Item 16. Form 10-K Summary

177K characters. Original on sec.gov · Markdown

Item 16. Form 10-K Summary

None.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Applied Materials, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Applied Materials, Inc. and subsidiaries (the Company) as of October 28, 2018 and October 29, 2017, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended October 28, 2018, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of October 28, 2018 and October 29, 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended October 28, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of October 28, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated December 13, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.



/S/ KPMG LLP
KPMG LLP

We have served as the Company’s auditor since 2004.

Santa Clara, California

December 13, 2018

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Applied Materials, Inc.:

Opinion on Internal Control Over Financial Reporting

We have audited Applied Materials, Inc. and subsidiaries (the Company) internal control over financial reporting as of October 28, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 28, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of October 28, 2018 and October 29, 2017, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended October 28, 2018, and the related notes (collectively, the consolidated financial statements), and our report dated December 13, 2018 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting in Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



/s/ KPMG LLP
KPMG LLP

Santa Clara, California

December 13, 2018

APPLIED MATERIALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share amounts)



Fiscal Year	2018		2017		2016

Net sales	$	17,253	$	14,537	$	10,825
Cost of products sold	9,436		8,005		6,314
Gross profit	7,817		6,532		4,511
Operating expenses:
Research, development and engineering	2,019		1,774		1,540
Marketing and selling	521		456		429
General and administrative	481		434		390
Total operating expenses	3,021		2,664		2,359
Income from operations	4,796		3,868		2,152
Interest expense	234		198		155
Interest and other income, net	132		61		16
Income before income taxes	4,694		3,731		2,013
Provision for income taxes	1,381		297		292
Net income	$	3,313	$	3,434	$	1,721
Earnings per share:
Basic	$	3.27	$	3.20	$	1.56
Diluted	$	3.23	$	3.17	$	1.54
Weighted average number of shares:
Basic	1,013		1,073		1,107
Diluted	1,026		1,084		1,116

See accompanying Notes to Consolidated Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)



Fiscal Year	2018			2017		2016

Net income	$	3,313		$	3,434	$	1,721
Other comprehensive income (loss), net of tax:
Change in unrealized net gain on investments	(51		)	23		16
Change in unrealized net loss on derivative instruments	4			7		(3		)
Change in defined and postretirement benefit plans	(17		)	21		(36		)
Other comprehensive income (loss), net of tax	(64		)	51		(23		)
Comprehensive income	$	3,249		$	3,485	$	1,698

See accompanying Notes to Consolidated Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except per share amounts)



	October 28, 2018			October 29, 2017

ASSETS
Current assets:
Cash and cash equivalents	$	3,440		$	5,010
Short-term investments	590			2,266
Accounts receivable, net	2,565			2,338
Inventories	3,722			2,930
Other current assets	430			374
Total current assets	10,747			12,918
Long-term investments	1,568			1,143
Property, plant and equipment, net	1,407			1,066
Goodwill	3,368			3,368
Purchased technology and other intangible assets, net	213			412
Deferred income taxes and other assets	470			512
Total assets	$	17,773		$	19,419

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	2,721		$	2,450
Customer deposits and deferred revenue	1,347			1,665
Total current liabilities	4,068			4,115
Long-term debt	5,309			5,304
Income taxes payable	1,254			392
Other liabilities	303			259
Total liabilities	10,934			10,070
Commitments and contingencies (Note 14)
Stockholders’ equity:
Preferred stock: $.01 par value per share; 1 shares authorized; no shares issued	—			—
Common stock: $.01 par value per share; 2,500 shares authorized; 967 and 1,060 shares outstanding at 2018 and 2017, respectively	10			11
Additional paid-in capital	7,274			7,056
Retained earnings	20,874			18,258
Treasury stock: 1,019 and 917 shares at 2018 and 2017, respectively	(21,194		)	(15,912		)
Accumulated other comprehensive loss	(125		)	(64		)
Total stockholders’ equity	6,839			9,349
Total liabilities and stockholders’ equity	$	17,773		$	19,419

See accompanying Notes to Consolidated Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In millions)



	Common Stock					Additional Paid-In Capital			Retained Earnings			Treasury Stock				Accumulated Other Comprehensive Income (Loss)			Total
	Shares		Amount					Shares		Amount

