10-Q 1 amat726201510-qq32015.htm FORM 10-Q 10-Q

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 26, 2015
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 26, 2015: 1,200,619,417




APPLIED MATERIALS, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JULY 26, 2015
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
(In millions, except per share amounts)
 
Three Months Ended
 
Nine Months Ended
 
July 26,
2015
 
July 27,
2014
 
July 26,
2015
 
July 27,
2014
 
(Unaudited)
Net sales
$
2,490

 
$
2,265

 
$
7,291

 
$
6,808

Cost of products sold
1,472

 
1,273

 
4,298

 
3,924

Gross profit
1,018

 
992

 
2,993

 
2,884

Operating expenses:
 
 
 
 
 
 
 
Research, development and engineering
372

 
357

 
1,088

 
1,068

Marketing and selling
112

 
108

 
332

 
324

General and administrative
135

 
126

 
392

 
375

Loss (gain) on derivatives associated with terminated business combination
3

 
10

 
(89
)
 
9

Total operating expenses
622

 
601

 
1,723

 
1,776

Income from operations
396

 
391

 
1,270

 
1,108

Interest expense
24

 
24

 
71

 
72

Interest and other income, net
3

 
3

 
2

 
14

Income before income taxes
375

 
370

 
1,201

 
1,050

Provision for income taxes
46

 
69

 
160

 
234

Net income
$
329

 
$
301

 
$
1,041

 
$
816

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.27

 
$
0.25

 
$
0.85

 
$
0.67

Diluted
$
0.27

 
$
0.24

 
$
0.84

 
$
0.66

Weighted average number of shares:
 
 
 
 
 
 
 
Basic
1,221

 
1,218

 
1,225

 
1,213

Diluted
1,231

 
1,233

 
1,238

 
1,230

See accompanying Notes to Consolidated Condensed Financial Statements.

3



APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
 
Three Months Ended
 
Nine Months Ended
 
July 26,
2015
 
July 27,
2014
 
July 26,
2015
 
July 27,
2014
 
(Unaudited)
Net income
$
329

 
$
301

 
$
1,041

 
$
816

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

 
(1
)
 
(3
)
 
(1
)
Change in unrealized net loss on derivative investments
(5
)
 

 
(5
)
 
(2
)
Change in defined and postretirement benefit plans

 

 
(43
)
 

Change in cumulative translation adjustments
11

 

 
9

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

 
(1
)
 
(42
)
 
(4
)
Comprehensive income
$
336

 
$
300

 
$
999

 
$
812

See accompanying Notes to Consolidated Condensed Financial Statements.



4


APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)
 
July 26,
2015
 
October 26,
2014
 
 
 
 
 
 
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
2,574

 
$
3,002

Short-term investments
169

 
160

Accounts receivable, net
1,991

 
1,670

Inventories
1,739

 
1,567

Other current assets
570

 
568

Total current assets
7,043

 
6,967

Long-term investments
958

 
935

Property, plant and equipment, net
882

 
861

Goodwill
3,304

 
3,304

Purchased technology and other intangible assets, net
811

 
951

Deferred income taxes and other assets
155

 
156

Total assets
$
13,153

 
$
13,174

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable, notes payable and accrued expenses
$
2,162

 
$
1,883

Customer deposits and deferred revenue
858

 
940

Total current liabilities
3,020

 
2,823

Long-term debt
1,547

 
1,947

Other liabilities
609

 
536

Total liabilities
5,176

 
5,306

Stockholders’ equity:
 
 
 
Common stock
12

 
12

Additional paid-in capital
6,485

 
6,384

Retained earnings
13,747

 
13,072

Treasury stock
(12,149
)
 
(11,524
)
Accumulated other comprehensive loss
(118
)
 
(76
)
Total stockholders’ equity
7,977

 
7,868

Total liabilities and stockholders’ equity
$
13,153

 
$
13,174

Amounts as of July 26, 2015 are unaudited. Amounts as of October 26, 2014 are derived from the October 26, 2014 audited consolidated financial statements.
See accompanying Notes to Consolidated Condensed Financial Statements.

