10-Q 1 amat0128201810-qq12018.htm AMAT Q1 2018 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 January 28, 2018
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, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer þ
 
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
 
Smaller reporting company ¨
 
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨        No  þ
Number of shares outstanding of the issuer’s common stock as of January 28, 2018: 1,050,687,501



APPLIED MATERIALS, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JANUARY 28, 2018
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
 
January 28,
2018
 
January 29,
2017
 
 
 
 
 
(Unaudited)
Net sales
$
4,204

 
$
3,278

Cost of products sold
2,284

 
1,833

Gross profit
1,920

 
1,445

Operating expenses:
 
 
 
Research, development and engineering
488

 
417

Marketing and selling
126

 
118

General and administrative
110

 
103

Total operating expenses
724

 
638

Income from operations
1,196

 
807

Interest expense
59

 
38

Interest and other income, net
25

 
2

Income before income taxes
1,162

 
771

Provision for income taxes
1,027

 
68

Net income
$
135

 
$
703

Earnings per share:
 
 
 
Basic and diluted
$
0.13

 
$
0.65

Weighted average number of shares:
 
 
 
Basic
1,056

 
1,078

Diluted
1,071

 
1,089

See accompanying Notes to Consolidated Condensed Financial Statements.

3



APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
 
Three Months Ended
 
January 28,
2018
 
January 29,
2017
 
 
 
 
 
(Unaudited)
Net income
$
135

 
$
703

Other comprehensive income (loss), net of tax:
 
 
 
Change in unrealized net gain on investments
6

 
1

Change in unrealized net loss on derivative instruments
(19
)
 
15

Change in defined and postretirement benefit plans
(2
)
 
(7
)
Other comprehensive (loss) income, net of tax
(15
)
 
9

Comprehensive income
$
120

 
$
712

See accompanying Notes to Consolidated Condensed Financial Statements.



4


APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)
 
January 28,
2018
 
October 29,
2017
 
 
 
 
 
 
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
6,799

 
$
5,010

Short-term investments
655

 
2,266

Accounts receivable, net
2,182

 
2,338

Inventories
3,125

 
2,930

Other current assets
268

 
374

Total current assets
13,029

 
12,918

Long-term investments
1,203

 
1,143

Property, plant and equipment, net
1,195

 
1,066

Goodwill
3,368

 
3,368

Purchased technology and other intangible assets, net
362

 
412

Deferred income taxes and other assets
506

 
512

Total assets
$
19,663

 
$
19,419

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
2,381

 
$
2,450

Customer deposits and deferred revenue
2,018

 
1,665

Total current liabilities
4,399

 
4,115

Income taxes payable
1,158

 
392

Long-term debt
5,305

 
5,304

Other liabilities
295

 
259

Total liabilities
11,157

 
10,070

Stockholders’ equity:
 
 
 
Common stock
11

 
11

Additional paid-in capital
6,980

 
7,056

Retained earnings
18,288

 
18,258

Treasury stock
(16,694
)
 
(15,912
)
Accumulated other comprehensive loss
(79
)
 
(64
)
Total stockholders’ equity
8,506

 
9,349

Total liabilities and stockholders’ equity
$
19,663

 
$
19,419

Amounts as of January 28, 2018 are unaudited. Amounts as of October 29, 2017 are derived from the October 29, 2017 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
Three Months Ended January 28, 2018
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Unaudited)
Balance at October 29, 2017
1,060

 
$
11

 
$
7,056

 
$
18,258

 
917

 
$
(15,912
)
 
$
(64
)
 
$
9,349

Net income

 

 

 
135

 

 

 

 
135

Other comprehensive loss, net of tax

 

 

 

 

 

 
(15
)
 
(15
)
Dividends

 

 

 
(105
)
 

 

 

 
(105
)
Share-based compensation

 

 
65

 

 

 

 

 
65

Issuance under stock plans
5

 

 
(141
)
 

 

 

 

 
(141
)
Common stock repurchases
(15
)
 

 

 

 
15

 
(782
)
 

 
(782
)
Balance at January 28, 2018
1,050

 
$
11

 
$
6,980

 
$
18,288

 
932

 
$
(16,694
)
 
$
(79
)
 
$
8,506

 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Three Months Ended January 29, 2017
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Unaudited)
Balance at October 30, 2016
1,078

 
$
11

 
$
6,809

 
$
15,252

 
889

 
$
(14,740
)
 
$
(115
)
 
$
7,217

Net income

 

 

 
703

 

 

 

 
703

Other comprehensive income, net of tax

 

 

 

 

 

 
9

 
9

Dividends

 

 

 
(108
)
 

 

 

 
(108
)
Share-based compensation

 

 
54

 

 

 

 

 
54

Issuance under stock plans, net of tax benefit of $44 and other
6

 

 
(58
)
 

 

 

 

 
(58
)
Common stock repurchases
(4
)
 

 

 

 
4

 
(130
)
 

 
(130
)
Balance at January 29, 2017
1,080

 
$
11

 
$
6,805

 
$
15,847

 
893

 
$
(14,870
)
 
$
(106
)
 
$
7,687


See accompanying Notes to Consolidated Condensed Financial Statements.



6


APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
 
Three Months Ended
 
January 28,
2018
 
January 29,
2017
 
 
 
 
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
135

 
$
703

Adjustments required to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
119

 
97

Share-based compensation
65

 
54

Deferred income taxes
41

 
25

Other

 
9

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
156

 
(89
)
Inventories
(195
)
 
(231
)
Other current and non-current assets
78

 
(42
)
Accounts payable and accrued expenses
(125
)
 
(56
)
Customer deposits and deferred revenue
353

 
293

Income taxes payable
807

 
15

Other liabilities
32

 
14

Cash provided by operating activities
1,466

 
792

Cash flows from investing activities:
 
 
 
Capital expenditures
(203
)
 
(64
)
Cash paid for acquisitions, net of cash acquired
(5
)
 

Proceeds from sales and maturities of investments
1,944

 
286

Purchases of investments
(384
)
 
(589
)
Cash provided by (used in) investing activities
1,352

 
(367
)
Cash flows from financing activities:
 
 
 
Common stock repurchases
(782
)
 
(130
)
Tax withholding payments for vested equity awards
(141
)
 
(102
)
Payments of dividends to stockholders
(106
)
 
(108
)
Cash used in financing activities
(1,029
)
 