Balance at October 25, 2015	1,160		$	11		$	6,575		$	13,967		793	$	(12,848	)	$	(92	)	$	7,613
Net income	—		—			—			1,721			—	—			—			1,721
Other comprehensive loss, net of tax	—		—			—			—			—	—			(23		)	(23		)
Dividends	—		—			—			(436		)	—	—			—			(436		)
Share-based compensation	—		—			201			—			—	—			—			201
Issuance under stock plans, net of a tax benefit of $23 and other	14		—			33			—			—	—			—			33
Common stock repurchases	(96	)	—			—			—			96	(1,892		)	—			(1,892		)
Balance at October 30, 2016	1,078		$	11		$	6,809		$	15,252		889	$	(14,740	)	$	(115	)	$	7,217
Net income	—		—			—			3,434			—	—			—			3,434
Other comprehensive income, net of tax	—		—			—			—			—	—			51			51
Dividends	—		—			—			(428		)	—	—			—			(428		)
Share-based compensation	—		—			220			—			—	—			—			220
Issuance under stock plans, net of a tax benefit of $55 and other	10		—			27			—			—	—			—			27
Common stock repurchases	(28	)	—			—			—			28	(1,172		)	—			(1,172		)
Balance at October 29, 2017	1,060		$	11		$	7,056		$	18,258		917	$	(15,912	)	$	(64	)	$	9,349
Adoption of new accounting standard (a)	—		—			—			(3		)	—	—			3			—
Net income	—		—			—			3,313			—	—			—			3,313
Other comprehensive loss, net of tax	—		—			—			—			—	—			(64		)	(64		)
Dividends	—		—			—			(694		)	—	—			—			(694		)
Share-based compensation	—		—			258			—			—	—			—			258
Issuance under stock plans	9		—			(40		)	—			—	—			—			(40		)
Common stock repurchases	(102	)	(1		)	—			—			102	(5,282		)	—			(5,283		)
Balance at October 28, 2018	967		$	10		$	7,274		$	20,874		1,019	$	(21,194	)	$	(125	)	$	6,839

(a) - Represents the reclassification adjustment related to the early adoption of Accounting Standards Update (ASU) 2018-02 Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. See Note 1.

See accompanying Notes to Consolidated Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)



Fiscal Year	2018			2017			2016

Cash flows from operating activities:
Net income	$	3,313		$	3,434		$	1,721
Adjustments required to reconcile net income to cash provided by operating activities:
Depreciation and amortization	457			407			389
Deferred income taxes	94			(11		)	21
Other	4			(9		)	38
Share-based compensation	258			220			201
Changes in operating assets and liabilities, net of amounts acquired:
Accounts receivable	(226		)	(37		)	(542		)
Inventories	(792		)	(879		)	(216		)
Other current and non-current assets	(93		)	(157		)	30
Accounts payable and accrued expenses	179			370			184
Customer deposits and deferred revenue	(318		)	289			611
Income taxes payable	886			121			173
Other liabilities	25			41			(44		)
Cash provided by operating activities	3,787			3,789			2,566
Cash flows from investing activities:
Capital expenditures	(622		)	(345		)	(253		)
Cash paid for acquisitions, net of cash acquired	(6		)	(68		)	(16		)
Proceeds from sales and maturities of investments	3,276			2,743			1,234
Purchases of investments	(2,077		)	(4,856		)	(1,390		)
Cash provided by (used in) investing activities	571			(2,526		)	(425		)
Cash flows from financing activities:
Debt borrowings, net of issuance costs	—			2,176			—
Debt repayments	—			(205		)	(1,207		)
Proceeds from common stock issuances	124			97			88
Common stock repurchases	(5,283		)	(1,172		)	(1,892		)
Tax withholding payments for vested equity awards	(164		)	(125		)	(77		)
Payments of dividends to stockholders	(605		)	(430		)	(444		)
Cash provided by (used in) financing activities	(5,928		)	341			(3,532		)
Increase (decrease) in cash and cash equivalents	(1,570		)	1,604			(1,391		)
Cash and cash equivalents — beginning of year	5,010			3,406			4,797
Cash and cash equivalents — end of year	$	3,440		$	5,010		$	3,406
Supplemental cash flow information:
Cash payments for income taxes	$	300		$	194		$	157
Cash refunds from income taxes	$	63		$	61		$	113
Cash payments for interest	$	219		$	186		$	151

See accompanying Notes to Consolidated Financial Statements.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1	Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of Applied Materials, Inc. and its subsidiaries (Applied or the Company) after elimination of intercompany balances and transactions. All references to a fiscal year apply to Applied’s fiscal year which ends on the last Sunday in October. Fiscal 2018, 2017 and 2016 contained 52, 52, and 53 weeks, respectively. Each fiscal quarter of 2018 and 2017 contained 13 weeks. The first fiscal quarter of 2016 contained 14 weeks, while the second, third and fourth quarters of fiscal 2016 contained 13 weeks.

