10-Q 1 amat0127201910-qq12019.htm AMAT 10-Q (Q1 2019) Document


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

þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 27, 2019
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  þ        No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer þ
 
Accelerated filer ¨
Non-accelerated filer ¨
 
Smaller reporting company ¨
 
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨        No  þ
Number of shares outstanding of the issuer’s common stock as of January 27, 2019: 949,392,609



APPLIED MATERIALS, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JANUARY 27, 2019
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 27,
2019
 
January 28,
2018
 
 
 
 
 
(Unaudited)
Net sales
$
3,753

 
$
4,205

Cost of products sold
2,088

 
2,265

Gross profit
1,665

 
1,940

Operating expenses:
 
 
 
Research, development and engineering
516

 
489

Marketing and selling
131

 
126

General and administrative
110

 
110

Total operating expenses
757

 
725

Income from operations
908

 
1,215

Interest expense
60

 
59

Interest and other income, net
40

 
27

Income before income taxes
888

 
1,183

Provision for income taxes
117

 
1,018

Net income
$
771

 
$
165

Earnings per share:
 
 
 
Basic
$
0.81

 
$
0.16

Diluted
$
0.80

 
$
0.15

Weighted average number of shares:
 
 
 
Basic
957

 
1,056

Diluted
965

 
1,071

See accompanying Notes to Consolidated Condensed Financial Statements.

3



APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
 
Three Months Ended
 
January 27,
2019
 
January 28,
2018
 
 
 
 
 
(Unaudited)
Net income
$
771

 
$
165

Other comprehensive income (loss), net of tax:
 
 
 
Change in unrealized gain (losses) on available-for-sale investments
5

 
6

Change in unrealized net loss on derivative instruments
(17
)
 
(19
)
Change in defined and postretirement benefit plans

 
(2
)
Other comprehensive income (loss), net of tax
(12
)
 
(15
)
Comprehensive income
$
759

 
$
150

See accompanying Notes to Consolidated Condensed Financial Statements.



4


APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)
 
January 27,
2019
 
October 28,
2018
 
 
 
 
 
 
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
3,192

 
$
3,440

Short-term investments
520

 
590

Accounts receivable, net
2,444

 
2,323

Inventories
3,703

 
3,721

Other current assets
426

 
530

Total current assets
10,285

 
10,604

Long-term investments
1,588

 
1,568

Property, plant and equipment, net
1,456

 
1,407

Goodwill
3,368

 
3,368

Purchased technology and other intangible assets, net
199

 
213

Deferred income taxes and other assets
2,026

 
473

Total assets
$
18,922

 
$
17,633

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
2,420

 
$
2,721

Contract liabilities
1,356

 
1,201

Total current liabilities
3,776

 
3,922

Income taxes payable
1,303

 
1,254

Long-term debt
5,310

 
5,309

Other liabilities
324

 
303

Total liabilities
10,713

 
10,788

Stockholders’ equity:
 
 
 
Common stock
9

 
10

Additional paid-in capital
7,265

 
7,274

Retained earnings
23,032

 
20,880

Treasury stock
(21,943
)
 
(21,194
)
Accumulated other comprehensive loss
(154
)
 
(125
)
Total stockholders’ equity
8,209

 
6,845

Total liabilities and stockholders’ equity
$
18,922

 
$
17,633

Amounts as of January 27, 2019 are unaudited. Amounts as of October 28, 2018 are derived from the October 28, 2018 audited consolidated financial statements.
See accompanying Notes to Consolidated Condensed Financial Statements.

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 27, 2019
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Unaudited)
Balance as of October 28, 2018
967

 
$
10

 
$
7,274

 
$
20,880

 
1,019

 
$
(21,194
)
 
$
(125
)
 
$
6,845

Adoption of new accounting standards (a)

 

 

 
1,570

 

 

 
(17
)
 
1,553

Net income

 

 

 
771

 

 

 

 
771

Other comprehensive loss, net of tax

 

 

 

 

 

 
(12
)
 
(12
)
Dividends declared ($0.20 per common share)

 

 

 
(189
)
 

 

 

 
(189
)
Share-based compensation

 

 
65

 

 

 

 

 
65

Issuance under stock plans
4

 

 
(74
)
 

 

 

 

 
(74
)
Common stock repurchases
(22
)
 
(1
)
 

 

 
22

 
(749
)
 

 
(750
)
Balance as of January 27, 2019
949

 
$
9

 
$
7,265

 
$
23,032

 
1,041

 
$
(21,943
)
 
$
(154
)
 
$
8,209

(a) - Represents the reclassification adjustment related to the adoption of Accounting Standard Update (ASU) 2016-01 Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and ASU 2016-16 Income Tax (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. See Note 1.
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings (b)
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Three Months Ended January 28, 2018
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Unaudited)
Balance as of October 29, 2017
1,060

 
$
11

 
$
7,056

 
$
18,539

 
917

 
$
(15,912
)
 
$
(64
)
 
$
9,630

Net income

 

 

 
165

 

 

 

 
165

Other comprehensive loss, net of tax

 

 

 

 

 

 
(15
)
 
(15
)
Dividends declared ($0.10 per common share)

 

 

 
(105
)
 

 

 

 
(105
)
Share-based compensation

 

 
65

 

 

 

 

 
65

Issuance under stock plans
5

 

 
(141
)
 

 

 

 

 
(141
)
Common stock repurchases
(15
)
 

 

 

 
15

 
(782
)
 

 
(782
)
Balance as of January 28, 2018
1,050

 
$
11

 
$
6,980

 
$
18,599

 
932

 
$
(16,694
)
 
$
(79
)
 
$
8,817

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

See accompanying Notes to Consolidated Condensed Financial Statements.



6


APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
 
Three Months Ended
 
January 27,
2019
 
January 28,
2018
 
 
 
 
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
771

 
$
165

Adjustments required to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
88

 
119

Share-based compensation
65

 
65

Deferred income taxes
41

 
32

Other
1

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(121
)
 
156

Inventories
18

 
(211
)
Other current and non-current assets
76

 
78

Accounts payable and accrued expenses
(313
)
 
(127
)
Contract liabilities
155

 
350

Income taxes payable
41

 
807

Other liabilities
12

 
32

Cash provided by operating activities
834

 
1,466

Cash flows from investing activities:
 
 
 
Capital expenditures
(133
)
 
(203
)
Cash paid for acquisitions, net of cash acquired

 
(5
)
Proceeds from sales and maturities of investments
464

 
1,944

Purchases of investments
(397
)
 
(384
)
Cash provided by (used in) investing activities
(66
)
 
1,352

Cash flows from financing activities:
 
 
 
Common stock repurchases
(750
)
 
(782
)
Tax withholding payments for vested equity awards
(74
)
 
(141
)
Payments of dividends to stockholders
(192
)
 
(106
)
Cash used in financing activities
(1,016
)
 
(1,029
)
Increase (decrease) in cash and cash equivalents
(248
)
 
1,789

Cash and cash equivalents — beginning of period
3,440

 
5,010

Cash and cash equivalents — end of period
$
3,192

 
$
6,799

Supplemental cash flow information:
 
 
 
Cash payments for income taxes
$
34

 
$
78

Cash refunds from income taxes
$
8

 
$
40

Cash payments for interest
$
34

 
$
34


See accompanying Notes to Consolidated Condensed Financial Statements.

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 28, 2018 audited consolidated financial statements and include all material adjustments, consisting of normal recurring adjustments, necessary to fairly present the information set forth therein. These unaudited interim consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Applied’s Annual Report on Form 10-K for the fiscal year ended October 28, 2018 (2018 Form 10-K). Applied’s results of operations for the three months ended January 27, 2019 are not necessarily indicative of future operating results. Applied’s fiscal year ends on the last Sunday in October of each year. Fiscal 2019 and 2018 each contain 52 weeks, and the first three months of fiscal 2019 and 2018 each contained 13 weeks.
At the beginning of the first quarter of fiscal 2019, Applied adopted the new revenue recognition standard using the full retrospective method. All financial statements and disclosures have been recast to comply with this new guidance. See "Recent Accounting Pronouncements - Accounting Standards Adopted" section below for further information.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, Applied evaluates its estimates, including those related to standalone selling price (SSP) related to revenue recognition, accounts receivable and sales allowances, fair values of financial instruments, inventories, intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair values of share-based awards, and income taxes, among others. Applied bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Changes to Significant Accounting Policies
Applied adopted various amended guidance during the first quarter of fiscal 2019. The following accounting policies have been updated as part of the adoption of the new standards.
Allowance for Doubtful Accounts
Applied maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. This allowance is based on historical experience, credit evaluations, specific customer collection history and any customer-specific issues Applied has identified. Changes in circumstances, such as an unexpected material adverse change in a major customer’s ability to meet its financial obligation to Applied or its payment trends, may require Applied to further adjust its estimates of the recoverability of amounts due to Applied. Bad debt expense and any reversals are recorded in marketing and selling expenses in the Consolidated Condensed Statement of Operations.
Sales and Value Added Taxes
Taxes collected from customers and remitted to governmental authorities are presented on a net basis in the accompanying Consolidated Condensed Statements of Operations.
Shipping and Handling Costs
Applied accounts for shipping and handling activities related to contracts with customers as costs to fulfill our promise to transfer the associated products. Accordingly, amounts billed for shipping and handling costs are recorded as a component of net sales and costs as a component of cost of products sold.
Warranty
Applied provides for the estimated cost of warranty when revenue is recognized. Estimated warranty costs are determined by analyzing specific product, current and historical configuration statistics and regional warranty support costs. Applied’s warranty obligation is affected by product and component failure rates, material usage and labor costs incurred in correcting product failures during the warranty period. If actual warranty costs differ substantially from Applied’s estimates, revisions to the estimated warranty liability would be required.

8


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



Applied also sells extended warranty contracts to its customers which provide an extension of the standard warranty coverage period of up to 2 years. Applied receives payment at the inception of the contract and recognizes revenue ratably over the extended warranty coverage period, as the customer simultaneously receives and consumes the benefits of the extended warranty.
Revenue Recognition from Contracts with Customers
Applied recognizes revenue when promised goods or services are transferred to a customer in an amount that reflects the consideration to which Applied expects to be entitled in exchange for those goods or services. Applied determines revenue recognition through the following five steps; (1) identification of the contract(s) with customers, (2) identification of the performance obligations in the contract, (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations in the contract, and (5) recognition of revenue when, or as, a performance obligation is satisfied.
Identifying the contract(s) with customers. Applied sells manufacturing equipment, services, and spare parts directly to its customers in the semiconductor, display, and related industries. The Company generally considers written documentation including, but not limited to, signed purchase orders, master agreements, and sales orders as contracts provided that collection is probable. Collectability is assessed based on the customer’s creditworthiness determined by reviewing the customer’s published credit and financial information, historical payment experience, as well as other relevant factors.
Identifying the performance obligations. Applied’s performance obligations include delivery of manufacturing equipment, service agreements, spare parts, installation, extended warranty and training. Applied’s service agreements are considered one performance obligation and may include multiple goods and services that we provide to the customer to deliver against a performance metric. Judgment is used to determine whether multiple promised goods or services in a contract should be accounted for separately or as a group.
Determine the transaction price. The transaction price for Applied’s contracts with customers may include fixed and variable consideration. Applied includes variable consideration in the transaction price to the extent that it is probable that a significant reversal of revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
Allocate the transaction price to the performance obligations. A contract’s transaction price is allocated to each distinct performance obligation identified within the contract. Applied generally estimates the standalone selling price of a distinct performance obligation based on historical cost plus an appropriate margin. For contracts with multiple performance obligations, Applied allocates the contract’s transaction price to each performance obligation using the relative standalone selling price of each distinct good or service in the contract.
Recognizing the revenue as performance obligations are satisfied. Applied recognizes revenue from equipment and spares parts at a point in time when Applied has satisfied its performance obligation by transferring control of the goods to the customer which typically occurs at shipment or delivery. Revenue from service agreements is recognized over time as customers receive the benefits of services.
The incremental costs to obtain a contract are not material.
Payment Terms. Payment terms vary by contract. Generally, the majority of payments are due within a certain number of days from shipment of goods or performance of service. The remainder is typically due upon customer technical acceptance. Applied typically receives deposits on future deliverables from customers in the Display and Adjacent Markets segment and, in certain instances, may also receive deposits from customers in the Applied Global Services segment. Applied’s payment terms do not generally contain a significant financing component.
Investments
All of Applied’s investments, except equity investments held in privately-held companies, are classified as available-for-sale at the respective balance sheet dates. Investments classified as available-for-sale are measured and recorded at fair value with changes in fair value recorded in the accompanying Consolidated Statements of Operations. Interest earned on cash and investments, as well as realized gains and losses on sale of securities, are included in interest and other income, net in the accompanying Consolidated Condensed Statements of Operations.
Equity investments without readily determinable fair value are measured at cost, less impairment, adjusted by observable price changes. Adjustments resulting from impairments and observable prices changes will be recorded in the accompanying Consolidated Condensed Statements of Operations.

9


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



Recent Accounting Pronouncements
Accounting Standards Adopted
Retirement Benefits. In March 2017, the FASB issued authoritative guidance which requires companies to present the service cost component of net benefit cost in the same line items in which they report compensation cost. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. Applied adopted this guidance in the first quarter of fiscal 2019 on a retrospective basis. The adoption of this guidance resulted in reclassification of other components of net benefit costs outside of income from operations and did not have a significant impact on Applied’s consolidated financial statements.
Business Combinations. In January 2017, the FASB issued authoritative guidance that clarifies the definition of a business to help companies evaluate whether acquisition or disposal transactions should be accounted for as asset groups or as businesses. Applied adopted this guidance in the first quarter of fiscal 2019 on a prospective basis. The impact of the adoption depends on the facts and circumstances of future acquisition or disposal transactions.
Income Taxes: Intra-Entity Asset Transfers. In October 2016, the FASB issued authoritative guidance that changed the tax accounting for intra-entity transfers of assets other than inventory. After adoption, the income tax effect of intra-entity transfers is realized at the time of the transfer instead of over the life of the asset. Applied adopted this guidance in the first quarter of fiscal 2019 using a modified retrospective approach, resulting in a cumulative effect adjustment to retained earnings. Upon adoption, deferred tax assets increased by $1.6 billion related to the estimated income tax effects of future amortization of intra-entity intangible asset transfers, with an offset to retained earnings.
Classification of Certain Cash Receipts and Cash Payments. In August 2016, the FASB issued authoritative guidance which addresses classification of certain cash receipts and cash payments related to the statement of cash flows. Effective in the first quarter of fiscal 2019, Applied adopted the authoritative guidance retrospectively. The adoption of this guidance did not have a significant impact and only impacts disclosures in Applied' s consolidated condensed statements of cash flow.
Financial Instruments: Classification and Measurement. In January 2016, the FASB issued authoritative guidance that requires equity investments that do not result in consolidation, and are not accounted for under the equity method, to be measured at fair value, and requires recognition of any changes in fair value in net income unless the investments qualify for a new measurement alternative. For financial liabilities measured at fair value, the change in fair value caused by a change in instrument-specific credit risk will be required to be presented separately in other comprehensive income. Applied adopted this standard in the first quarter of fiscal year 2019. Upon adoption, Applied elected to apply the measurement alternative for equity investments without readily determinable fair value. Under the alternative, Applied measures investments without readily determinable fair value at cost, less impairment, adjusted by observable price changes prospectively to all equity investments that exist as of adoption and will reassess at each reporting period whether an investment qualifies for the alternative. Adopting this standard required Applied to record a cumulative net increase to retained earnings of approximately $21 million with the corresponding $17 million decrease in accumulated other comprehensive income, net of tax, for the unrealized gains and losses associated with equity investments with readily determinable fair values, as the authoritative guidance is required to be adopted prospectively. Going forward, the impact of this new standard could result in volatility in Applied's consolidated statement of operations.
Revenue Recognition. In May 2014, the FASB issued authoritative guidance that requires revenue recognition to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and requires certain additional disclosures. Applied adopted this authoritative guidance in the first quarter of fiscal 2019 using the full retrospective method, which required restating each prior reporting period presented. Refer to the Impacts to Previously Reported Results section below for the impact of the adoption of the standard to Applied’s consolidated financial statements.
For all periods prior to the date of initial adoption of this standard, Applied elected to use the practical expedient pursuant to which Applied excluded disclosures of both transaction prices allocated to remaining performance obligations and when these performance obligations are expected to be recognized as revenue.
The most significant impact from the adoption of this standard is fewer constraints on revenue recognition upon shipment of manufacturing equipment.
    


10


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



Impacts to Previously Reported Results
Adoption of the standards related to revenue recognition and retirement benefits impacted Applied’s Consolidated Condensed Statement of Operations for the first quarter of fiscal 2018 as follows:
 
Three Months Ended
 
January 28, 2018
 
As Previously Reported
Revenue Recognition Adjustment
Retirement Benefit Adjustment
As Adjusted
 
(In millions, except per share amounts)
 
 
 
 
 
Net sales
$
4,204

$
1

$

$
4,205

Cost of products sold
$
2,284

$
(20
)
$
1

$
2,265

Gross profit
$
1,920

$
21

$
(1
)
$
1,940

Research, development and engineering
$
488

$

$
1

$
489

Interest and other income, net
$
25

$

$
2

$
27

Income before income taxes
$
1,162

$
21

$
(2
)
$
1,183

Provision for income taxes
$
1,027

$
(9
)
$

$
1,018

Net income
$
135

$
30

$

$
165

Earnings per share: basic
$
0.13

$
0.03

$

$
0.16

Earnings per share: diluted
$
0.13

$
0.02

$

$
0.15

Adoption of the retirement benefits standard did not have any impact on Applied’s Consolidated Balance Sheet or Consolidated Condensed Statement of Cash Flows.
Adoption of the standard related to revenue recognition impacted Applied’s Consolidated Balance Sheet at October 28, 2018 as follows:
 
October 28, 2018
 
As Previously Reported
Adjustment
As Adjusted
 
(In millions)
 
 
 
 
Accounts receivable, net
$
2,565

$
(242
)
$
2,323

Inventories
$
3,722

$
(1
)
$
3,721

Other current assets
$
430

$
100

$
530

Deferred income taxes and other assets
$
470

$
3

$
473

Customer deposits and deferred revenue
$
1,347

$
(1,347
)
$

Contract liabilities
$

$
1,201

$
1,201

Retained earnings
$
20,874

$
6

$
20,880


11


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



Adoption of the revenue recognition standard did not impact cash provided by or used in investing or financing activities in Applied’s consolidated Condensed Statement of Cash Flows for the first quarter of fiscal 2018. The adoption did not impact total cash provided by operating activities, however it impacted individual components of cash provided by operating activities for the first quarter of fiscal 2018 as follows:
 
Three Months Ended
 
January 28, 2018
 
As Previously Reported
Adjustment
As Adjusted
 
(In millions)
 
 
 
 
Cash flows from operating activities:
 

 
Net income
$
135

$
30

$
165

Adjustments required to reconcile net income to cash provided by operating activities:
 
 
 
Deferred income taxes
$
41

$
(9
)
$
32

Changes in operating assets and liabilities:
 
 
 
Inventories
$
(195
)
$
(16
)
$
(211
)
Accounts payable and accrued expenses
$
(125
)
$
(2
)
$
(127
)
Contract liabilities
$
353

$
(3
)
$
350

Accounting Standards Not Yet Adopted
Retirement Benefits: Changes to the Disclosure Requirements for Defined Benefit and other Postretirement Plans. In August 2018, the FASB issued authoritative guidance that adds, removes, and clarifies disclosure requirements for defined benefit and other postretirement plans. This authoritative guidance will be effective for Applied in fiscal 2021 on a retrospective basis, with early adoption permitted. Applied is currently evaluating the effect of this new guidance on Applied’s consolidated financial statements.
Fair Value Measurement: Changes to the Disclosure Requirements for Fair Value Measurement. In August 2018, the FASB issued authoritative guidance that eliminates, amends, and adds disclosure requirements for fair value measurements. While the amended and new disclosure requirements primarily relate to Level 3 fair value measurements, the authoritative guidance also eliminates disclosure requirements related to the amount and reasons for transfer between Level 1 and Level 2 of fair value hierarchy, policy for timing of transfer between levels, and the valuation processes for Level 3 fair value measurements. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2020. Early adoption is permitted only for the removal and amendment of certain disclosures, while the new disclosures requirements are to be applied prospectively. Applied is currently evaluating the effect of this new guidance on Applied’s consolidated financial statements.
Derivatives and Hedging. In August 2017, the FASB issued authoritative guidance that modifies the recognition and presentation of hedge accounting to better align an entity’s risk management strategies and financial reporting for hedging relationships. The authoritative guidance expands the application of hedge accounting for non-financial and financial risk components and eases certain hedge effectiveness assessment requirements. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2020, with early adoption permitted. Applied is currently evaluating the effect of this new guidance on Applied’s consolidated financial statements.
Receivables: Nonrefundable Fees and Other Costs. In March 2017, the FASB issued authoritative guidance that will shorten the amortization period for certain callable debt securities held at a premium to the earliest call date to more closely align with expectations incorporated in market pricing. This authoritative guidance will be effective for Applied in the first quarter of fiscal 2020 on a modified retrospective basis, with early adoption permitted. Applied is currently evaluating the impact of adopting this new accounting guidance on Applied’s consolidated financial statements.
Goodwill Impairment. In January 2017, the FASB issued authoritative guidance that simplifies the process required to test goodwill for impairment. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2021. Early adoption is permitted. The adoption of this guidance is not expected to have a significant impact on Applied’s consolidated financial statements.

12


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



Financial Instruments: Credit Losses. In June 2016, the FASB issued authoritative guidance that modifies the impairment model for certain financial assets by requiring use of an expected loss methodology, which will result in more timely recognition of credit losses. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2021. Early adoption is permitted beginning in the first quarter of fiscal 2020. Applied is currently evaluating the effect of this new guidance on Applied’s consolidated financial statements.
Leases. In February 2016, the FASB issued authoritative guidance for lease accounting, which requires lessees to recognize lease assets and liabilities on the balance sheet for certain lease arrangements that are classified as operating leases under the previous standard, and to provide for enhanced disclosures. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2020 and should be applied using a modified retrospective approach. Early adoption is permitted. Applied is currently evaluating the effect of this new guidance on Applied’s consolidated financial statements.


13


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



Note 2
Earnings Per Share
Basic earnings per share is determined using the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined using the weighted average number of common shares and potential common shares (representing the dilutive effect of stock options, restricted stock units, and employee stock purchase plan shares) outstanding during the period. Applied’s net income has not been adjusted for any period presented for purposes of computing basic or diluted earnings per share due to the Company’s non-complex capital structure.
 
 
Three Months Ended
 
January 27,
2019
 
January 28,
2018
 
 
 
 
 
(In millions, except per share amounts)
Numerator:
 
 
 
Net income
$
771

 
$
165

Denominator:
 
 
 
Weighted average common shares outstanding
957

 
1,056

Effect of weighted dilutive stock options, restricted stock units and employee stock purchase plan shares
8

 
15

Denominator for diluted earnings per share
965

 
1,071

Basic earnings per share
$
0.81

 
$
0.16

Diluted earnings per share
$
0.80

 
$
0.15

Potentially weighted dilutive securities
8

 

Potentially weighted dilutive securities attributable to outstanding stock options and restricted stock units are excluded from the calculation of diluted earnings per share where the combined exercise price and average unamortized fair value are greater than the average market price of Applied common stock, and therefore their inclusion would be anti-dilutive.

14


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



Note 3
Cash, Cash Equivalents and Investments
Summary of Cash, Cash Equivalents and Investments
The following tables summarize Applied’s cash, cash equivalents and investments:
 
January 27, 2019
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
 
 
 
 
 
 
 
 
(In millions)
Cash
$
1,016

 
$

 
$

 
$
1,016

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
1,911

 

 

 
1,911

Commercial paper, corporate bonds and medium-term notes
265

 

 

 
265

Total Cash equivalents
2,176

 

 

 
2,176

Total Cash and Cash equivalents
$
3,192

 
$

 
$

 
$
3,192

Short-term and long-term investments:
 
 
 
 
 
 
 
U.S. Treasury and agency securities
$
375

 
$

 
$

 
$
375

Non-U.S. government securities*
9

 

 

 
9

Municipal securities
402

 
1

 
2

 
401

Commercial paper, corporate bonds and medium-term notes
628

 
1

 
3

 
626

Asset-backed and mortgage-backed securities
565

 

 
3

 
562

Total fixed income securities
1,979

 
2

 
8

 
1,973

Publicly traded equity securities
15

 
20

 
4

 
31

Equity investments in privately-held companies
104

 

 

 
104

Total equity investments
119

 
20

 
4

 
135

Total short-term and long-term investments
$
2,098

 
$
22

 
$
12

 
$
2,108

 
 
 
 
 
 
 
 
Total Cash, Cash equivalents and Investments
$
5,290

 
$
22

 
$
12

 
$
5,300

 _________________________
* Includes agency debt securities guaranteed by Canada.


15


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



October 28, 2018
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
 
 
 
 
 
 
 
 
(In millions)
Cash
$
1,489

 
$

 
$

 
$
1,489

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
1,599

 

 

 
1,599

Commercial paper, corporate bonds and medium-term notes
352

 

 

 
352

Total Cash equivalents
1,951

 

 

 
1,951

Total Cash and Cash equivalents
$
3,440

 
$

 
$

 
$
3,440

Short-term and long-term investments:
 
 
 
 
 
 
 
U.S. Treasury and agency securities
$
335

 
$

 
$
2

 
$
333

Non-U.S. government securities*
10

 

 

 
10

Municipal securities
399

 

 
4

 
395

Commercial paper, corporate bonds and medium-term notes
705

 

 
3

 
702

Asset-backed and mortgage-backed securities
595

 

 
4

 
591

Total fixed income securities
2,044

 

 
13

 
2,031

Publicly traded equity securities
17

 
25

 
4

 
38

Equity investments in privately-held companies
89

 

 

 
89

Total equity investments
106

 
25

 
4

 
127

Total short-term and long-term investments
$
2,150

 
$
25

 
$
17

 
$
2,158

 
 
 
 
 
 
 
 
Total Cash, Cash equivalents and Investments
$
5,590

 
$
25

 
$
17

 
$
5,598

 _________________________
* Includes agency debt securities guaranteed by Canada.
 
Maturities of Investments
The following table summarizes the contractual maturities of Applied’s investments as of January 27, 2019:
 
 
Cost
 
Estimated
Fair Value
 
 
 
 
 
(In millions)
Due in one year or less
$
429

 
$
428

Due after one through five years
985

 
983

No single maturity date**
684

 
697

Total
$
2,098

 
$
2,108

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

Gains and Losses on Investments
During the three months ended January 27, 2019 and January 28, 2018, gross realized gains and losses on investments for these periods were not material.
As of January 27, 2019, and October 28, 2018, gross unrealized losses related to Applied’s debt investment portfolio were not material. Applied regularly reviews its debt investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether an unrealized loss is considered to be temporary, or other-than-temporary and therefore impaired, include: the length of time and extent to which fair value has been lower than the cost basis; the financial condition, credit quality and near-term prospects of the investee; and whether it is more likely than not that Applied will be required to sell the security prior to recovery.

16


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



Applied determined that the gross unrealized losses on its marketable fixed-income securities as of January 27, 2019 and January 28, 2018 were temporary in nature and therefore it did not recognize any impairment of its marketable fixed-income securities during the three months ended January 27, 2019 or January 28, 2018. Impairment charges on equity investments in privately-held companies during the three months ended January 27, 2019 and January 28, 2018 were not material. These impairment charges are included in interest and other income, net in the Consolidated Condensed Statement of Operations.
Unrealized gains and losses on investments classified as equity investments are recognized in other income (expense), net in the Consolidated Condensed Statement of Operations. Prior to the adoption of Accounting Standards Update (ASU) 2016-01 Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities in the first quarter of fiscal 2019, these unrealized gains and temporary losses were included within accumulated other comprehensive income (loss), net of any related tax effect.
The components of gain (losses) on equity investments for the three months ended January 27, 2019 were as follows:
 
Three Months Ended
 
January 27, 2019
 
 
 
(In millions)
Publicly traded equity securities
 
Unrealized gain
$
6

Unrealized loss
(2
)
Gain on sales
1

Loss on sales

Equity investments in privately-held companies
 
Unrealized gain
7

Unrealized loss
(1
)
Gain on sales
1

Loss on sales

Total gain on equity investments, net
$
12



17


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




Note 4
Fair Value Measurements
Applied’s financial assets are measured and recorded at fair value, except for equity investments in privately-held companies. These equity investments are generally accounted for under the measurement alternative, defined as cost, less impairments, adjusted for subsequent observable price changes and are periodically assessed for impairment when events or circumstances indicate that a decline in value may have occurred. Applied’s nonfinancial assets, such as goodwill, intangible assets, and property, plant and equipment, are recorded at cost and are assessed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.
Fair Value Hierarchy
Applied uses the following fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
 
Level 1 — Quoted prices in active markets for identical assets or liabilities;
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Applied’s investments consist primarily of debt securities that are classified as available-for-sale and recorded at their fair values. In determining the fair value of investments, Applied uses pricing information from pricing services that value securities based on quoted market prices and models that utilize observable market inputs. In the event a fair value estimate is unavailable from a pricing service, Applied generally obtains non-binding price quotes from brokers. Applied then reviews the information provided by the pricing services or brokers to determine the fair value of its short-term and long-term investments. In addition, to validate pricing information obtained from pricing services, Applied periodically performs supplemental analysis on a sample of securities. Applied reviews any significant unanticipated differences identified through this analysis to determine the appropriate fair value. As of January 27, 2019, substantially all of Applied’s available-for-sale, short-term and long-term investments were recognized at fair value that was determined based upon observable inputs.
Applied’s equity investments with readily determinable values consist of publicly traded equity securities. Upon adoption of ASU 2016-01, these investments are measured at fair value using quoted prices for identical assets in an active market and the changes in fair value of these equity investments are recognized in the consolidated statements of operations. Applied adopted the standard using a modified retrospective transition method, and reclassified the unrealized gains on these equity investments of $21 million to retained earnings as a cumulative-effect adjustment on the condensed consolidated balance sheets.
Investments with remaining effective maturities of 12 months or less from the balance sheet date are classified as short-term investments. Investments with remaining effective maturities of more than 12 months from the balance sheet date are classified as long-term investments.


18


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



Assets Measured at Fair Value on a Recurring Basis
Financial assets (excluding cash balances) measured at fair value on a recurring basis are summarized below:
 
 
January 27, 2019
 
October 28, 2018
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Assets:
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale debt security investments
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
1,911

 
$

 
$
1,911

 
$
1,599

 
$

 
$
1,599

U.S. Treasury and agency securities
343

 
32

 
375

 
297

 
36

 
333

Non-U.S. government securities

 
9

 
9

 

 
10

 
10

Municipal securities

 
401

 
401

 

 
395

 
395

Commercial paper, corporate bonds and medium-term notes

 
891

 
891

 

 
1,054

 
1,054

Asset-backed and mortgage-backed securities

 
562

 
562

 

 
591

 
591

Total available-for-sale debt security investments
$
2,254

 
$
1,895

 
$
4,149

 
$
1,896

 
$
2,086

 
$
3,982

Equity investments with readily determinable values
 
 
 
 
 
 
 
 
 
 
 
Publicly traded equity securities
$
31

 
$

 
$
31

 
$
38

 
$

 
$
38

Total equity investments with readily determinable values
$
31

 
$

 
$
31

 
$
38

 
$

 
$
38

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
2,285

 
$
1,895

 
$
4,180

 
$
1,934

 
$
2,086

 
$
4,020

There were no transfers between Level 1 and Level 2 fair value measurements during the three months ended January 27, 2019 or January 28, 2018. Applied did not have any financial assets measured at fair value on a recurring basis within Level 3 fair value measurements as of January 27, 2019 or October 28, 2018.
Assets and Liabilities without Readily Determinable Values Measured on a Non-recurring Basis
Applied’s equity investments without readily determinable values consist of equity investments in privately-held companies. Upon adoption of ASU 2016-01, Applied elected the measurement alternative, defined as cost, less impairments, adjusted for subsequent observable price changes on a prospective basis for certain equity investments without readily determinable fair values and is required to account for any subsequent observable changes in fair value within the statements of operations. Applied adopted the guidance prospectively, effective October 29, 2018, and there was no impact to Applied’s condensed consolidated financial statements. Prior to the adoption of ASU 2016-01, these investments were generally accounted for under the cost method of accounting. These investments are periodically assessed for impairment when an event or circumstance indicates that a decline in value may have occurred. Impairment charges on equity investments in privately-held companies during the three months ended January 27, 2019 and January 28, 2018 were not material.
Other
The carrying amounts of Applied’s financial instruments, including cash and cash equivalents, accounts receivable, notes payable - short term, and accounts payable and accrued expenses, approximate fair value due to their short maturities. As of January 27, 2019, the aggregate principal amount of long-term debt was $5.4 billion and the estimated fair value was $5.5 billion. As of October 28, 2018, the aggregate principal and estimated fair value amounts of long-term debt were both $5.4 billion. The estimated fair value of long-term debt is determined by Level 2 inputs and is based primarily on quoted market prices for the same or similar issues. See Note 10 of the Notes to the Consolidated Condensed Financial Statements for further detail of existing debt.

19


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



Note 5
Derivative Instruments and Hedging Activities
Derivative Financial Instruments
Applied conducts business in a number of foreign countries, with certain transactions denominated in local currencies, such as the Japanese yen, euro, Israeli shekel and Taiwanese dollar. Applied uses derivative financial instruments, such as forward exchange contracts and currency option contracts, to hedge certain forecasted foreign currency denominated transactions expected to occur typically within the next 24 months. The purpose of Applied’s foreign currency management is to mitigate the effect of exchange rate fluctuations on certain foreign currency denominated revenues, costs and eventual cash flows. The terms of currency instruments used for hedging purposes are generally consistent with the timing of the transactions being hedged.
Applied does not use derivative financial instruments for trading or speculative purposes. Derivative instruments and hedging activities, including foreign currency exchange and interest rate contracts, are recognized on the balance sheet at fair value. Changes in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of any hedges, are recognized currently in earnings. All of Applied’s derivative financial instruments are recorded at their fair value in other current assets or in accounts payable and accrued expenses. 
Hedges related to anticipated transactions are designated and documented at the inception of the hedge as cash flow hedges and foreign exchange derivatives are typically entered into once per month. Cash flow hedges are evaluated for effectiveness quarterly. The effective portion of the gain or loss on these hedges is reported as a component of AOCI in stockholders’ equity and is reclassified into earnings when the hedged transaction affects earnings. The majority of the after-tax net income or loss related to foreign exchange derivative instruments included in AOCI as of January 27, 2019 is expected to be reclassified into earnings within 12 months. Changes in the fair value of currency forward exchange and option contracts due to changes in time value are excluded from the assessment of effectiveness. Both ineffective hedge amounts and hedge components excluded from the assessment of effectiveness are recognized in earnings. If the transaction being hedged is no longer probable to occur, or if a portion of any derivative is deemed to be ineffective, Applied promptly recognizes the gain or loss on the associated financial instrument in earnings. The amount recognized due to discontinuance of cash flow hedges that were probable not to occur by the end of the originally specified time period was not significant for the three months ended January 27, 2019 and January 28, 2018.
Additionally, forward exchange contracts are generally used to hedge certain foreign currency denominated assets or liabilities. These derivatives are typically entered into once per month and are not designated for hedge accounting treatment. Accordingly, changes in the fair value of these hedges are recorded in earnings to offset the changes in the fair value of the assets or liabilities being hedged.
The fair values of foreign exchange derivative instruments as of January 27, 2019 and October 28, 2018 were not material.



20


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



The effects of derivative instruments and hedging activities on the Consolidated Condensed Statements of Operations were as follows:
 
 
 
Three Months Ended
 
 
 
January 27, 2019
 
January 28, 2018
Effective Portion
 
Ineffective Portion and Amount
Excluded from
Effectiveness
Testing
 
Effective Portion
 
Ineffective Portion and Amount
Excluded from
Effectiveness
Testing
 
Location of Gain or
(Loss)
 
Gain or
(Loss)
 
Gain or (Loss)
Reclassified
from AOCI into
Income
 
Gain or (Loss)
Recognized in
Income
 
Gain or
(Loss)
 
Gain or (Loss)
Reclassified
from AOCI into
Income
 
Gain or (Loss)
Recognized in
Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Derivatives in Cash Flow Hedging Relationships
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
AOCI
 
$
(16
)
 
$

 
$

 
$
(18
)
 
$

 
$

Foreign exchange contracts
Cost of products sold
 

 
12

 
5

 

 
8

 
2

Foreign exchange contracts
General and administrative
 

 
(5
)
 
(1
)
 

 
(1
)
 
(2
)
Interest rate contracts
Interest expense
 

 

 

 

 
(1
)
 

Total
 
 
$
(16
)
 
$
7

 
$
4

 
$
(18
)
 
$
6

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of Gain or (Loss) 
Recognized in Income
 
 
Three Months Ended
Location of Gain or
(Loss) Recognized
in Income
 
January 27, 2019
 
January 28,
2018
 
 
 
 
 
 
 
 
 
(In millions)
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
Foreign exchange contracts
General and administrative
 
$
(10
)
 
$
(8
)
Total
 
 
$
(10
)
 
$
(8
)

Credit Risk Contingent Features
If Applied’s credit rating were to fall below investment grade, it would be in violation of credit risk contingent provisions of the derivative instruments discussed above, and certain counterparties to the derivative instruments could request immediate payment on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a net liability position was immaterial as of January 27, 2019.
Entering into derivative contracts with banks exposes Applied to credit-related losses in the event of the banks’ nonperformance. However, Applied’s exposure is not considered significant.


21


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



Note 6
Accounts Receivable, Net
Applied has agreements with various financial institutions to sell accounts receivable and discount promissory notes from selected customers. Applied sells its accounts receivable without recourse. Applied, from time to time, also discounts letters of credit issued by customers through various financial institutions. The discounting of letters of credit depends on many factors, including the willingness of financial institutions to discount the letters of credit and the cost of such arrangements.
Applied sold $464 million and $376 million of accounts receivable during the three months ended January 27, 2019 and January 28, 2018, respectively. Applied did not discount letters of credit issued by customers or discount promissory notes during the three months ended January 27, 2019 and January 28, 2018. Financing charges on the sale of receivables and discounting of letters of credit are included in interest expense in the accompanying Consolidated Condensed Statements of Operations and were not material for all periods presented.
Accounts receivable are presented net of allowance for doubtful accounts of $33 million as of January 27, 2019 and October 28, 2018. Applied sells its products principally to manufacturers within the semiconductor and display industries. While Applied believes that its allowance for doubtful accounts is adequate and represents its best estimate as of January 27, 2019, it continues to closely monitor customer liquidity and industry and economic conditions, which may result in changes to Applied’s estimates.