(340
)
Increase in cash and cash equivalents
1,789

 
85

Cash and cash equivalents — beginning of period
5,010

 
3,406

Cash and cash equivalents — end of period
$
6,799

 
$
3,491

Supplemental cash flow information:
 
 
 
Cash payments for income taxes
$
78

 
$
35

Cash refunds from income taxes
$
40

 
$
2

Cash payments for interest
$
34

 
$
34


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 29, 2017 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 29, 2017 (2017 Form 10-K). Applied’s results of operations for the three months ended January 28, 2018 are not necessarily indicative of future operating results. Applied’s fiscal year ends on the last Sunday in October of each year. Fiscal 2018 and 2017 each contain 52 weeks, and the first three months of fiscal 2018 and 2017 each contained 13 weeks.
Certain prior year amounts have been reclassified to conform to current year presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, Applied evaluates its estimates, including those related to accounts receivable and sales allowances, fair values of financial instruments, inventories, intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair values of share-based awards, and income taxes, among others. Applied bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Revenue Recognition
Applied recognizes revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; seller’s price to buyer is fixed or determinable; and collectability is probable. Applied’s shipping terms are customarily FOB Applied shipping point or equivalent terms. Applied’s revenue recognition policy generally results in revenue recognition at the following points: (1) for all transactions where legal title passes to the customer upon shipment or delivery, Applied recognizes revenue upon passage of title for all products that have been demonstrated to meet product specifications prior to shipment; the portion of revenue associated with certain installation-related tasks is deferred, and that revenue is recognized upon completion of the installation-related tasks; (2) for products that have not been demonstrated to meet product specifications prior to shipment, revenue is recognized at customer technical acceptance; (3) for transactions where legal title does not pass at shipment or delivery, revenue is recognized when legal title passes to the customer, which is generally at customer technical acceptance; and (4) for arrangements containing multiple elements, the revenue relating to the undelivered elements is deferred using the relative selling price method utilizing estimated sales prices until delivery of the deferred elements. Applied limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or adjustment. In cases where Applied has sold products that have been demonstrated to meet product specifications prior to shipment, Applied believes that at the time of delivery, it has an enforceable claim to amounts recognized as revenue. Spare parts revenue is generally recognized upon shipment, and services revenue is generally recognized over the period that the services are provided.
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.


8

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



Recent Accounting Pronouncements
Accounting Standards Adopted
Inventory Measurement. In July 2015, the Financial Accounting Standard 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. Applied adopted this authoritative guidance in the first quarter of fiscal 2018 prospectively to measurement of inventory after the effective date. The adoption of this guidance did not have a material impact on Applied’s consolidated financial statements.
Share-Based Compensation. In March 2016, the FASB issued authoritative guidance that simplifies several aspects of the accounting for share-based payment transactions, including forfeitures, income tax, and classification on the statement of cash flows. Applied adopted this guidance in the first quarter of fiscal 2018. Upon adoption, Applied elected to continue to estimate forfeitures expected to occur to determine the amount of compensation costs to be recognized in each period. The new standard also required recognition of excess tax benefits in the provision for income taxes rather than additional paid-in capital prospectively. In the first quarter of fiscal 2018, Applied recognized excess tax benefits of $51 million in the Consolidated Condensed Statements of Operations. Additionally, Applied elected to apply the presentation requirements for cash flows related to excess tax benefits and employee taxes paid for withheld shares retrospectively. Adopting this guidance increased cash provided by operating activities by a net $146 million with a corresponding net increase in cash used in financing activities for the three months ended January 29, 2017.
Accounting Standards Not Yet Adopted
Derivatives and Hedging. In August 2017, the FASB issued authoritative guidance that modifies the recognition and presentation of hedge accounting to better align an entity’s risk management strategies and financial reporting for hedging relationships. The authoritative guidance expands the application of hedge accounting for non-financial and financial risk components and eases certain hedge effectiveness assessment requirements. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2020, with early adoption permitted. Applied is currently evaluating the effect of this new guidance on Applied’s consolidated financial statements.
Share-Based Compensation: Modification Accounting. In May 2017, the FASB issued an update to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the change in terms or conditions. This authoritative guidance will be applied prospectively to awards modified following adoption and will be effective for Applied in the first quarter of fiscal 2019 with early adoption permitted. The impact of the adoption of this guidance will depend on whether the Company makes any future modifications of share-based payment awards.
Receivables: Nonrefundable Fees and Other Costs. In March 2017, the FASB issued authoritative guidance that will shorten the amortization period for certain callable debt securities held at a premium to the earliest call date to more closely align with expectations incorporated in market pricing. This authoritative guidance will be effective for Applied in the first quarter of fiscal 2020 on a modified retrospective basis, with early adoption permitted. Applied is currently evaluating the impact of adopting this new accounting guidance on Applied’s consolidated financial statements.
Retirement Benefits. In March 2017, the FASB issued authoritative guidance which requires companies to present the service cost component of net benefit cost in the same line items in which they report compensation cost. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2019 on a retrospective basis, with early adoption permitted. The adoption of this guidance is only expected to result in reclassification of other components of net benefit costs outside of income from operations and is not expected to have a significant impact on Applied’s consolidated financial statements.
Goodwill Impairment. In January 2017, the FASB issued authoritative guidance that simplifies the process required to test goodwill for impairment. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2021. Early adoption is permitted. The adoption of this guidance is not expected to have a significant impact on Applied’s consolidated financial statements.