5


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
Nine Months Ended July 26, 2015
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Unaudited)
Balance at October 26, 2014
1,221

 
$
12

 
$
6,384

 
$
13,072

 
717

 
$
(11,524
)
 
$
(76
)
 
$
7,868

Net income

 

 

 
1,041

 

 

 

 
1,041

Other comprehensive loss, net of tax

 

 

 

 

 

 
(42
)
 
(42
)
Dividends

 

 

 
(366
)
 

 

 

 
(366
)
Share-based compensation

 

 
141

 

 

 

 

 
141

Issuance under stock plans, net of a tax benefit of $54 and other
12

 

 
(40
)
 

 

 

 

 
(40
)
Common stock repurchases
(32
)
 

 

 

 
32

 
(625
)
 

 
(625
)
Balance at July 26, 2015
1,201

 
$
12

 
$
6,485

 
$
13,747

 
749

 
$
(12,149
)
 
$
(118
)
 
$
7,977

 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Nine Months Ended July 27, 2014
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Unaudited)
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
(In millions)
 
Nine Months Ended
 
July 26,
2015
 
July 27,
2014
 
 
 
 
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
1,041

 
$
816

Adjustments required to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
275

 
281

Share-based compensation
141

 
132

Excess tax benefits from share-based compensation
(54
)
 
(26
)
Deferred income taxes and other
89

 
70

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(322
)
 
11

Inventories
(172
)
 
(133
)
Other assets
(2
)
 
79

Accounts payable and accrued expenses
(174
)
 
(75
)
Customer deposits and deferred revenue
(82
)
 
271

Income taxes payable
(72
)
 
13

Other liabilities
24

 
(46
)
Cash provided by operating activities
692

 
1,393

Cash flows from investing activities:
 
 
 
Capital expenditures
(164
)
 
(178
)
Proceeds from sales and maturities of investments
900

 
702

Purchases of investments
(960
)
 
(632
)
Cash used in investing activities
(224
)
 
(108
)
Cash flows from financing activities:
 
 
 
Proceeds from common stock issuances and other
43

 
67

Common stock repurchases
(625
)
 

Excess tax benefits from share-based compensation
54

 
26

Payments of dividends to stockholders
(368
)
 
(363
)
Cash used in financing activities
(896
)
 
(270
)
Increase (decrease) in cash and cash equivalents
(428
)
 
1,015

Cash and cash equivalents — beginning of period
3,002

 
1,711

Cash and cash equivalents — end of period
$
2,574

 
$
2,726

Supplemental cash flow information:
 
 
 
Cash payments for income taxes
$
258

 
$
108

Cash refunds from income taxes
$
10

 
$
33

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 26, 2014 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 26, 2014 (2014 Form 10-K). Applied’s results of operations for the three and nine months ended July 26, 2015 are not necessarily indicative of future operating results. Applied’s fiscal year ends on the last Sunday in October of each year. Fiscal 2015 and 2014 each contain 52 weeks, and the first nine months of fiscal 2015 and 2014 each contained 39 weeks.
Certain prior year amounts have been reclassified to conform to current year presentation.
Out of Period Adjustment
During the second quarter of fiscal 2015, Applied recorded an adjustment primarily to correct an error in the recognition of cost of sales in the U.S. related to intercompany sales. While this error had no impact on Applied’s consolidated cost of sales, it resulted in overstating profitability in the U.S. and the provision for income taxes, income taxes payable and other tax balance sheet accounts in each year since fiscal 2010. The impact of the adjustment to the nine months ended July 26, 2015 was a decrease to the provision for income taxes of $35 million and a corresponding increase in net income, resulting in an increase in diluted earnings per share of $0.03. Applied determined that the impact of the error on the originating periods was immaterial, and accordingly, a restatement of prior period amounts was not considered necessary. Applied also believes that the impact of correcting the error in fiscal 2015 will not be material.
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 July 2015, the Financial Accounting Standards Board (FASB) issued authoritative guidance that requires inventory to be measured at the lower of cost and net realizable value instead of at lower of cost or market. This guidance does not apply to inventory that is measured using last-in, first out (LIFO) or the retail inventory method but applies to all other inventory including those measured using first-in, first-out (FIFO) or the average cost method. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2018 and should be applied prospectively. Early adoption is permitted as of the beginning of an interim or annual reporting period. Applied is currently evaluating the effect of this new guidance on Applied's consolidated financial statements.
In May 2015, the FASB issued authoritative guidance to remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The new guidance also removes the requirement of certain disclosures for all  investments that are eligible to be measured at fair value using the net asset value per share practical expedient. The guidance becomes effective retrospectively for Applied in the first quarter of fiscal 2017. Early adoption is permitted. The adoption of this guidance will only impact disclosures in Applied's financial statements.
In April 2015, the FASB issued authoritative guidance for customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This guidance will not change accounting for service contracts. The guidance becomes effective for Applied in the first quarter of fiscal 2017 and may be adopted either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively. Early adoption is permitted. Applied is currently evaluating the effect of this new guidance on Applied's financial position, results of operations and its ongoing financial reporting, including the selection of a transition method.
In April 2015, the FASB issued authoritative guidance that requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts. The authoritative guidance is effective for Applied in the first quarter of fiscal 2017 and should be applied retrospectively. Early adoption is permitted. The adoption of this guidance is not expected to have a significant impact on Applied's consolidated financial statements.
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. This new standard will supersede most current revenue recognition guidance, including industry-specific guidance. Entities will have the option of using either a full retrospective or modified retrospective approach to adopting the guidance. Under the modified approach, an entity would recognize the cumulative effect of initially applying the guidance with an adjustment to the opening balance of retained earnings in the period of adoption. In addition, the modified approach will require additional disclosures. In August 2015, the FASB issued an amendment to defer the effective date by one year and allow entities to early adopt no earlier than the original effective date. With this amendment, the guidance will be effective for Applied in the first quarter of fiscal 2019. Applied is currently evaluating the effect of this new guidance on Applied's financial position, results of operations and its ongoing financial reporting, including the selection of a transition method.
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.

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 26,
2015
 
July 27,
2014
 
July 26,
2015
 
July 27,
2014
 
 
 
 
 
 
 
 
 
(In millions, except per share amounts)
Numerator:
 
 
 
 
 
 
 
Net income
$
329

 
$
301

 
$
1,041

 
$
816

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
1,221

 
1,218

 
1,225

 
1,213

Effect of dilutive stock options, restricted stock units and employee stock purchase plan shares
10

 
15

 
13

 
17

Denominator for diluted earnings per share
1,231

 
1,233

 
1,238

 
1,230

Basic earnings per share
$
0.27

 
$
0.25

 
$
0.85

 
$
0.67

Diluted earnings per share
$
0.27

 
$
0.24

 
$
0.84

 
$
0.66

Potentially dilutive securities

 

 
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 26, 2015
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair  Value
 
 
 
 
 
 
 
 
 
(In millions)
Cash
$
422

 
$

 
$

 
$
422

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
2,152

 

 

 
2,152

Total Cash equivalents
2,152

 

 

 
2,152

Total Cash and Cash equivalents
$
2,574

 
$

 
$

 
$
2,574

Short-term and long-term investments:
 
 
 
 
 
 
 
U.S. Treasury and agency securities
$
82

 
$

 
$

 
$
82

Non-U.S. government securities*
9

 

 

 
9

Municipal securities
390

 
1

 

 
391

Commercial paper, corporate bonds and medium-term notes
239

 

 
1

 
238

Asset-backed and mortgage-backed securities
274

 

 
1

 
273

Total fixed income securities
994

 
1

 
2

 
993

Publicly traded equity securities
28

 
29

 

 
57

Equity investments in privately-held companies
77

 

 

 
77

Total short-term and long-term investments
$
1,099

 
$
30

 
$
2

 
$
1,127

Total Cash, Cash equivalents and Investments
$
3,673

 
$
30

 
$
2

 
$
3,701

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

11

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




October 26, 2014
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair  Value
 
 
 
 
 
 
 
 
 
(In millions)
Cash
$
508

 
$

 
$

 
$
508

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
2,494

 

 

 
2,494

Total Cash equivalents
2,494

 

 

 
2,494

Total Cash and Cash equivalents
$
3,002

 
$

 
$

 
$
3,002

Short-term and long-term investments:
 
 
 
 
 
 
 
U.S. Treasury and agency securities
$
62

 
$

 
$

 
$
62

Non-U.S. government securities
14

 

 

 
14

Municipal securities
391

 
2

 

 
393

Commercial paper, corporate bonds and medium-term notes
223

 
1

 

 
224

Asset-backed and mortgage-backed securities
287

 
1

 
2

 
286

Total fixed income securities
977

 
4

 
2

 
979

Publicly traded equity securities
19

 
31

 

 
50

Equity investments in privately-held companies
66

 

 

 
66

Total short-term and long-term investments
$
1,062

 
$
35

 
$
2

 
$
1,095

Total Cash, Cash equivalents and Investments
$
4,064

 
$
35

 
$
2

 
$
4,097


 Maturities of Investments
The following table summarizes the contractual maturities of Applied’s investments at July 26, 2015:
 