Certain prior year amounts have been reclassified to conform to current year presentation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, Applied evaluates its estimates, including those related to accounts receivable and sales allowances, fair values of financial instruments, inventories, intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair values of share-based awards, and income taxes, among others. Applied bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Cash Equivalents

All highly-liquid investments with a remaining maturity of three months or less at the time of purchase are considered to be cash equivalents. Cash equivalents consist primarily of investments in institutional money market funds.

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 recorded at fair value based upon quoted market prices, and any temporary difference between the cost and fair value of an investment is presented as a separate component of accumulated other comprehensive income (loss). The specific identification method is used to determine the gains and losses on investments. 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 Statements of Operations.

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 Statement of Operations.

Inventories

Inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out (FIFO) basis. Applied adjusts inventory carrying value for estimated obsolescence equal to the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future demand and market conditions. Applied fully writes down inventories and noncancelable purchase orders for inventory deemed obsolete. Applied performs periodic reviews of inventory items to identify excess inventories on hand by comparing on-hand balances to anticipated usage using recent historical activity as well as anticipated or forecasted demand. If estimates of customer demand diminish further or market conditions become less favorable than those projected by Applied, additional inventory adjustments may be required.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Property, Plant and Equipment

Property, plant and equipment is stated at cost. Depreciation is provided over the estimated useful lives of the assets using the straight-line method. Estimated useful lives for financial reporting purposes are as follows: buildings and improvements, 3 to 30 years; demonstration and manufacturing equipment, 3 to 5 years; software, 3 to 5 years; and furniture, fixtures and other equipment, 3 to 5 years. Land improvements are amortized over the shorter of 15 years or the estimated useful life. Leasehold improvements are amortized over the shorter of five years or the lease term.

Intangible Assets

Goodwill and indefinite-lived assets 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. Purchased technology and other intangible assets are presented at cost, net of accumulated amortization, and are amortized over their estimated useful lives of 1 to 15 years using the straight-line method.

Long-Lived Assets

Applied reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets or asset group may not be recoverable. Applied assesses these assets for impairment based on estimated future cash flows from these assets.

Research, Development and Engineering Costs

Research, development and engineering costs are expensed as incurred.

Sales and Value Added Taxes

Taxes collected from customers and remitted to governmental authorities are presented on a net basis in the accompanying Consolidated Statements of Operations.

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.

Income Taxes

Applied recognizes a current tax liability for the estimated amount of income tax payable on tax returns for the current fiscal year. Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences between the book and tax bases of assets and liabilities. Deferred tax assets are also recognized for net operating loss and tax credit carryovers. Deferred tax assets are offset by a valuation allowance to the extent it is more likely than not that they are not expected to be realized.

Applied recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized from such positions are estimated based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Any changes in judgment related to uncertain tax positions are recognized in Applied’s provision for income taxes in the quarter in which such change occurs. Interest and penalties related to uncertain tax positions are recognized in Applied’s provision for income taxes.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Revenue Recognition

Applied recognizes revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; seller’s price to buyer is fixed or determinable; and collectability is probable. Applied’s shipping terms are customarily FOB Applied shipping point or equivalent terms. Applied’s revenue recognition policy generally results in revenue recognition at the following points: (1) for all transactions where legal title passes to the customer upon shipment or delivery, Applied recognizes revenue upon passage of title for all products that have been demonstrated to meet product specifications prior to shipment; the portion of revenue associated with certain installation-related tasks is deferred, and that revenue is recognized upon completion of the installation-related tasks; (2) for products that have not been demonstrated to meet product specifications prior to shipment, revenue is recognized at customer technical acceptance; (3) for transactions where legal title does not pass at shipment or delivery, revenue is recognized when legal title passes to the customer, which is generally at customer technical acceptance; and (4) for arrangements containing multiple elements, the revenue relating to the undelivered elements is deferred using the relative selling price method utilizing estimated sales prices until delivery of the deferred elements. Applied limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or adjustment. In cases where Applied has sold products that have been demonstrated to meet product specifications prior to shipment, Applied believes that at the time of delivery, it has an enforceable claim to amounts recognized as revenue. Spare parts revenue is generally recognized upon shipment, and services revenue is generally recognized over the period that the services are provided.

When a sales arrangement contains multiple elements, such as hardware and services and/or software products, Applied allocates revenue to each element based on a selling price hierarchy. The selling price for a deliverable is based on its vendor specific objective evidence (VSOE) if available, third party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. Applied generally utilizes the ESP due to the nature of its products. In multiple element arrangements where more-than-incidental software deliverables are included, revenue is allocated to each separate unit of accounting for each of the non-software deliverables and to the software deliverables as a group using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is then allocated to each software deliverable using the guidance for recognizing software revenue.

Derivative Financial Instruments

Applied uses financial instruments, such as forward exchange and currency option contracts, to hedge a portion of, but not all, existing and anticipated foreign currency denominated transactions typically expected to occur within 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. In certain cases, Applied also uses interest rate swap or lock agreements to hedge against the variability of cash flows due to changes in the benchmark interest rate of fixed rate debt. The terms of derivative financial instruments used for hedging purposes are generally consistent with the timing of the transactions being hedged. All of Applied’s derivative financial instruments are recorded at fair value based upon quoted market prices for comparable instruments. For derivative instruments designated and qualifying as cash flow hedges, the effective portion of the gain or loss on these hedges is reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity, and is reclassified into earnings when the hedged transaction affects earnings. If the transaction being hedged fails to occur, or if a portion of any derivative is ineffective, the gain or loss on the associated financial instrument is recorded promptly in earnings. For derivative instruments used to hedge existing foreign currency denominated assets or liabilities, the gain or loss on these hedges is recorded promptly in earnings to offset the changes in the fair value of the assets or liabilities being hedged. Applied does not use derivative financial instruments for trading or speculative purposes.

Foreign Currencies

As of October 28, 2018, all of Applied’s subsidiaries use the United States dollar as their functional currency. Accordingly, assets and liabilities of these subsidiaries are remeasured using exchange rates in effect at the end of the period, except for non-monetary assets, such as inventories and property, plant and equipment, which are remeasured using historical exchange rates. Foreign currency-denominated revenues and costs are remeasured using average exchange rates for the period, except for costs related to those balance sheet items that are remeasured using historical exchange rates. The resulting remeasurement gains and losses are included in general and administrative expenses in the Consolidated Statements of Operations as incurred.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Concentrations of Credit Risk

Financial instruments that potentially subject Applied to significant concentrations of credit risk consist principally of cash equivalents, investments, trade accounts receivable and derivative financial instruments used in hedging activities. Applied invests in a variety of financial instruments, such as, but not limited to, commercial paper, corporate and municipal bonds, United States Treasury and agency securities, and asset-backed and mortgage-backed securities, and, by policy, limits the amount of credit exposure with any one financial institution or commercial issuer. Applied performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral to secure accounts receivable. Applied maintains an allowance reserve for potentially uncollectible accounts receivable based on its assessment of the collectability of accounts receivable. Applied regularly reviews the allowance by considering factors such as historical experience, credit quality, age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. In addition, Applied utilizes letters of credit to mitigate credit risk when considered appropriate. Applied is exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments, but does not expect any counterparties to fail to meet their obligations. In some instances, Applied has entered into security arrangements which require the counterparties to post collateral to further mitigate credit exposure.

Recent Accounting Pronouncements

Accounting Standards Adopted

Inventory Measurement. In July 2015, the Financial Accounting Standard Board (FASB) issued authoritative guidance that requires inventory to be measured at the lower of cost and net realizable value instead of at lower of cost or market. This guidance does not apply to inventory that is measured using last-in, first out (LIFO) or the retail inventory method but applies to all other inventory including those measured using first-in, first-out (FIFO) or the average cost method. Applied adopted this authoritative guidance in the first quarter of fiscal 2018 prospectively to the measurement of inventory after the effective date. The adoption of this guidance did not have a material impact on Applied’s consolidated financial statements.

Share-Based Compensation. In March 2016, the FASB issued authoritative guidance that simplifies several aspects of the accounting for share-based payment transactions, including forfeitures, income tax, and classification on the statement of cash flows. Applied adopted this guidance in the first quarter of fiscal 2018. Upon adoption, Applied elected to continue to estimate forfeitures expected to occur to determine the amount of compensation costs to be recognized in each period. The new standard also required recognition of excess tax benefits in the provision for income taxes rather than additional paid-in capital prospectively. In fiscal 2018, Applied recognized an excess tax benefit of $51 million in the Consolidated Condensed Statements of Operations. Additionally, Applied elected to apply the presentation requirements for cash flows related to excess tax benefits and employee taxes paid for withheld shares retrospectively. Adopting this guidance increased cash provided by operating activities by $180 million and $100 million with corresponding net decreases in cash provided by financing activities for fiscal 2017 and 2016, respectively.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. In February 2018, the FASB issued authoritative guidance that allows stranded tax effects of the Tax Cuts and Jobs Act (the “Tax Act”) to be reclassified from accumulated other comprehensive income to retained earnings. Applied adopted this guidance at the beginning of the third quarter of fiscal 2018. The stranded income tax effects related to the Tax Act were reclassified from accumulated other comprehensive income to retained earnings in the consolidated statements of stockholders' equity as of October 28, 2018.

