10-Q 1 amat-form10xqq32014.htm FORM 10-Q AMAT-Form 10-Q (Q3 2014)

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 July 27, 2014
or

¨
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  þ        No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
 
Accelerated filer ¨
 
 
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
 
Smaller reporting company ¨
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 July 27, 2014: 1,218,394,316




APPLIED MATERIALS, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JULY 27, 2014
TABLE OF CONTENTS
 
 
 
Page
 
PART I. FINANCIAL INFORMATION
 
Item 1:    
 
 
 
 
 
 
Item 2:    
Item 3:    
Item 4:    
 
 
 
 
PART II. OTHER INFORMATION
 
Item 1:    
Item 1A:
Item 2:    
Item 6:    
 




PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
 
Three Months Ended
 
Nine Months Ended
 
July 27,
2014
 
July 28,
2013
 
July 27,
2014
 
July 28,
2013
 
(Unaudited)
 
(In millions, except per share amounts)
Net sales
$
2,265

 
$
1,975

 
$
6,808

 
$
5,521

Cost of products sold
1,273

 
1,169

 
3,924

 
3,325

Gross margin
992

 
806

 
2,884

 
2,196

Operating expenses:
 
 
 
 
 
 
 
Research, development and engineering
357

 
334

 
1,068

 
982

Marketing and selling
108

 
111

 
324

 
334

General and administrative
136

 
97

 
377

 
348

Impairment of goodwill and intangible assets

 

 

 
278

Restructuring charges and asset impairments

 
14

 
7

 
33

Total operating expenses
601

 
556

 
1,776

 
1,975

Income from operations
391

 
250

 
1,108

 
221

Interest expense
24

 
23

 
72

 
71

Interest and other income, net
3

 
1

 
14

 
6

Income before income taxes
370

 
228

 
1,050

 
156

Provision for income taxes
69

 
60

 
234

 
83

Net income
$
301

 
$
168

 
$
816

 
$
73

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.25

 
$
0.14

 
$
0.67

 
$
0.06

Diluted
$
0.24

 
$
0.14

 
$
0.66

 
$
0.06

Weighted average number of shares:
 
 
 
 
 
 
 
Basic
1,218

 
1,203

 
1,213

 
1,201

Diluted
1,233

 
1,220

 
1,230

 
1,218

See accompanying Notes to Consolidated Condensed Financial Statements.

3



APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
 
Three Months Ended
 
Nine Months Ended
 
July 27,
2014
 
July 28,
2013
 
July 27,
2014
 
July 28,
2013
 
(Unaudited)
 
(In millions)
Net income
$
301

 
$
168

 
$
816

 
$
73

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in unrealized net gain on investments
(1
)
 
(4
)
 
(1
)
 
3

Change in unrealized net gain on derivative investments

 
(2
)
 
(2
)
 
5

Change in defined and postretirement benefit plans

 

 

 
(2
)
Change in cumulative translation adjustments

 
(1
)
 
(1
)
 
(6
)
Other comprehensive income (loss), net of tax
(1
)
 
(7
)
 
(4
)
 

Comprehensive income
$
300

 
$
161

 
$
812

 
$
73

See accompanying Notes to Consolidated Condensed Financial Statements.



4


APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
 
July 27,
2014
 
October 27,
2013
 
 
 
 
 
(In millions)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
2,726

 
$
1,711

Short-term investments
145

 
180

Accounts receivable, net
1,622

 
1,633

Inventories
1,547

 
1,413

Other current assets
600

 
705

Total current assets
6,640

 
5,642

Long-term investments
957

 
1,005

Property, plant and equipment, net
849

 
850

Goodwill
3,294

 
3,294

Purchased technology and other intangible assets, net
979

 
1,103

Deferred income taxes and other assets
132

 
149

Total assets
$
12,851

 
$
12,043

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
1,689

 
$
1,649

Customer deposits and deferred revenue
1,066

 
794

Total current liabilities
2,755

 
2,443

Long-term debt
1,947

 
1,946

Other liabilities
465

 
566

Total liabilities
5,167

 
4,955

Stockholders’ equity:
 
 
 
Common stock
12

 
12

Additional paid-in capital
6,300

 
6,151

Retained earnings
12,938

 
12,487

Treasury stock
(11,524
)
 
(11,524
)
Accumulated other comprehensive loss
(42
)
 
(38
)
Total stockholders’ equity
7,684

 
7,088

Total liabilities and stockholders’ equity
$
12,851

 
$
12,043

Amounts as of July 27, 2014 are unaudited. Amounts as of October 27, 2013 are derived from the October 27, 2013 audited consolidated financial statements.
See accompanying Notes to Consolidated Condensed Financial Statements.

