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

    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2021
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) 
Delaware94-1655526
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
3050 Bowers Avenue
P.O. Box 58039
Santa Clara, California 95052-8039
(Address of principal executive offices)

(408727-5555
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading SymbolName of Each Exchange on Which Registered
Common Stock, par value $.01 per shareAMATThe NASDAQ Stock Market LLC
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          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          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 filerAccelerated filer 
Non-accelerated filerSmaller 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  
Number of shares outstanding of the issuer’s common stock as of January 31, 2021: 917,660,832




APPLIED MATERIALS, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2021
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 3:
Item 4:
Item 5:
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 31,
2021
January 26,
2020
(Unaudited)
Net sales$5,162 $4,162 
Cost of products sold2,813 2,304 
Gross profit2,349 1,858 
Operating expenses:
Research, development and engineering606 552 
Marketing and selling147 135 
General and administrative161 129 
Severance and related charges152  
Total operating expenses1,066 816 
Income from operations1,283 1,042 
Interest expense61 59 
Interest and other income, net18 22 
Income before income taxes1,240 1,005 
Provision for income taxes110 113 
Net income$1,130 $892 
Earnings per share:
Basic$1.23 $0.97 
Diluted$1.22 $0.96 
Weighted average number of shares:
Basic915 916 
Diluted925 927 
See accompanying Notes to Consolidated Condensed Financial Statements.
3


APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
Three Months Ended
January 31,
2021
January 26,
2020
(Unaudited)
Net income$1,130 $892 
Other comprehensive income (loss), net of tax:
Change in unrealized gain (loss) on available-for-sale investments(2)2 
Change in unrealized net loss on derivative instruments4 (10)
Other comprehensive income (loss), net of tax2 (8)
Comprehensive income$1,132 $884 
See accompanying Notes to Consolidated Condensed Financial Statements.
4

APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)
January 31,
2021
October 25,
2020
 
ASSETS
Current assets:
Cash and cash equivalents$6,213 $5,351 
Short-term investments410 387 
Accounts receivable, net3,045 2,963 
Inventories3,925 3,904 
Other current assets676 764 
Total current assets14,269 13,369 
Long-term investments1,601 1,538 
Property, plant and equipment, net1,638 1,604 
Goodwill3,479 3,466 
Purchased technology and other intangible assets, net140 153 
Deferred income taxes and other assets2,178 2,223 
Total assets$23,305 $22,353 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses$2,932 $3,138 
Contract liabilities1,572 1,321 
Total current liabilities4,504 4,459 
Long-term debt5,449 5,448 
Income taxes payable1,210 1,206 
Other liabilities669 662 
Total liabilities11,832 11,775 
Stockholders’ equity:
Common stock9 9 
Additional paid-in capital7,869 7,904 
Retained earnings28,137 27,209 
Treasury stock(24,245)(24,245)
Accumulated other comprehensive loss(297)(299)
Total stockholders’ equity11,473 10,578 
Total liabilities and stockholders’ equity$23,305 $22,353 
Amounts as of January 31, 2021 are unaudited. Amounts as of October 25, 2020 are derived from the October 25, 2020 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 StockAdditional
Paid-In
Capital
Retained
Earnings
Treasury StockAccumulated
Other
Comprehensive
Income (Loss)
Total
Three Months Ended January 31, 2021SharesAmountSharesAmount
(Unaudited)
Balance as of October 25, 2020914 $9 $7,904 $27,209 1,091 $(24,245)$(299)$10,578 
Net income— — — 1,130 — — — 1,130 
Other comprehensive income (loss), net of tax— — — — — — 2 2 
Dividends declared ($0.22 per common share)
— — — (202)— — — (202)
Share-based compensation— — 107 — — — — 107 
Issuance under stock plans4 — (142)— — — — (142)
Balance as of January 31, 2021918 $9 $7,869 $28,137 1,091 $(24,245)$(297)$11,473 


