Edgar Filing: APPLIED MATERIALS INC /DE

Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


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

For the quarterly period ended January 27, 2019


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

For the transition period from to

Commission File Number 000-06920

Applied Materials, Inc.

(Exact name of registrant as specified in its charter)



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

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

(408) 727-5555

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically 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 such files). Yes þ No ¨

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.



Large accelerated filer þ		Accelerated filer ¨
Non-accelerated filer ¨		Smaller reporting company ¨
		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 Exchange Act). Yes ¨ No þ

Number of shares outstanding of the issuer’s common stock as of January 27, 2019: 949,392,609

Table of Contents

APPLIED MATERIALS, INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JANUARY 27, 2019

TABLE OF CONTENTS



		Page
	PART I. FINANCIAL INFORMATION
Item 1:	Financial Statements (Unaudited)	3
	Consolidated Condensed Statements of Operations for the Three Months Ended January 27, 2019 and January 28, 2018	3
	Consolidated Condensed Statements of Comprehensive Income for the Three Months Ended January 27, 2019 and January 28, 2018	4
	Consolidated Condensed Balance Sheets as of January 27, 2019 and October 28, 2018	5
	Consolidated Condensed Statement of Stockholders’ Equity for the Three Months Ended January 27, 2019 and January 28, 2018	6
	Consolidated Condensed Statements of Cash Flows for the Three Months Ended January 27, 2019 and January 28, 2018	7
	Notes to Consolidated Condensed Financial Statements	8
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4:	Controls and Procedures	53

	PART II. OTHER INFORMATION
Item 1:	Legal Proceedings	54
Item 1A:	Risk Factors	54
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	65
Item 6:	Exhibits	66
	Signatures	67

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(In millions, except per share amounts)



	Three Months Ended
	January 27, 2019		January 28, 2018

	(Unaudited)
Net sales	$	3,753	$	4,205
Cost of products sold	2,088		2,265
Gross profit	1,665		1,940
Operating expenses:
Research, development and engineering	516		489
Marketing and selling	131		126
General and administrative	110		110
Total operating expenses	757		725
Income from operations	908		1,215
Interest expense	60		59
Interest and other income, net	40		27
Income before income taxes	888		1,183
Provision for income taxes	117		1,018
Net income	$	771	$	165
Earnings per share:
Basic	$	0.81	$	0.16
Diluted	$	0.80	$	0.15
Weighted average number of shares:
Basic	957		1,056
Diluted	965		1,071

See accompanying Notes to Consolidated Condensed Financial Statements.

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APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)



	Three Months Ended
	January 27, 2019			January 28, 2018

	(Unaudited)
Net income	$	771		$	165
Other comprehensive income (loss), net of tax:
Change in unrealized gain (losses) on available-for-sale investments	5			6
Change in unrealized net loss on derivative instruments	(17		)	(19		)
Change in defined and postretirement benefit plans	—			(2		)
Other comprehensive income (loss), net of tax	(12		)	(15		)
Comprehensive income	$	759		$	150

See accompanying Notes to Consolidated Condensed Financial Statements.

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APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(In millions)



	January 27, 2019			October 28, 2018


ASSETS
Current assets:
Cash and cash equivalents	$	3,192		$	3,440
Short-term investments	520			590
Accounts receivable, net	2,444			2,323
Inventories	3,703			3,721
Other current assets	426			530
Total current assets	10,285			10,604
Long-term investments	1,588			1,568
Property, plant and equipment, net	1,456			1,407
Goodwill	3,368			3,368
Purchased technology and other intangible assets, net	199			213
Deferred income taxes and other assets	2,026			473
Total assets	$	18,922		$	17,633

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	2,420		$	2,721
Contract liabilities	1,356			1,201
Total current liabilities	3,776			3,922
Income taxes payable	1,303			1,254
Long-term debt	5,310			5,309
Other liabilities	324			303
Total liabilities	10,713			10,788
Stockholders’ equity:
Common stock	9			10
Additional paid-in capital	7,265			7,274
Retained earnings	23,032			20,880
Treasury stock	(21,943		)	(21,194		)
Accumulated other comprehensive loss	(154		)	(125		)
Total stockholders’ equity	8,209			6,845
Total liabilities and stockholders’ equity	$	18,922		$	17,633

Amounts as of January 27, 2019 are unaudited. Amounts as of October 28, 2018 are derived from the October 28, 2018 audited consolidated financial statements.

See accompanying Notes to Consolidated Condensed Financial Statements.