9

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



Business Combinations. In January 2017, the FASB issued authoritative guidance that clarifies the definition of a business to help companies evaluate whether acquisition or disposal transactions should be accounted for as asset groups or as businesses. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2019 on a prospective basis, with early adoption permitted. The impact of the adoption depends on the facts and circumstances of future acquisition or disposal transactions.
Income Taxes: Intra-Entity Asset Transfers. In October 2016, the FASB issued authoritative guidance that requires entities to recognize at the transaction date the income tax effects of intercompany asset transfers other than inventory. The authoritative 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 consolidated financial statements.
Classification of Certain Cash Receipts and Cash Payments. In August 2016, a new authoritative guidance was issued which addresses classification of certain cash receipts and cash payments related to the statement of cash flows. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2019. The adoption of this guidance is not expected to have a significant impact on Applied’s consolidated financial statements.
Financial Instruments: Credit Losses. In June 2016, the FASB issued authoritative guidance that modifies the impairment model for certain financial assets by requiring use of an expected loss methodology, which will result in more timely recognition of credit losses. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2021. Early adoption is permitted beginning in the first quarter of fiscal 2020. Applied is currently evaluating the effect of this new guidance on Applied’s consolidated financial statements.
Leases. In February 2016, the FASB issued authoritative guidance for lease accounting, which requires lessees to recognize lease assets and liabilities on the balance sheet for certain lease arrangements that are classified as operating leases under the previous standard, and to provide for enhanced disclosures. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2020 and should be applied using a modified retrospective approach. Early adoption is permitted. Applied is currently evaluating the effect of this new guidance on Applied’s consolidated financial statements.
Financial Instruments: Classification and Measurement. In January 2016, the FASB issued authoritative guidance that requires equity investments that do not result in consolidation, and are not accounted for under the equity method, to be measured at fair value, and requires recognition of any changes in fair value in net income unless the investments qualify for a new 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.
Revenue Recognition. In May 2014, the FASB issued authoritative guidance that requires revenue recognition to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, and requires certain additional disclosures. 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. 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, which is the Company’s planned adoption date. Applied currently anticipates adopting this new guidance using the full retrospective approach, although this continues to be assessed as part of the overall evaluation.
In fiscal 2016, Applied established a project steering committee and cross-functional implementation team to identify potential differences that would result from applying the requirements of the new standard to Applied’s revenue contracts. In addition, the implementation team is also responsible for identifying and implementing changes to business processes, systems and controls to support recognition and disclosure under the new standard. While the Company’s evaluation of the impact of this new guidance is not complete, Applied currently expects the timing of revenue recognition for certain products to be earlier than under current revenue recognition guidance. Applied will continue to complete its evaluation of the effect of this new guidance on Applied’s financial position, results of operations and its ongoing financial reporting, and its preliminary assessments are subject to change.



10

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



Note 2
Earnings Per Share
Basic earnings per share is determined using the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined using the weighted average number of common shares and potential common shares (representing the dilutive effect of stock options, restricted stock units, and employee stock purchase plan shares) outstanding during the period. Applied’s net income has not been adjusted for any period presented for purposes of computing basic or diluted earnings per share due to the Company’s non-complex capital structure.
 
 
Three Months Ended
 
January 28,
2018
 
January 29,
2017
 
 
 
 
 
(In millions, except per share amounts)
Numerator:
 
 
 
Net income
$
135

 
$
703

Denominator:
 
 
 
Weighted average common shares outstanding
1,056

 
1,078

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

 
11

Denominator for diluted earnings per share
1,071

 
1,089

Basic and diluted earnings per share
$
0.13

 
$
0.65

Potentially dilutive securities

 


Potentially dilutive securities attributable to outstanding stock options and restricted stock units are excluded from the calculation of diluted earnings per share where the combined exercise price and average unamortized fair value are greater than the average market price of Applied common stock, and therefore their inclusion would be anti-dilutive. Prior to the first quarter of fiscal 2018 and the adoption of the Accounting Standards Update (“ASU”) 2016-09 related to share-based compensation, the assumed tax benefits upon the exercise of options and vesting of restricted stock units were also included in this calculation.

11

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:
 
January 28, 2018
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair  Value
 
 
 
 
 
 
 
 
 
(In millions)
Cash
$
1,469

 
$

 
$

 
$
1,469

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
3,766

 

 

 
3,766

Non-U.S. government securities*
40

 

 

 
40

Municipal securities
836

 

 

 
836

Commercial paper, corporate bonds and medium-term notes
688

 

 

 
688

Total Cash equivalents
5,330

 

 

 
5,330

Total Cash and Cash equivalents
$
6,799

 
$

 
$

 
$
6,799

Short-term and long-term investments:
 
 
 
 
 
 
 
U.S. Treasury and agency securities
$
255

 
$

 
$
1

 
$
254

Non-U.S. government securities*
10

 

 

 
10

Municipal securities
452

 

 
2

 
450

Commercial paper, corporate bonds and medium-term notes
563

 

 
2

 
561

Asset-backed and mortgage-backed securities
397

 

 
3

 
394

Total fixed income securities
1,677

 

 
8

 
1,669

Publicly traded equity securities
22

 
93

 
1

 
114

Equity investments in privately-held companies
75

 

 

 
75

Total short-term and long-term investments
$
1,774

 
$
93

 
$
9

 
$
1,858

Total Cash, Cash equivalents and Investments
$
8,573

 
$
93

 
$
9

 
$
8,657

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


12

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



October 29, 2017
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair  Value
 
 
 
 
 
 
 
 
 
(In millions)
Cash
$
1,346

 
$

 
$

 
$
1,346

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
2,658

 

 

 
2,658

U.S. Treasury and agency securities
15

 

 

 
15

Non-U.S. government securities*
55

 

 

 
55

Municipal securities
341

 

 

 
341

Commercial paper, corporate bonds and medium-term notes
595

 

 

 
595

Total Cash equivalents
3,664

 

 

 
3,664

Total Cash and Cash equivalents
$
5,010

 
$

 
$

 
$
5,010

Short-term and long-term investments:
 
 
 
 
 
 
 
U.S. Treasury and agency securities
$
667

 
$

 
$
1

 
$
666

Non-U.S. government securities*
161

 

 

 
161

Municipal securities
1,007

 

 

 
1,007

Commercial paper, corporate bonds and medium-term notes
1,024

 
1

 
1

 
1,024

Asset-backed and mortgage-backed securities
379

 

 
1

 
378

Total fixed income securities
3,238

 
1

 
3

 
3,236

Publicly traded equity securities
22

 
78

 
1

 
99

Equity investments in privately-held companies
74

 

 

 
74

Total short-term and long-term investments
$
3,334

 
$
79

 
$
4

 
$
3,409

Total Cash, Cash equivalents and Investments
$
8,344

 
$
79

 
$
4

 
$
8,419

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

 Maturities of Investments
The following table summarizes the contractual maturities of Applied’s investments at January 28, 2018:
 
 
Cost
 
Estimated
Fair  Value
 
 
 
 
 
(In millions)
Due in one year or less
$
606

 
$
606

Due after one through five years
674

 
668

No single maturity date**
494

 
584

 
$
1,774

 
$
1,858

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


13

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



Gains and Losses on Investments
During the three months ended January 28, 2018 and January 29, 2017, gross realized gains and losses on investments were not material.
At January 28, 2018 and October 29, 2017, 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 fixed-income securities at January 28, 2018 and January 29, 2017 were temporary in nature and therefore it did not recognize any impairment of its marketable fixed-income securities during the three months ended January 28, 2018 or January 29, 2017. Impairment charges on equity investments in privately-held companies during the three months ended January 28, 2018 and January 29, 2017 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 whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.
Fair Value Hierarchy
Applied uses the following fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
 
Level 1 — Quoted prices in active markets for identical assets or liabilities;
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Applied’s investments consist primarily of debt securities that are classified as available-for-sale and recorded at their fair values. In determining the fair value of investments, Applied uses pricing information from pricing services that value securities based on quoted market prices and models that utilize observable market inputs. In the event a fair value estimate is unavailable from a pricing service, Applied generally obtains non-binding price quotes from brokers. Applied then reviews the information provided by the pricing services or brokers to determine the fair value of its short-term and long-term investments. In addition, to validate pricing information obtained from pricing services, Applied periodically performs supplemental analysis on a sample of securities. Applied reviews any significant unanticipated differences identified through this analysis to determine the appropriate fair value.
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 January 28, 2018, 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.