Common StockAdditional
Paid-In
Capital
Retained
Earnings
Treasury StockAccumulated
Other
Comprehensive
Income (Loss)
Total
Three Months Ended January 26, 2020SharesAmountSharesAmount
(Unaudited)
Balance as of October 27, 2019916 $9 $7,595 $24,386 1,079 $(23,596)$(180)$8,214 
Net income— — — 892 — — — 892 
Other comprehensive income (loss), net of tax— — — — — — (8)(8)
Dividends declared ($0.21 per common share)
— — — (193)— — — (193)
Share-based compensation— — 93 — — — — 93 
Issuance under stock plans6 — (138)— — — — (138)
Common stock repurchases(3)— — — 3 (200)— (200)
Balance as of January 26, 2020919 $9 $7,550 $25,085 1,082 $(23,796)$(188)$8,660 



See accompanying Notes to Consolidated Condensed Financial Statements.


6

APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
Three Months Ended
January 31,
2021
January 26,
2020
(Unaudited)
Cash flows from operating activities:
Net income$1,130 $892 
Adjustments required to reconcile net income to cash provided by operating activities:
Depreciation and amortization94 94 
Severance and related charges148  
Share-based compensation107 93 
Deferred income taxes28 30 
Other 15 
Changes in operating assets and liabilities:
Accounts receivable(81)(146)
Inventories(21)2 
Other current and non-current assets94 (99)
Accounts payable and accrued expenses(335)(6)
Contract liabilities251 64 
Income taxes payable(8)23 
Other liabilities14 25 
Cash provided by operating activities1,421 987 
Cash flows from investing activities:
Capital expenditures(121)(102)
Cash paid for acquisitions, net of cash acquired(12) 
Proceeds from sales and maturities of investments358 368 
Purchases of investments(441)(428)
Cash used in investing activities(216)(162)
Cash flows from financing activities:
Proceeds from common stock issuances  15 
Common stock repurchases (200)
Tax withholding payments for vested equity awards(142)(153)
Payments of dividends to stockholders(201)(192)
Cash used in financing activities(343)(530)
Increase in cash, cash equivalents and restricted cash equivalents862 295 
Cash, cash equivalents and restricted cash equivalents — beginning of period5,466 3,129 
Cash, cash equivalents and restricted cash equivalents — end of period$6,328 $3,424 
Reconciliation of cash, cash equivalents, and restricted cash equivalents
Cash and cash equivalents$6,213 $3,424 
Restricted cash equivalents included in deferred income taxes and other assets115  
Total cash, cash equivalents, and restricted cash equivalents$6,328 $3,424 
Supplemental cash flow information:
Cash payments for income taxes$110 $82 
Cash refunds from income taxes$19 $1 
Cash payments for interest$35 $34 
See accompanying Notes to Consolidated Condensed Financial Statements.
7


Note 1    Basis of Presentation
Basis of Presentation
In the opinion of management, the unaudited interim consolidated condensed financial statements of Applied Materials, Inc. and its subsidiaries (Applied or the Company) included herein have been prepared on a basis consistent with the October 25, 2020 audited consolidated financial statements and include all material adjustments, consisting of normal recurring adjustments, necessary to fairly present the information set forth therein. These unaudited interim consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Applied’s Annual Report on Form 10-K for the fiscal year ended October 25, 2020 (2020 Form 10-K). Applied’s results of operations for the three months ended January 31, 2021 are not necessarily indicative of future operating results. Applied’s fiscal year ends on the last Sunday in October of each year. Fiscal 2021 and 2020 contain 53 weeks and 52 weeks, respectively, and the first three months of fiscal 2021 and 2020 contained 14 and 13 weeks, respectively.
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.
As of January 31, 2021, the COVID-19 pandemic and worldwide response remains fluid. As a result, many of Applied’s estimates and assumptions are subject to increased judgment and volatility. These estimates may differ materially in future periods as the pandemic continues to evolve and additional information becomes available.
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 Applied provides 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.
8