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APPLIED MATERIALS, INC

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In millions)



	Common Stock					Additional Paid-In Capital			Retained Earnings			Treasury Stock				Accumulated Other Comprehensive Income (Loss)			Total
Three Months Ended January 27, 2019	Shares		Amount			Additional Paid-In Capital			Retained Earnings			Shares	Amount			Accumulated Other Comprehensive Income (Loss)			Total

	(Unaudited)
Balance as of October 28, 2018	967		$	10		$	7,274		$	20,880		1,019	$	(21,194	)	$	(125	)	$	6,845
Adoption of new accounting standards (a)	—		—			—			1,570			—	—			(17		)	1,553
Net income	—		—			—			771			—	—			—			771
Other comprehensive loss, net of tax	—		—			—			—			—	—			(12		)	(12		)
Dividends declared ($0.20 per common share)	—		—			—			(189		)	—	—			—			(189		)
Share-based compensation	—		—			65			—			—	—			—			65
Issuance under stock plans	4		—			(74		)	—			—	—			—			(74		)
Common stock repurchases	(22	)	(1		)	—			—			22	(749		)	—			(750		)
Balance as of January 27, 2019	949		$	9		$	7,265		$	23,032		1,041	$	(21,943	)	$	(154	)	$	8,209

(a) - Represents the reclassification adjustment related to the adoption of Accounting Standard Update (ASU) 2016-01 Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and ASU 2016-16 Income Tax (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. See Note 1.



	Common Stock				Additional Paid-In Capital			Retained Earnings (b)			Treasury Stock				Accumulated Other Comprehensive Income (Loss)			Total
Three Months Ended January 28, 2018	Shares		Amount		Additional Paid-In Capital			Retained Earnings (b)			Shares	Amount			Accumulated Other Comprehensive Income (Loss)			Total

	(Unaudited)
Balance as of October 29, 2017	1,060		$	11	$	7,056		$	18,539		917	$	(15,912	)	$	(64	)	$	9,630
Net income	—		—		—			165			—	—			—			165
Other comprehensive loss, net of tax	—		—		—			—			—	—			(15		)	(15		)
Dividends declared ($0.10 per common share)	—		—		—			(105		)	—	—			—			(105		)
Share-based compensation	—		—		65			—			—	—			—			65
Issuance under stock plans	5		—		(141		)	—			—	—			—			(141		)
Common stock repurchases	(15	)	—		—			—			15	(782		)	—			(782		)
Balance as of January 28, 2018	1,050		$	11	$	6,980		$	18,599		932	$	(16,694	)	$	(79	)	$	8,817

(b) - Retained earnings balance as of October 29, 2017 included adjustment of $281 million related to the adoption of the standard related to revenue recognition.

See accompanying Notes to Consolidated Condensed Financial Statements.

Table of Contents

APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In millions)



	Three Months Ended
	January 27, 2019			January 28, 2018

	(Unaudited)
Cash flows from operating activities:
Net income	$	771		$	165
Adjustments required to reconcile net income to cash provided by operating activities:
Depreciation and amortization	88			119
Share-based compensation	65			65
Deferred income taxes	41			32
Other	1			—
Changes in operating assets and liabilities:
Accounts receivable	(121		)	156
Inventories	18			(211		)
Other current and non-current assets	76			78
Accounts payable and accrued expenses	(313		)	(127		)
Contract liabilities	155			350
Income taxes payable	41			807
Other liabilities	12			32
Cash provided by operating activities	834			1,466
Cash flows from investing activities:
Capital expenditures	(133		)	(203		)
Cash paid for acquisitions, net of cash acquired	—			(5		)
Proceeds from sales and maturities of investments	464			1,944
Purchases of investments	(397		)	(384		)
Cash provided by (used in) investing activities	(66		)	1,352
Cash flows from financing activities:
Common stock repurchases	(750		)	(782		)
Tax withholding payments for vested equity awards	(74		)	(141		)
Payments of dividends to stockholders	(192		)	(106		)
Cash used in financing activities	(1,016		)	(1,029		)
Increase (decrease) in cash and cash equivalents	(248		)	1,789
Cash and cash equivalents — beginning of period	3,440			5,010
Cash and cash equivalents — end of period	$	3,192		$	6,799
Supplemental cash flow information:
Cash payments for income taxes	$	34		$	78
Cash refunds from income taxes	$	8		$	40
Cash payments for interest	$	34		$	34

See accompanying Notes to Consolidated Condensed Financial Statements.

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Note 1 Basis of Presentation

Basis of Presentation

In the opinion of management, the unaudited interim consolidated condensed financial statements of Applied Materials, Inc. and its subsidiaries (Applied or the Company) included herein have been prepared on a basis consistent with the October 28, 2018 audited consolidated financial statements and include all material adjustments, consisting of normal recurring adjustments, necessary to fairly present the information set forth therein. These unaudited interim consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Applied’s Annual Report on Form 10-K for the fiscal year ended October 28, 2018 (2018 Form 10-K). Applied’s results of operations for the three months ended January 27, 2019 are not necessarily indicative of future operating results. Applied’s fiscal year ends on the last Sunday in October of each year. Fiscal 2019 and 2018 each contain 52 weeks, and the first three months of fiscal 2019 and 2018 each contained 13 weeks.