Share-Based Compensation: Modification Accounting. In May 2017, the FASB issued an update to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the change in terms or conditions. Applied adopted this guidance in the third quarter of fiscal 2018 on a prospective basis. The impact of the adoption of this guidance will depend on whether the Company makes any future modifications of share-based payment awards.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

Retirement Benefits. In March 2017, the FASB issued authoritative guidance which requires companies to present the service cost component of net benefit cost in the same line items in which they report compensation cost. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2019 on a retrospective basis. The adoption of this guidance is only expected to result in reclassification of other components of net benefit costs outside of income from operations and is not expected to have a significant impact on Applied’s consolidated financial statements.

Goodwill Impairment. In January 2017, the FASB issued authoritative guidance that simplifies the process required to test goodwill for impairment. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2021. Early adoption is permitted. The adoption of this guidance is not expected to have a significant impact on Applied’s consolidated financial statements.

Business Combinations. In January 2017, the FASB issued authoritative guidance that clarifies the definition of a business to help companies evaluate whether acquisition or disposal transactions should be accounted for as asset groups or as businesses. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2019 on a prospective basis. The impact of the adoption depends on the facts and circumstances of future acquisition or disposal transactions.

Income Taxes: Intra-Entity Asset Transfers. In October 2016, the FASB issued authoritative guidance that requires entities to recognize at the transaction date the income tax consequences of intercompany asset transfers other than inventory. Applied will adopt this standard in the first quarter of fiscal 2019 using a modified-retrospective approach resulting in a cumulative-effect adjustment to retained earnings. Applied estimates an increase in deferred tax assets of approximately $1.6 billion with a corresponding increase in retained earnings related to the recognition of income tax effects of intra-entity asset transfers that occurred prior to the adoption date.

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. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2019. The adoption of this guidance is not expected to have a significant impact on Applied’s consolidated financial statements.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED 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.

Financial Instruments: Classification and Measurement. In January 2016, the FASB issued authoritative guidance that requires equity investments that do not result in consolidation, and are not accounted for under the equity method, to be measured at fair value, and requires recognition of any changes in fair value in net income unless the investments qualify for a new practicability exception. For financial liabilities measured at fair value, the change in fair value caused by a change in instrument-specific credit risk will be required to be presented separately in other comprehensive income. Applied will adopt this standard in the first quarter of fiscal year 2019. Applied will make elections on whether to apply fair value or the measurement alternative for equity investments without readily determinable fair value on an investment-by-investment basis. For the equity securities without readily determinable fair values, fair value will be applied prospectively to all equity investments that exist as of adoption. Upon adoption, Applied will record a cumulative-effect adjustment to retained earnings for the unrealized gains and losses associated with equity investments with readily determinable fair values. Applied currently estimates a net increase to retained earnings of approximately $21 million with the corresponding net decrease in accumulated other comprehensive income.

Revenue Recognition. In May 2014, the FASB issued authoritative guidance that requires revenue recognition to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and requires certain additional disclosures. This new standard will supersede most current revenue recognition guidance, including industry-specific guidance. Entities will have the option of using either a full retrospective or modified retrospective approach to adopting the guidance. In August 2015, the FASB issued an amendment to defer the effective date by one year and allow entities to early adopt no earlier than the original effective date. With this amendment, the guidance will be effective for Applied in the first quarter of fiscal 2019, which is the Company’s planned adoption date. Applied currently anticipates adopting this new guidance using the full retrospective approach.

In fiscal 2016, Applied established a project steering committee and cross-functional implementation team that has identified potential differences that would result from applying the requirements of the new standard to Applied’s revenue contracts. In addition, the implementation team has identified and is now implementing changes to business processes, systems and controls to support recognition and disclosure under the new standard.

While the Company’s evaluation of the impact of this new guidance is not complete, Applied currently expects that the new standard will have the following impacts:


•	Revenue related to the sale of equipment and spares will generally continue to be recognized at a point in time upon the transfer of control. Under this new guidance, the point of time at which revenue is recognized for certain of these products is expected to be earlier than under current revenue recognition guidance as there will be fewer constraints related to customer acceptance.


•	Revenue related to the sale of services will generally continue to be recognized over time as the services are performed.


•	Disclosures related to revenue recognition, including contract balances and revenue disaggregation, will be expanded.


•	Applied continues to evaluate the effect that this new guidance will have on the financial position and results of operations for fiscal 2018. However, for fiscal 2017, Applied expects an increase of our net sales between $140 million and $180 million, or approximately 1%.

Applied is nearing completion of retrospectively adjusting financial information and will continue to evaluate the effect that the standard will have on its consolidated financial statements, including disclosures, and its preliminary assessments are subject to change.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED 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.



Fiscal Year	2018		2017		2016

	(In millions, except per share amounts)
Numerator:
Net income	$	3,313	$	3,434	$	1,721
Denominator:
Weighted average common shares outstanding	1,013		1,073		1,107
Effect of dilutive stock options, restricted stock units and employee stock purchase plan shares	13		11		9
Denominator for diluted earnings per share	1,026		1,084		1,116
Basic earnings per share	$	3.27	$	3.20	$	1.56
Diluted earnings per share	$	3.23	$	3.17	$	1.54
Potentially dilutive securities	—		—		—

Potentially dilutive securities attributable to outstanding stock options and restricted stock units are excluded from the calculation of diluted earnings per share where the combined exercise price and average unamortized fair value are greater than the average market price of Applied common stock, and therefore their inclusion would be anti-dilutive. Prior to the adoption of Accounting Standards Update (ASU) 2016-09 Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting in the first quarter of fiscal 2018, the assumed tax benefits upon the exercise of options and vesting of restricted stock units were also included in this calculation.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED 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:



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 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.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



October 29, 2017	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value

	(In millions)
Cash	$	1,346	$	—	$	—	$	1,346
Cash equivalents:
Money market funds	2,658		—		—		2,658
U.S. Treasury and agency securities	15		—		—		15
Non-U.S. government securities	55		—		—		55
Municipal securities	341		—		—		341
Commercial paper, corporate bonds and medium-term notes	595		—		—		595
Total Cash equivalents	3,664		—		—		3,664
Total Cash and Cash equivalents	$	5,010	$	—	$	—	$	5,010
Short-term and long-term investments:
U.S. Treasury and agency securities	$	667	$	—	$	1	$	666
Non-U.S. government securities*	161		—		—		161
Municipal securities	1,007		—		—		1,007
Commercial paper, corporate bonds and medium-term notes	1,024		1		1		1,024
Asset-backed and mortgage-backed securities	379		—		1		378
Total fixed income securities	3,238		1		3		3,236
Publicly traded equity securities	22		78		1		99
Equity investments in privately-held companies	74		—		—		74
Total short-term and long-term investments	$	3,334	$	79	$	4	$	3,409
Total Cash, Cash equivalents and Investments	$	8,344	$	79	$	4	$	8,419

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

Maturities of Investments

The following table summarizes the contractual maturities of Applied’s investments at October 28, 2018:



	Cost		Estimated Fair Value

	(In millions)
Due in one year or less	$	503	$	502
Due after one through five years	946		938
No single maturity date**	701		718
Total	$	2,150	$	2,158

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

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Gains and Losses on Investments

Gross realized gains and losses on sales of investments for each fiscal year were as follows:



	2018		2017		2016

	(In millions)
Gross realized gains	$	29	$	14	$	10
Gross realized losses	$	3	$	1	$	2

At October 28, 2018, gross unrealized losses related to Applied’s investment portfolio were not material. Applied regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether an unrealized loss is considered to be temporary, or other-than-temporary and therefore impaired, include: the length of time and extent to which fair value has been lower than the cost basis; the financial condition, credit quality and near-term prospects of the investee; and whether it is more likely than not that Applied will be required to sell the security prior to recovery. Generally, the contractual terms of investments in marketable securities do not permit settlement at prices less than the amortized cost of the investments. Applied determined that the gross unrealized losses on its marketable fixed income securities at October 28, 2018, October 29, 2017 and October 30, 2016 were temporary in nature and therefore it did not recognize any impairment of its marketable fixed income securities for fiscal 2018, 2017 or 2016. During fiscal 2018, 2017 and 2016, Applied determined that certain of its equity investments were other-than-temporarily impaired and, accordingly, recognized impairment charges of $5 million, $10 million and $8 million, respectively. These impairment charges are included in interest and other income, net in the Consolidated Statement of Operations.

Unrealized gains and temporary losses on investments classified as available-for-sale are included within accumulated other comprehensive income (loss), net of any related tax effect. Upon realization, those amounts are reclassified from accumulated other comprehensive income (loss) to results of operations.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED 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 cost method of accounting and are periodically assessed for other-than-temporary impairment when events or circumstances indicate that an other-than-temporary decline in value may have occurred. Applied’s nonfinancial assets, such as goodwill, intangible assets, and property, plant and equipment, are recorded at cost and are assessed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

Fair Value Hierarchy

Applied uses the following fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:


•	Level 1 — Quoted prices in active markets for identical assets or liabilities;


•	Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and


•	Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Applied’s investments consist primarily of debt securities that are classified as available-for-sale and recorded at their fair values. In determining the fair value of investments, Applied uses pricing information from pricing services that value securities based on quoted market prices and models that utilize observable market inputs. In the event a fair value estimate is unavailable from a pricing service, Applied generally obtains non-binding price quotes from brokers. Applied then reviews the information provided by the pricing services or brokers to determine the fair value of its short-term and long-term investments. In addition, to validate pricing information obtained from pricing services, Applied periodically performs supplemental analysis on a sample of securities. Applied reviews any significant unanticipated differences identified through this analysis to determine the appropriate fair value.