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


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, typically within 12 months, 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.
Recent Accounting Pronouncements
Accounting Standards Adopted
Retirement Benefits: Changes to the Disclosure Requirements for Defined Benefit and other Postretirement Plans. In August 2018, the Financial Accounting Standard Board (FASB) issued authoritative guidance that adds, removes, and clarifies disclosure requirements for defined benefit and other postretirement plans. Applied adopted this guidance in the first quarter of fiscal 2021 under the retrospective basis. The adoption of this guidance did not have a significant impact on Applied's defined benefit and other postretirement disclosures.
Goodwill Impairment. In January 2017, the FASB issued authoritative guidance that simplifies the process required to test goodwill for impairment. Applied adopted this guidance in the first quarter of fiscal 2021. The adoption of this guidance did not have a significant impact on Applied’s consolidated condensed 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. Applied adopted this guidance in the first quarter of fiscal 2021 under the modified retrospective basis. The adoption of this guidance did not have a significant impact on Applied’s consolidated condensed financial statements.
Accounting Standards Not Yet Adopted
Simplifying the Accounting for Income Taxes: In December 2019, the FASB issued an accounting standard update to simplify the accounting for income taxes (Topic 740). This amendment removes certain exceptions and improves consistent application of accounting principles for certain areas in Topic 740. This authoritative guidance will be effective for Applied in the first quarter of fiscal 2022, with early adoption permitted. Applied is currently evaluating the effect of this new guidance on Applied’s consolidated financial statements.

9


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


Note 2      Earnings Per Share
Basic earnings per share is determined using the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined using the weighted average number of common shares and potential common shares (representing the dilutive effect of 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 31,
2021
January 26,
2020
 (In millions, except per share amounts)
Numerator:
Net income $1,130 $892 
Denominator:
Weighted average common shares outstanding915 916 
Effect of weighted dilutive restricted stock units and employee stock purchase plan shares10 11 
Denominator for diluted earnings per share925 927 
Basic earnings per share$1.23 $0.97 
Diluted earnings per share$1.22 $0.96 
Potentially weighted dilutive securities  
Potentially weighted dilutive securities attributable to outstanding 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.
10


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


Note 3      Cash, Cash Equivalents and Investments
Summary of Cash, Cash Equivalents and Investments
The following tables summarize Applied’s cash, cash equivalents and investments by security type:
 
January 31, 2021CostGross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
 (In millions)
Cash$1,150 $— $— $1,150 
Cash equivalents:
Money market funds5,038 — — 5,038 
Municipal securities15 — — 15 
Commercial paper, corporate bonds and medium-term notes10 — — 10 
Total Cash equivalents5,063 — — 5,063 
Total Cash and Cash equivalents$6,213 $— $— $6,213 
Short-term and long-term investments:
Bank certificate of deposit$2 $ $ $2 
U.S. Treasury and agency securities332 2  334 
Non-U.S. government securities*6   6 
Municipal securities354 6  360 
Commercial paper, corporate bonds and medium-term notes552 7  559 
Asset-backed and mortgage-backed securities540 8  548 
Total fixed income securities1,786 23  1,809 
Publicly traded equity securities12 42 1 53 
Equity investments in privately-held companies132 26 9 149 
Total equity investments144 68 10 202 
Total short-term and long-term investments$1,930 $91 $10 $2,011 
Total Cash, Cash equivalents and Investments$8,143 $91 $10 $8,224 
_________________________
* Includes agency debt securities guaranteed by Canada
11


