Table of Contents Applied is exposed to risks as a result of ongoing changes in the various industries in which it operates. Applied is exposed to risks as a result of ongoing changes specific to the semiconductor industry. • 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. • 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; 20 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 manufacturing equipment and service products, including: 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: