10-Q 1 amat731201610-qq32016.htm FORM 10-Q Document


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)

þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2016
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 31, 2016: 1,080,893,856




APPLIED MATERIALS, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JULY 31, 2016
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 31,
2016
 
July 26,
2015
 
July 31,
2016
 
July 26,
2015
 
 
 
 
 
 
 
 
 
(Unaudited)
Net sales
$
2,821

 
$
2,490

 
$
7,528

 
$
7,291

Cost of products sold
1,629

 
1,472

 
4,416

 
4,298

Gross profit
1,192

 
1,018

 
3,112

 
2,993

Operating expenses:
 
 
 
 
 
 
 
Research, development and engineering
386

 
372

 
1,146

 
1,088

Marketing and selling
107

 
112

 
315

 
332

General and administrative
103

 
135

 
276

 
392

Loss (gain) on derivatives associated with terminated business combination

 
3

 

 
(89
)
Total operating expenses
596

 
622

 
1,737

 
1,723

Income from operations
596

 
396

 
1,375

 
1,270

Interest expense
38

 
24

 
117

 
71

Interest and other income, net
6

 
3

 
15

 
2

Income before income taxes
564

 
375

 
1,273

 
1,201

Provision for income taxes
59

 
46

 
162

 
160

Net income
$
505

 
$
329

 
$
1,111

 
$
1,041

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.47

 
$
0.27

 
$
1.00

 
$
0.85

Diluted
$
0.46

 
$
0.27

 
$
0.99

 
$
0.84

Weighted average number of shares:
 
 
 
 
 
 
 
Basic
1,083

 
1,221

 
1,115

 
1,225

Diluted
1,093

 
1,231

 
1,123

 
1,238

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 31,
2016
 
July 26,
2015
 
July 31,
2016
 
July 26,
2015
 
 
 
 
 
 
 
 
 
(Unaudited)
Net income
$
505

 
$
329

 
$
1,111

 
$
1,041

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in unrealized net gain on investments
17

 
1

 
21

 
(3
)
Change in unrealized net loss on derivative instruments
(9
)
 
(5
)
 
(16
)
 
(5
)
Change in defined and postretirement benefit plans

 

 

 
(43
)
Change in cumulative translation adjustments

 
11

 

 
9

Other comprehensive income (loss), net of tax
8

 
7

 
5

 
(42
)
Comprehensive income
$
513

 
$
336

 
$
1,116

 
$
999

See accompanying Notes to Consolidated Condensed Financial Statements.



4


APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)
 
July 31,
2016
 
October 25,
2015
 
 
 
 
 
 
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
2,828

 
$
4,797

Short-term investments
438

 
168

Accounts receivable, net
1,852

 
1,739

Inventories
2,026

 
1,833

Other current assets
255

 
724

Total current assets
7,399

 
9,261

Long-term investments
960

 
946

Property, plant and equipment, net
905

 
892

Goodwill
3,305

 
3,302

Purchased technology and other intangible assets, net
621

 
762

Deferred income taxes and other assets
509

 
145

Total assets
$
13,699

 
$
15,308

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Short-term debt
$

 
$
1,200

Accounts payable and accrued expenses
1,800

 
1,833

Customer deposits and deferred revenue
1,164

 
765

Total current liabilities
2,964

 
3,798

Long-term debt
3,343

 
3,342

Other liabilities
573

 
555

Total liabilities
6,880

 
7,695

Stockholders’ equity:
 
 
 
Common stock
11

 
11

Additional paid-in capital
6,714

 
6,575

Retained earnings
14,750

 
13,967

Treasury stock
(14,569
)
 
(12,848
)
Accumulated other comprehensive loss
(87
)
 
(92
)
Total stockholders’ equity
6,819

 
7,613

Total liabilities and stockholders’ equity
$
13,699

 
$
15,308

Amounts as of July 31, 2016 are unaudited. Amounts as of October 25, 2015 are derived from the October 25, 2015 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 31, 2016
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Unaudited)
Balance at October 25, 2015
1,160

 
$
11

 
$
6,575

 
$
13,967

 
793

 
$
(12,848
)
 
$
(92
)
 
$
7,613

Net income

 

 

 
1,111

 

 

 

 
1,111

Other comprehensive income (loss), net of tax

 

 

 

 

 

 
5

 
5

Dividends

 

 

 
(328
)
 

 

 

 
(328
)
Share-based compensation

 

 
150

 

 

 

 

 
150

Issuance under stock plans, net of a tax benefit of $18 and other
11

 

 
(11
)
 

 

 

 

 
(11
)
Common stock repurchases
(90
)
 

 

 

 
90

 
(1,721
)
 

 
(1,721
)
Balance at July 31, 2016
1,081

 
$
11

 
$
6,714

 
$
14,750

 
883

 
$
(14,569
)
 
$
(87
)
 
$
6,819

 
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


See accompanying Notes to Consolidated Condensed Financial Statements.



6


APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
 
Nine Months Ended
 
July 31,
2016
 
July 26,
2015
 
 
 
 
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
1,111

 
$
1,041

Adjustments required to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
289

 
275

Share-based compensation
150

 
141

Excess tax benefits from share-based compensation
(18
)
 
(54
)
Deferred income taxes
14

 
25

Other
20

 
64

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(112
)
 
(322
)
Inventories
(192
)
 
(172
)
Other current and non-current assets
52

 
(2
)
Accounts payable and accrued expenses
(84
)
 
(174
)
Customer deposits and deferred revenue
399

 
(82
)
Income taxes payable
38

 
(72
)
Other liabilities
2

 
24

Cash provided by operating activities
1,669

 
692

Cash flows from investing activities:
 
 
 
Capital expenditures
(165
)
 
(162
)
Cash paid for acquisitions, net of cash acquired
(5
)
 
(2
)
Proceeds from sales and maturities of investments
681

 
900

Purchases of investments
(947
)
 
(960
)
Cash used in investing activities
(436
)
 
(224
)
Cash flows from financing activities:
 
 
 
Debt repayments
(1,207
)
 

Proceeds from common stock issuances
44

 
43

Common stock repurchases
(1,721
)
 
(625
)
Excess tax benefits from share-based compensation
18

 
54

Payments of dividends to stockholders
(336
)
 
(368
)
Cash used in financing activities
(3,202
)
 
(896
)
Decrease in cash and cash equivalents
(1,969
)
 
(428
)
Cash and cash equivalents — beginning of period
4,797

 
3,002

Cash and cash equivalents — end of period
$
2,828

 
$
2,574

Supplemental cash flow information:
 
 
 
Cash payments for income taxes
$
144

 
$
258

Cash refunds from income taxes
$
104

 
$
10

Cash payments for interest
$
110

 
$
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 25, 2015 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 25, 2015 (2015 Form 10-K). Applied’s results of operations for the three and nine months ended July 31, 2016 are not necessarily indicative of future operating results. Applied’s fiscal year ends on the last Sunday in October of each year. Fiscal 2016 and 2015 contain 53 weeks and 52 weeks, respectively, and the first nine months of fiscal 2016 and 2015 contained 40 weeks and 39 weeks, respectively.
Effective in the third quarter of fiscal 2016, Applied began to account for its roll-to-roll web coating systems (previously included in the Energy and Environmental Solutions segment) and display upgrade equipment (previously included in the Applied Global Services segment) under the Display and Adjacent Markets segment (previously Display). As a result of these changes, Applied's solar business (previously included in the Energy and Environmental Solutions segment) is included in Corporate and Other as it did not meet the threshold for a separate reportable segment. Results for prior periods have been recast to conform to the current presentation. As of July 31, 2016, Applied's three primary reportable segments are: Semiconductor Systems (previously Silicon Systems), Applied Global Services and Display and Adjacent Markets. See Note 14 of Notes to the Consolidated Condensed Financial Statements for further detail on reportable segments.
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 June 2016, the Financial Accounting Standards Board (FASB) issued authoritative guidance that modifies the impairment model for certain financial assets by requiring use of an expected loss methodology, which will result in more timely recognition of credit losses. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2021. Early adoption is permitted beginning in the first quarter of fiscal 2020. Applied is currently evaluating the effect of this new guidance on Applied's consolidated financial statements.
In March 2016, the FASB issued authoritative guidance that simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2018. 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 February 2016, the FASB issued authoritative guidance for lease accounting, which requires lessees to recognize lease assets and liabilities on the balance sheet for certain lease arrangements that are classified as operating leases under the previous standard, and to provide for enhanced disclosures. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2020 and should be applied using a modified retrospective approach. Early adoption is permitted. Applied is currently evaluating the effect of this new guidance on Applied's consolidated financial statements.
In January 2016, the FASB issued authoritative guidance that requires equity investments that do not result in consolidation, and are not accounted for under the equity method, to be measured at fair value, and requires recognition of any changes in fair value in net income unless the investments qualify for a new practicability exception. For financial liabilities measured at fair value, the change in fair value caused by a change in instrument-specific credit risk will be required to be presented separately in other comprehensive income. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2019. Early adoption is permitted only for the provisions related to the recognition of changes in fair value of financial liabilities caused by instrument-specific credit risk. Applied is currently evaluating the effect of this new guidance on Applied's consolidated financial statements.
In November 2015, the FASB issued authoritative guidance requiring all deferred tax assets and liabilities, and any related valuation allowance, to be classified as noncurrent on the balance sheet. Applied elected to prospectively adopt the authoritative guidance in the beginning of the first quarter of fiscal 2016. Prior periods were not retrospectively adjusted.
In July 2015, the 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.

9

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



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. Applied will adopt this guidance in the first quarter of fiscal 2017 prospectively to all arrangements entered into or materially modified after the effective date. The adoption of this guidance is not expected to have a significant impact on Applied's consolidated financial statements.
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. Subsequent to the amendment, the FASB issued additional clarifying implementation guidance. 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.


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 31,
2016
 
July 26,
2015
 
July 31,
2016
 
July 26,
2015
 
 
 
 
 
 
 
 
 
(In millions, except per share amounts)
Numerator:
 
 
 
 
 
 
 
Net income
$
505

 
$
329

 
$
1,111

 
$
1,041

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
1,083

 
1,221

 
1,115

 
1,225

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

 
10

 
8

 
13

Denominator for diluted earnings per share
1,093

 
1,231

 
1,123

 
1,238

Basic earnings per share
$
0.47

 
$
0.27

 
$
1.00

 
$
0.85

Diluted earnings per share
$
0.46

 
$
0.27

 
$
0.99

 
$
0.84

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 31, 2016
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair  Value
 
 
 
 
 
 
 
 
 
(In millions)
Cash
$
1,084

 
$

 
$

 
$
1,084

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
1,380

 

 

 
1,380

U.S. Treasury and agency securities
40

 

 

 
40

Municipal securities
167

 

 

 
167

Commercial paper, corporate bonds and medium-term notes
157

 

 

 
157

Total Cash equivalents
1,744

 

 

 
1,744

Total Cash and Cash equivalents
$
2,828

 
$

 
$

 
$
2,828

Short-term and long-term investments:
 
 
 
 
 
 
 
U.S. Treasury and agency securities
$
253

 
$

 
$

 
$
253

Non-U.S. government securities*
20

 

 

 
20

Municipal securities
409

 
3

 

 
412

Commercial paper, corporate bonds and medium-term notes
306

 
1

 

 
307

Asset-backed and mortgage-backed securities
264

 
1

 
1

 
264

Total fixed income securities
1,252

 
5

 
1

 
1,256

Publicly traded equity securities
33

 
48

 
4

 
77

Equity investments in privately-held companies
65

 

 

 
65

Total short-term and long-term investments
$
1,350

 
$
53

 
$
5

 
$
1,398

Total Cash, Cash equivalents and Investments
$
4,178

 
$
53

 
$
5

 
$
4,226

 _________________________
* 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 25, 2015
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair  Value
 
 
 
 
 
 
 
 
 
(In millions)
Cash
$
1,010

 
$

 
$

 
$
1,010

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
3,272

 

 

 
3,272

Non-U.S. government securities
60

 

 

 
60

Municipal securities
73

 

 

 
73

Commercial paper, corporate bonds and medium-term notes
382

 

 

 
382

Total Cash equivalents
3,787

 

 

 
3,787

Total Cash and Cash equivalents
$
4,797

 
$

 
$

 
$
4,797

Short-term and long-term investments:
 
 
 
 
 
 
 
U.S. Treasury and agency securities
$
84

 
$

 
$

 
$
84

Non-U.S. government securities
9

 

 

 
9

Municipal securities
384

 
2

 

 
386

Commercial paper, corporate bonds and medium-term notes
250

 

 

 
250

Asset-backed and mortgage-backed securities
262

 

 

 
262

Total fixed income securities
989

 
2

 

 
991

Publicly traded equity securities
28

 
17

 

 
45

Equity investments in privately-held companies
78

 

 

 
78

Total short-term and long-term investments
$
1,095

 
$
19

 
$

 
$
1,114

Total Cash, Cash equivalents and Investments
$
5,892

 
$
19

 
$

 
$
5,911


 Maturities of Investments
The following table summarizes the contractual maturities of Applied’s investments at July 31, 2016:
 
 
Cost
 
Estimated
Fair  Value
 
 
 
 
 
(In millions)
Due in one year or less
$
422

 
$
422

Due after one through five years
566

 
570

No single maturity date**
362

 
406

 
$
1,350

 
$
1,398

 _________________________
** 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 31, 2016 and July 26, 2015, gross realized gains and losses on investments were not material.
At July 31, 2016 and October 25, 2015, 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 31, 2016 and July 26, 2015 were temporary in nature and therefore it did not recognize any impairment of its marketable securities during the three and nine months ended July 31, 2016 or July 26, 2015. Impairment charges on equity investments in privately-held companies during the three and nine months ended July 31, 2016 and July 26, 2015 were not material. 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 31, 2016, 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 31, 2016
 
October 25, 2015
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Assets:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
1,380

 
$

 
$
1,380

 
$
3,272

 
$

 
$
3,272

U.S. Treasury and agency securities
90

 
203

 
293

 
72

 
12

 
84

Non-U.S. government securities

 
20

 
20

 

 
69

 
69

Municipal securities

 
579

 
579

 

 
459

 
459

Commercial paper, corporate bonds and medium-term notes

 
464

 
464

 

 
632

 
632

Asset-backed and mortgage-backed securities

 
264

 
264

 

 
262

 
262

Publicly traded equity securities
77

 

 
77

 
45

 

 
45

Total
$
1,547

 
$
1,530

 
$
3,077

 
$
3,389

 
$
1,434

 
$
4,823

There were no transfers between Level 1 and Level 2 fair value measurements during the three and nine months ended July 31, 2016 or July 26, 2015. Applied did not have any financial assets measured at fair value on a recurring basis within Level 3 fair value measurements as of July 31, 2016 or October 25, 2015.
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 31, 2016, equity investments in privately-held companies totaled $65 million, of which $58 million of investments were accounted for under the cost method of accounting and $7 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 25, 2015, equity investments in privately-held companies totaled $78 million, of which $70 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. Impairment charges on equity investments in privately-held companies during the three and nine months ended July 31, 2016 and July 26, 2015 were not material.
Other
The carrying amounts of Applied’s financial instruments, including cash and cash equivalents, accounts receivable, notes payable - short term, and accounts payable and accrued expenses, approximate fair value due to their short maturities. At July 31, 2016, the carrying amount of long-term debt was $3.3 billion and the estimated fair value was $3.8 billion. At October 25, 2015, the carrying amount of long-term debt was $3.3 billion and the estimated fair value was $3.5 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 9 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 and Taiwanese dollar. Applied uses derivative financial instruments, such as forward exchange contracts and currency option contracts, to hedge certain forecasted foreign currency denominated transactions expected to occur typically within the next 24 months. The purpose of Applied’s foreign currency management is to mitigate the effect of exchange rate fluctuations on certain foreign currency denominated revenues, costs and eventual cash flows. The terms of currency instruments used for hedging purposes are generally consistent with the timing of the transactions being hedged.
During fiscal 2015, Applied entered into and settled 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 and settled in conjunction with the issuance of debt in September 2015. The loss from the settlement of the interest rate swap agreement that was included in accumulated other comprehensive income (AOCI) in stockholders' equity is being amortized to interest expense over the term of the senior unsecured 10-year notes issued in September 2015.
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 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 31, 2016 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 31, 2016 and July 26, 2015.
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.
In September 2013, Applied purchased foreign exchange option contracts to limit its foreign exchange risk associated with the then-anticipated business combination with Tokyo Electron Limited (TEL). These derivatives did not qualify for hedge accounting treatment and 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 then-anticipated business combination with TEL on April 26, 2015, these foreign exchange option contracts were sold during the third quarter of fiscal 2015. 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. The cash flow impact of these derivatives has been classified as operating cash flows in the Consolidated Condensed Statements of Cash Flows.
The fair values of foreign exchange derivative instruments at July 31, 2016 and October 25, 2015 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 31, 2016
 
July 26, 2015
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
 
$
(26
)
 
$
(13
)
 
$
1

 
$
5

 
$
2

 
$
(1
)
Foreign exchange contracts
General and administrative
 

 
1

 
(1
)
 

 
3

 

Interest rate swaps
Interest expense
 

 
(1
)
 

 
$
(8
)
 
$

 
$

Total
 
 
$
(26
)
 
$
(13
)
 
$

 
$
(3
)
 
$
5

 
$
(1
)

 
 
 
Nine Months Ended
July 31, 2016
 
July 26, 2015
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
 
$
(49
)
 
$
(21
)
 
$
1

 
$
10

 
$
15

 
$
(3
)
Foreign exchange contracts
General and administrative
 

 
(1
)
 
(2
)
 

 
(5
)
 
(1
)
Interest rate swaps
Interest expense
 

 
(1
)
 

 
(8
)
 

 

Total
 
 
$
(49
)
 
$
(23
)
 
$
(1
)
 
$
2

 
$
10

 
$
(4
)




16

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



 
 
 
Amount of Gain or (Loss) 
Recognized in Income
 
 
Three Months Ended
 
Nine Months Ended
Location of Gain or
(Loss) Recognized
in Income
 
July 31, 2016
 
July 26, 2015
 
July 31, 2016
 
July 26, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
Gain on derivatives associated with terminated business combination
 
$

 
$
(3
)
 
$

 
$
89

Foreign exchange contracts
General and
administrative
 
(31
)
 
11

 
(67
)
 
31

Total
 
 
$
(31
)
 
$
8

 
$
(67
)
 
$
120

 
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 31, 2016.
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 sold $57 million of accounts receivable during the three and nine months ended July 31, 2016. Applied did not sell accounts receivable during the three and nine months ended July 26, 2015. Applied did not discount letters of credit issued by customers or discount promissory notes during the three and nine months ended July 31, 2016 and July 26, 2015. 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 $48 million at July 31, 2016 and $49 million at October 25, 2015. Applied sells its products principally to manufacturers within the semiconductor and display industries. While Applied believes that its allowance for doubtful accounts is adequate and represents its best estimate as of July 31, 2016, it continues to closely monitor customer liquidity and industry and economic conditions, which may result in changes to Applied’s estimates.

Note 7
Balance Sheet Detail
 
 
July 31,
2016
 
October 25,
2015
 
 
 
 
 
(In millions)
Inventories
 
 
 
Customer service spares
$
432

 
$
382

Raw materials
461

 
461

Work-in-process
392

 
271

Finished goods
741

 
719

 
$
2,026

 
$
1,833

 

17

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



Included in finished goods inventory are $183 million at July 31, 2016, and $155 million at October 25, 2015, 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 $205 million and $185 million of evaluation inventory at July 31, 2016 and October 25, 2015, respectively.
 
July 31,
2016
 
October 25,
2015
 
 
 
 
 
(In millions)
Other Current Assets
 
 
 
Deferred income taxes, net1
$

 
$
403

Prepaid income taxes and income taxes receivable
76

 
127

Prepaid expenses and other
179

 
194

 
$
255

 
$
724

 
1 July 31, 2016 balance reflects the effects of the prospective adoption of the authoritative guidance in the first quarter of fiscal 2016, which required all deferred tax assets and liabilities, and any related valuation allowance to be classified as noncurrent on the balance sheet.
 
Useful Life
 
July 31,
2016
 
October 25,
2015
 
 
 
 
 
 
 
(In years)
 
(In millions)
Property, Plant and Equipment, Net
 
 
 
Land and improvements
 
 
$
159

 
$
157

Buildings and improvements
3-30
 
1,259

 
1,247

Demonstration and manufacturing equipment
3-5
 
1,017

 
920

Furniture, fixtures and other equipment
3-15
 
569

 
574

Construction in progress
 
 
54

 
48

Gross property, plant and equipment
 
 
3,058

 
2,946

Accumulated depreciation
 
 
(2,153
)
 
(2,054
)
 
 
 
$
905

 
$
892


 
July 31,
2016
 
October 25,
2015
 
 
 
 
 
(In millions)
Accounts Payable and Accrued Expenses
 
 
 
Accounts payable
$
717

 
$
658

Compensation and employee benefits
449

 
509

Warranty
139

 
126

Dividends payable
108

 
116

Income taxes payable
23

 
60

Other accrued taxes
45

 
58

Interest payable
35

 
36

Other
284

 
270

 
$
1,800

 
$
1,833

 

18

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



 
July 31,
2016
 
October 25,
2015
 
 
 
 
 
(In millions)
Customer Deposits and Deferred Revenue
 
 
 
Customer deposits
$
383

 
$
132

Deferred revenue
781

 
633

 
$
1,164

 
$
765

 
Applied typically receives deposits on future deliverables from customers in the Display and Adjacent Markets segment and, in certain instances, may also receive deposits from customers in the Applied Global Services segment.
 
July 31,
2016
 
October 25,
2015
 
 
 
 
 
(In millions)
Other Liabilities
 
 
 
Deferred income taxes
$
16

 
$
56

Income taxes payable
284

 
227

Defined and postretirement benefit plans
190

 
187

Other
83

 
85

 
$
573

 
$
555


19

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



Note 8
Goodwill, Purchased Technology and Other Intangible Assets
Goodwill and Purchased Intangible Assets
Applied’s methodology for allocating the purchase price relating to purchase acquisitions is determined through established and generally accepted valuation techniques. Goodwill is measured as the excess of the purchase price over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. Applied assigns assets acquired (including goodwill) and liabilities assumed to one or more reporting units as of the date of acquisition. Typically, acquisitions relate to a single reporting unit and thus do not require the allocation of goodwill to multiple reporting units. If the products obtained in an acquisition are assigned to multiple reporting units, the goodwill is distributed to the respective reporting units as part of the purchase price allocation process.
Goodwill and purchased intangible assets with indefinite useful lives are not amortized, but are reviewed for impairment annually during the fourth quarter of each fiscal year and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The process of evaluating the potential impairment of goodwill and intangible assets requires significant judgment, especially in emerging markets. Applied regularly monitors current business conditions and considers other factors including, but not limited to, adverse industry or economic trends, restructuring actions and lower projections of profitability that may impact future operating results.
To test goodwill for impairment, Applied first performs a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, Applied then performs the two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. Under the two-step goodwill impairment test, Applied would in the first step compare the estimated fair value of each reporting unit to its carrying value. Applied determines the fair value of each of its reporting units based on a weighting of income and market approaches. If the carrying value of a reporting unit exceeds its fair value, Applied would then perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If Applied determines that the carrying value of a reporting unit’s goodwill exceeds its implied fair value, Applied would record an impairment charge equal to the difference.
As of July 31, 2016, Applied's reporting units include Transistor and Interconnect Group, Patterning and Packaging Group, and Imaging and Process Control Group, which combine to form the Semiconductor Systems reporting segment, Applied Global Services, and Display and Adjacent Markets.
Effective in the third quarter of fiscal 2016, Applied began to account for its roll-to-roll web coating systems (previously included in the Energy and Environmental Solutions segment) and display upgrade equipment (previously included in the Applied Global Services segment) under the Display and Adjacent Markets segment (previously Display). See Note 14, Industry Segment Operations. These changes did not affect the Semiconductor Systems reporting segment.
Due to this change, Applied performed a goodwill impairment test for Applied Global Services and Display and Adjacent Markets immediately before the changes in the composition of the segments, reallocated $31 million of goodwill from Applied Global Services associated with the display upgrade equipment business to Display and Adjacent Markets based on the estimated relative fair value of each business unit and, then performed another goodwill impairment test for Applied Global Services and Display and Adjacent Markets after the change. There was no goodwill associated with the roll-to-roll web coating systems business. Prior period information in the tables below has been reclassified to conform to current presentation, which reflects the new organizational structure.