At the beginning of the first quarter of fiscal 2019, Applied adopted the new revenue recognition standard using the full retrospective method. All financial statements and disclosures have been recast to comply with this new guidance. See "Recent Accounting Pronouncements - Accounting Standards Adopted" section below for further information.

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 standalone selling price (SSP) related to revenue recognition, 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.

Changes to Significant Accounting Policies

Applied adopted various amended guidance during the first quarter of fiscal 2019. The following accounting policies have been updated as part of the adoption of the new standards.

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. Bad debt expense and any reversals are recorded in marketing and selling expenses in the Consolidated Condensed Statement of Operations.

Sales and Value Added Taxes

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

Shipping and Handling Costs

Applied accounts for shipping and handling activities related to contracts with customers as costs to fulfill our promise to transfer the associated products. Accordingly, amounts billed for shipping and handling costs are recorded as a component of net sales and costs as a component of cost of products sold.

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 MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Applied also sells extended warranty contracts to its customers which provide an extension of the standard warranty coverage period of up to 2 years. Applied receives payment at the inception of the contract and recognizes revenue ratably over the extended warranty coverage period, as the customer simultaneously receives and consumes the benefits of the extended warranty.

Revenue Recognition from Contracts with Customers

Applied recognizes revenue when promised goods or services are transferred to a customer in an amount that reflects the consideration to which Applied expects to be entitled in exchange for those goods or services. Applied determines revenue recognition through the following five steps; (1) identification of the contract(s) with customers, (2) identification of the performance obligations in the contract, (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations in the contract, and (5) recognition of revenue when, or as, a performance obligation is satisfied.

Identifying the contract(s) with customers. Applied sells manufacturing equipment, services, and spare parts directly to its customers in the semiconductor, display, and related industries. The Company generally considers written documentation including, but not limited to, signed purchase orders, master agreements, and sales orders as contracts provided that collection is probable. Collectability is assessed based on the customer’s creditworthiness determined by reviewing the customer’s published credit and financial information, historical payment experience, as well as other relevant factors.

Identifying the performance obligations. Applied’s performance obligations include delivery of manufacturing equipment, service agreements, spare parts, installation, extended warranty and training. Applied’s service agreements are considered one performance obligation and may include multiple goods and services that we provide to the customer to deliver against a performance metric. Judgment is used to determine whether multiple promised goods or services in a contract should be accounted for separately or as a group.

Determine the transaction price. The transaction price for Applied’s contracts with customers may include fixed and variable consideration. Applied includes variable consideration in the transaction price to the extent that it is probable that a significant reversal of revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

Allocate the transaction price to the performance obligations. A contract’s transaction price is allocated to each distinct performance obligation identified within the contract. Applied generally estimates the standalone selling price of a distinct performance obligation based on historical cost plus an appropriate margin. For contracts with multiple performance obligations, Applied allocates the contract’s transaction price to each performance obligation using the relative standalone selling price of each distinct good or service in the contract.

Recognizing the revenue as performance obligations are satisfied. Applied recognizes revenue from equipment and spares parts at a point in time when Applied has satisfied its performance obligation by transferring control of the goods to the customer which typically occurs at shipment or delivery. Revenue from service agreements is recognized over time as customers receive the benefits of services.

The incremental costs to obtain a contract are not material.

Payment Terms. Payment terms vary by contract. Generally, the majority of payments are due within a certain number of days from shipment of goods or performance of service. The remainder is typically due upon customer technical acceptance. 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. Applied’s payment terms do not generally contain a significant financing component.

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 measured and recorded at fair value with changes in fair value recorded in the accompanying Consolidated Statements of Operations. 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 Condensed Statements of Operations.

Equity investments without readily determinable fair value are measured at cost, less impairment, adjusted by observable price changes. Adjustments resulting from impairments and observable prices changes will be recorded in the accompanying Consolidated Condensed Statements of Operations.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Recent Accounting Pronouncements

Accounting Standards Adopted

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. Applied adopted this guidance in the first quarter of fiscal 2019 on a retrospective basis. The adoption of this guidance resulted in reclassification of other components of net benefit costs outside of income from operations and did not 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. Applied adopted this guidance 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 changed the tax accounting for intra-entity transfers of assets other than inventory. After adoption, the income tax effect of intra-entity transfers is realized at the time of the transfer instead of over the life of the asset. Applied adopted this guidance in the first quarter of fiscal 2019 using a modified retrospective approach, resulting in a cumulative effect adjustment to retained earnings. Upon adoption, deferred tax assets increased by $1.6 billion related to the estimated income tax effects of future amortization of intra-entity intangible asset transfers, with an offset to retained earnings.

