	 as	 established	 by	 applicable	 local	 governmental	 oversight	 and	 taxing	 authorities.	 Depending	 on	 the	 design	 of	 the	 plan,	 local	 custom	 and	 market circumstances,	the	liabilities	of	a	plan	may	exceed	the	qualified	plan	assets.	The	differences	between	the	aggregate	projected	benefit	obligations	and	aggregate	plan assets	of	these	plans	have	been	recorded	as	liabilities	by	Applied	and	are	included	in	other	liabilities	and	accrued	expenses	in	the	Consolidated	Balance	Sheets.

Through	December	31,	2017,	Applied	also	sponsored	a	U.S.	post-retirement	plan	that	provided	covered	medical	and	vision	benefits	to	certain	eligible	retirees.	An eligible	retiree	also	could	elect	coverage	for	an	eligible	spouse	or	domestic	partner	who	was	not	eligible	for	Medicare.	Coverage	ended	entirely	for	all	participants	when the	plan	terminated	on	December	31,	2017.	In	addition,	Applied	also	has	a	post-retirement	benefit	plan	as	a	result	of	the	acquisition	of	Varian.	Applied's	liability	under these	post-retirement	plans,	which	was	included	in	other	liabilities	in	the	Consolidated	Balance	Sheets,	were	immaterial	at	each	of	October	28,	2018	and	October	29, 2017.

A	summary	of	the	changes	in	benefit	obligations	and	plan	assets,	which	includes	post-retirement	benefits,	for	each	fiscal	year	is	presented	below:

|  | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
|  | (In\tmillions,\texcept\tpercentages) | (In\tmillions,\texcept\tpercentages) |  |
| Change\tin\tprojected\tbenefit\tobligation |  |  |  |
| Beginning\tprojected\tbenefit\tobligation | $506 | $495 | $471 |
| Service\tcost | 12 | 13 | 13 |
| Interest\tcost | 11 | 10 | 13 |
| Plan\tparticipants'\tcontributions | 1 | 2 | 1 |
| Actuarial\t(gain)\tloss | 24 | (35) | 77 |
| Curtailments,\tsettlements\tand\tspecial\ttermination\tbenefits | (1) | (1) | (6) |
| Foreign\tcurrency\texchange\trate\tchanges | (16) | 34 | (42) |
| Benefits\tpaid | (12) | (12) | (10) |
| Plan\tamendments\tand\tbusiness\tcombinations | (1) | — | (22) |
| Ending\tprojected\tbenefit\tobligation | $524 | $506 | $495 |
| Ending\taccumulated\tbenefit\tobligation | $490 | $472 | $460 |
| Range\tof\tassumptions\tto\tdetermine\tbenefit\tobligations |  |  |  |
| Discount\trate | 0.6%\t-\t3.1% | 0.5%\t-\t3.4% | 0.5%\t-\t3.1% |
| Rate\tof\tcompensation\tincrease | 2.4%\t-\t3.5% | 2.2%\t-\t3.5% | 1.6%\t-\t3.6% |
| Change\tin\tplan\tassets |  |  |  |
| Beginning\tfair\tvalue\tof\tplan\tassets | $361 | $310 | $281 |
| Return\ton\tplan\tassets | 17 | 18 | 37 |
| Employer\tcontributions | 11 | 16 | 50 |
| Plan\tparticipants'\tcontributions | 1 | 2 | 1 |
| Foreign\tcurrency\texchange\trate\tchanges | (12) | 28 | (45) |
| Divestitures,\tsettlements\tand\tbusiness\tcombinations | (1) | (1) | (4) |
| Benefits\tpaid | (12) | (12) | (10) |
| Ending\tfair\tvalue\tof\tplan\tassets | $365 | $361 | $310 |
| Funded\tstatus | $(159) | $(145) | $(185) |
| Amounts\trecognized\tin\tthe\tconsolidated\tbalance\tsheets |  |  |  |
| Noncurrent\tasset | $19 | $17 | $11 |
| Current\tliability | (1) | (1) | (2) |
| Noncurrent\tliability | (177) | (161) | (194) |
| Total | $(159) | $(145) | $(185) |
| Estimated\tamortization\tfrom\taccumulated\tother\tcomprehensive\tloss\tinto\tnet\tperiodic\nbenefit\tcost\tover\tthe\tnext\tfiscal\tperiod |  |  |  |
| Actuarial\tloss | $8 | $6 | $6 |
| Prior\tservice\tcredit | (1) | (4) | (16) |
| Total | $7 | $2 | $(10) |
| Amounts\trecognized\tin\taccumulated\tother\tcomprehensive\tloss |  |  |  |
| Net\tactuarial\tloss | $161 | $141 | $186 |
| Prior\tservice\tcredit | (2) | (4) | (21) |
| Total | $159 | $137 | $165 |
| Plans\twith\tprojected\tbenefit\tobligations\tin\texcess\tof\tplan\tassets |  |  |  |
| Projected\tbenefit\tobligation | $365 | $326 | $341 |
| Fair\tvalue\tof\tplan\tassets | $186 | $142 | $145 |
| Plans\twith\taccumulated\tbenefit\tobligations\tin\texcess\tof\tplan\tassets |  |  |  |
| Accumulated\tbenefit\tobligation | $331 | $293 | $307 |
| Fair\tvalue\tof\tplan\tassets | $186 | $142 | $145 |