5


APPLIED MATERIALS, INC
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Unaudited)
 
(In millions)
Balance at October 27, 2013
1,204

 
$
12

 
$
6,151

 
$
12,487

 
717

 
$
(11,524
)
 
$
(38
)
 
$
7,088

Net income

 

 

 
816

 

 

 

 
816

Other comprehensive loss, net of tax

 

 

 

 

 

 
(4
)
 
(4
)
Dividends

 

 

 
(365
)
 

 

 

 
(365
)
Share-based compensation

 

 
132

 

 

 

 

 
132

Issuance under stock plans, net of a tax benefit of $26 and other
14

 

 
17

 

 

 

 

 
17

Balance at July 27, 2014
1,218

 
$
12

 
$
6,300

 
$
12,938

 
717

 
$
(11,524
)
 
$
(42
)
 
$
7,684

See accompanying Notes to Consolidated Condensed Financial Statements.



6


APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 
Nine Months Ended
 
July 27,
2014
 
July 28,
2013
 
 
 
 
 
(Unaudited)
 
(In millions)
Cash flows from operating activities:
 
 
 
Net income
$
816

 
$
73

Adjustments required to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
281

 
312

Impairment of goodwill and intangible assets

 
278

Restructuring charges and asset impairments
7

 
33

Unrealized loss on derivative associated with announced business combination
9

 

Share-based compensation
132

 
121

Other
37

 
(102
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
11

 
51

Inventories
(133
)
 
(85
)
Other assets
70

 
18

Accounts payable and accrued expenses
(62
)
 
(132
)
Customer deposits and deferred revenue
271

 

Other liabilities
(46
)
 
37

Cash provided by operating activities
1,393

 
604

Cash flows from investing activities:
 
 
 
Capital expenditures
(178
)
 
(141
)
Proceeds from sales and maturities of investments
702

 
737

Purchases of investments
(632
)
 
(438
)
Cash provided by (used in) investing activities
(108
)
 
158

Cash flows from financing activities:
 
 
 
Proceeds from common stock issuances and other
93

 
125

Common stock repurchases

 
(198
)
Payments of dividends to stockholders
(363
)
 
(336
)
Cash used in financing activities
(270
)
 
(409
)
Increase in cash and cash equivalents
1,015

 
353

Cash and cash equivalents — beginning of year
1,711

 
1,392

Cash and cash equivalents — end of year
$
2,726

 
$
1,745

Supplemental cash flow information:
 
 
 
Cash payments for income taxes
$
108

 
$
184

Cash refunds from income taxes
$
33

 
$
67

Cash payments for interest
$
85

 
$
85



See accompanying Notes to Consolidated Condensed Financial Statements.

7


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 27, 2013 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 27, 2013 (2013 Form 10-K). Applied’s results of operations for the three and nine months ended July 27, 2014 are not necessarily indicative of future operating results. Applied’s fiscal year ends on the last Sunday in October of each year. Fiscal 2014 and 2013 each contain 52 weeks, and the first nine months of fiscal 2014 and 2013 each contained 39 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.
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; 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.


8


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)



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.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (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. This new standard will supersede most current revenue recognition guidance, including industry-specific guidance. The guidance becomes effective for Applied in the first quarter of fiscal 2018, and can be applied either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Early adoption is prohibited. Applied is currently evaluating the impact of this new guidance on Applied's financial position and results of operations.
In April 2014, the FASB issued authoritative guidance that raises the threshold for a disposal transaction to qualify as a discontinued operation and requires additional disclosures about discontinued operations and disposals of individually significant components that do not qualify as discontinued operations. The authoritative guidance becomes effective prospectively for Applied in the first quarter of fiscal 2016. Early adoption is permitted, but only for disposals that have not been reported in financial statements previously issued.
In July 2013, the FASB issued authoritative guidance that will require an unrecognized tax benefit to be presented as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, with certain exceptions. The authoritative guidance becomes effective for Applied in the first quarter of fiscal 2015, with early adoption permitted. The guidance is not expected to have an impact on Applied's financial position or results of operations.