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. Effective in the first quarter of fiscal 2019, Applied adopted the authoritative guidance retrospectively. The adoption of this guidance did not have a significant impact and only impacts disclosures in Applied' s consolidated condensed statements of cash flow.

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 measurement alternative. 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 adopted this standard in the first quarter of fiscal year 2019. Upon adoption, Applied elected to apply the measurement alternative for equity investments without readily determinable fair value. Under the alternative, Applied measures investments without readily determinable fair value at cost, less impairment, adjusted by observable price changes prospectively to all equity investments that exist as of adoption and will reassess at each reporting period whether an investment qualifies for the alternative. Adopting this standard required Applied to record a cumulative net increase to retained earnings of approximately $21 million with the corresponding $17 million decrease in accumulated other comprehensive income, net of tax, for the unrealized gains and losses associated with equity investments with readily determinable fair values, as the authoritative guidance is required to be adopted prospectively. Going forward, the impact of this new standard could result in volatility in Applied's consolidated statement of operations.

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. Applied adopted this authoritative guidance in the first quarter of fiscal 2019 using the full retrospective method, which required restating each prior reporting period presented. Refer to the Impacts to Previously Reported Results section below for the impact of the adoption of the standard to Applied’s consolidated financial statements.

For all periods prior to the date of initial adoption of this standard, Applied elected to use the practical expedient pursuant to which Applied excluded disclosures of both transaction prices allocated to remaining performance obligations and when these performance obligations are expected to be recognized as revenue.

The most significant impact from the adoption of this standard is fewer constraints on revenue recognition upon shipment of manufacturing equipment.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Impacts to Previously Reported Results

Adoption of the standards related to revenue recognition and retirement benefits impacted Applied’s Consolidated Condensed Statement of Operations for the first quarter of fiscal 2018 as follows:



	Three Months Ended
	January 28, 2018
	As Previously Reported		Revenue Recognition Adjustment			Retirement Benefit Adjustment			As Adjusted
	(In millions, except per share amounts)

Net sales	$	4,204	$	1		$	—		$	4,205
Cost of products sold	$	2,284	$	(20	)	$	1		$	2,265
Gross profit	$	1,920	$	21		$	(1	)	$	1,940
Research, development and engineering	$	488	$	—		$	1		$	489
Interest and other income, net	$	25	$	—		$	2		$	27
Income before income taxes	$	1,162	$	21		$	(2	)	$	1,183
Provision for income taxes	$	1,027	$	(9	)	$	—		$	1,018
Net income	$	135	$	30		$	—		$	165
Earnings per share: basic	$	0.13	$	0.03		$	—		$	0.16
Earnings per share: diluted	$	0.13	$	0.02		$	—		$	0.15

Adoption of the retirement benefits standard did not have any impact on Applied’s Consolidated Balance Sheet or Consolidated Condensed Statement of Cash Flows.

Adoption of the standard related to revenue recognition impacted Applied’s Consolidated Balance Sheet at October 28, 2018 as follows:



	October 28, 2018
	As Previously Reported		Adjustment			As Adjusted
	(In millions)

Accounts receivable, net	$	2,565	$	(242	)	$	2,323
Inventories	$	3,722	$	(1	)	$	3,721
Other current assets	$	430	$	100		$	530
Deferred income taxes and other assets	$	470	$	3		$	473
Customer deposits and deferred revenue	$	1,347	$	(1,347	)	$	—
Contract liabilities	$	—	$	1,201		$	1,201
Retained earnings	$	20,874	$	6		$	20,880

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Adoption of the revenue recognition standard did not impact cash provided by or used in investing or financing activities in Applied’s consolidated Condensed Statement of Cash Flows for the first quarter of fiscal 2018. The adoption did not impact total cash provided by operating activities, however it impacted individual components of cash provided by operating activities for the first quarter of fiscal 2018 as follows:



	Three Months Ended
	January 28, 2018
	As Previously Reported			Adjustment			As Adjusted
	(In millions)

Cash flows from operating activities:
Net income	$	135		$	30		$	165
Adjustments required to reconcile net income to cash provided by operating activities:
Deferred income taxes	$	41		$	(9	)	$	32
Changes in operating assets and liabilities:
Inventories	$	(195	)	$	(16	)	$	(211	)
Accounts payable and accrued expenses	$	(125	)	$	(2	)	$	(127	)
Contract liabilities	$	353		$	(3	)	$	350

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.