14

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



Assets Measured at Fair Value on a Recurring Basis
Financial assets (excluding cash balances) measured at fair value on a recurring basis are summarized below:
 
 
January 28, 2018
 
October 29, 2017
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Assets:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
3,766

 
$

 
$
3,766

 
$
2,658

 
$

 
$
2,658

U.S. Treasury and agency securities
227

 
27

 
254

 
192

 
489

 
681

Non-U.S. government securities

 
50

 
50

 

 
216

 
216

Municipal securities

 
1,286

 
1,286

 

 
1,348

 
1,348

Commercial paper, corporate bonds and medium-term notes

 
1,249

 
1,249

 

 
1,619

 
1,619

Asset-backed and mortgage-backed securities

 
394

 
394

 

 
378

 
378

Publicly traded equity securities
114

 

 
114

 
99

 

 
99

Total
$
4,107

 
$
3,006

 
$
7,113

 
$
2,949

 
$
4,050

 
$
6,999

There were no transfers between Level 1 and Level 2 fair value measurements during the three months ended January 28, 2018 or January 29, 2017. Applied did not have any financial assets measured at fair value on a recurring basis within Level 3 fair value measurements as of January 28, 2018 or October 29, 2017.
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 January 28, 2018, equity investments in privately-held companies totaled $75 million, of which $65 million of these investments were accounted for under the cost method of accounting and $10 million of investments had been measured at fair value on a non-recurring basis within Level 3 fair value measurements due to an other-than-temporary decline in value. At October 29, 2017, equity investments in privately-held companies totaled $74 million, of which $65 million of these 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 months ended January 28, 2018 and January 29, 2017 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 January 28, 2018 and October 29, 2017, the carrying amount of long-term debt was $5.3 billion and the estimated fair value was $5.8 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.

15

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 2017, Applied entered into and settled interest rate lock agreements, with a total notional amount of $700 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 March 2017. The $14 million loss from the settlement of the interest rate lock agreement, which was included in AOCI in stockholders’ equity, is being amortized to interest expense over the term of the senior unsecured 10-year notes issued in March 2017.
Applied does not use derivative financial instruments for trading or speculative purposes. Derivative instruments and hedging activities, including foreign currency exchange and interest rate contracts, are recognized on the balance sheet at fair value. Changes in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of any hedges, are recognized currently in earnings. All of Applied’s derivative financial instruments are recorded at their fair value in other current assets or in accounts payable and accrued expenses. 
Hedges related to anticipated transactions are designated and documented at the inception of the hedge as cash flow hedges and foreign exchange derivatives are typically entered into once per month. Cash flow hedges are evaluated for effectiveness quarterly. The effective portion of the gain or loss on these hedges is reported as a component of AOCI in stockholders’ equity and is reclassified into earnings when the hedged transaction affects earnings. The majority of the after-tax net income or loss related to foreign exchange derivative instruments included in AOCI at January 28, 2018 is expected to be reclassified into earnings within 12 months. Changes in the fair value of currency forward exchange and option contracts due to changes in time value are excluded from the assessment of effectiveness. Both ineffective hedge amounts and hedge components excluded from the assessment of effectiveness are recognized in earnings. If the transaction being hedged is no longer probable to occur, or if a portion of any derivative is deemed to be ineffective, Applied promptly recognizes the gain or loss on the associated financial instrument in earnings. The amount recognized due to discontinuance of cash flow hedges that were probable not to occur by the end of the originally specified time period was not significant for the three months ended January 28, 2018 and January 29, 2017.
Additionally, forward exchange contracts are generally used to hedge certain foreign currency denominated assets or liabilities. These derivatives are typically entered into once per month and are not designated for hedge accounting treatment. Accordingly, changes in the fair value of these hedges are recorded in earnings to offset the changes in the fair value of the assets or liabilities being hedged.
The fair values of foreign exchange derivative instruments at January 28, 2018 and October 29, 2017 were not material.



16

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



The effects of derivative instruments and hedging activities on the Consolidated Condensed Statements of Operations were as follows:
 
 
 
Three Months Ended
 
 
 
January 28, 2018
 
January 29, 2017
Effective Portion
 
Ineffective Portion and Amount
Excluded from
Effectiveness
Testing
 
Effective Portion
 
Ineffective Portion and Amount
Excluded from
Effectiveness
Testing
 
Location of Gain or
(Loss)
 
Gain or
(Loss)
 
Gain or (Loss)
Reclassified
from AOCI into
Income
 
Gain or (Loss)
Recognized in
Income
 
Gain or
(Loss)
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
AOCI
 
$
(18
)
 
$

 
$

 
$
16

 
$

 
$

Foreign exchange contracts
Cost of products sold
 

 
8

 
2

 

 
(4
)
 
(2
)
Foreign exchange contracts
General and administrative
 

 
(1
)
 
(2
)
 

 
(3
)
 

Interest rate contracts
Interest expense
 

 
(1
)
 

 

 
(1
)
 

Total
 
 
$
(18
)
 
$
6

 
$

 
$
16

 
$
(8
)
 
$
(2
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of Gain or (Loss) 
Recognized in Income
 
 
Three Months Ended
Location of Gain or
(Loss) Recognized
in Income
 
January 28, 2018
 
January 29,
2017
 
 
 
 
 
 
 
 
 
(In millions)
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
Foreign exchange contracts
General and administrative
 
$
(8
)
 
$
31

Total
 
 
$
(8
)
 
$
31

 
Credit Risk Contingent Features
If Applied’s credit rating were to fall below investment grade, it would be in violation of credit risk contingent provisions of the derivative instruments discussed above, and certain counterparties to the derivative instruments could request immediate payment on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a net liability position was immaterial as of January 28, 2018.
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.