Note 7
Contract Balances
Contract assets primarily result from receivables for goods transferred to customers and where payment is conditional upon technical sign off and not just the passage of time. Contract liabilities consist of unsatisfied performance obligations related to advance payments received and billings in excess of revenue recognized. Applied’s contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period.
Contract assets are generally classified as current and included in Other Current Assets in the Consolidated Condensed Balance Sheets. Contract liabilities are classified as current or non-current based on the timing of when performance obligations will be satisfied and associated revenue is expected to be recognized.
Contract balances at the end of each reporting period were as follows:
 
January 27, 2019
 
October 28, 2018
 
(In millions)
 
 
 
 
Contract assets
$
100

 
$
99

Contract liabilities
$
1,356

 
$
1,201

The increase in net contract liabilities was primarily due to netted contract assets being classified to accounts receivable as conditions for payments were met.
During the three months ended January 27, 2019, Applied recognized revenue of approximately $288 million related to contract liabilities at October 28, 2018.
There were no impairment losses recognized on Applied's accounts receivables and contract assets during the three months ended January 27, 2019.
As of January 27, 2019, the amount of remaining unsatisfied performance obligations on contracts with an original estimated duration of one year or more was approximately $232 million, which is expected to be recognized within the next 36 months. Applied has elected the available practical expedient to exclude the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less.

22


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



Note 8
Balance Sheet Detail
 
 
January 27,
2019
 
October 28,
2018
 
 
 
 
 
(In millions)
Inventories
 
 
 
Customer service spares
$
1,093

 
$
989

Raw materials
1,018

 
1,020

Work-in-process
526

 
505

Finished goods
1,066

 
1,207

 
$
3,703

 
$
3,721

 
Included in finished goods inventory are $8 million as of January 27, 2019, and $19 million as of October 28, 2018, of newly-introduced systems at customer locations where the sales transaction did not meet Applied’s revenue recognition criteria as set forth in Note 1. Finished goods inventory includes $341 million and $350 million of evaluation inventory as of January 27, 2019 and October 28, 2018, respectively.
 
January 27,
2019
 
October 28,
2018
 
 
 
 
 
(In millions)
Other Current Assets
 
 
 
Prepaid income taxes and income taxes receivable
$
32

 
$
40

Prepaid expenses and other
394

 
490

 
$
426

 
$
530


 
Useful Life
 
January 27,
2019
 
October 28,
2018
 
 
 
 
 
 
 
(In years)
 
(In millions)
Property, Plant and Equipment, Net
 
 
 
Land and improvements
 
 
$
245

 
$
245

Buildings and improvements
3-30
 
1,460

 
1,448

Demonstration and manufacturing equipment
3-5
 
1,335

 
1,282

Furniture, fixtures and other equipment
3-5
 
639

 
634

Construction in progress
 
 
243

 
203

Gross property, plant and equipment
 
 
3,922

 
3,812

Accumulated depreciation
 
 
(2,466
)
 
(2,405
)
 
 
 
$
1,456

 
$
1,407


 
January 27,
2019
 
October 28,
2018
 
 
 
 
 
(In millions)
Deferred Income Taxes and Other Assets
 
 
 
Non-current deferred income taxes and income taxes receivable
$
1,856

 
$
319

Other assets
170

 
154

 
$
2,026

 
$
473





23


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



 
January 27,
2019
 
October 28,
2018
 
 
 
 
 
(In millions)
Accounts Payable and Accrued Expenses
 
 
 
Accounts payable
$
978

 
$
996

Compensation and employee benefits
426

 
639

Warranty
200

 
208

Dividends payable
190

 
193

Income taxes payable
129

 
136

Other accrued taxes
73

 
112

Interest payable
59

 
38

Other
365

 
399

 
$
2,420

 
$
2,721

 
 
 
January 27,
2019
 
October 28,
2018
 
 
 
 
 
(In millions)
Other Liabilities
 
 
 
Defined and postretirement benefit plans
$
178

 
$
177

Other
146

 
126

 
$
324

 
$
303


24


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




Note 9
Goodwill, Purchased Technology and Other Intangible Assets
Goodwill and Purchased Intangible Assets
Applied’s methodology for allocating the purchase price relating to purchase acquisitions is determined through established and generally accepted valuation techniques. Goodwill is measured as the excess of the purchase price over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. Applied assigns assets acquired (including goodwill) and liabilities assumed to one or more reporting units as of the date of acquisition. Typically, acquisitions relate to a single reporting unit and thus do not require the allocation of goodwill to multiple reporting units. If the products obtained in an acquisition are assigned to multiple reporting units, the goodwill is distributed to the respective reporting units as part of the purchase price allocation process.
Goodwill and purchased intangible assets with indefinite useful lives are not amortized, but are reviewed for impairment annually during the fourth quarter of each fiscal year and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The process of evaluating the potential impairment of goodwill and intangible assets requires significant judgment, especially in emerging markets. Applied regularly monitors current business conditions and considers other factors including, but not limited to, adverse industry or economic trends, restructuring actions and lower projections of profitability that may impact future operating results.
To test goodwill for impairment, Applied first performs a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, Applied then performs the two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. Under the two-step goodwill impairment test, Applied would in the first step compare the estimated fair value of each reporting unit to its carrying value. Applied determines the fair value of each of its reporting units based on a weighting of income and market approaches. If the carrying value of a reporting unit exceeds its fair value, Applied would then perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If Applied determines that the carrying value of a reporting unit’s goodwill exceeds its implied fair value, Applied would record an impairment charge equal to the difference.
As of January 27, 2019, Applied’s reporting units include Semiconductor Product Group and Imaging and Process Control Group, which combine to form the Semiconductor Systems reporting segment, Applied Global Services, and Display and Adjacent Markets.
The evaluation of goodwill and intangible assets for impairment requires the exercise of significant judgment. In the event of future changes in business conditions, Applied will be required to reassess and update its forecasts and estimates used in future impairment analyses. If the results of these future analyses are lower than current estimates, a material impairment charge may result at that time.
Details of goodwill as of January 27, 2019 and October 28, 2018 were as follows:
 
 
January 27,
2019
 
October 28,
2018
 
 
 
 
 
(In millions)
Semiconductor Systems
$
2,151

 
$
2,151

Applied Global Services
1,018

 
1,018

Display and Adjacent Markets
199

 
199

Carrying amount
$
3,368

 
$
3,368

A summary of Applied’s purchased technology and intangible assets is set forth below:
 
January 27,
2019
 
October 28,
2018
 
 
 
 
 
(In millions)
Purchased technology, net
$
99

 
$
109

Intangible assets - finite-lived, net
100

 
104

Total
$
199

 
$
213


25


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



Finite-Lived Purchased Intangible Assets
Applied amortizes purchased intangible assets with finite lives using the straight-line method over the estimated economic lives of the assets, ranging from 1 to 15 years.
Applied evaluates long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset group may not be recoverable. Applied assesses the fair value of the assets based on the amount of the undiscounted future cash flow that the assets are expected to generate and recognizes an impairment loss when estimated undiscounted future cash flow expected to result from the use of the asset, plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When Applied identifies an impairment, Applied reduces the carrying value of the group of assets to comparable market values, when available and appropriate, or to its estimated fair value based on a discounted cash flow approach.
Intangible assets, such as purchased technology, are generally recorded in connection with a business acquisition. The value assigned to intangible assets is usually based on estimates and judgments regarding expectations for the success and life cycle of products and technology acquired. Applied evaluates the useful lives of its intangible assets each reporting period to determine whether events and circumstances require revising the remaining period of amortization. In addition, Applied reviews intangible assets for impairment when events or changes in circumstances indicate their carrying value may not be recoverable. Management considers such indicators as significant differences in actual product acceptance from the estimates, changes in the competitive and economic environments, technological advances, and changes in cost structure.
 