|  | 2018 | 2017 |
| :--- | :--- | :--- |
| Plan\tassets\t—\tallocation |  |  |
| Equity\tsecurities | 47% | 47% |
| Debt\tsecurities | 32% | 39% |
| Insurance\tcontracts | 10% | 11% |
| Other\tinvestments | 10% | 3% |
| Cash | 1% | —% |

The	following	table	presents	a	summary	of	the	ending	fair	value	of	the	plan	assets:

Applied's	investment	strategy	for	its	defined	benefit	plans	is	to	invest	plan	assets	in	a	prudent	manner,	maintaining	well-diversified	portfolios	with	the	long-term objective	of	meeting	 the	obligations	of	 the	plans	as	 they	come	due.	Asset	allocation	decisions	are	 typically	made	by	plan	fiduciaries	with	 input	from	Applied's international	pension	committee.	Applied's	asset	allocation	strategy	incorporates	a	sufficient	equity	exposure	in	order	for	the	plans	to	benefit	from	the	expected	better long-term	 performance	 of	 equities	 relative	 to	 the	 plans'	 liabilities.	Applied	 retains	 investment	 managers,	 where	 appropriate,	 to	 manage	 the	 assets	 of	 the	 plans. Performance	of	investment	managers	is	monitored	by	plan	fiduciaries	with	the	assistance	of	local	investment	consultants.	The	investment	managers	make	investment decisions	within	the	guidelines	set	forth	by	plan	fiduciaries.	Risk	management	practices	include	diversification	across	asset	classes	and	investment	styles,	and	periodic rebalancing	toward	target	asset	allocation	ranges.	Investment	managers	may	use	derivative	instruments	for	efficient	portfolio	management	purposes.	Plan	assets	do	not include	any	of	Applied's	own	equity	or	debt	securities.

A	summary	of	the	components	of	net	periodic	benefit	costs	and	the	weighted	average	assumptions	used	for	net	periodic	benefit	cost	calculations	for	each	fiscal year	is	presented	below:

| Service	cost | $12 | $13 | $13 |
| :--- | :--- | :--- | :--- |
| Interest\tcost | 11 | 10 | 13 |
| Expected\treturn\ton\tplan\tassets | (20) | (18) | (14) |
| Amortization\tof\tactuarial\tloss\tand\tprior\tservice\tcredit | 3 | (10) | 3 |
| Settlement\tand\tcurtailment\tloss | — | — | (5) |
| Net\tperiodic\tbenefit\tcost\t(income) | $6 | $(5) | $10 |
| Weighted\taverage\tassumptions |  |  |  |
| Discount\trate | 2.16% | 1.88% | 2.82% |
| Expected\tlong-term\treturn\ton\tassets | 5.41% | 5.38% | 5.38% |
| Rate\tof\tcompensation\tincrease | 2.66% | 2.69% | 2.71% |

Asset	return	assumptions	are	derived	based	on	actuarial	and	statistical	methodologies,	from	analysis	of	long-term	historical	data	relevant	to	the	country	in	which each	plan	is	in	effect	and	the	investments	applicable	to	the	corresponding	plan.	The	discount	rate	for	each	plan	was	derived	by	reference	to	appropriate	benchmark	yields on	high	quality	corporate	bonds,	allowing	for	the	approximate	duration	of	both	plan	obligations	and	the	relevant	benchmark	yields.

      Future	expected	benefit	payments	for	the	pension	plans	and	the	post-retirement	plan	over	the	next	ten	fiscal	years	are	as	follows:

Company	contributions	to	these	plans	for	fiscal	2019	are	expected	to	be	approximately	$15	million.

# Executive	Deferred	Compensation	Plans

Applied	 sponsors	two	 unfunded	 deferred	 compensation	 plans,	 the	 Executive	 Deferred	 Compensation	 Plan	 (Predecessor	 EDCP)	 and	 the	 2016	 Deferred Compensation	Plan	(2016	DCP)	(formerly	known	as	the	2005	Executive	Deferred	Compensation	Plan),	under	which	certain	employees	may	elect	to	defer	a	portion	of their	following	year's	eligible	earnings.	The	Predecessor	EDCP	was	frozen	as	of	December	31,	2004	such	that	no	new	deferrals	could	be	made	under	the	plan	after	that date	and	the	plan	would	qualify	for	"grandfather"	relief	under	Section	409A	of	the	Code.	The	Predecessor	EDCP	participant	accounts	continue	to	be	maintained	under the	plan	and	credited	with	deemed	interest.	The	2016	DCP	was	originally	implemented	by	Applied	effective	as	of	January	1,	2005,	and	amended	and	restated	as	of October	 12,	 2015,	 and	 is	 intended	 to	 comply	 with	 the	 requirements	 of	 Section	 409A	 of	 the	 Code.	 In	 addition,	Applied	 also	 sponsors	 a	 non-qualified	 deferred compensation	plan	as	a	result	of	the	acquisition	of	Varian.	Amounts	payable,	including	accrued	deemed	interest,	totaled	$92	million	and	$63	million	at	October	28,	2018 and	October	29,	2017,	respectively,	which	were	included	in	other	liabilities	in	the	Consolidated	Balance	Sheets.