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


October 25, 2020CostGross
Unrealized
Gains
Gross
Unrealized
Losses
Estimated
Fair Value
 (In millions)
Cash$1,136 $— $— $1,136 
Cash equivalents:
Money market funds4,209 — — 4,209 
Municipal securities6 — — 6 
Total Cash equivalents4,215 — — 4,215 
Total Cash and Cash equivalents$5,351 $— $— $5,351 
Short-term and long-term investments:
U.S. Treasury and agency securities$394 $4 $ $398 
Municipal securities359 6  365 
Commercial paper, corporate bonds and medium-term notes492 8 1 499 
Asset-backed and mortgage-backed securities470 9  479 
Total fixed income securities1,715 27 1 1,741 
Publicly traded equity securities11 36 2 45 
Equity investments in privately-held companies121 25 7 139 
Total equity investments132 61 9 184 
Total short-term and long-term investments$1,847 $88 $10 $1,925 
Total Cash, Cash equivalents and Investments$7,198 $88 $10 $7,276 
 
 
Maturities of Investments
The following table summarizes the contractual maturities of Applied’s investments as of January 31, 2021:
 
CostEstimated
Fair Value
 (In millions)
Due in one year or less$390 $392 
Due after one through five years857 869 
No single maturity date**683 750 
Total$1,930 $2,011 
 _________________________
** 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 31, 2021 and January 26, 2020 gross realized gains and losses on investments were not material.
As of January 31, 2021, and October 25, 2020, 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 from credit losses or other factors. Factors considered in determining whether an unrealized loss is considered to be a credit loss include: the significance of the decline in value compared to 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. Credit losses related to available-for-sale debt securities are recorded as an allowance for credit losses through interest and other income, net. Any additional changes in fair value that are not related to credit losses are recognized in accumulated other comprehensive income.
12


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


During the three months ended January 31, 2021, with the adoption of credit losses authoritative guidance, Applied did not recognize significant credit losses and the ending allowance for credit losses was not material. Applied determined that the gross unrealized losses on its marketable fixed-income securities as of January 26, 2020 were temporary in nature and therefore it did not recognize any impairment of its marketable fixed-income securities during the three months ended January 26, 2020. Impairment charges on equity investments in privately-held companies during the three months ended January 31, 2021 and January 26, 2020 were not material. These impairment charges are included in interest and other income, net in the Consolidated Condensed Statement of Operations.
The components of gain (loss) on equity investments for the three months ended January 31, 2021 and January 26, 2020 were as follows:
Three Months Ended
January 31, 2021January 26, 2020
 (In millions)
Publicly traded equity securities
Unrealized gain $8 $2 
Unrealized loss (3)
Equity investments in privately-held companies
Unrealized gain1  
Unrealized loss(3)(1)
Realized gain on sales2  
Realized loss on sales or impairment (2)
Total gain (loss) on equity investments, net$8 $(4)

13


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 on a recurring basis, 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 31, 2021, 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. 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.
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.