 
Cost
 
Estimated
Fair  Value
 
 
 
 
 
(In millions)
Due in one year or less
$
156

 
$
156

Due after one through five years
559

 
559

Due after five years
4

 
4

No single maturity date**
380

 
408

 
$
1,099

 
$
1,127

 _________________________
** 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 26, 2015, gross realized gains and losses on investments were not material. 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.
At July 26, 2015 and October 26, 2014, 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 26, 2015 and July 27, 2014 were temporary in nature and therefore it did not recognize any impairment of its marketable securities during the three and nine months ended July 26, 2015 or July 27, 2014. Impairment charges on equity investments in privately-held companies during the three and nine months ended July 26, 2015 were $1 million and $9 million, respectively. Impairment charges on equity investments in privately-held companies during the three and nine months ended July 27, 2014 were $7 million and $13 million, respectively. 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 26, 2015, 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:
 
 
July 26, 2015
 
October 26, 2014
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Assets:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
2,152

 
$

 
$
2,152

 
$
2,494

 
$

 
$
2,494

U.S. Treasury and agency securities
62

 
20

 
82

 
43

 
19

 
62

Non-U.S. government securities

 
9

 
9

 

 
14

 
14

Municipal securities

 
391

 
391

 

 
393

 
393

Commercial paper, corporate bonds and medium-term notes

 
238

 
238

 

 
224

 
224

Asset-backed and mortgage-backed securities

 
273

 
273

 

 
286

 
286

Publicly traded equity securities
57

 

 
57

 
50

 

 
50

Foreign exchange derivative assets

 
2

 
2

 

 
52

 
52

Total
$
2,271

 
$
933

 
$
3,204

 
$
2,587

 
$
988

 
$
3,575

There were no transfers between Level 1 and Level 2 fair value measurements during the three and nine months ended July 26, 2015 or July 27, 2014. Applied did not have any financial assets measured at fair value on a recurring basis within Level 3 fair value measurements as of July 26, 2015 or October 26, 2014.
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 26, 2015, equity investments in privately-held companies totaled $77 million, of which $69 million of investments were accounted for under the cost method of accounting and $8 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 26, 2014, equity investments in privately-held companies totaled $66 million, of which $57 million of investments were accounted for under the cost method of accounting and $9 million of investments had been measured at fair value on a non-recurring basis within Level 3 fair value measurements due to an other-than-temporary decline in value. Impairment charges on equity investments in privately-held companies during the three and nine months ended July 26, 2015 were $1 million and $9 million, respectively. Impairment charges on equity investments in privately-held companies during the three and nine months ended July 27, 2014 were $7 million and $13 million, respectively.
Other
The carrying amounts of Applied’s financial instruments, including cash and cash equivalents, accounts receivable, notes payable - short term, and accounts payable and accrued expenses, approximate fair value due to their short maturities. At July 26, 2015, the carrying amount of long-term debt was 1.5 billion and the estimated fair value was $1.7 billion. At October 26, 2014, the carrying amount of long-term debt was 1.9 billion and the estimated fair value was $2.2 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.

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 is also exposed to interest rate risk associated with its potential future borrowings. During the three months ended July 26, 2015, Applied entered into a series of forward-starting interest rate swap agreements, with a total notional amount of $600 million, to hedge against the variability of cash flows due to changes in the benchmark interest rate of fixed rate debt. These instruments were designated as cash flow hedges at inception. As of July 26, 2015, the fair value of interest rate swap agreements were not material.
Applied does not use derivative financial instruments for trading or speculative purposes. Derivative instruments and hedging activities, including foreign currency exchange contracts and interest rate swap agreements, 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 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 foreign exchange derivative instruments included in AOCI at July 26, 2015 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 and nine months ended July 26, 2015 and July 27, 2014.
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.
Following the announcement of the proposed business combination with Tokyo Electron Limited (TEL) in September 2013, Applied purchased foreign exchange option contracts to limit its foreign exchange risk associated with the proposed combination. The derivatives used to hedge currency exposure did not qualify for hedge accounting treatment. These derivatives were marked to market at the end of each reporting period with gains and losses recorded as part of operating expenses. Due to the termination of the proposed business combination with TEL on April 26, 2015, these foreign exchange option contracts were sold during the third quarter of fiscal 2015. At October 26, 2014, the fair value of these foreign exchange option contracts was approximately $52 million. During the three and nine months ended July 26, 2015, Applied recorded a loss of $3 million and a gain of $89 million, respectively, related to these contracts. During the three and nine months ended July 27, 2014, Applied recorded an unrealized loss of $10 million and $9 million, respectively, related to these contracts. The cash flow impact of these derivatives has been classified as operating cash flows in the Consolidated Condensed Statements of Cash Flows.
Other than the foreign exchange option contracts discussed in the preceding paragraph, the fair values of other foreign exchange derivative instruments at July 26, 2015 and October 26, 2014 were not material.



15

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
 
 
 
July 26, 2015
 
July 27, 2014
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

 
$
2

 
$
(1
)
 
$
1

 
$

 
$

Foreign exchange contracts
General and administrative
 

 
3

 

 

 

 

Interest rate swaps
Interest expense
 
(8
)
 

 

 

 

 

Total
 
 
$
(3
)
 
$
5

 
$
(1
)
 
$
1

 
$

 
$


 
 
 
Nine Months Ended
 
 
 
July 26, 2015
 
July 27, 2014
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
 
$
10

 
$
15

 
$
(3
)
 
$
5

 
$
4

 
$
(2
)
Foreign exchange contracts
General and administrative
 

 
(5
)
 
(1
)
 

 
3

 
(1
)
Interest rate swaps
Interest expense
 
(8
)
 

 

 

 

 

Total
 
 
$
2

 
$
10

 
$
(4
)
 
$
5

 
$
7

 
$
(3
)

 
 
 
Amount of Gain or (Loss) 
Recognized in Income
 
 
Three Months Ended
 
Nine Months Ended
Location of Gain or
(Loss) Recognized
in Income
 
July 26, 2015
 
July 27, 2014
 
July 26, 2015
 
July 27, 2014
 
 
 
(In millions)
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
General and
administrative
 
$
8

 
$
(11
)
 
$
120

 
$
2

Total
 
 
$
8

 
$
(11
)
 
$
120

 
$
2

 

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 26, 2015.
Entering into derivative contracts with banks exposes Applied to credit-related losses in the event of the banks’ nonperformance. However, Applied’s exposure is not considered significant.


Note 6    Accounts Receivable, 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 did not factor any accounts receivable during the three and nine months ended July 26, 2015 or the three months ended July 27, 2014. Applied factored accounts receivable of $45 million during the nine months ended July 27, 2014. Applied did not discount letters of credit during the three and nine months ended July 26, 2015 or three months ended July 27, 2014. Applied discounted $29 million of letters of credit issued by customers during the nine months ended July 27, 2014. Applied did not discount promissory notes during the three and nine months ended July 26, 2015 and July 27, 2014. 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 $57 million at July 26, 2015 and $58 million at October 26, 2014. 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 26, 2015, 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 26,
2015
 
October 26,
2014
 
 
 
 
 
(In millions)
Inventories
 
 
 
Customer service spares
$
353

 
$
316

Raw materials
438

 
405

Work-in-process
329

 
316

Finished goods
619

 
530

 
$
1,739

 
$
1,567

 
Included in finished goods inventory are $97 million at July 26, 2015, and $104 million at October 26, 2014, 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 $184 million and $164 million of evaluation inventory at July 26, 2015 and October 26, 2014, respectively.

 
July 26,
2015
 
October 26,
2014
 
 
 
 
 
(In millions)
Other Current Assets
 
 
 
Deferred income taxes, net
$
227

 
$
232

Prepaid income taxes and income taxes receivable
153

 
79

Prepaid expenses and other
190

 
257

 
$
570

 
$
568

 
 
Useful Life
 
July 26,
2015
 
October 26,
2014
 
 
 
 
 
 
 
(In years)
 
(In millions)
Property, Plant and Equipment, Net
 
 
 
Land and improvements
 
 
$
161

 
$
156

Buildings and improvements
3-30
 
1,276

 
1,227

Demonstration and manufacturing equipment
3-5
 
917

 
829

Furniture, fixtures and other equipment
3-15
 
572

 
575

Construction in progress
 
 
51

 
61

Gross property, plant and equipment
 
 
2,977

 
2,848

Accumulated depreciation
 
 
(2,095
)
 
(1,987
)
 
 
 
$
882

 
$
861



18

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



 
July 26,
2015
 
October 26,
2014
 
 
 
 
 
(In millions)
Accounts Payable, Notes Payable and Accrued Expenses
 
 
 
Accounts payable
$
693

 
$
613

Compensation and employee benefits
463

 
524

Notes payable, short-term
400

 

Warranty
125

 
113

Dividends payable
120

 
122

Income taxes payable
40

 
142

Other accrued taxes
50

 
51

Interest payable
14

 
30

Other
257

 
288

 
$
2,162

 
$
1,883

 
 
July 26,
2015
 
October 26,
2014
 
 
 
 
 
(In millions)
Customer Deposits and Deferred Revenue
 
 
 
Customer deposits
$
200

 
$
286

Deferred revenue
658

 
654

 
$
858

 
$
940

 
Applied typically receives deposits on future deliverables from customers in the Energy and Environmental Solutions and Display segments. In certain instances, customer deposits may be received from customers in the Applied Global Services segment.
 
July 26,
2015
 
October 26,
2014
 
 
 
 
 
(In millions)
Other Liabilities
 
 
 
Deferred income taxes
$
50

 
$
32

Income taxes payable
200

 
225

Defined and postretirement benefit plans
255

 
208

Other
104

 
71

 
$
609

 
$
536


Note 8
Business Combination

On September 24, 2013, Applied and TEL entered into a Business Combination Agreement, which was intended to effect a strategic combination of their respective businesses into a new combined company, and was subject to regulatory approvals. On April 26, 2015, Applied and TEL announced that they had mutually agreed to terminate the Business Combination Agreement. No termination fee is payable by either Applied or TEL.

19

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.
During the third quarter of fiscal 2015, Applied implemented a new management structure, which resulted in changes in Applied’s reporting units. Applied determined its reporting units by first identifying its operating segments, and then assessing whether components of these operating segments constitute a business for which discrete financial information is available and where segment management regularly reviews the operating results of that component. Applied aggregates reporting units within an operating segment that have similar economic characteristics and are similar in nature of their products and services, production processes, type or class of customers, distribution methods and operational environment. As a result of the change in management structure, there were no changes in Applied’s reportable segments identified in Note 16, Industry Segment Operations. However, Applied identified three reporting units, which include Transistor and Interconnect Group, Patterning and Packaging Group, and Imaging and Process Control Group, which combine to form the Silicon Systems Group reporting segment. The new management structure did not affect Applied Global Services, Display and Energy and Environmental Solutions.
Based on these changes, Applied performed a goodwill impairment test for Silicon Systems Group immediately before the change in reporting units, allocated goodwill to each reporting unit in Silicon Systems Group based on the estimated fair value of each reporting unit and, then performed another goodwill impairment test  for each of the new reporting units within the Silicon Systems Group.

20

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



In performing the goodwill impairment test, Applied utilized both the discounted cash flow method (weighted 75%) and the guideline company method (weighted 25%) to estimate the fair value of the reporting units. The estimates used in the impairment testing were consistent with the discrete forecasts that Applied uses to manage its business, and considered any significant developments that occurred during the quarter. Under the discounted cash flow method, cash flows beyond the discrete forecasts were estimated using a terminal growth rate, which considered the long-term earnings growth rate specific to the reporting units. The estimated future cash flows were discounted to present value using each reporting unit's weighted average cost of capital. The weighted average cost of capital measures a reporting unit's cost of debt and equity financing weighted by the percentage of debt and equity in a reporting unit's target capital structure. In addition, the weighted average cost of capital was derived using both known and estimated market metrics, and was adjusted to reflect both the timing and risks associated with the estimated cash flows. The tax rate used in the discounted cash flow method was the median tax rate of comparable companies and reflected Applied's current international structure, which is consistent with the market participant perspective. Under the guideline company method, market multiples were applied to forecasted revenues and earnings before interest, taxes, depreciation and amortization. The market multiples used were consistent with comparable publicly-traded companies and considered each reporting unit's size, growth and profitability relative to its comparable companies. Based on Applied’s analysis, the estimated fair value exceeded the carrying value for Silicon Systems Group as a single reporting unit and for each new reporting unit subsequent to the change, and therefore, the second step of the goodwill impairment test was not required.
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 26, 2015 and October 26, 2014 were as follows:
 
 
July 26, 2015
 
October 26, 2014
 
Goodwill
 
Other
Intangible
Assets
 
Total
 
Goodwill
 
Other
Intangible
Assets
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Silicon Systems Group
$
2,151

 
$

 
$
2,151

 
$
2,151

 
$
103

 
$
2,254

Applied Global Services
1,027

 
6

 
1,033

 
1,027

 
6

 
1,033

Display
126

 
18

 
144

 
126

 
18

 
144

Energy and Environmental Solutions

 
2

 
2

 