# Note	13 Income

# Taxes

The	components	of	income	before	income	taxes	for	each	fiscal	year	were	as	follows:

| U.S. | $439 | $514 | $199 |
| :--- | :--- | :--- | :--- |
| Foreign | 4,255 | 3,217 | 1,814 |
|  | $4,694 | $3,731 | $2,013 |

The	components	of	the	provision	for	income	taxes	for	each	fiscal	year	were	as	follows:

The	Tax	Act	also	includes	provisions	that	do	not	affect	Applied	in	fiscal	2018,	including	a	provision	designed	to	tax	global	intangible	low-taxed	income	("GILTI"). Due	to	the	complexity	of	the	GILTI	tax	rules,	this	provision	and	related	tax	accounting	will	continue	to	be	evaluated.	An	accounting	policy	choice	is	allowed	to	either treat	taxes	due	on	future	U.S.	inclusions	related	to	GILTI	in	taxable	income	as	a	current-period	expense	when	incurred	(the	"period	cost	method")	or	factor	such	amounts into	the	measurement	of	deferred	taxes	(the	"deferred	method").	The	calculation	of	the	deferred	balance	with	respect	to	the	new	GILTI	tax	provisions	will	depend,	in part,	on	analyzing	global	income	to	determine	whether	future	U.S.	inclusions	in	taxable	income	are	expected	related	to	GILTI	and,	if	so,	what	the	impact	is	expected	to be.	An	accounting	policy	choice	has	not	yet	been	made.

Before	the	Tax	Act,	U.S.	income	tax	had	not	been	provided	for	certain	unrepatriated	earnings	that	were	considered	indefinitely	reinvested.	Income	tax	is	now provided	for	all	unrepatriated	earnings.

In	the	reconciliation	between	the	statutory	U.S.	federal	income	tax	rate	and	the	effective	income	tax	rate,	the	effect	of	foreign	operations	taxed	at	various	rates represents	the	difference	between	an	income	tax	provision	at	the	U.S.	federal	statutory	income	tax	rate	and	the	recorded	income	tax	provision,	with	the	difference expressed	as	a	percentage	of	worldwide	income	before	income	taxes.	This	effect	is	substantially	related	to	the	tax	effect	of	pre-tax	income	in	jurisdictions	with	lower statutory	tax	rates.	The	foreign	operations	with	the	most	significant	effective	tax	rate	impact	are	in	Singapore.	The	statutory	tax	rate	for	fiscal	2018	for	Singapore	is	17%. Applied	has	been	granted	conditional	reduced	tax	rates	that	expire	in	fiscal	2025,	excluding	potential	renewal	and	subject	to	certain	conditions	with	which	Applied expects	to	comply.	The	tax	benefit	arising	from	these	tax	rates	was	$272	million	for	fiscal	2018	or	$0.28	per	diluted	share.

Deferred	tax	assets	and	liabilities	are	recognized	for	the	estimated	future	tax	effects	of	temporary	differences	between	the	book	and	tax	bases	of	assets	and liabilities.	Deferred	tax	assets	are	also	recognized	for	net	operating	loss	and	tax	credit	carryovers.	Deferred	tax	assets	are	offset	by	a	valuation	allowance	to	the	extent	it	is more	likely	than	not	that	they	are	not	expected	to	be	realized.	The	components	of	deferred	income	tax	assets	and	liabilities	were	as	follows:

|  | October	28,<br>2018 | October	29,<br>2017 |
| :--- | :--- | :--- |
|  | (In\tmillions) |  |
| Deferred\ttax\tassets: |  |  |
| Allowance\tfor\tdoubtful\taccounts | $8 | $13 |
| Inventory\treserves\tand\tbasis\tdifference | 117 | 156 |
| Installation\tand\twarranty\treserves | 7 | 1 |
| Accrued\tliabilities | 20 | 31 |
| Deferred\trevenue | 9 | 15 |
| Tax\tcredits | 236 | 317 |
| Deferred\tcompensation | 79 | 81 |
| Share-based\tcompensation | 37 | 53 |
| Other | 48 | 67 |
| Gross\tdeferred\ttax\tassets | 561 | 734 |
| Valuation\tallowance | (230) | (227) |
| Total\tdeferred\ttax\tassets | 331 | 507 |
| Deferred\ttax\tliabilities: |  |  |
| Fixed\tassets | (48) | (36) |
| Intangible\tassets | (38) | (76) |
| Undistributed\tforeign\tearnings | (32) | (11) |
| Foreign\texchange | (3) | (4) |
| Total\tgross\tdeferred\ttax\tliabilities | (121) | (127) |
| Net\tdeferred\ttax\tassets | $210 | $380 |