Investments with remaining effective maturities of 12 months or less from the balance sheet date are classified as short-term investments. Investments with remaining effective maturities of more than 12 months from the balance sheet date are classified as long-term investments. As of October 28, 2018, substantially all of Applied’s available-for-sale, short-term and long-term investments were recognized at fair value that was determined based upon observable inputs.

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:



	October 28, 2018						October 29, 2017
	Level 1		Level 2		Total		Level 1		Level 2		Total

	(In millions)
Assets:
Money market funds	$	1,599	$	—	$	1,599	$	2,658	$	—	$	2,658
U.S. Treasury and agency securities	297		36		333		192		489		681
Non-U.S. government securities	—		10		10		—		216		216
Municipal securities	—		395		395		—		1,348		1,348
Commercial paper, corporate bonds and medium-term notes	—		1,054		1,054		—		1,619		1,619
Asset-backed and mortgage-backed securities	—		591		591		—		378		378
Publicly traded equity securities	38		—		38		99		—		99
Total	$	1,934	$	2,086	$	4,020	$	2,949	$	4,050	$	6,999

There were no transfers between Level 1 and Level 2 fair value measurements during fiscal 2018 and 2017, and Applied did not have any financial assets measured at fair value on a recurring basis within Level 3 fair value measurements as of October 28, 2018 or October 29, 2017.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Assets and Liabilities Measured at Fair Value on a Non-recurring Basis

Equity investments in privately-held companies are generally accounted for under the cost method of accounting and are periodically assessed for other-than-temporary impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred. If Applied determines that an other-than-temporary impairment has occurred, the investment will be written down to its estimated fair value based on available information, such as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operational performance and any other readily available market data. Equity investments in privately-held companies totaled $89 million at October 28, 2018, of which $72 million of investments were accounted for under the cost method of accounting and $17 million of investments had been measured at fair value on a non-recurring basis within Level 3 fair value measurements due to an other-than-temporary decline in value. Equity investments in privately-held companies totaled $74 million at October 29, 2017, of which $65 million of investments were accounted for under the cost method of accounting and $9 million of investments had been measured at fair value on a non-recurring basis within Level 3 fair value measurements due to an other-than-temporary decline in value.

During fiscal 2018, 2017 and 2016, Applied determined that certain of its equity investments were other-than-temporarily impaired and, accordingly, recognized impairment charges of $5 million, $10 million and $8 million, respectively.

Other

The carrying amounts of Applied’s financial instruments, including cash and cash equivalents, accounts receivable, notes payable - short term, and accounts payable and accrued expenses, approximate fair value due to their short maturities. At October 28, 2018, the aggregate principal and estimated fair value amounts of long-term debt were both $5.4 billion. At October 29, 2017, the aggregate principal amount of long-term debt was $5.4 billion, and the estimated fair value was $5.8 billion. The estimated fair value of long-term debt is determined by Level 2 inputs and is based primarily on quoted market prices for the same or similar issues. See Note 10 of the Notes to the Consolidated Financial Statements for further detail of existing debt.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 5	Derivative Instruments and Hedging Activities

Derivative Financial Instruments

Applied conducts business in a number of foreign countries, with certain transactions denominated in local currencies, such as the Japanese yen, euro, Israeli shekel and Taiwanese dollar. Applied uses derivative financial instruments, such as forward exchange contracts and currency option contracts, to hedge certain forecasted foreign currency denominated transactions expected to occur typically within the next 24 months. The purpose of Applied’s foreign currency management is to mitigate the effect of exchange rate fluctuations on certain foreign currency denominated revenues, costs and eventual cash flows. The terms of currency instruments used for hedging purposes are generally consistent with the timing of the transactions being hedged.

During fiscal 2017, Applied entered into and settled interest rate lock agreements, with a total notional amount of $700 million to hedge against the variability of benchmark interest rates prior to the issuance of the debt. These instruments were designated as cash flow hedges at inception and settled in conjunction with the issuance of debt in March 2017. The $14 million loss from the settlement of the interest rate lock agreement, which was included in AOCI in stockholders’ equity, is being amortized to interest expense over the term of the senior unsecured 10-year notes issued in March 2017.