17

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




Note 6
Accounts Receivable, Net
Applied has agreements with various financial institutions to sell accounts receivable and discount promissory notes from selected customers. Applied sells its accounts receivable without recourse. Applied, from time to time, also discounts letters of credit issued by customers through various financial institutions. The discounting of letters of credit depends on many factors, including the willingness of financial institutions to discount the letters of credit and the cost of such arrangements.
Applied sold $376 million and $63 million of accounts receivable during the three months ended January 28, 2018 and January 29, 2017, respectively. Applied did not discount letters of credit issued by customers or discount promissory notes during the three months ended January 28, 2018 and January 29, 2017. 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 $34 million at January 28, 2018 and October 29, 2017. Applied sells its products principally to manufacturers within the semiconductor and display industries. While Applied believes that its allowance for doubtful accounts is adequate and represents its best estimate as of January 28, 2018, it continues to closely monitor customer liquidity and industry and economic conditions, which may result in changes to Applied’s estimates.


18

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



Note 7
Balance Sheet Detail
 
 
January 28,
2018
 
October 29,
2017
 
 
 
 
 
(In millions)
Inventories
 
 
 
Customer service spares
$
626

 
$
595

Raw materials
712

 
603

Work-in-process
524

 
468

Finished goods
1,263

 
1,264

 
$
3,125

 
$
2,930

 
Included in finished goods inventory are $317 million at January 28, 2018, and $331 million at October 29, 2017, 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 $280 million and $281 million of evaluation inventory at January 28, 2018 and October 29, 2017, respectively.
 
January 28,
2018
 
October 29,
2017
 
 
 
 
 
(In millions)
Other Current Assets
 
 
 
Prepaid income taxes and income taxes receivable
$
22

 
$
57

Prepaid expenses and other
246

 
317

 
$
268

 
$
374


 
Useful Life
 
January 28,
2018
 
October 29,
2017
 
 
 
 
 
 
 
(In years)
 
(In millions)
Property, Plant and Equipment, Net
 
 
 
Land and improvements
 
 
$
221

 
$
160

Buildings and improvements
3-30
 
1,371

 
1,315

Demonstration and manufacturing equipment
3-5
 
1,170

 
1,129

Furniture, fixtures and other equipment
3-15
 
576

 
572

Construction in progress
 
 
162

 
135

Gross property, plant and equipment
 
 
3,500

 
3,311

Accumulated depreciation
 
 
(2,305
)
 
(2,245
)
 
 
 
$
1,195

 
$
1,066



19

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



 
January 28,
2018
 
October 29,
2017
 
 
 
 
 
(In millions)
Accounts Payable and Accrued Expenses
 
 
 
Accounts payable
$
1,041

 
$
945

Compensation and employee benefits
407

 
666

Warranty
204

 
199

Dividends payable
105

 
106

Income taxes payable
153

 
112

Other accrued taxes
64

 
70

Interest payable
59

 
38

Other
348

 
314

 
$
2,381

 
$
2,450

 
 
January 28,
2018
 
October 29,
2017
 
 
 
 
 
(In millions)
Customer Deposits and Deferred Revenue
 
 
 
Customer deposits
$
626

 
$
381

Deferred revenue
1,392

 
1,284

 
$
2,018

 
$
1,665

 
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.
 
January 28,
2018
 
October 29,
2017
 
 
 
 
 
(In millions)
Other Liabilities
 
 
 
Defined and postretirement benefit plans
$
167

 
$
160

Other
128

 
99

 
$
295

 
$
259


20

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 January 28, 2018, Applied’s reporting units include Semiconductor Product Group and Imaging and Process Control Group, which combine to form the Semiconductor Systems reporting segment, Applied Global Services, and Display and Adjacent Markets.
The evaluation of goodwill and intangible assets for impairment requires the exercise of significant judgment. In the event of future changes in business conditions, Applied will be required to reassess and update its forecasts and estimates used in future impairment analyses. If the results of these future analyses are lower than current estimates, a material impairment charge may result at that time.
Details of goodwill as of January 28, 2018 and October 29, 2017 were as follows:
 
 
January 28,
2018
 
October 29,
2017
 
 
 
 
 
(In millions)
Semiconductor Systems
$
2,151

 
$
2,151

Applied Global Services
1,018

 
1,018

Display and Adjacent Markets
199

 
199

Carrying amount
$
3,368

 
$
3,368

A summary of Applied’s purchased technology and intangible assets is set forth below:
 
January 28,
2018
 
October 29,
2017
 
 
 
 
 
(In millions)
Purchased technology, net
$
244

 
$
288

Intangible assets - finite-lived, net
118

 
124

Total
$
362

 
$
412


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:
 
 
January 28, 2018
 
October 29, 2017
 
Purchased
Technology
 
Other
Intangible
Assets
 
Total
 
Purchased
Technology
 
Other
Intangible
Assets
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Gross carrying amount:
 
 
 
 
 
 
 
 
 
 
 
Semiconductor Systems
$
1,449

 
$
252

 
$
1,701

 
$
1,449

 
$
252

 
$
1,701

Applied Global Services
33

 
44

 
77

 
33

 
44

 
77

Display and Adjacent Markets
163

 
38

 
201

 
163

 
38

 
201

Corporate and Other

 
9

 
9

 

 
9

 
9

Gross carrying amount
$
1,645

 
$
343

 
$
1,988

 
$
1,645

 
$
343

 
$
1,988

Accumulated amortization:
 
 
 
 
 
 
 
 
 
 
 
Semiconductor Systems
$
(1,251
)
 
$
(136
)
 
$
(1,387
)
 
$
(1,210
)
 
$
(131
)
 
$
(1,341
)
Applied Global Services
(28
)
 
(44
)
 
(72
)
 
(28
)
 
(44
)
 
(72
)
Display and Adjacent Markets
(122
)
 
(36
)
 
(158
)
 
(119
)
 
(35
)
 
(154
)
Corporate and Other

 
(9
)
 
(9
)
 

 
(9
)
 
(9
)
Accumulated amortization
$
(1,401
)
 
$
(225
)
 
$
(1,626
)
 
$
(1,357
)
 
$
(219
)
 
$
(1,576
)
Carrying amount
$
244

 
$
118

 
$
362

 
$
288

 
$
124

 
$
412

Details of amortization expense by segment were as follows:
 
Three Months Ended
 
January 28,
2018
 
January 29,
2017
 
 
 