 

 

Carrying amount
$
3,304

 
$
26

 
$
3,330

 
$
3,304

 
$
127

 
$
3,431

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.
A summary of Applied's purchased technology and intangible assets is set forth below:
 
July 26,
2015
 
October 26,
2014
 
 
 
 
 
(In millions)
Purchased technology, net
$
618

 
$
636

Intangible assets - finite-lived, net
167

 
188

Intangible assets - indefinite-lived
26

 
127

Total
$
811

 
$
951



21

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:
 
 
July 26, 2015
 
October 26, 2014
 
Purchased
Technology
 
Other
Intangible
Assets
 
Total
 
Purchased
Technology
 
Other
Intangible
Assets
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Gross carrying amount:
 
 
 
 
 
 
 
 
 
 
 
Silicon Systems Group
$
1,449

 
$
252

 
$
1,701

 
$
1,346

 
$
252

 
$
1,598

Applied Global Services
29

 
44

 
73

 
28

 
44

 
72

Display
110

 
33

 
143

 
110

 
33

 
143

Energy and Environmental Solutions
4

 
12

 
16

 
5

 
17

 
22

Gross carrying amount
$
1,592

 
$
341

 
$
1,933

 
$
1,489

 
$
346

 
$
1,835

Accumulated amortization:
 
 
 
 
 
 
 
 
 
 
 
Silicon Systems Group
$
(835
)
 
$
(90
)
 
$
(925
)
 
$
(716
)
 
$
(77
)
 
$
(793
)
Applied Global Services
(25
)
 
(44
)
 
(69
)
 
(24
)
 
(44
)
 
(68
)
Display
(110
)
 
(33
)
 
(143
)
 
(110
)
 
(31
)
 
(141
)
Energy and Environmental Solutions
(4
)
 
(7
)
 
(11
)
 
(3
)
 
(6
)
 
(9
)
Accumulated amortization
$
(974
)
 
$
(174
)
 
$
(1,148
)
 
$
(853
)
 
$
(158
)
 
$
(1,011
)
Carrying amount
$
618

 
$
167

 
$
785

 
$
636

 
$
188

 
$
824



22

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




Details of amortization expense by segment were as follows:
 
Three Months Ended
 
Nine Months Ended
 
July 26,
2015
 
July 27,
2014
 
July 26,
2015
 
July 27,
2014
 
 
 
 
 
 
 
 
 
(In millions)
Silicon Systems Group
$
45

 
$
42

 
$
132

 
$
126

Applied Global Services

 

 
1

 
3

Display

 
1

 
2

 
2

Energy and Environmental Solutions
1

 
2

 
3

 
5

Total
$
46

 
$
45

 
$
138

 
$
136

Amortization expense was charged to the following categories:
 
Three Months Ended
 
Nine Months Ended
 
July 26,
2015
 
July 27,
2014
 
July 26,
2015
 
July 27,
2014
 
 
 
 
 
 
 
 
 
(In millions)
Cost of products sold
$
40

 
$
38

 
$
120

 
$
117

Research, development and engineering
1

 
1

 
1

 
1

Marketing and selling
5

 
5

 
15

 
16

General and administrative

 
1

 
2

 
2

Total
$
46

 
$
45

 
$
138

 
$
136

As of July 26, 2015, future estimated amortization expense is expected to be as follows:
 
 
Amortization
Expense
 
(In millions)
2015 (remaining 3 months)
$
48

2016
189

2017
186

2018
185

2019
66

Thereafter
111

Total
$
785



23

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 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. Remaining credit facilities in the amount of approximately $64 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 26, 2015 and October 26, 2014, and Applied has not utilized these credit facilities.
Debt outstanding as of July 26, 2015 and October 26, 2014 was as follows:
 
 
Principal Amount
 
 
 
 
 
July 26,
2015
 
October 26,
2014
 
Effective
Interest Rate
 
Interest
Pay Dates
 
(In millions)
 
 
 
 
Short-term debt:
 
 
 
 
 
 
 
2.650% Senior Notes Due 2016
$
400

 
$

 
2.666%
 
June 15, December 15
 
 
 
 
 
 
 
 
Long-term debt:
 
 
 
 
 
 
 
2.650% Senior Notes Due 2016

 
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
 
1,550

 
1,950

 
 
 
 
Total unamortized discount
(3
)
 
(3
)
 
 
 
 
Total long-term debt
1,547

 
1,947

 
 
 
 
Total debt
$
1,947

 
$
1,947

 
 
 
 




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 and product investments based on changes in market condition and competitive environment as well as customer demand. Costs associated with restructuring actions can include termination benefits and related charges, in addition to facility closure, contract termination and other related activities. Restructuring charges and asset impairments are included in general and administrative expenses in the Consolidated Condensed Statements of Operations.

During the third quarter of fiscal 2015, Applied implemented cost reduction measures in its solar business to achieve a lower break-even level and improve business performance and incurred $17 million in restructuring charges and asset impairments and $34 million of inventory-related charges recorded in cost of products sold. These costs are reported in Applied Global Services and Energy and Environmental Solutions segments. Total costs expected to be incurred in implementing these actions are in the range of $45 million to $55 million. Applied expects to complete the principal activities related to these actions by the first quarter of fiscal 2016. As of July 26, 2015, the restructuring accruals related to these actions were $10 million, of which $8 million is related to severance and other employee cost accruals.


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 Loss on Derivative Instruments Qualifying as Cash Flow Hedges
 
Defined and Postretirement Benefit Plans
 
Cumulative Translation Adjustments
 
Total
 
(in millions)
 
 
Balance at October 26, 2014
$
24

 
$

 
$
(105
)
 
$
5

 
$
(76
)
Other comprehensive income (loss) before reclassifications
(3
)
 
1

 
(45
)
 

 
(47
)
Amounts reclassified out of AOCI

 
(6
)
 
2

 
9

 
5

Other comprehensive income (loss), net of tax
(3
)
 
(5
)
 
(43
)
 
9

 
(42
)
Balance at July 26, 2015
$
21

 
$
(5
)
 
$
(148
)
 
$
14

 
$
(118
)

 
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 income (loss), net of tax
(1
)
 
(2
)
 

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

 
$

 
$
(72
)
 
$
6

 
$
(42
)

The increase in accumulated other comprehensive (loss) associated with pension liability during the nine months ended July 26, 2015 amounted to $43 million, net of income tax effect and was primarily due to lower discount rates used to determine the benefit obligation, taking into account prevailing interest rates.


25

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



The effects on net income of amounts reclassified from AOCI for the three and nine months ended July 26, 2015 and July 27, 2014 were not material.
Stock Repurchase Program

On April 26, 2015, Applied's Board of Directors approved a common stock repurchase program authorizing up to $3.0 billion in repurchases over the three years ending April 2018. At July 26, 2015, $2.4 billion remained available for future stock repurchases under the new repurchase program. Applied's prior stock repurchase program ended March 2015.

The following table summarizes Applied’s stock repurchases for the three and nine months ended July 26, 2015:
 
Three and Nine Months Ended
 
July 26, 2015
 
 
 
(In millions, except per share amounts)
Shares of common stock repurchased
32

Cost of stock repurchased
$
625

Average price paid per share
$
19.47


Applied did not purchase any shares of its common stock during the three and nine months ended July 27, 2014.

Applied records treasury stock purchases under the cost method using the first-in, first-out (FIFO) method. Upon reissuance of treasury stock, amounts in excess of the acquisition cost are credited to additional paid in capital. If Applied reissues treasury stock at an amount below its acquisition cost and additional paid in capital associated with prior treasury stock transactions is insufficient to cover the difference between the acquisition cost and the reissue price, this difference is recorded against retained earnings.
Dividends
In June 2015, March 2015 and December 2014, Applied's Board of Directors declared quarterly cash dividends in the amount of $0.10 per share. Dividends declared during the nine months ended July 26, 2015 and July 27, 2014 totaled $366 million and $365 million, respectively. Applied currently anticipates that cash dividends will continue to be paid on a quarterly basis, although the declaration of any future cash dividend is at the discretion of the Board of Directors and will depend on Applied’s financial condition, results of operations, capital requirements, business conditions and other factors, as well as a determination by the Board of Directors that cash dividends are in the best interests of Applied’s stockholders.
Share-Based Compensation
Applied has a stockholder-approved equity plan, the Employee Stock Incentive Plan, which permits grants to employees of share-based awards, including stock options, restricted stock, restricted stock units, performance shares and performance units. In addition, the plan provides for the automatic grant of restricted stock units to non-employee directors and permits the grant of share-based awards to non-employee directors and consultants. Share-based awards made 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 26, 2015 and July 27, 2014, Applied recognized share-based compensation expense related to stock options, ESPP shares, restricted stock, restricted stock units, performance sha