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 31, 2021October 25, 2020
 Level 1Level 2TotalLevel 1Level 2Total
 (In millions)
Assets:
Available-for-sale debt security investments
Money market funds*$5,153 $ $5,153 $4,324 $ $4,324 
Bank certificate of deposit 2 2    
U.S. Treasury and agency securities308 26 334 375 23 398 
Non-U.S. government securities 6 6    
Municipal securities 375 375  371 371 
Commercial paper, corporate bonds and medium-term notes 569 569  499 499 
Asset-backed and mortgage-backed securities 548 548  479 479 
Total available-for-sale debt security investments$5,461 $1,526 $6,987 $4,699 $1,372 $6,071 
Equity investments with readily determinable values
Publicly traded equity securities$53 $ $53 $45 $ $45 
Total equity investments with readily determinable values$53 $ $53 $45 $ $45 
Total$5,514 $1,526 $7,040 $4,744 $1,372 $6,116 
 _________________________
* Amount as of January 31, 2021 and October 25, 2020, each includes $115 million invested in money market funds related to deferred compensation plans. Due to restrictions on the distribution of these funds, they are classified as restricted cash equivalents and are included in deferred income taxes and other assets in the Consolidated Condensed Balance Sheets.
Applied did not have any financial assets measured at fair value on a recurring basis within Level 3 fair value measurements as of January 31, 2021 or October 25, 2020.
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. 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. 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 31, 2021 and January 26, 2020 were not material.
Other
The carrying amounts of Applied’s financial instruments, including cash and cash equivalents, restricted 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 31, 2021 and October 25, 2020, the aggregate principal amount of long-term senior notes was $5.5 billion and the estimated fair value was $6.6 billion. The estimated fair value of long-term senior unsecured notes is determined by Level 2 inputs and is based primarily on quoted market prices for the same or similar issues. See Note 11 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, Israeli shekel, euro 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 31, 2021 is expected to be reclassified into earnings within 12 months. Changes in the fair value of option contracts due to changes in time value are excluded from the assessment of effectiveness. The initial value of this excluded component is amortized on a straight-line basis over the life of the hedging instrument and recognized in the financial statement line item to which the hedge relates. 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 the consolidated condensed statement of operations. 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 were not significant for the three months ended January 31, 2021 and January 26, 2020.
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 31, 2021 and October 25, 2020 were not material.
Applied is also exposed to interest rate risk associated with its potential future borrowings. During the three months ended January 26, 2020, Applied entered into a series of interest rate contracts 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 were settled in conjunction with the issuance of debt in May 2020.
The gain (loss) on derivatives in cash flow hedging relationships recognized in AOCI for derivatives designated as hedging instruments for the indicated periods were as follows:
Three Months Ended
January 31,
2021
January 26,
2020
(In millions)
Derivatives in Cash Flow Hedging Relationships:
Foreign exchange contracts$1 $7 
Interest rate contracts (18)
Total$1 $(11)
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 31, 2021January 26, 2020
Derivatives in Cash Flow Hedging RelationshipsDerivatives in Cash Flow Hedging Relationships
Total Amount Presented in the Consolidated Condensed Statement of Operations in which the Effects of Cash Flow Hedges are RecordedAmount of Gain or (Loss)
Reclassified
from AOCI into
Consolidated Condensed Statement of Operations
Amount of Gain (Loss) Excluded from Effectiveness Testing
Recognized in
Consolidated Condensed Statement of Operations
Total Amount Presented in the Consolidated Condensed Statement of Operations in which the Effects of Cash Flow Hedges are RecordedAmount of Gain or (Loss)
Reclassified
from AOCI into
Consolidated Condensed Statement of Operations
Amount of Gain (Loss) Excluded from Effectiveness Testing
Recognized in
Consolidated Condensed Statement of Operations
(In millions)
Foreign Exchange Contracts:
Net Sales$5,162 $(4)$ $4,162 $(1)$2 
Cost of products sold$2,813 2 (1)$2,304 2  
Research, development and engineering$606 1  $552 1  
Interest Rate Contracts:
Interest expense$61 (3) $59 (1) 
$(4)$(1)$1 $2 


  Amount of Gain or (Loss) 
Recognized in Consolidated Condensed Statement of Operations
Three Months Ended
Location of Gain or
(Loss) Recognized
in Consolidated Condensed Statement of Operations
January 31,
2021
January 26,
2020
 (In millions)
Derivatives Not Designated as Hedging Instruments
Foreign exchange contractsInterest and other income, net$ $4 
Total return swaps - deferred compensationCost of products sold1  
Total return swaps - deferred compensationOperating expenses7  
Total$8 $4 

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 31, 2021.
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 generally 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 $369 million and $206 million of account receivables during the three months ended January 31, 2021 and January 26, 2020, respectively. Applied did not discount letters of credit issued by customers or discount promissory notes during the three months ended January 31, 2021 and January 26, 2020. 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 credit losses of $30 million as of January 31, 2021 and October 25, 2020. Applied sells its products principally to manufacturers within the semiconductor and display industries. While Applied believes that its allowance for credit losses is adequate and represents its best estimate as of January 31, 2021, 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 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 are 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 obli