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.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

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.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


Note 2	Earnings Per Share

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



	Three Months Ended
	January 27, 2019		January 28, 2018

	(In millions, except per share amounts)
Numerator:
Net income	$	771	$	165
Denominator:
Weighted average common shares outstanding	957		1,056
Effect of weighted dilutive stock options, restricted stock units and employee stock purchase plan shares	8		15
Denominator for diluted earnings per share	965		1,071
Basic earnings per share	$	0.81	$	0.16
Diluted earnings per share	$	0.80	$	0.15
Potentially weighted dilutive securities	8		—

Potentially weighted 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.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


Note 3	Cash, Cash Equivalents and Investments

Summary of Cash, Cash Equivalents and Investments

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



January 27, 2019	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value

	(In millions)
Cash	$	1,016	$	—	$	—	$	1,016
Cash equivalents:
Money market funds	1,911		—		—		1,911
Commercial paper, corporate bonds and medium-term notes	265		—		—		265
Total Cash equivalents	2,176		—		—		2,176
Total Cash and Cash equivalents	$	3,192	$	—	$	—	$	3,192
Short-term and long-term investments:
U.S. Treasury and agency securities	$	375	$	—	$	—	$	375
Non-U.S. government securities*	9		—		—		9
Municipal securities	402		1		2		401
Commercial paper, corporate bonds and medium-term notes	628		1		3		626
Asset-backed and mortgage-backed securities	565		—		3		562
Total fixed income securities	1,979		2		8		1,973
Publicly traded equity securities	15		20		4		31
Equity investments in privately-held companies	104		—		—		104
Total equity investments	119		20		4		135
Total short-term and long-term investments	$	2,098	$	22	$	12	$	2,108

Total Cash, Cash equivalents and Investments	$	5,290	$	22	$	12	$	5,300

_________________________

* Includes agency debt securities guaranteed by Canada.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)



October 28, 2018	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value

	(In millions)
Cash	$	1,489	$	—	$	—	$	1,489
Cash equivalents:
Money market funds	1,599		—		—		1,599
Commercial paper, corporate bonds and medium-term notes	352		—		—		352
Total Cash equivalents	1,951		—		—		1,951
Total Cash and Cash equivalents	$	3,440	$	—	$	—	$	3,440
Short-term and long-term investments:
U.S. Treasury and agency securities	$	335	$	—	$	2	$	333
Non-U.S. government securities*	10		—		—		10
Municipal securities	399		—		4		395
Commercial paper, corporate bonds and medium-term notes	705		—		3		702
Asset-backed and mortgage-backed securities	595		—		4		591
Total fixed income securities	2,044		—		13		2,031
Publicly traded equity securities	17		25		4		38
Equity investments in privately-held companies	89		—		—		89
Total equity investments	106		25		4		127
Total short-term and long-term investments	$	2,150	$	25	$	17	$	2,158

Total Cash, Cash equivalents and Investments	$	5,590	$	25	$	17	$	5,598

_________________________

* Includes agency debt securities guaranteed by Canada.

Maturities of Investments

The following table summarizes the contractual maturities of Applied’s investments as of January 27, 2019:



	Cost		Estimated Fair Value

	(In millions)
Due in one year or less	$	429	$	428
Due after one through five years	985		983
No single maturity date**	684		697
Total	$	2,098	$	2,108

_________________________

** 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

During the three months ended January 27, 2019 and January 28, 2018, gross realized gains and losses on investments for these periods were not material.

As of January 27, 2019, and October 28, 2018, gross unrealized losses related to Applied’s debt investment portfolio were not material. Applied regularly reviews its debt 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.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Applied determined that the gross unrealized losses on its marketable fixed-income securities as of January 27, 2019 and January 28, 2018 were temporary in nature and therefore it did not recognize any impairment of its marketable fixed-income securities during the three months ended January 27, 2019 or January 28, 2018. Impairment charges on equity investments in privately-held companies during the three months ended January 27, 2019 and January 28, 2018 were not material. These impairment charges are included in interest and other income, net in the Consolidated Condensed Statement of Operations.

Unrealized gains and losses on investments classified as equity investments are recognized in other income (expense), net in the Consolidated Condensed Statement of Operations. Prior to the adoption of Accounting Standards Update (ASU) 2016-01 Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities in the first quarter of fiscal 2019, these unrealized gains and temporary losses were included within accumulated other comprehensive income (loss), net of any related tax effect.

The components of gain (losses) on equity investments for the three months ended January 27, 2019 were as follows:



	Three Months Ended
	January 27, 2019

	(In millions)
Publicly traded equity securities
Unrealized gain	$	6
Unrealized loss	(2		)
Gain on sales	1
Loss on sales	—
Equity investments in privately-held companies
Unrealized gain	7
Unrealized loss	(1		)
Gain on sales	1
Loss on sales	—
Total gain on equity investments, net	$	12

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


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 measurement alternative, defined as cost, less impairments, adjusted for subsequent observable price changes and are periodically assessed for impairment when events or circumstances indicate that a 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. As of January 27, 2019, 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.