The	following	table	presents	a	summary	of	non-current	deferred	tax	assets	and	liabilities:

|  | October	28,<br>2018 | October	29,<br>2017 |
| :--- | :--- | :--- |
|  | (In\tmillions) |  |
| Non-current\tdeferred\ttax\tasset | $222 | $385 |
| Non-current\tdeferred\ttax\tliability | (12) | (5) |
|  | $210 | $380 |

A	valuation	allowance	is	recorded	to	reflect	the	estimated	amount	of	net	deferred	tax	assets	that	may	not	be	realized.	Changes	in	the	valuation	allowance	in	each fiscal	year	were	as	follows:

| Beginning	balance | $227 | $207 | $207 |
| :--- | :--- | :--- | :--- |
| Increases | 8 | 20 | 27 |
| Decreases | (5) | — | (27) |
| Ending\tbalance | $230 | $227 | $207 |

At	October	28,	2018,	Applied	has	state	research	and	development	tax	credit	carryforwards	of	$236	million,	including	$227	million	of	credits	that	are	carried	over until	exhausted	and	$9	million	that	are	carried	over	for	15	years	and	begin	to	expire	in	fiscal	2028.	Management	believes	it	is	more	likely	than	not	that	all	tax	credit carryforwards,	net	of	valuation	allowance,	will	be	utilized.

Applied	 maintains	 liabilities	 for	 uncertain	 tax	 positions.	These	 liabilities	 involve	 considerable	 judgment	 and	 estimation	 and	 are	 continuously	 monitored	 by management	based	on	the	best	information	available.	Gross	unrecognized	tax	benefits	are	classified	as	non-current	income	taxes	payable.	A	reconciliation	of	the beginning	and	ending	balances	of	gross	unrecognized	tax	benefits	in	each	fiscal	year	is	as	follows:

| Beginning	balance	of	gross	unrecognized	tax	benefits | $391 | $320 | $177 |
| :--- | :--- | :--- | :--- |
| Settlements\twith\ttax\tauthorities | (152) | (42) | (25) |
| Lapses\tof\tstatutes\tof\tlimitation | (37) | (15) | (2) |
| Increases\tin\ttax\tpositions\tfor\tcurrent\tyear | 91 | 95 | 62 |
| Increases\tin\ttax\tpositions\tfor\tprior\tyears | 83 | 33 | 109 |
| Decreases\tin\ttax\tpositions\tfor\tprior\tyears | (2) | — | (1) |
| Ending\tbalance\tof\tgross\tunrecognized\ttax\tbenefits | $374 | $391 | $320 |

Tax	expense	for	interest	and	penalties	on	unrecognized	tax	benefits	for	fiscal	2018,	2017	and	2016	was	$12	million,	$17	million	and	$24	million,	respectively.	The income	tax	liability	for	interest	and	penalties	for	fiscal	2018,	2017	and	2016	was	$26	million,	$46	million	and	$33	million,	respectively,	and	was	classified	as	non-current income	taxes	payable.

Included	in	the	balance	of	unrecognized	tax	benefits	for	fiscal	2018,	2017	and	2016	are	$294	million,	$284	million,	and	$302	million,	respectively,	of	tax	benefits that,	if	recognized,	would	affect	the	effective	tax	rate.

In	fiscal	2018,	Applied	paid	$158	million,	including	interest	and	penalties,	as	a	result	of	a	settlement	in	Israel	for	fiscal	2011	through	fiscal	2015	resulting	in	the recognition	of	a	tax	benefit	of	$6	million.	In	fiscal	2017,	Applied	paid	$29	million,	including	interest	and	penalties,	as	a	result	of	a	settlement	in	Italy	for	fiscal	2011 resulting	in	the	recognition	of	a	tax	expense	of	$6	million.	In	fiscal	2016,	Applied	paid	$25	million,	including	interest	and	penalties,	as	a	result	of	a	settlement	in Switzerland	for	fiscal	2011	through	fiscal	2015	resulting	in	the	recognition	of	a	tax	expense	of	$19	million.

Applied's	tax	returns	remain	subject	to	examination	by	taxing	authorities.	These	include	U.S.	returns	for	fiscal	2010	and	later	years,	and	foreign	tax	returns	for fiscal	2009	and	later	years.

The	timing	of	the	resolution	of	income	tax	examinations,	as	well	as	the	amounts	and	timing	of	various	tax	payments	that	may	be	part	of	the	settlement	process,	is highly	uncertain.	This	could	cause	fluctuations	in	Applied's	financial	condition	and	results	of	operations.	Applied	continues	to	have	ongoing	negotiations	with	various taxing	authorities	throughout	the	year.