Details of finite-lived intangible assets were as follows:
 
 
January 27, 2019
 
October 28, 2018
 
Purchased
Technology
 
Other
Intangible
Assets
 
Total
 
Purchased
Technology
 
Other
Intangible
Assets
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Gross carrying amount:
 
 
 
 
 
 
 
 
 
 
 
Semiconductor Systems
$
1,449

 
$
252

 
$
1,701

 
$
1,449

 
$
252

 
$
1,701

Applied Global Services
33

 
44

 
77

 
33

 
44

 
77

Display and Adjacent Markets
163

 
38

 
201

 
163

 
38

 
201

Corporate and Other

 
9

 
9

 

 
9

 
9

Gross carrying amount
$
1,645

 
$
343

 
$
1,988

 
$
1,645

 
$
343

 
$
1,988

Accumulated amortization:
 
 
 
 
 
 
 
 
 
 
 
Semiconductor Systems
$
(1,382
)
 
$
(154
)
 
$
(1,536
)
 
$
(1,375
)
 
$
(150
)
 
$
(1,525
)
Applied Global Services
(29
)
 
(44
)
 
(73
)
 
(29
)
 
(44
)
 
(73
)
Display and Adjacent Markets
(135
)
 
(36
)
 
(171
)
 
(132
)
 
(36
)
 
(168
)
Corporate and Other

 
(9
)
 
(9
)
 

 
(9
)
 
(9
)
Accumulated amortization
$
(1,546
)
 
$
(243
)
 
$
(1,789
)
 
$
(1,536
)
 
$
(239
)
 
$
(1,775
)
Carrying amount
$
99

 
$
100

 
$
199

 
$
109

 
$
104

 
$
213

Details of amortization expense by segment were as follows:
 
Three Months Ended
 
January 27,
2019
 
January 28,
2018
 
 
 
 
 
(In millions)
Semiconductor Systems
$
11

 
$
46

Display and Adjacent Markets
3

 
4

Total
$
14

 
$
50


26


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



Amortization expense was charged to the following categories:
 
Three Months Ended
 
January 27,
2019
 
January 28,
2018
 
 
 
 
 
(In millions)
Cost of products sold
$
9

 
$
45

Marketing and selling
5

 
5

Total
$
14

 
$
50

As of January 27, 2019, future estimated amortization expense is expected to be as follows: 
 
Amortization
Expense
 
(In millions)
2019 (remaining 9 months)
$
43

2020
52

2021
39

2022
24

2023
11

Thereafter
30

Total
$
199



27


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



Note 10
Borrowing Facilities and Debt
Applied has credit facilities for unsecured borrowings in various currencies of up to $1.6 billion, of which $1.5 billion is comprised of a committed revolving credit agreement with a group of banks that is scheduled to expire in September 2021. This agreement provides for borrowings in United States dollars at interest rates keyed to one of various benchmark rates selected by Applied for each advance, plus a margin based on Applied’s public debt rating and includes financial and other covenants. Remaining credit facilities in the amount of approximately $73 million are with Japanese banks. Applied’s ability to borrow under these facilities is subject to bank approval at the time of the borrowing request, and any advances will be at rates indexed to the banks’ prime reference rate denominated in Japanese yen. No amounts were outstanding under any of these facilities as of both January 27, 2019 and October 28, 2018, and Applied has not utilized these credit facilities. In fiscal 2011, Applied established a short-term commercial paper program of up to $1.5 billion. As of January 27, 2019, Applied did not have any commercial paper outstanding.
Debt outstanding as of January 27, 2019 and October 28, 2018 was as follows: 
 
Principal Amount
 
 
 
 
 
January 27,
2019
 
October 28,
2018
 
Effective
Interest Rate
 
Interest
Pay Dates
 
 
 
 
 
 
 
 
 
(In millions)
 
 
 
 
Long-term debt:
 
 
 
 
 
 
 
2.625% Senior Notes Due 2020
$
600

 
$
600

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

 
750

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

 
700

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

 
1,200

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

 
500

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

 
600

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

 
1,000

 
4.361%
 
April 1, October 1
 
5,350

 
5,350

 
 
 
 
Total unamortized discount
(10
)
 
(11
)
 
 
 
 
Total unamortized debt issuance costs 
(30
)
 
(30
)
 
 
 
 
Total long-term debt
$
5,310

 
$
5,309

 
 
 
 

28


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



Note 11
Stockholders’ Equity, Comprehensive Income and Share-Based Compensation
Accumulated Other Comprehensive Income (Loss)
Changes in the components of AOCI, net of tax, were as follows:
 
 
Unrealized Gain on Investments, Net
 
Unrealized Gain (Loss) on Derivative Instruments Qualifying as Cash Flow Hedges
 
Defined and Postretirement Benefit Plans
 
Cumulative Translation Adjustments
 
Total
 
 
 
 
 
 
 
 
 
 
 
(in millions)
Balance as of October 28, 2018
$
7

 
$
(9
)
 
$
(137
)
 
$
14

 
$
(125
)
 Adoption of new accounting standards (a)
(17
)
 

 

 

 
(17
)
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
5

 
(12
)
 

 

 
(7
)
   Amounts reclassified out of AOCI

 
(5
)
 

 

 
(5
)
Other comprehensive income (loss), net of tax
5

 
(17
)
 

 

 
(12
)
 
 
 
 
 
 
 
 
 
 
Balance as of January 27, 2019
$
(5
)
 
$
(26
)
 
$
(137
)
 
$
14

 
$
(154
)
(a) - Represents the reclassification adjustment related to the adoption of Accounting Standard Update (ASU) 2016-01 Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities in the first quarter of fiscal 2019. See Note 1.
 
Unrealized Gain (Loss) on Investments, Net
 
Unrealized Gain (Loss) on Derivative Instruments Qualifying as Cash Flow Hedges
 
Defined and Postretirement Benefit Plans
 
Cumulative Translation Adjustments
 
Total
 
 
 
 
 
 
 
 
 
 
 
(in millions)
Balance as of October 29, 2017
$
53

 
$
(11
)
 
$
(120
)
 
$
14

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

 
(14
)
 

 

 
(8
)
Amounts reclassified out of AOCI

 
(5
)
 
(2
)
 

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

 
(19
)
 
(2
)