 
 
(In millions)
Semiconductor Systems
$
46

 
$
47

Display and Adjacent Markets
4

 
1

Total
$
50

 
$
48


22

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



Amortization expense was charged to the following categories:
 
Three Months Ended
 
January 28,
2018
 
January 29,
2017
 
 
 
 
 
(In millions)
Cost of products sold
$
45

 
$
42

Research, development and engineering

 
1

Marketing and selling
5

 
5

Total
$
50

 
$
48

As of January 28, 2018, future estimated amortization expense is expected to be as follows: 
 
Amortization
Expense
 
(In millions)
2018 (remaining 9 months)
$
148

2019
57

2020
52

2021
40

2022
65

Total
$
362



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 2021. This agreement provides for borrowings in United States dollars at interest rates keyed to one of various benchmark rates selected by Applied for each advance, plus a margin based on Applied’s public debt rating and includes financial and other covenants. Remaining credit facilities in the amount of approximately $73 million are with Japanese banks. Applied’s ability to borrow under these facilities is subject to bank approval at the time of the borrowing request, and any advances will be at rates indexed to the banks’ prime reference rate denominated in Japanese yen. No amounts were outstanding under any of these facilities at both January 28, 2018 and October 29, 2017, and Applied has not utilized these credit facilities. In fiscal 2011, Applied established a short-term commercial paper program of up to $1.5 billion. At January 28, 2018, Applied did not have any commercial paper outstanding.
Debt outstanding as of January 28, 2018 and October 29, 2017 was as follows:
 
 
Principal Amount
 
 
 
 
 
January 28,
2018
 
October 29,
2017
 
Effective
Interest Rate
 
Interest
Pay Dates
 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
Long-term debt:
 
 
 
 
 
 
 
2.625% Senior Notes Due 2020
$
600

 
$
600

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

 
750

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

 
700

 
3.944%
 
April 1, October 1
3.300% Senior Notes Due 2027
1,200

 
1,200

 
3.342%
 
April 1, October 1
5.100% Senior Notes Due 2035
500

 
500

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

 
600

 
5.879%
 
June 15, December 15
4.350% Senior Notes Due 2047
1,000

 
1,000

 
4.361%
 
April 1, October 1
 
5,350

 
5,350

 
 
 
 
Total unamortized discount
(12
)
 
(12
)
 
 
 
 
Total unamortized debt issuance costs 
(33
)
 
(34
)
 
 
 
 
Total long-term debt
5,305

 
5,304

 
 
 
 
 
 
 
 
 
 
 
 
Total debt
$
5,305

 
$
5,304

 
 
 
 


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 29, 2017
$
53

 
$
(11
)
 
$
(120
)
 
$
14

 
$
(64
)
Other comprehensive income (loss) before reclassifications
6

 
(14
)
 

 

 
(8
)
Amounts reclassified out of AOCI

 
(5
)
 
(2
)
 

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

 
(19
)
 
(2
)
 

 
(15
)
Balance at January 28, 2018
$
59

 
$
(30
)
 
$
(122
)
 
$
14

 
$
(79
)

 
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 30, 2016
$
30

 
$
(18
)
 
$
(141
)
 
$
14

 
$
(115
)
Other comprehensive income (loss) before reclassifications

 
10

 

 

 
10

Amounts reclassified out of AOCI
1

 
5

 
(7
)
 

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

 
15

 
(7
)
 

 
9

Balance at January 29, 2017
$
31

 
$
(3
)
 
$
(148
)
 
$
14

 
$
(106
)
The tax effects on net income of amounts reclassified from AOCI for the three months ended January 28, 2018 and January 29, 2017 were not material.














25

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



Stock Repurchase Program
In September 2017, the Board of Directors approved a common stock repurchase program authorizing up to $3.0 billion in repurchases, which was in addition to a $2.0 billion common stock repurchase program approved in June 2016. At January 28, 2018, $2.8 billion remained available for future stock repurchases under this repurchase program. In February 2018, the Board of Directors approved a new common stock repurchase program authorizing up to an additional $6.0 billion in repurchases.
The following table summarizes Applied’s stock repurchases for the three months ended January 28, 2018 and January 29, 2017:
 
Three Months Ended
 
January 28,
2018
 
January 29,
2017
 
 
 
 
 
(in millions, except per share amount)
Shares of common stock repurchased
15

 
4

Cost of stock repurchased
$
782

 
$
130

Average price paid per share
$
53.41

 
$
31.80

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 December 2017, Applied’s Board of Directors declared a quarterly cash dividend in the amount of $0.10 per share, to be paid in March 2018. Dividends paid during the three months ended January 28, 2018 and January 29, 2017 totaled $106 million and $108 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. In February 2018, the Board of Directors approved a quarterly cash dividend of $0.20 per share to be paid in June 2018.
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 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 months ended January 28, 2018 and January 29, 2017, Applied recognized share-based compensation expense related to stock options, ESPP shares, restricted stock, restricted stock units, performance shares and performance units. The effect of share-based compensation on the results of operations was as follows:
 
 
Three Months Ended
 
January 28,
2018
 
January 29,
2017
 
 
 
 
 
(In millions)
Cost of products sold
$
22

 
$
17

Research, development and engineering
24

 
20

Marketing and selling
8

 
7

General and administrative
11

 
10

Total share-based compensation
$
65

 
$
54


26

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



The cost associated with share-based awards that are subject solely to time-based vesting requirements, less expected forfeitures, is recognized over the awards’ service period for the entire award on a straight-line basis. The cost associated with performance-based equity awards is recognized for each tranche over the service period, based on an assessment of the likelihood that the applicable performance goals will be achieved.
At January 28, 2018, Applied had $481 million in total unrecognized compensation expense, net of estimated forfeitures, related to grants of share-based awards and shares issued under Applied’s ESPP, which will be recognized over a weighted average period of 2.9 years. At January 28, 2018, there were 82 million shares available for grants of share-based awards under the Employee Stock Incentive Plan, and an additional 20 million shares available for issuance under the ESPP.

Restricted Stock Units, Restricted Stock, Performance Shares and Performance Units
A summary of the changes in restricted stock units, restricted stock, performance shares and performance units outstanding under Applied’s equity compensation plans during the three months ended January 28, 2018 is presented below:
 
Shares
 
Weighted
Average
Grant Date
Fair Value
 
 
 
 
 
(In millions, except per share amounts)
Outstanding at October 29, 2017
22

 
$
23.96

Granted
5

 
$
51.84

Vested
(8
)
 
$
21.72

Canceled

 
$
26.81

Outstanding at January 28, 2018
19

 
$
31.65

At January 28, 2018, 1 million additional performance-based awards could be earned based upon achievement of certain levels of specified performance goals.
During the first quarter of fiscal 2018, certain executive officers were granted awards that are subject to the achievement of specified performance goals. These awards become eligible to vest only if performance goals are achieved and will vest only if the grantee remains employed by Applied through each applicable vesting date. Certain awards require the achievement of positive adjusted operating profit and vest ratably over three years. Other awards require the achievement of targeted levels of adjusted operating margin and wafer fabrication equipment market share, and the number of shares that may vest in full after three years ranges from 0% to 200% of the target amount.
The fair value of these awards is estimated on the date of grant. If the goals are achieved, the awards will vest, provided that the grantee remains employed by Applied through each applicable vesting date. If the performance goals are not met as of the end of the performance period, no compensation expense is recognized and any previously recognized compensation expense is reversed. The expected cost is based on the awards that are probable to vest and is reflected over the service period and reduced for estimated forfeitures.
 
 
 
 

27

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



Note 11    Income Taxes
On December 22, 2017, the U.S. government enacted tax legislation referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act included a reduction to the U.S. federal corporate tax rate from 35.0 percent to 21.0 percent and requires a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries payable over eight years. U.S. deferred tax assets and liabilities will be subject to remeasurement due to the reduction of the U.S. federal corporate tax rate. Applied’s fiscal year 2018 will have a blended U.S. federal corporate tax rate of 23.4 percent based on the number of days before and after the effective date of the Tax Act.
The U.S. Securities and Exchange Commission (the “SEC”) staff issued Staff Accounting Bulletin (“SAB”) No. 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that will not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification (“ASC”) 740. Pursuant to this guidance, provisional adjustments were recorded when reasonable estimates could be determined. No adjustments were recorded when reasonable estimates could not be determined. These provisional estimates will be revised as information becomes available and as guidance is issued by the Internal Revenue Service. The accounting for the tax effects of the Tax Act will be completed during the measurement period.
The transition tax is a tax on previously untaxed accumulated and current earnings and profits (“E&P”) of certain foreign subsidiaries. To determine the amount of the transition tax, the amount of post-1986 E&P of relevant subsidiaries, as well as the amount of foreign income taxes paid on such earnings, must be calculated. A transition tax expense was recorded in the first fiscal quarter 2018 based on reasonable estimates of foreign subsidiaries E&P. Additional information is being gathered to more precisely compute the transition tax which will be completed during the measurement period.
Tax expense was also recorded based on the decrease in U.S. deferred tax assets due to the reduction of the U.S. federal corporate tax rate from 35.0 percent to 21.0 percent. Tax expense from the decrease in net U.S. deferred tax assets may be affected by other analyses related to the Tax Act, including the calculation of deemed repatriation of deferred foreign income and the state tax effect of adjustments made to federal temporary differences. Valuation allowance analyses are affected by various provisions of the Tax Act (e.g., deemed repatriation of deferred foreign income, global intangible low taxed income inclusions and new categories of foreign tax credits). Since Applied has recorded provisional estimates related to certain portions of the Tax Act, any corresponding determination of the need for or change in a valuation allowance is also provisional.
The Tax Act also includes provisions that do not affect Applied in fiscal 2018, including a provision designed to tax global intangible low-taxed income (“GILTI”). Due to the complexity of the GILTI tax rules, this provision and related tax accounting will continue to be evaluated. An accounting policy choice is allowed to either treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or factor such amounts into the measurement of deferred taxes (the “deferred method”). The calculation of the deferred balance with respect to the new GILTI tax provisions will depend, in part, on analyzing global income to determine whether future U.S. inclusions in taxable income are expected related to GILTI and, if so, what the impact is expected to be, and an accounting policy choice has not yet been made.
Applied’s effective tax rates for the first quarters of fiscal 2018 and 2017 were 88.4 percent and 8.8 percent, respectively. The effective tax rate for the first quarter of fiscal 2018 was higher compared to the same quarter in the prior year primarily due to $1.0 billion of income tax expense related to the Tax Act for the transition tax and the decrease in U.S. deferred tax assets. Tax expense in the first quarter of fiscal 2018 was partially offset by adoption of authoritative guidance for share-based compensation that resulted in the recognition of excess tax benefits of $51 million in provision for income taxes rather than paid-in capital, and by the effect of the lower U.S. federal corporate tax rate and changes in the geographical composition of income.
During the next twelve months, it is reasonably possible that existing liabilities for unrecognized tax benefits could be reduced by approximately $13 million as a result of negotiations with taxing authorities and the expiration of statutes of limitation.

28

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




Note 12
Warranty, Guarantees and Contingencies    
Warranty
Changes in the warranty reserves are presented below:
 
 
Three Months Ended
 
January 28,
2018
 
January 29,
2017
 
 
 
 
 
(In millions)
Beginning balance
$
199

 
$
153

Warranties issued
46

 
40

Change in reserves related to preexisting warranty
2

 
3

Consumption of reserves
(43
)
 
(26
)
Ending balance
$
204

 
$
170

  Applied products are generally sold with a warranty for a 12-month period following installation. The provision for the estimated cost of warranty is recorded when revenue is recognized. Parts and labor are covered under the terms of the warranty agreement. The warranty provision is based on historical experience by product, configuration and geographic region. Quarterly warranty consumption is generally associated with sales that occurred during the preceding four quarters, and quarterly warranty provisions are generally related to the current quarter’s sales.
Guarantees
In the ordinary course of business, Applied provides standby letters of credit or other guarantee instruments to third parties as required for certain transactions initiated by either Applied or its subsidiaries. As of January 28, 2018, the maximum potential amount of future payments that Applied could be required to make under these guarantee agreements was approximately $72 million. Applied has not recorded any liability in connection with these guarantee agreements beyond that required to appropriately account for the underlying transaction being guaranteed. Applied does not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under these guarantee agreements.
Applied also has agreements with various banks to facilitate subsidiary banking operations worldwide, including overdraft arrangements, issuance of bank guarantees, and letters of credit. As of January 28, 2018, Applied has provided parent guarantees to banks for approximately $141 million to cover these arrangements.