# Note	14 Warranty,	Guarantees,	Commitments	and

# Contingencies

# Leases

Applied	leases	some	of	its	facilities	and	equipment	under	non-cancelable	operating	leases	and	has	options	to	renew	most	leases,	with	rentals	to	be	negotiated. Total	rent	expense	for	fiscal	2018,	2017	and	2016,	was	$50	million,	$34	million	and	$38	million,	respectively.

As	of	October	28,	2018,	future	minimum	lease	payments	are	expected	to	be	as	follows:

|  | Lease	Payments |
| :--- | :--- |
| Fiscal | (In\tmillions) |
| 2019 | $50 |
| 2020 | 40 |
| 2021 | 28 |
| 2022 | 20 |
| 2023 | 13 |
| Thereafter | 22 |

Changes	in	the	warranty	reserves	during	each	fiscal	year	were	as	follows:

| Beginning	balance | $199 | $153 | $126 |
| :--- | :--- | :--- | :--- |
| Provisions\tfor\twarranty | 183 | 166 | 135 |
| Changes\tin\treserves\trelated\tto\tpreexisting\twarranty | 3 | 1 | (12) |
| Consumption\tof\treserves | (176) | (121) | (96) |
| Ending\tbalance | $209 | $199 | $153 |

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

# Guarantees

# Legal	Matters

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

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

# Note	15 Industry	Segment	Operations

Applied's	three	reportable	segments	are:	Semiconductor	Systems,	Applied	Global	Services,	and	Display	and	Adjacent	Markets.	As	defined	under	the	accounting literature,	Applied's	chief	operating	decision-maker	has	been	identified	as	the	President	and	Chief	Executive	Officer,	who	reviews	operating	results	to	make	decisions about	allocating	resources	and	assessing	performance	for	 the	entire	Company.	Segment	 information	 is	presented	based	upon	Applied's	management	organization structure	as	of	October	28,	2018	and	the	distinctive	nature	of	each	segment.	Future	changes	to	this	internal	financial	structure	may	result	in	changes	to	Applied's reportable	segments.

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

The	Applied	Global	Services	segment	provides	integrated	solutions	to	optimize	equipment	and	fab	performance	and	productivity,	including	spares,	upgrades, services,	certain	remanufactured	earlier	generation	equipment	and	factory	automation	software	for	semiconductor,	display	and	other	products.

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

Each	operating	segment	is	separately	managed	and	has	separate	financial	results	that	are	reviewed	by	Applied's	chief	operating	decision-maker.	Each	reportable segment	contains	closely	related	products	that	are	unique	to	the	particular	segment.	Segment	operating	income	is	determined	based	upon	internal	performance	measures used	by	Applied's	chief	operating	decision-maker.	The	chief	operating	decision-maker	does	not	evaluate	operating	segments	using	total	asset	information.

Applied	derives	the	segment	results	directly	from	its	internal	management	reporting	system.	The	accounting	policies	Applied	uses	to	derive	reportable	segment results	are	substantially	the	same	as	those	used	for	external	reporting	purposes.	Management	measures	the	performance	of	each	reportable	segment	based	upon	several metrics	including	orders,	net	sales	and	operating	income.	Management	uses	these	results	to	evaluate	the	performance	of,	and	to	assign	resources	to,	each	of	the	reportable segments.

The	Corporate	and	Other	category	includes	revenues	from	products,	as	well	as	costs	of	products	sold,	for	fabricating	solar	photovoltaic	cells	and	modules,	and certain	operating	expenses	that	are	not	allocated	to	its	reportable	segments	and	are	managed	separately	at	the	corporate	level.	These	operating	expenses	include	costs related	 to	share-based	compensation;	certain	management,	finance,	 legal,	human	resources,	and	research,	development	and	engineering	functions	provided	at	 the corporate	 level;	and	unabsorbed	 information	 technology	and	occupancy.	In	addition,	Applied	does	not	allocate	 to	 its	reportable	segments	restructuring	and	asset impairment	charges	and	any	associated	adjustments	related	to	restructuring	actions,	unless	these	actions	pertain	to	a	specific	reportable	segment.	Segment	operating income	also	excludes	interest	income/expense	and	other	financial	charges	and	income	taxes.	Management	does	not	consider	the	unallocated	costs	in	measuring	the performance	of	the	reportable	segments.