Applied’s equity investments with readily determinable values consist of publicly traded equity securities. Upon adoption of ASU 2016-01, these investments are measured at fair value using quoted prices for identical assets in an active market and the changes in fair value of these equity investments are recognized in the consolidated statements of operations. Applied adopted the standard using a modified retrospective transition method, and reclassified the unrealized gains on these equity investments of $21 million to retained earnings as a cumulative-effect adjustment on the condensed consolidated balance sheets.

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.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Assets Measured at Fair Value on a Recurring Basis

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



	January 27, 2019						October 28, 2018
	Level 1		Level 2		Total		Level 1		Level 2		Total

	(In millions)
Assets:
Available-for-sale debt security investments
Money market funds	$	1,911	$	—	$	1,911	$	1,599	$	—	$	1,599
U.S. Treasury and agency securities	343		32		375		297		36		333
Non-U.S. government securities	—		9		9		—		10		10
Municipal securities	—		401		401		—		395		395
Commercial paper, corporate bonds and medium-term notes	—		891		891		—		1,054		1,054
Asset-backed and mortgage-backed securities	—		562		562		—		591		591
Total available-for-sale debt security investments	$	2,254	$	1,895	$	4,149	$	1,896	$	2,086	$	3,982
Equity investments with readily determinable values
Publicly traded equity securities	$	31	$	—	$	31	$	38	$	—	$	38
Total equity investments with readily determinable values	$	31	$	—	$	31	$	38	$	—	$	38

Total	$	2,285	$	1,895	$	4,180	$	1,934	$	2,086	$	4,020

There were no transfers between Level 1 and Level 2 fair value measurements during the three months ended January 27, 2019 or January 28, 2018. Applied did not have any financial assets measured at fair value on a recurring basis within Level 3 fair value measurements as of January 27, 2019 or October 28, 2018.

Assets and Liabilities without Readily Determinable Values Measured on a Non-recurring Basis

Applied’s equity investments without readily determinable values consist of equity investments in privately-held companies. Upon adoption of ASU 2016-01, Applied elected the measurement alternative, defined as cost, less impairments, adjusted for subsequent observable price changes on a prospective basis for certain equity investments without readily determinable fair values and is required to account for any subsequent observable changes in fair value within the statements of operations. Applied adopted the guidance prospectively, effective October 29, 2018, and there was no impact to Applied’s condensed consolidated financial statements. Prior to the adoption of ASU 2016-01, these investments were generally accounted for under the cost method of accounting. These investments are periodically assessed for impairment when an event or circumstance indicates that a decline in value may have occurred. Impairment charges on equity investments in privately-held companies during the three months ended January 27, 2019 and January 28, 2018 were not material.

Other

The carrying amounts of Applied’s financial instruments, including cash and cash equivalents, accounts receivable, notes payable - short term, and accounts payable and accrued expenses, approximate fair value due to their short maturities. As of January 27, 2019, the aggregate principal amount of long-term debt was $5.4 billion and the estimated fair value was $5.5 billion. As of October 28, 2018, the aggregate principal and estimated fair value amounts of long-term debt were both $5.4 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 Condensed Financial Statements for further detail of existing debt.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


Note 5	Derivative Instruments and Hedging Activities

Derivative Financial Instruments

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

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 as of January 27, 2019 is expected to be reclassified into earnings within 12 months. Changes in the fair value of currency forward exchange and option contracts due to changes in time value are excluded from the assessment of effectiveness. Both ineffective hedge amounts and hedge components excluded from the assessment of effectiveness are recognized in earnings. If the transaction being hedged is no longer probable to occur, or if a portion of any derivative is deemed to be ineffective, Applied promptly recognizes the gain or loss on the associated financial instrument in earnings. The amount recognized due to discontinuance of cash flow hedges that were probable not to occur by the end of the originally specified time period was not significant for the three months ended January 27, 2019 and January 28, 2018.