9


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
 
Nine Months Ended
 
July 27,
2014
 
July 28,
2013
 
July 27,
2014
 
July 28,
2013
 
 
 
 
 
 
 
 
 
(In millions, except per share amounts)
Numerator:
 
 
 
 
 
 
 
Net income
$
301

 
$
168

 
$
816

 
$
73

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
1,218

 
1,203

 
1,213

 
1,201

Effect of dilutive stock options, restricted stock units and employee stock purchase plan shares
15

 
17

 
17

 
17

Denominator for diluted earnings per share
1,233

 
1,220

 
1,230

 
1,218

Basic earnings per share
$
0.25

 
$
0.14

 
$
0.67

 
$
0.06

Diluted earnings per share
$
0.24

 
$
0.14

 
$
0.66

 
$
0.06

Potentially dilutive securities

 
1

 

 
1


Potentially dilutive securities attributable to outstanding stock options and restricted stock units were excluded from the calculation of diluted earnings per share because the combined exercise price, average unamortized fair value and assumed tax benefits upon the exercise of options and the vesting of restricted stock units were greater than the average market price of Applied common stock, and therefore their inclusion would have been anti-dilutive.

10


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 by security type:
 
July 27, 2014
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair  Value
 
 
 
 
 
 
 
 
 
(In millions)
Cash
$
745

 
$

 
$

 
$
745

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
1,978

 

 

 
1,978

Municipal securities
3

 

 

 
3

Total Cash equivalents
1,981

 

 

 
1,981

Total Cash and Cash equivalents
$
2,726

 
$

 
$

 
$
2,726

Short-term and long-term investments:
 
 
 
 
 
 
 
U.S. Treasury and agency securities
$
72

 
$

 
$

 
$
72

Non-U.S. government securities*
15

 

 

 
15

Municipal securities
390

 
2

 

 
392

Commercial paper, corporate bonds and medium-term notes
228

 
1

 

 
229

Asset-backed and mortgage-backed securities
272

 
1

 
2

 
271

Total fixed income securities
977

 
4

 
2

 
979

Publicly traded equity securities
19

 
31

 

 
50

Equity investments in privately-held companies
73

 

 

 
73

Total short-term and long-term investments
$
1,069

 
$
35

 
$
2

 
$
1,102

Total Cash, Cash equivalents and Investments
$
3,795

 
$
35

 
$
2

 
$
3,828

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

11


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)




October 27, 2013
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair  Value
 
 
 
 
 
 
 
 
 
(In millions)
Cash
$
611

 
$

 
$

 
$
611

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
1,095

 

 

 
1,095

Municipal securities
5

 

 

 
5

Total Cash equivalents
1,100

 

 

 
1,100

Total Cash and Cash equivalents
$
1,711

 
$

 
$

 
$
1,711

Short-term and long-term investments:
 
 
 
 
 
 
 
U.S. Treasury and agency securities
$
170

 
$

 
$

 
$
170

Non-U.S. government securities
11

 

 

 
11

Municipal securities
379

 
2

 

 
381

Commercial paper, corporate bonds and medium-term notes
218

 
2

 
1

 
219

Asset-backed and mortgage-backed securities
268

 
2

 
2

 
268

Total fixed income securities
1,046

 
6

 
3

 
1,049

Publicly traded equity securities
27

 
33

 

 
60

Equity investments in privately-held companies
76

 

 

 
76

Total short-term and long-term investments
$
1,149

 
$
39

 
$
3

 
$
1,185

Total Cash, Cash equivalents and Investments
$
2,860

 
$
39

 
$
3

 
$
2,896


 Maturities of Investments
The following table summarizes the contractual maturities of Applied’s investments at July 27, 2014:
 
 
Cost
 
Estimated
Fair  Value
 
 
 
 
 
(In millions)
Due in one year or less
$
134

 
$
134

Due after one through five years
571

 
573

No single maturity date**
364

 
395

 
$
1,069

 
$
1,102

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

12


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)




Gains and Losses on Investments
During the three and nine months ended July 27, 2014, gross realized gains on investments were $9 million and $21 million, respectively, and gross realized losses on investments were not material. During the three and nine months ended July 28, 2013, gross realized gains and losses on investments were not material.
At July 27, 2014 and October 27, 2013, 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 securities at July 27, 2014 and July 28, 2013 were temporary in nature and therefore it did not recognize any impairment of its marketable securities during the three and nine months ended July 27, 2014 or July 28, 2013. Applied recognized $7 million and $13 million of impairment charges on its equity investments in privately-held companies during the three and nine months ended July 27, 2014, respectively, and recorded $3 million and $5 million of impairment charges on its equity investments in privately-held companies during the three and nine months ended July 28, 2013. These impairment charges are included in interest and other income, net in the consolidated condensed 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 when events or circumstances indicate that an other-than-temporary decline in value may have occurred.
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 July 27, 2014, 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.