Information	for	each	reportable	segment	for	and	as	of	the	end	of	each	fiscal	year	were	as	follows:

|  | Net	Sales | Operating<br>Income		(Loss) | Depreciation/<br>Amortization | Capital<br>Expenditures | Accounts<br>Receivable | Inventories |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | (In\tmillions) |  |  |  |
| 2018: |  |  |  |  |  |  |
| Semiconductor\tSystems | $10,903 | $3,634 | $303 | $168 | $1,755 | $2,213 |
| Applied\tGlobal\tServices | 3,754 | 1,102 | 21 | 33 | 610 | 1,243 |
| Display\tand\tAdjacent\tMarkets | 2,498 | 679 | 20 | 39 | 248 | 249 |
| Corporate\tand\tOther | 98 | (619) | 113 | 382 | (48) | 17 |
| Total | $17,253 | $4,796 | $457 | $622 | $2,565 | $3,722 |
| 2017: |  |  |  |  |  |  |
| Semiconductor\tSystems | $9,517 | $3,173 | $286 | $150 | $1,626 | $1,760 |
| Applied\tGlobal\tServices | 3,017 | 817 | 15 | 21 | 564 | 762 |
| Display\tand\tAdjacent\tMarkets | 1,900 | 502 | 12 | 17 | 190 | 367 |
| Corporate\tand\tOther | 103 | (624) | 94 | 157 | (42) | 41 |
| Total | $14,537 | $3,868 | $407 | $345 | $2,338 | $2,930 |
| 2016: |  |  |  |  |  |  |
| Semiconductor\tSystems | $6,873 | $1,807 | $277 | $114 | $1,524 | $1,188 |
| Applied\tGlobal\tServices | 2,589 | 682 | 12 | 14 | 559 | 594 |
| Display\tand\tAdjacent\tMarkets | 1,206 | 245 | 5 | 6 | 238 | 215 |
| Corporate\tand\tOther | 157 | (582) | 95 | 119 | (42) | 53 |
| Total | $10,825 | $2,152 | $389 | $253 | $2,279 | $2,050 |

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

| Unallocated	net	sales | $98 | $103 | $157 |
| :--- | :--- | :--- | :--- |
| Unallocated\tcost\tof\tproducts\tsold\tand\texpenses | (459) | (507) | (538) |
| Share-based\tcompensation | (258) | (220) | (201) |
| Total | $(619) | $(624) | $(582) |

For	geographical	reporting,	revenue	by	geographic	location	is	determined	by	the	location	of	customers'	facilities	to	which	products	were	shipped.	Long-lived	assets consist	primarily	of	property,	plant	and	equipment	and	are	attributed	to	the	geographic	location	in	which	they	are	located.	Net	sales	and	long-lived	assets	by	geographic region	for	and	as	of	each	fiscal	year	were	as	follows:

| United	States | $1,532 | $1,474 | $1,143 |
| :--- | :--- | :--- | :--- |
| China | 5,113 | 2,746 | 2,259 |
| Korea | 3,603 | 4,052 | 1,883 |
| Taiwan | 2,732 | 3,291 | 2,843 |
| Japan | 2,405 | 1,518 | 1,279 |
| Europe | 1,066 | 816 | 615 |
| Southeast\tAsia | 802 | 640 | 803 |
| Total\toutside\tUnited\tStates | 15,721 | 13,063 | 9,682 |
| Consolidated\ttotal | $17,253 | $14,537 | $10,825 |

| United	States | $1,414 | $915 |
| :--- | :--- | :--- |
| China | 13 | 47 |
| Korea | 21 | 21 |
| Taiwan | 29 | 50 |
| Japan | 9 | 8 |
| Europe | 50 | 47 |
| Southeast\tAsia | 25 | 98 |
| Total\toutside\tUnited\tStates | 147 | 271 |
| Consolidated\ttotal | $1,561 | $1,186 |

The	following	customers	accounted	for	at	least	10	percent	of	Applied's	net	sales	in	each	fiscal	year,	which	were	for	products	and	services	in	multiple	reportable segments:

|  | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| Samsung\tElectronics\tCo.,\tLtd. | 13% | 23% | 13% |
| Taiwan\tSemiconductor\tManufacturing\tCompany\tLimited | 11% | 15% | 16% |
| Intel\tCorporation | 11% | * | 11% |
| Micron\tTechnology,\tInc. | * | * | 11% |

# Note	16 Unaudited	Quarterly	Consolidated	Financial	Data

|  | First | Second | Third | Fourth | Fiscal	Year |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | (In\tmillions,\texcept\tper\tshare\tamounts) |  |  |
| 2018: |  |  |  |  |  |
| Net\tsales | $4,204 | $4,567 | $4,468 | $4,014 | $17,253 |
| Gross\tprofit | $1,920 | $2,090 | $2,027 | $1,780 | $7,817 |
| Net\tincome | $135 | $1,129 | $1,173 | $876 | $3,313 |
| Earnings\tper\tdiluted\tshare | $0.13 | $1.09 | $1.17 | $0.89 | $3.23 |
| 2017: |  |  |  |  |  |
| Net\tsales | $3,278 | $3,546 | $3,744 | $3,969 | $14,537 |
| Gross\tprofit | $1,445 | $1,600 | $1,700 | $1,787 | $6,532 |
| Net\tincome | $703 | $824 | $925 | $982 | $3,434 |
| Earnings\tper\tdiluted\tshare | $0.65 | $0.76 | $0.85 | $0.91 | $3.17 |