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 as of January 27, 2019 and October 28, 2018 were not material.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

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



		Three Months Ended
		January 27, 2019									January 28, 2018
		Effective Portion						Ineffective Portion and Amount Excluded from Effectiveness Testing			Effective Portion						Ineffective Portion and Amount Excluded from Effectiveness Testing
	Location of Gain or (Loss)	Gain or (Loss)			Gain or (Loss) Reclassified from AOCI into Income			Gain or (Loss) Recognized in Income			Gain or (Loss)			Gain or (Loss) Reclassified from AOCI into Income			Gain or (Loss) Recognized in Income

		(In millions)
Derivatives in Cash Flow Hedging Relationships
Foreign exchange contracts	AOCI	$	(16	)	$	—		$	—		$	(18	)	$	—		$	—
Foreign exchange contracts	Cost of products sold	—			12			5			—			8			2
Foreign exchange contracts	General and administrative	—			(5		)	(1		)	—			(1		)	(2		)
Interest rate contracts	Interest expense	—			—			—			—			(1		)	—
Total		$	(16	)	$	7		$	4		$	(18	)	$	6		$	—



		Amount of Gain or (Loss) Recognized in Income
		Three Months Ended
	Location of Gain or (Loss) Recognized in Income	January 27, 2019			January 28, 2018

		(In millions)
Derivatives Not Designated as Hedging Instruments
Foreign exchange contracts	General and administrative	$	(10	)	$	(8	)
Total		$	(10	)	$	(8	)

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 January 27, 2019.

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.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


Note 6	Accounts Receivable, Net

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 $464 million and $376 million of accounts receivable during the three months ended January 27, 2019 and January 28, 2018, respectively. Applied did not discount letters of credit issued by customers or discount promissory notes during the three months ended January 27, 2019 and January 28, 2018. Financing charges on the sale of receivables and discounting of letters of credit are included in interest expense in the accompanying Consolidated Condensed Statements of Operations and were not material for all periods presented.

Accounts receivable are presented net of allowance for doubtful accounts of $33 million as of January 27, 2019 and October 28, 2018. 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 January 27, 2019, it continues to closely monitor customer liquidity and industry and economic conditions, which may result in changes to Applied’s estimates.


Note 7	Contract Balances

Contract assets primarily result from receivables for goods transferred to customers and where payment is conditional upon technical sign off and not just the passage of time. Contract liabilities consist of unsatisfied performance obligations related to advance payments received and billings in excess of revenue recognized. Applied’s contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period.

Contract assets are generally classified as current and included in Other Current Assets in the Consolidated Condensed Balance Sheets. Contract liabilities are classified as current or non-current based on the timing of when performance obligations will be satisfied and associated revenue is expected to be recognized.

Contract balances at the end of each reporting period were as follows:



	January 27, 2019		October 28, 2018
	(In millions)

Contract assets	$	100	$	99
Contract liabilities	$	1,356	$	1,201

The increase in net contract liabilities was primarily due to netted contract assets being classified to accounts receivable as conditions for payments were met.

During the three months ended January 27, 2019, Applied recognized revenue of approximately $288 million related to contract liabilities at October 28, 2018.

There were no impairment losses recognized on Applied's accounts receivables and contract assets during the three months ended January 27, 2019.

As of January 27, 2019, the amount of remaining unsatisfied performance obligations on contracts with an original estimated duration of one year or more was approximately $232 million, which is expected to be recognized within the next 36 months. Applied has elected the available practical expedient to exclude the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


Note 8	Balance Sheet Detail



	January 27, 2019		October 28, 2018

	(In millions)
Inventories
Customer service spares	$	1,093	$	989
Raw materials	1,018		1,020
Work-in-process	526		505
Finished goods	1,066		1,207
	$	3,703	$	3,721

Included in finished goods inventory are $8 million as of January 27, 2019, and $19 million as of October 28, 2018, 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 $341 million and $350 million of evaluation inventory as of January 27, 2019 and October 28, 2018, respectively.



	January 27, 2019		October 28, 2018

	(In millions)
Other Current Assets
Prepaid income taxes and income taxes receivable	$	32	$	40
Prepaid expenses and other	394		490
	$	426	$	530



	Useful Life	January 27, 2019			October 28, 2018

	(In years)	(In millions)
Property, Plant and Equipment, Net
Land and improvements		$	245		$	245
Buildings and improvements	3-30	1,460			1,448
Demonstration and manufacturing equipment	3-5	1,335			1,282
Furniture, fixtures and other equipment	3-5	639			634
Construction in progress		243			203
Gross property, plant and equipment		3,922			3,812
Accumulated depreciation		(2,466		)	(2,405		)
		$	1,456		$	1,407



	January 27, 2019		October 28, 2018

	(In millions)
Deferred Income Taxes and Other Assets
Non-current deferred income taxes and income taxes receivable	$	1,856	$	319
Other assets	170		154
	$	2,026	$	473

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)



	January 27, 2019		October 28, 2018

	(In millions)
Accounts Payable and Accrued Expenses
Accounts payable	$	978	$	996
Compensation and employee benefits	426		639
Warranty	200		208
Dividends payable	190		193
Income taxes payable	129		136
Other accrued taxes	73		112
Interest payable	59		38
Other	365		399
	$	2,420	$	2,721



	January 27, 2019		October 28, 2018

	(In millions)
Other Liabilities
Defined and postretirement benefit plans	$	178	$	177
Other	146		126
	$	324	$	303

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


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 January 27, 2019, 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.