13


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 as of July 27, 2014 and October 27, 2013:
 
 
July 27, 2014
 
October 27, 2013
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Assets:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
1,978

 
$

 
$
1,978

 
$
1,095

 
$

 
$
1,095

U.S. Treasury and agency securities
42

 
30

 
72

 
66

 
104

 
170

Non-U.S. government securities

 
15

 
15

 

 
11

 
11

Municipal securities

 
395

 
395

 

 
386

 
386

Commercial paper, corporate bonds and medium-term notes

 
229

 
229

 

 
219

 
219

Asset-backed and mortgage-backed securities

 
271

 
271

 

 
268

 
268

Publicly traded equity securities
50

 

 
50

 
60

 

 
60

Foreign exchange derivative assets

 
11

 
11

 

 
20

 
20

Total
$
2,070

 
$
951

 
$
3,021

 
$
1,221

 
$
1,008

 
$
2,229

There were no transfers between Level 1 and Level 2 fair value measurements during the three and nine months ended July 27, 2014 or July 28, 2013. Applied did not have any financial assets measured at fair value on a recurring basis within Level 3 fair value measurements as of July 27, 2014 or October 27, 2013.
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. At July 27, 2014, equity investments in privately-held companies totaled $73 million, of which $63 million of investments were accounted for under the cost method of accounting and $10 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. At October 27, 2013, equity investments in privately-held companies totaled $76 million, of which $66 million of investments were accounted for under the cost method of accounting and $10 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. Applied recognized $7 million and $13 million of impairment charges on its equity investments in privately-held companies during the three and nine months ended July 27, 2014, respectively, and $3 million and $5 million during the three and nine months ended July 28, 2013, respectively.
Other
The carrying amounts of Applied’s financial instruments, including cash and cash equivalents, accounts receivable, notes payable, and accounts payable and accrued expenses, approximate fair value due to their short maturities. At July 27, 2014, the carrying amount of long-term debt was $1.9 billion and the estimated fair value was $2.2 billion. At October 27, 2013, the carrying amount of long-term debt was $1.9 billion and the estimated fair value was $2.1 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.

14


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, Taiwanese dollar and Swiss franc. 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 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 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 accumulated other comprehensive income or loss (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 derivative instruments included in AOCI at July 27, 2014 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 general and administrative expenses. 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 and nine months ended July 27, 2014 and July 28, 2013.
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.
During the fourth quarter of fiscal 2013, Applied purchased foreign exchange option contracts to limit its foreign exchange risk associated with the announced business combination with Tokyo Electron Limited (TEL). The derivatives used to hedge currency exposure did not qualify for hedge accounting treatment. These derivatives are marked to market at the end of each reporting period with gains and losses recorded as general and administrative expenses. At July 27, 2014, April 27, 2014 and October 27, 2013, the fair value of these foreign exchange option contracts was approximately $8 million, $18 million and $17 million, respectively. Applied recorded unrealized losses of $10 million and $9 million during the three and nine months ended July 27, 2014, respectively, related to such contracts. The cash flow impact of this derivative has been classified as operating cash flows in the Consolidated Condensed Statements of Cash Flows. To further mitigate credit exposure in connection with these foreign exchange option contracts, Applied entered into security arrangements with certain counterparties, which require the counterparties to post collateral amounting to the approximate fair value of the derivative contracts. The cash collateral is included in cash and cash equivalents in the Consolidated Condensed Statements of Financial Position, with the corresponding liability included in accounts payable and accrued expenses.
Other than the foreign exchange option contracts discussed in the preceding paragraph, the fair values of other derivative instruments at July 27, 2014 and October 27, 2013 were not material.


15


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)




The effects of derivative instruments on the Consolidated Condensed Statements of Operations for the three and nine months ended July 27, 2014 and July 28, 2013 were as follows:
 
 
 
Three Months Ended July 27, 2014
 
Three Months Ended July 28, 2013
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) Reclassified
from AOCI into
Income
 
Gain or
(Loss)
Recognized
in AOCI
 
Gain or (Loss)
Reclassified
from AOCI into
Income
 
Gain or (Loss)
Recognized in
Income
 
Gain or
(Loss)
Recognized
in AOCI
 
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
Cost of products sold
 
$
1

 
$

 
$

 
$
7

 
$
7

 
$
(1
)
Foreign exchange contracts
General and administrative
 

 

 

 

 
3

 
(1
)
Total
 
 
$
1

 
$

 
$

 
$
7

 
$
10

 
$
(2
)

 
 
 
Nine Months Ended July 27, 2014
 
Nine Months Ended July 28, 2013
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) Reclassified
from AOCI into
Income
 
Gain or
(Loss)
Recognized
in AOCI
 
Gain or (Loss)
Reclassified
from AOCI into
Income
 
Gain or (Loss)
Recognized in
Income
 
Gain or
(Loss)
Recognized
in AOCI
 
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
Cost of products sold
 
$
5

 
$
4

 
$
(2
)
 