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 forecast 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 which 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 Applied Global Services and Display and Adjacent Markets segments before and after the change in their compositions, 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 31, 2016 and October 25, 2015 were as follows:
 
 
July 31, 2016
 
October 25, 2015
 
Goodwill
 
Other
Intangible
Assets
 
Total
 
Goodwill
 
Other
Intangible
Assets
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Semiconductor Systems
$
2,151

 
$

 
$
2,151

 
$
2,151

 
$

 
$
2,151

Applied Global Services
999

 
5

 
1,004

 
996

 
5

 
1,001

Display and Adjacent Markets
155

 
20

 
175

 
155

 
20

 
175

Carrying amount
$
3,305

 
$
25

 
$
3,330

 
$
3,302

 
$
25

 
$
3,327

From time to time, Applied makes acquisitions of and investments in companies related to existing or new markets for Applied.
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 31,
2016
 
October 25,
2015
 
 
 
 
 
(In millions)
Purchased technology, net
$
450

 
$
575

Intangible assets - finite-lived, net
146

 
162

Intangible assets - indefinite-lived
25

 
25

Total
$
621

 
$
762


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 31, 2016
 
October 25, 2015
 
Purchased
Technology
 
Other
Intangible
Assets
 
Total
 
Purchased
Technology
 
Other
Intangible
Assets
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Gross carrying amount:
 
 
 
 
 
 
 
 
 
 
 
Semiconductor Systems
$
1,449

 
$
252

 
$
1,701

 
$
1,449

 
$
252

 
$
1,701

Applied Global Services
28

 
44

 
72

 
28

 
44

 
72

Display and Adjacent Markets
113

 
36

 
149

 
113

 
36

 
149

Corporate and Other
2

 
9

 
11

 
1

 
9

 
10

Gross carrying amount
$
1,592

 
$
341

 
$
1,933

 
$
1,591

 
$
341

 
$
1,932

Accumulated amortization:
 
 
 
 
 
 
 
 
 
 
 
Semiconductor Systems
$
(1,001
)
 
$
(109
)
 
$
(1,110
)
 
$
(876
)
 
$
(95
)
 
$
(971
)
Applied Global Services
(27
)
 
(44
)
 
(71
)
 
(26
)
 
(44
)
 
(70
)
Display and Adjacent Markets
(113
)
 
(34
)
 
(147
)
 
(113
)
 
(34
)
 
(147
)
Corporate and Other
(1
)
 
$
(8
)
 
(9
)
 
(1
)
 
(6
)
 
(7
)
Accumulated amortization
$
(1,142
)
 
$
(195
)
 
$
(1,337
)
 
$
(1,016
)
 
$
(179
)
 
$
(1,195
)
Carrying amount
$
450

 
$
146

 
$
596

 
$
575

 
$
162

 
$
737


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 31,
2016
 
July 26,
2015
 
July 31,
2016
 
July 26,
2015
 
 
 
 
 
 
 
 
 
(In millions)
Semiconductor Systems
$
47

 
$
45

 
$
139

 
$
132

Applied Global Services

 

 
1

 
1

Display and Adjacent Markets

 
1

 

 
3

Corporate & Other

 

 
2

 
2

Total
$
47

 
$
46

 
$
142

 
$
138

Amortization expense was charged to the following categories:
 
Three Months Ended
 
Nine Months Ended
 
July 31,
2016
 
July 26,
2015
 
July 31,
2016
 
July 26,
2015
 
 
 
 
 
 
 
 
 