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 as of January 27, 2019 and October 28, 2018 were as follows:



	January 27, 2019		October 28, 2018

	(In millions)
Semiconductor Systems	$	2,151	$	2,151
Applied Global Services	1,018		1,018
Display and Adjacent Markets	199		199
Carrying amount	$	3,368	$	3,368

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



	January 27, 2019		October 28, 2018

	(In millions)
Purchased technology, net	$	99	$	109
Intangible assets - finite-lived, net	100		104
Total	$	199	$	213

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

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:



	January 27, 2019									October 28, 2018
	Purchased Technology			Other Intangible Assets			Total			Purchased Technology			Other Intangible Assets			Total

	(In millions)
Gross carrying amount:
Semiconductor Systems	$	1,449		$	252		$	1,701		$	1,449		$	252		$	1,701
Applied Global Services	33			44			77			33			44			77
Display and Adjacent Markets	163			38			201			163			38			201
Corporate and Other	—			9			9			—			9			9
Gross carrying amount	$	1,645		$	343		$	1,988		$	1,645		$	343		$	1,988
Accumulated amortization:
Semiconductor Systems	$	(1,382	)	$	(154	)	$	(1,536	)	$	(1,375	)	$	(150	)	$	(1,525	)
Applied Global Services	(29		)	(44		)	(73		)	(29		)	(44		)	(73		)
Display and Adjacent Markets	(135		)	(36		)	(171		)	(132		)	(36		)	(168		)
Corporate and Other	—			(9		)	(9		)	—			(9		)	(9		)
Accumulated amortization	$	(1,546	)	$	(243	)	$	(1,789	)	$	(1,536	)	$	(239	)	$	(1,775	)
Carrying amount	$	99		$	100		$	199		$	109		$	104		$	213

Details of amortization expense by segment were as follows:



	Three Months Ended
	January 27, 2019		January 28, 2018

	(In millions)
Semiconductor Systems	$	11	$	46
Display and Adjacent Markets	3		4
Total	$	14	$	50

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Amortization expense was charged to the following categories:



	Three Months Ended
	January 27, 2019		January 28, 2018

	(In millions)
Cost of products sold	$	9	$	45
Marketing and selling	5		5
Total	$	14	$	50

As of January 27, 2019, future estimated amortization expense is expected to be as follows:



	Amortization Expense
	(In millions)
2019 (remaining 9 months)	$	43
2020	52
2021	39
2022	24
2023	11
Thereafter	30
Total	$	199

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


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 $73 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 as of both January 27, 2019 and October 28, 2018, 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. As of January 27, 2019, Applied did not have any commercial paper outstanding.

Debt outstanding as of January 27, 2019 and October 28, 2018 was as follows:



	Principal Amount
	January 27, 2019			October 28, 2018			Effective Interest Rate	Interest Pay Dates

	(In millions)
Long-term debt:
2.625% Senior Notes Due 2020	$	600		$	600		2.640%	April 1, October 1
4.300% Senior Notes Due 2021	750			750			4.326%	June 15, December 15
3.900% Senior Notes Due 2025	700			700			3.944%	April 1, October 1
3.300% Senior Notes Due 2027	1,200			1,200			3.342%	April 1, October 1
5.100% Senior Notes Due 2035	500			500			5.127%	April 1, October 1
5.850% Senior Notes Due 2041	600			600			5.879%	June 15, December 15
4.350% Senior Notes Due 2047	1,000			1,000			4.361%	April 1, October 1
	5,350			5,350
Total unamortized discount	(10		)	(11		)
Total unamortized debt issuance costs	(30		)	(30		)
Total long-term debt	$	5,310		$	5,309

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


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

Accumulated Other Comprehensive Income (Loss)

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



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

	(in millions)
Balance as of October 28, 2018	$	7		$	(9	)	$	(137	)	$	14	$	(125	)
Adoption of new accounting standards (a)	(17		)	—			—			—		(17		)

Other comprehensive income (loss) before reclassifications	5			(12		)	—			—		(7		)
Amounts reclassified out of AOCI	—			(5		)	—			—		(5		)
Other comprehensive income (loss), net of tax	5			(17		)	—			—		(12		)

Balance as of January 27, 2019	$	(5	)	$	(26	)	$	(137	)	$	14	$	(154	)



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

	(in millions)
Balance as of October 29, 2017	$	53	$	(11	)	$	(120	)	$	14	$	(64	)
Other comprehensive income (loss) before reclassifications	6		(14		)	—			—		(8		)
Amounts reclassified out of AOCI	—		(5		)	(2		)	—		(7		)
Other comprehensive income (loss), net of tax	6