$
29

 
$
16

 
$
(2
)
Foreign exchange contracts
General and administrative
 

 
3

 
(1
)
 

 
6

 
(1
)
Total
 
 
$
5

 
$
7

 
$
(3
)
 
$
29

 
$
22

 
$
(3
)

 
 
 
Amount of Gain or (Loss) 
Recognized in Income
 
 
Three Months Ended
 
Nine Months Ended
Location of Gain or
(Loss) Recognized
in Income
 
July 27, 2014
 
July 28, 2013
 
July 27, 2014
 
July 28, 2013
 
 
 
(In millions)
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
General and
administrative
 
$
(11
)
 
$
2

 
$
2

 
$
31

Total
 
 
$
(11
)
 
$
2

 
$
2

 
$
31

 

16


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)




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 July 27, 2014.
Entering into foreign exchange 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, 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 factored accounts receivable of $45 million during the nine months ended July 27, 2014 and none during the three months ended July 27, 2014 or the three and nine months ended July 28, 2013. Applied discounted $29 million of letters of credit issued by customers during the nine months ended July 27, 2014 and none during the three months ended July 27, 2014 or the three and nine months ended July 28, 2013. 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 $73 million at July 27, 2014 and $74 million at October 27, 2013. Applied sells its products principally to manufacturers within the semiconductor, display and solar industries. While Applied believes that its allowance for doubtful accounts is adequate and represents its best estimate as of July 27, 2014, it continues to closely monitor customer liquidity and industry and economic conditions, which may result in changes to Applied’s estimates regarding collectability.


17


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)




Note 7
Balance Sheet Detail
 
 
July 27,
2014
 
October 27,
2013
 
 
 
 
 
(In millions)
Inventories
 
 
 
Customer service spares
$
302

 
$
274

Raw materials
377

 
325

Work-in-process
304

 
283

Finished goods
564

 
531

 
$
1,547

 
$
1,413

 
Included in finished goods inventory are $184 million at July 27, 2014, and $136 million at October 27, 2013, 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 $165 million and $177 million of evaluation inventory at July 27, 2014 and October 27, 2013, respectively.

 
July 27,
2014
 
October 27,
2013
 
 
 
 
 
(In millions)
Other Current Assets
 
 
 
Deferred income taxes, net
$
291

 
$
323

Prepaid expenses
166

 
135

Prepaid income taxes and income taxes receivable
70

 
178

Other
73

 
69

 
$
600

 
$
705

 
 
Useful Life
 
July 27,
2014
 
October 27,
2013
 
 
 
 
 
 
 
(In years)
 
(In millions)
Property, Plant and Equipment, Net
 
 
 
Land and improvements
 
 
$
156

 
$
167

Buildings and improvements
3-30
 
1,220

 
1,217

Demonstration and manufacturing equipment
3-5
 
822

 
792

Furniture, fixtures and other equipment
3-15
 
574

 
589

Construction in progress
 
 
57

 
52

Gross property, plant and equipment
 
 
2,829

 
2,817

Accumulated depreciation
 
 
(1,980
)
 
(1,967
)
 
 
 
$
849

 
$
850



18


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)



 
July 27,
2014
 
October 27,
2013
 
 
 
 
 
(In millions)
Accounts Payable and Accrued Expenses
 
 
 
Accounts payable
$
583

 
$
582

Compensation and employee benefits
478

 
417

Warranty
112

 
102

Dividends payable
122

 
121

Income taxes payable
107

 
73

Other accrued taxes
50

 
41

Interest payable
14

 
30

Restructuring reserve
11

 
39

Other
212

 
244

 
$
1,689

 
$
1,649

 
 
July 27,
2014
 
October 27,
2013
 
 
 
 
 
(In millions)
Customer Deposits and Deferred Revenue
 
 
 
Customer deposits
$
262

 
$
175

Deferred revenue
804

 
619

 
$
1,066

 
$
794

 
Applied typically receives deposits on future deliverables from customers in the Display and Energy and Environmental Solutions segments. In certain instances, customer deposits may be received from customers in the Applied Global Services segment.
 