(In millions)
Cost of products sold
$
42

 
$
40

 
$
126

 
$
120

Research, development and engineering

 
1

 
1

 
1

Marketing and selling
5

 
5

 
15

 
15

General and administrative

 

 

 
2

Total
$
47

 
$
46

 
$
142

 
$
138

As of July 31, 2016, future estimated amortization expense is expected to be as follows:
 
 
Amortization
Expense
 
(In millions)
2016 (remaining 3 months)
$
47

2017
187

2018
185

2019
44

2020
39

Thereafter
94

Total
$
596



23

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



Note 9
Borrowing Facilities and Debt
Applied has credit facilities for unsecured borrowings in various currencies of up to $1.6 billion, of which $1.5 billion is comprised of a committed revolving credit agreement with a group of banks that is scheduled to expire in September 2020. This agreement provides for borrowings in United States dollars at interest rates keyed to one of various benchmark rates selected by Applied for each advance, plus a margin based on Applied's public debt rating and includes financial and other covenants. Remaining credit facilities in the amount of approximately $76 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 31, 2016 and October 25, 2015, and Applied has not utilized these credit facilities.
In September 2015, Applied issued senior unsecured notes in the aggregate principal amount of $1.8 billion and used a portion of the net proceeds to redeem $400 million in principal amount of its 2.650% senior notes due in 2016 at a redemption price of $405 million in November 2015. After adjusting for the carrying value of debt issuance costs and discounts, Applied recorded a $5 million loss on the prepayment of the $400 million debt, which is included in interest and other income, net in the Consolidated Condensed Statement of Operations for the first quarter of fiscal 2016.
In October 2015, a wholly-owned foreign subsidiary of Applied entered into a short-term loan agreement with multiple lenders, under which it borrowed $800 million to facilitate the return of capital to Applied. In January 2016, the $800 million aggregated principal amount of the loan was repaid.
Debt outstanding as of July 31, 2016 and October 25, 2015 was as follows:
 
 
Principal Amount
 
 
 
 
 
July 31,
2016
 
October 25,
2015
 
Effective
Interest Rate
 
Interest
Pay Dates
 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
Short-term debt:
 
 
 
 
 
 
 
2.650% Senior Notes Due 2016
$

 
$
400

 
2.666%
 
June 15, December 15
Other debt

 
800

 
1.0% - 1.25%
 
 
Total short-term debt

 
1,200

 
 
 
 
Long-term debt:
 
 
 
 
 
 
 
7.125% Senior Notes Due 2017
200

 
200

 
7.190%
 
April 15, October 15
2.625% Senior Notes Due 2020
600

 
600

 
2.640%
 
April 1, October 1
4.300% Senior Notes Due 2021
750

 
750

 
4.326%
 
June 15, December 15
3.900% Senior Notes Due 2025
700

 
700

 
3.944%
 
April 1, October 1
5.100% Senior Notes Due 2035
500

 
500

 
5.127%
 
April 1, October 1
5.850% Senior Notes Due 2041
600

 
600

 
5.879%
 
June 15, December 15
 
3,350

 
3,350

 
 
 
 
Total unamortized discount
(7
)
 
(8
)
 
 
 
 
Total long-term debt
3,343

 
3,342

 
 
 
 
Total debt
$
3,343

 
$
4,542

 
 
 
 




24

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



Note 10
Stockholders’ Equity, Comprehensive Income and Share-Based Compensation
Accumulated Other Comprehensive Income (Loss)
Changes in the components of AOCI, net of tax, were as follows:
 
 
Unrealized Gain on Investments, Net
 
Unrealized Gain (Loss) on Derivative Instruments Qualifying as Cash Flow Hedges
 
Defined and Postretirement Benefit Plans
 
Cumulative Translation Adjustments
 
Total
 
 
 
 
 
 
 
 
 
 
 
(in millions)
Balance at October 25, 2015
$
14

 
$
(15
)
 
$
(105
)
 
$
14

 
$
(92
)
Other comprehensive income (loss) before reclassifications
21

 
(31
)
 

 

 
(10
)
Amounts reclassified out of AOCI

 
15

 

 

 
15

Other comprehensive income (loss), net of tax
21