Legal Matters
From time to time, Applied receives notification from third parties, including customers and suppliers, seeking indemnification, litigation support, payment of money or other actions by Applied in connection with claims made against them. In addition, from time to time, Applied receives notification from third parties claiming that Applied may be or is infringing or misusing their intellectual property or other rights. Applied also is subject to various other legal proceedings and claims, both asserted and unasserted, that arise in the ordinary course of business. 
Although the outcome of the above-described matters, claims and proceedings cannot be predicted with certainty, Applied does not believe that any will have a material effect on its consolidated financial condition or results of operations.



29

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



Note 13
Industry Segment Operations
Applied’s three reportable segments are: Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets. As defined under the accounting literature, Applied’s chief operating decision-maker has been identified as the President and Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Segment information is presented based upon Applied’s management organization structure as of January 28, 2018 and the distinctive nature of each segment. Future changes to this internal financial structure may result in changes to Applied’s reportable segments.
The Semiconductor Systems reportable segment includes semiconductor capital equipment for etch, rapid thermal processing, deposition, chemical mechanical planarization, metrology and inspection, wafer packaging, and ion implantation.
The Applied Global Services segment provides integrated solutions to optimize equipment and fab performance and productivity, including spares, upgrades, services, certain remanufactured earlier generation equipment and factory automation software for semiconductor, display and other products.
The Display and Adjacent Markets segment includes products for manufacturing liquid crystal displays (LCDs), organic light-emitting diodes (OLEDs), equipment upgrades and flexible coating systems and other display technologies for TVs, personal computers, smart phones, and other consumer-oriented devices.
Each operating segment is separately managed and has separate financial results that are reviewed by Applied’s chief operating decision-maker. Each reportable segment contains closely related products that are unique to the particular segment. Segment operating income is determined based upon internal performance measures used by Applied’s chief operating decision-maker. The chief operating decision-maker does not evaluate operating segments using total asset information.
Applied derives the segment results directly from its internal management reporting system. The accounting policies Applied uses to derive reportable segment results are substantially the same as those used for external reporting purposes. Management measures the performance of each reportable segment based upon several metrics including net sales and operating income. Management uses these results to evaluate the performance of, and to assign resources to, each of the reportable segments.
The Corporate and Other category includes revenues from products, as well as costs of products sold, for fabricating solar photovoltaic cells and modules, and certain operating expenses that are not allocated to its reportable segments and are managed separately at the corporate level. These operating expenses include costs related to share-based compensation; certain management, finance, legal, human resources, and research, development and engineering functions provided at the corporate level; and unabsorbed information technology and occupancy. In addition, Applied does not allocate to its reportable segments restructuring and asset impairment charges and any associated adjustments related to restructuring actions, unless these actions pertain to a specific reportable segment. Segment operating income also excludes interest income/expense and other financial charges and income taxes. Management does not consider the unallocated costs in measuring the performance of the reportable segments.


30

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




Net sales and operating income (loss) for each reportable segment were as follows:
 
 
Three Months Ended
 
Net Sales
 
Operating
Income  (Loss)
 
 
 
 
 
(In millions)
January 28, 2018:
 
 
 
Semiconductor Systems
$
2,847

 
$
995

Applied Global Services
880

 
254

Display and Adjacent Markets
455

 
101

Corporate and Other
22

 
(154
)
Total
$
4,204

 
$
1,196

January 29, 2017:
 
 
 
Semiconductor Systems
$
2,150

 
$
690

Applied Global Services
676

 
178

Display and Adjacent Markets
422

 
115

Corporate and Other
30

 
(176
)
Total
$
3,278

 
$
807


The reconciling items included in Corporate and Other were as follows:
 
 
Three Months Ended
 
January 28,
2018
 
January 29,
2017
 
 
 
 
 
(In millions)
Unallocated net sales
$
22

 
$
30

Unallocated cost of products sold and expenses
(111
)
 
(152
)
Share-based compensation
(65
)
 
(54
)
Total
$
(154
)
 
$
(176
)

The following customers accounted for at least 10 percent of Applied’s net sales for the three months ended January 28, 2018, and sales to these customers included products and services from multiple reportable segments.
 
 
Percentage of Net Sales
Samsung Electronics Co., Ltd.
20
%
Taiwan Semiconductor Manufacturing Company Limited
13
%



31



Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following management’s discussion and analysis is provided in addition to the accompanying consolidated condensed financial statements and notes to assist in understanding Applied’s results of operations and financial condition. Financial information as of January 28, 2018 should be read in conjunction with the financial statements for the fiscal year ended October 29, 2017 contained in the Company’s Form 10-K filed December 15, 2017.
This report contains forward-looking statements that involve a number of risks and uncertainties. Examples of forward-looking statements include those regarding Applied’s future financial or operating results, cash flows and cash deployment strategies, declaration of dividends, share repurchases, business strategies and priorities, costs and cost controls, products, competitive positions, management’s plans and objectives for future operations, research and development, strategic acquisitions and investments, growth opportunities, restructuring activities, backlog, working capital, liquidity, investment portfolio and policies, taxes, supply chain, manufacturing, properties, legal proceedings and claims, customer demand and spending, end-use demand, market and industry trends and outlooks, general economic conditions and other statements that are not historical facts, as well as their underlying assumptions. Forward-looking statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “potential” and “continue,” the negative of these terms, or other comparable terminology. All forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in Part II, Item 1A, “Risk Factors,” below and elsewhere in this report. These and many other factors could affect Applied’s future financial condition and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by Applied or on its behalf. Forward-looking statements are based on management’s estimates, projections and expectations as of the date hereof, and Applied undertakes no obligation to revise or update any such statements.

Overview
Applied provides manufacturing equipment, services and software to the semiconductor, display, and related industries. Applied’s customers include manufacturers of semiconductor wafers and chips, liquid crystal and organic light-emitting diode (OLED) displays, and other electronic devices. These customers may use what they manufacture in their own end products or sell the items to other companies for use in advanced electronic components. Each of Applied’s businesses is subject to variable industry conditions, as demand for manufacturing equipment and services can change depending on supply and demand for chips, display technologies, and other electronic devices, as well as other factors, such as global economic and market conditions, and the nature and timing of technological advances in fabrication processes.
Applied operates in three reportable segments: Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets. A summary of financial information for each reportable segment is found in Note 13 of Notes to Consolidated Condensed Financial Statements. A discussion of factors that could affect Applied’s operations is set forth under “Risk Factors” in Part II, Item 1A, which is incorporated herein by reference. Product development and manufacturing activities occur primarily in the United States, Europe, Israel, and Asia. Applied’s broad range of equipment and service products are highly technical and are sold primarily through a direct sales force.