July 27,
2014
 
October 27,
2013
 
 
 
 
 
(In millions)
Other Liabilities
 
 
 
Deferred income taxes
$
64

 
$
71

Income taxes payable
128

 
174

Defined and postretirement benefit plans
202

 
193

Other
71

 
128

 
$
465

 
$
566


19


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)




Note 8
Business Combination
On September 24, 2013, Applied and Tokyo Electron Limited (TEL) entered into a Business Combination Agreement, which was amended on February 14, 2014, to effect a strategic combination of their respective businesses into a new combined company. TEL, a Japanese corporation, is a global supplier of semiconductor and flat panel display production equipment, and a provider of technical support and services for semiconductor, flat panel display and photovoltaic panel production equipment. Under the terms of the Business Combination Agreement, TEL shareholders will receive 3.25 shares of the new combined company for every TEL share held. Applied shareholders will receive one share of the new combined company for every Applied share held. Based on the number of shares of Applied common stock and shares of TEL common stock expected to be issued and outstanding immediately prior to the closing of the transaction, it is anticipated that, immediately following the transaction, former Applied stockholders and former TEL shareholders will own approximately 68% and 32%, respectively, of the new combined company.
The new combined company, Eteris N.V., will have dual headquarters in Tokyo and Santa Clara and dual listing of its shares on the Tokyo Stock Exchange and NASDAQ, and will be incorporated in the Netherlands. In June 2014, the shareholders of Applied and TEL approved the proposed business combination. The closing of the transaction remains subject to customary conditions, including regulatory approvals. It is expected that the combined company will commence a $3.0 billion stock repurchase program targeted to be executed within 12 months following the closing of the transaction.
The Business Combination Agreement contains mutual pre-closing covenants, including the obligation of Applied and TEL to conduct their businesses in the ordinary course consistent in all material respects with past practices. The agreement also contains termination rights for Applied and TEL and provides that upon certain events, such as a termination due to a change in recommendation by the other party or a termination relating to certain tax rulings, a termination fee of $400 million is payable.



20


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. Applied’s reporting units are consistent with the reportable segments identified in Note 16, Industry Segment Operations, which are based on the manner in which Applied operates its business and the nature of those operations.
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 and other indefinite-lived intangible assets as of July 27, 2014 and October 27, 2013 were as follows :
 
 
July 27, 2014
 
October 27, 2013
 
Goodwill
 
Other
Intangible
Assets
 
Total
 
Goodwill
 
Other
Intangible
Assets
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Silicon Systems Group
$
2,151

 
$
142

 
$
2,293

 
$
2,151

 
$
142

 
$
2,293

Applied Global Services
1,027

 
6

 
1,033

 
1,027

 

 
1,027

Display
116

 

 
116

 
116

 

 
116

Carrying amount
$
3,294

 
$
148

 
$
3,442

 
$
3,294

 
$
142

 
$
3,436

Other intangible assets that are not subject to amortization consist primarily of in-process technology, which will be subject to amortization upon commercialization. The fair value assigned to in-process technology was determined using the income approach taking into account estimates and judgments regarding risks inherent in the development process, including the likelihood of achieving technological success and market acceptance. If an in-process technology project is abandoned, the acquired technology attributable to the project will be written off.


21


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)



A summary of Applied's purchased technology and intangible assets is set forth below:
 
July 27,
2014
 
October 27,
2013
 
 
 
 
 
(In millions)
Purchased technology, net
$
639

 
$
748

Intangible assets - finite-lived, net
192

 
213

Intangible assets - indefinite-lived
148

 
142

Total
$
979

 
$
1,103


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 as of July 27, 2014 and October 27, 2013:
 
 
July 27, 2014
 
October 27, 2013
 
Purchased
Technology
 
Other
Intangible
Assets
 
Total
 
Purchased
Technology
 
Other
Intangible
Assets
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Gross carrying amount:
 
 
 
 
 
 
 
 
 
 
 
Silicon Systems Group
$
1,307

 
$
252

 
$
1,559

 
$
1,301

 
$
252

 
$
1,553

Applied Global Services
28

 
44

 
72

 
28

 
44

 
72

Display
110

 
33

 
143

 
110

 
33

 
143

Energy and Environmental Solutions
5

 
15

 
20

 
5

 
15

 
20

Gross carrying amount
$
1,450

 
$
344

 
$
1,794

 
$
1,444

 
$
344

 
$
1,788

Accumulated amortization:
 
 
 
 
 
 
 
 
 
 
 
Silicon Systems Group
$
(674
)
 
$
(72
)
 
$
(746
)
 
$
(562
)
 
$
(58
)
 
$
(620
)
Applied Global Services
(24
)
 
(44
)
 
(68
)
 
(23
)
 
(42
)
 
(65
)
Display
(110
)
 
(31
)
 
(141
)
 
(110
)
 
(29
)
 
(139
)
Energy and Environmental Solutions
(3
)
 
(5
)
 
(8
)
 
(1
)
 
(2
)
 
(3
)
Accumulated amortization
$
(811
)
 
$
(152
)
 
$
(963
)
 
$
(696
)
 
$
(131
)
 
$
(827
)
Carrying amount
$
639

 
$
192

 
$
831

 
$
748

 
$
213

 
$
961



22


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)



Details of amortization expense by segment for the three and nine months ended July 27, 2014 and July 28, 2013 were as follows:
 
Three Months Ended
 
Nine Months Ended
 
July 27,
2014
 
July 28,
2013
 
July 27,
2014
 
July 28,
2013
 
 
 
 
 
 
 
 
 
(In millions)
Silicon Systems Group
$
42

 
$
42

 
$
126

 
$
130

Applied Global Services

 
1

 
3

 
3

Display
1

 
2

 
2

 
6

Energy and Environmental Solutions
2

 
1

 
5

 
14

Total
$
45

 
$
46

 
$
136

 
$
153

For the three and nine months ended July 27, 2014 and July 28, 2013, amortization expense was charged to the following categories:
 
Three Months Ended
 
Nine Months Ended
 
July 27,
2014
 
July 28,
2013
 
July 27,
2014
 
July 28,
2013
 
 
 
 
 
 
 
 
 
(In millions)
Cost of products sold
$
38

 
$
40

 
$
117

 
$
126

Research, development and engineering
1

 

 
1

 
1

Marketing and selling
5

 
5

 
16

 
21

General and administrative
1

 
1

 
2

 
5

Total
$
45

 
$
46

 
$
136

 
$
153

As of July 27, 2014, future estimated amortization expense is expected to be as follows:
 
 
Amortization
Expense
 
(In millions)
2014
45

2015
176

2016
169

2017
166

2018
164

Thereafter
111

Total
$
831



23


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)




Note 10
Borrowing Facilities and Long-Term 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 May 2017. This agreement provides for borrowings in United States dollars at interest rates keyed to one of the two rates selected by Applied for each advance and includes financial and other covenants with which Applied was in compliance at July 27, 2014. Remaining credit facilities in the amount of approximately $78 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 July 27, 2014 and October 27, 2013, and Applied has not utilized these credit facilities. In connection with the proposed business combination with TEL, Applied intends to amend or replace its undrawn $1.5 billion unsecured revolving credit agreement.
Long-term debt outstanding as of July 27, 2014 and October 27, 2013 was as follows:
 
 
Principal Amount
 
 
 
 
 
July 27,
2014
 
October 27,
2013
 
Effective
Interest Rate
 
Interest
Pay Dates
 
(In millions)
 
 
 
 
2.650% Senior Notes Due 2016
$
400

 
$
400

 
2.666%
 
June 15, December 15
7.125% Senior Notes Due 2017
200

 
200

 
7.190%
 
April 15, October 15
4.300% Senior Notes Due 2021
750

 
750

 
4.326%
 
June 15, December 15
5.850% Senior Notes Due 2041
600

 
600

 
5.879%
 
June 15, December 15
 
1,950

 
1,950

 
 
 
 
Total unamortized discount
(3
)
 
(4
)
 
 
 
 
Total long-term debt
$
1,947

 
$
1,946

 
 
 
 

Applied has debt agreements that contain financial and other covenants. These covenants require Applied to maintain certain minimum financial ratios. At July 27, 2014, Applied was in compliance with all such covenants.


24


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)



Note 11
Restructuring Charges and Asset Impairments

From time to time, Applied initiates restructuring activities to appropriately align its cost structure relative to prevailing economic and industry conditions and associated customer demand as well as in connection with certain acquisitions. Costs associated with restructuring actions can include termination benefits and related charges, in addition to facility closure, contract termination and other related activities.
The following table summarizes major components of the restructuring and asset impairment charges during the three and nine months ended July 27, 2014 and July 28, 2013:
 
 
Three Months Ended
 
Nine Months Ended
 
July 27,
2014
 
July 28,
2013
 
July 27,
2014
 
July 28,
2013
 
 
 
 
 
 
 
 
 
(In millions)
2012 Global Restructuring Plan
 
 
 
 
 
 
 
Severance and other employee-related costs
$

 
$
4

 
$
7

 
$
12

2012 EES Restructuring Plan
 
 
 
 
 
 
 
Severance and other employee-related costs1

 
3

 

 
5

Contract cancellation and other costs

 
1

 

 
3

Asset impairments

 
6

 

 
11

Others
 
 
 
 
 
 
 
Severance and other employee-related costs

 

 

 
2

 
$

 
$
14

 
$
7

 
$
33

____________________________
1 Includes post-retirement benefit expense which was recorded in accumulated other comprehensive loss.

Restructuring and asset impairment charges were recorded as follows:
 
Three Months Ended
 
Nine Months Ended
 
July 27,
2014
 
July 28,
2013
 
July 27,
2014
 
July 28,
2013
 
 
 
 
 
 
 
 
 
(In millions)
Silicon Systems Group
$

 
$

 
$

 
$
1

Applied Global Services

 

 

 
2

Energy and Environmental Solutions

 
10

 

 
18

Corporate Unallocated

 
4

 
7

 
12

Total
$

 
$
14

 
$
7

 
$
33



25


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)



2012 Global Restructuring Plan
On October 3, 2012, Applied announced a restructuring plan (the 2012 Global Restructuring Plan) to realign its global workforce and enhance its ability to invest for growth. Under this plan, Applied implemented a voluntary retirement program and other workforce reduction actions. The voluntary retirement program was available to certain U.S. employees who met minimum age and length of service requirements, as well as other business-specific criteria. Applied implemented other workforce reduction actions globally across multiple business segments and functions, the extent of which depended on the number of employees who participated in the voluntary retirement program and other considerations. A total of approximately 1,300 positions were affected under this plan. As of January 26, 2014, principal activities related to this plan were complete.
During the nine months ended July 27, 2014, Applied recognized $7 million of employee-related costs in connection with this plan. During the three and nine months ended July 28, 2013, Applied recognized $4 million and $12 million, respectively, of employee-related costs in connection with the plan. Total costs incurred in implementing this plan were $152 million, none of which were allocated to the segments.

Restructuring Reserves
Changes in restructuring reserves during the nine months ended July 27, 2014 were as follows:
 
 
2012 Global Restructuring Plan
 
2012 EES Restructuring Plan
 
Others
 
 
 
Severance and Other Employee-Related Costs
 
Severance and Other Employee-Related Costs
 
Contract Cancellation and Other Costs
 
Severance and Other Employee-Related Costs
 
Contract Cancellation and Other Costs
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Balance, October 27, 2013
$
26

 
$
5

 
$
5

 
$
2

 
$
1

 
$
39

Provision for restructuring reserves
7

 

 

 

 

 
7

Consumption of reserves
(27
)
 
(4
)
 
(1
)
 
(2
)
 

 
(34
)
Reclassification of restructuring reserves

 
(1
)
 

 

 

 
(1
)
Balance, July 27, 2014
$
6

 

 
4

 
$

 
$
1

 
$
11



26


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)




Note 12
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 on Derivative Instruments Qualifying as Cash Flow Hedges
 
Defined and Postretirement Benefit Plans
 
Cumulative Translation Adjustments
 
Total
 
(in millions)
 
 
Balance at October 27, 2013
$
25

 
$
2

 
$
(72
)
 
$
7

 
$
(38
)
Other comprehensive income (loss) before reclassifications
8

 
3

 

 
(1
)
 
10

Amounts reclassified out of AOCI
(9
)
 
(5
)
 

 

 
(14
)
Other comprehensive loss, net of tax
(1
)
 
(2
)
 

 
(1
)
 
(4
)
Balance at July 27, 2014
$
24

 
$

 
$
(72
)
 
$
6

 
$
(42
)

The effects on net income of amounts reclassified from AOCI for the three and nine months ended July 27, 2014 were not material.
Stock Repurchase Program

On March 5, 2012, Applied's Board of Directors approved a stock repurchase program authorizing up to $3.0 billion in repurchases over the next three years ending in March 2015. Under this authorization, Applied purchases shares of its common stock on the open market. At July 27, 2014, $1.6 billion remained available for future stock repurchases under this repurchase program.
Applied did not purchase any shares of its common stock during the three and nine months ended July 27, 2014. The following table summarizes Applied’s stock repurchases for the three and nine months ended July 28, 2013:
 
 
July 28, 2013
 
Three Months Ended
 
Nine Months Ended
 
 
 
 
 
(In millions, except per share amounts)
Shares of common stock repurchased
3

 
15

Cost of stock repurchased
$
50

 
$
198

Average price paid per share
$
15.33

 
$
13.18

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.

27


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)



Dividends
In June 2014, March 2014 and December 2013, Applied's Board of Directors declared quarterly cash dividends in the amount of $0.10 per share, resulting in total dividends declared during the nine months ended July 27, 2014 of $365 million. Dividends declared during the nine months ended July 28, 2013 totaled $348 million. 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 beginning in March 2012 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.
During the three and nine months ended July 27, 2014 and July 28, 2013, Applied recognized share-based compensation expense related to stock options, ESPP shares, restricted stock, restricted stock units, performance shares and performance units. Total share-based compensation and related tax benefits were as follows:
 
 
Three Months Ended
 
Nine Months Ended
 
July 27,
2014
 
July 28,
2013
 
July 27,
2014
 
July 28,
2013
 
 
 
 
 
 
 
 
 
(In millions)
Share-based compensation
$
44

 
$
40