# INDEX	TO	EXHIBITS

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

| Exhibit	No. | Description | Form | File	No. | Exhibit	No. | Filing	Date |
| :--- | :--- | :--- | :--- | :--- | :--- |
| 3.1 |  | 10-Q | 000-06920 | 3.1 | 6/3/2009 |
|  | through\tMarch\t10,\t2009 |  |  |  |  |
| 3.2 | Certificate\tof\tDesignation,\tPreferences\tand\tRights\tof\tthe\tTerms\tof\tthe\tSeries\tA | 10-Q | 000-06920 | 3(i)(a) | 9/14/1999 |
|  | Junior\tParticipating\tPreferred\tStock\tdated\tas\tof\tJuly\t9,\t1999 |  |  |  |  |
| 3.3 |  | 8-K | 000-06920 | 3.1 | 12/11/2015 |
|  | 8,\t2015 |  |  |  |  |
| 4.1 |  | 8-K | 000-06920 | 4.1 | 6/10/2011 |
|  | Bank\tNational\tAssociation,\tas\tTrustee |  |  |  |  |
| 4.2 | First\tSupplemental\tIndenture,\tdated\tJune\t8,\t2011,\tby\tand\tbetween\tApplied | 8-K | 000-06920 | 4.2 | 6/10/2011 |
|  | Materials,\tInc.\tand\tU.S.\tBank\tNational\tAssociation,\tas\tTrustee |  |  |  |  |
| 4.3 | Second\tSupplemental\tIndenture,\tdated\tSeptember\t24,\t2015,\tby\tand\tbetween\tApplied | 8-K | 000-06920 | 4.1 | 9/24/2015 |
|  | Materials,\tInc.\tand\tU.S.\tBank\tNational\tAssociation,\tas\tTrustee |  |  |  |  |
| 4.4 | Third\tSupplemental\tIndenture,\tdated\tMarch\t31,\t2017,\tby\tand\tbetween\tApplied | 8-K | 000-06920 | 4.1 | 3/31/2017 |
|  | Materials,\tInc.\tand\tU.S.\tBank\tNational\tAssociation,\tas\tTrustee |  |  |  |  |
| 10.1 | Form\tof\tIndemnification\tAgreement\tbetween\tApplied\tMaterials,\tInc.\tand\tNon- | 10-K | 000-06920 | 10.44 | 1/31/2000 |
|  | Employee\tDirectors |  |  |  |  |
| 10.2 |  | 10-K | 000-06920 | 10.46 | 1/31/2000 |
|  | its\tofficers |  |  |  |  |
| 10.3 | Applied\tMaterials,\tInc.\tProfit\tSharing\tScheme\t(Ireland) | S-8 | 333-45011 | 4.1 | 1/27/1998 |
| 10.4* | Applied\tMaterials,\tInc.\tamended\tand\trestated\tRelocation\tPolicy | 8-K | 000-06920 | 10.46 | 10/31/2005 |
| 10.5* |  | 10-Q | 000-06920 | 10.58 | 3/3/2009 |

| Exhibit	No. | Description | Form | File	No. | Exhibit	No. | Filing	Date |
| :--- | :--- | :--- | :--- | :--- | :--- |
| 10.6 | Deed\tof\tAmendment\tto\tApplied\tMaterials\tProfit\tSharing\tScheme,\tdated\tFebruary\t7, | 10-K | 000-06920 | 10.48 | 12/12/2008 |
|  | 2006,\tto\tamend\tClause\t20\tof\tthe\tTrust\tDeed\tthereunder |  |  |  |  |
| 10.7 | Deed\tof\tAmendment\tto\tApplied\tMaterials\tProfit\tSharing\tScheme,\tdated\tFebruary\t7, | 10-K | 000-06920 | 10.49 | 12/12/2008 |
|  | 2006,\tto\tamend\tthe\tdefinition\tof\tEligible\tEmployee\tin\tthe\tFirst\tSchedule\tto\tthe |  |  |  |  |
|  | Trust\tDeed\tthereunder. |  |  |  |  |
| 10.8* | Form\tof\tRestricted\tStock\tUnit\tAgreement\tfor\tuse\tunder\tthe\tamended\tand\trestated | 10-Q | 000-06920 | 10.1 | 8/23/2018 |
|  | Applied\tMaterials,\tInc.\tEmployee\tStock\tIncentive\tPlan |  |  |  |  |
| 10.9* | Form\tof\tRestricted\tStock\tUnit\tAgreement\tfor\tNonemployee\tDirectors\tfor\tuse\tunder | 10-Q | 000-06920 | 10.4 | 5/24/2012 |
| 10.10* | Form\tof\tPerformance\tShares\tAgreement\tfor\tuse\tunder\tthe\tamended\tand\trestated | 10-Q | 000-06920 | 10.5 | 5/24/2012 |
|  | Applied\tMaterials,\tInc.\tEmployee\tStock\tIncentive\tPlan |  |  |  |  |
| 10.11* | Form\tof\tRestricted\tStock\tAgreement\tfor\tuse\tunder\tthe\tamended\tand\trestated\tApplied | 10-Q | 000-06920 | 10.3 | 8/23/2012 |
|  | Materials,\tInc.\tEmployee\tStock\tIncentive\tPlan |  |  |  |  |
| 10.12* | Applied\tMaterials,\tInc.\tEmployees'\tStock\tPurchase\tPlan,\tamended\tand\trestated | 10-K | 000-06920 | 10.54 | 12/5/2012 |
|  | effective\tOctober\t28,\t2012 |  |  |  |  |
| 10.13* |  | 10-Q | 000-06920 | 10.2 | 8/22/2013 |
|  | Dickerson |  |  |  |  |
| 10.14* | Form\tof\tNon-Qualified\tStock\tOption\tAgreement\tfor\tEmployees\tfor\tuse\tunder\tthe | 10-Q | 000-06920 | 10.4 | 8/22/2013 |
|  | Applied\tMaterials,\tInc.\tEmployee\tStock\tIncentive\tPlan,\tas\tamended |  |  |  |  |
| 10.15* |  | 10-Q | 000-06920 | 10.2 | 2/20/2014 |
|  | Employee\tStock\tIncentive\tPlan,\tas\tamended |  |  |  |  |
| 10.16* | Form\tof\tLetter\tof\tUnderstanding\tfor\tLong-Term\tAssignment | 10-K | 000-06920 | 10.49 | 12/17/2014 |
| 10.17* | Applied\tMaterials,\tInc.\tApplied\tIncentive\tPlan,\tamended\tand\trestated\teffective | 10-Q | 000-06920 | 10.4 | 2/19/2015 |
|  | October\t27,\t2014 |  |  |  |  |
| 10.18* | Form\tof\tPerformance\tShares\tAgreement\tfor\tfiscal\t2015\tperformance-based\tequity | 10-Q | 000-06920 | 10.5 | 2/19/2015 |
|  | awards\tfor\tcertain\texecutive\tofficers\tunder\tthe\tamended\tand\trestated\tApplied |  |  |  |  |
|  | Materials,\tInc.\tEmployee\tStock\tIncentive\tPlan |  |  |  |  |
| 10.19 |  | 8-K | 000-06920 | 10.1 | 9/9/2015 |
|  | therein |  |  |  |  |
| 10.20 | Extension\tAgreement,\tdated\tas\tof\tSeptember\t3,\t2017,\tto\tCredit\tAgreement,\tdated\tas | 8-K | 000-06920 | 10.1 | 9/5/2017 |
|  | as\tadministrative\tagent,\tand\tthe\tlenders\tparty\tthereto. |  |  |  |  |
| 10.21* |  | 10-K | 000-06920 | 10.32 | 12/9/2015 |
|  | restated\teffective\tJuly\t15,\t2015 |  |  |  |  |
| 10.22* | Applied\tMaterials,\tInc.\t2016\tDeferred\tCompensation\tPlan | 10-K | 000-06920 | 10.33 | 12/9/2015 |
| 10.23* |  | 10-Q | 000-06920 | 10.1 | 5/25/2017 |
|  | effective\tMarch\t9,\t2017 |  |  |  |  |
| 10.24* |  | 10-Q | 000-06920 | 10.2 | 5/25/2017 |

* Indicates	a	management	contract	or	compensatory	plan	or	arrangement,	as	required	by	Item	15(a)(3).

† Filed	herewith.

‡ Furnished	herewith.

# SIGNATURES

Pursuant	to	the	requirements	of	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934,	the	registrant	has	duly	caused	this	report	to	be	signed	on	its	behalf	by the	undersigned,	thereunto	duly	authorized.

Gary	E.	Dickerson

President,	Chief	Executive	Officer

# POWER	OF	ATTORNEY

KNOW	ALL	PERSONS	BY	THESE	PRESENTS,	that	each	person	whose	signature	appears	below	constitutes	and	appoints	Gary	E.	Dickerson,	Daniel	J.	Durn and	Thomas	F.	Larkins,	jointly	and	severally,	his	or	her	attorneys-in-fact,	each	with	the	power	of	substitution,	for	him	or	her	in	any	and	all	capacities,	to	sign	any amendments	to	this	Annual	Report	on	Form	10-K,	and	to	file	the	same,	with	exhibits	thereto	and	other	documents	in	connection	therewith,	with	the	Securities	and Exchange	Commission,	hereby	ratifying	and	confirming	all	that	each	of	said	attorneys-in-fact,	or	his	substitute	or	substitutes,	may	do	or	cause	to	be	done	by	virtue hereof.

Pursuant	to	the	requirements	of	the	Securities	Exchange	Act	of	1934,	this	report	has	been	signed	below	by	the	following	persons	on	behalf	of	the	registrant	and	in the	capacities	and	on	the	dates	indicated.



Question: what is the roi for applied materials if the investment made on october 2013 was sold 2 years later?
Calculation: start_value = 100
end_value = 96.67
answer = (end_value - start_value) / 100 * 100
Answer: -3.3%