Applied does not use derivative financial instruments for trading or speculative purposes. Derivative instruments and hedging activities, including foreign currency exchange and interest rate contracts, are recognized on the balance sheet at fair value. Changes in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of any hedges, are recognized currently in earnings. All of Applied’s derivative financial instruments are recorded at their fair value in other current assets or in accounts payable and accrued expenses.

Hedges related to anticipated transactions are designated and documented at the inception of the hedge as cash flow hedges and foreign exchange derivatives are typically entered into once per month. Cash flow hedges are evaluated for effectiveness quarterly. The effective portion of the gain or loss on these hedges is reported as a component of AOCI in stockholders’ equity and is reclassified into earnings when the hedged transaction affects earnings. The majority of the after-tax net income or loss related to foreign exchange derivative instruments included in AOCI at October 28, 2018 is expected to be reclassified into earnings within 12 months. Changes in the fair value of currency forward exchange and option contracts due to changes in time value are excluded from the assessment of effectiveness. Both ineffective hedge amounts and hedge components excluded from the assessment of effectiveness are recognized in earnings. If the transaction being hedged is no longer probable to occur, or if a portion of any derivative is deemed to be ineffective, Applied promptly recognizes the gain or loss on the associated financial instrument in earnings. The amount recognized due to discontinuance of cash flow hedges that were probable not to occur by the end of the originally specified time period were not significant for fiscal years 2018 and 2017 and was a loss of $8 million for fiscal 2016.

Additionally, forward exchange contracts are generally used to hedge certain foreign currency denominated assets or liabilities. These derivatives are typically entered into once per month and are not designated for hedge accounting treatment. Accordingly, changes in the fair value of these hedges are recorded in earnings to offset the changes in the fair value of the assets or liabilities being hedged.

The fair values of foreign exchange derivative instruments at October 28, 2018 and October 29, 2017 were not material.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The effects of derivative instruments and hedging activities on the Consolidated Statements of Operations were as follows:



		Effective Portion						Ineffective Portion and Amount Excluded from Effectiveness Testing
Derivatives in Cash Flow Hedging Relationships	Location of Gain or (Loss)	Gain or (Loss)			Gain or (Loss) Reclassified from AOCI into Income			Gain or (Loss) Recognized in Income

		(In millions)
2018
Foreign exchange contracts	AOCI	$	3		$	—		$	—
Foreign exchange contracts	Cost of products sold	—			4			19
Foreign exchange contracts	General and administrative	—			(3		)	(7		)
Interest rate contracts	Interest expense	—			(3		)	—
Total		$	3		$	(2	)	$	12

2017
Foreign exchange contracts	AOCI	$	35		$	—		$	—
Foreign exchange contracts	Cost of products sold	—			7			(3		)
Foreign exchange contracts	General and administrative	—			7			(2		)
Interest rate contracts	AOCI	(14		)	—			—
Interest rate contracts	Interest expense	—			(3		)	—
Total		$	21		$	11		$	(5	)

2016
Foreign exchange contracts	AOCI	$	(53	)	$	—		$	—
Foreign exchange contracts	Cost of products sold	—			(46		)	2
Foreign exchange contracts	General and administrative	—			—			(11		)
Interest rate contracts	Interest expense	—			(2		)	—
Total		$	(53	)	$	(48	)	$	(9	)



		Amount of Gain or (Loss) Recognized in Income
Derivatives Not Designated as Hedging Instruments	Location of Gain or (Loss) Recognized in Income	2018			2017		2016

		(In millions)
Foreign exchange contracts	General and administrative	$	(5	)	$	39	$	(75	)
Total		$	(5	)	$	39	$	(75	)

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 October 28, 2018 and October 29, 2017.

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.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED 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 $1.6 billion, $746 million and $75 million of accounts receivable during fiscal 2018, 2017 and 2016, respectively. Applied discounted letters of credit issued by customers of $37 million in fiscal 2018. There was no discounting of promissory notes in fiscal 2018. Applied did not discount letters of credit issued by customers or discount promissory notes during fiscal 2017 or 2016. Financing charges on the sale of receivables and discounting of letters of credit are included in interest expense in the accompanying Consolidated Statements of Operations and were not material for all years presented.

Accounts receivable are presented net of allowance for doubtful accounts of $33 million and $34 million at October 28, 2018 and October 29, 2017, respectively. Changes in allowance for doubtful accounts in each fiscal year were as follows:



	2018			2017			2016

	(In millions)
Beginning balance	$	34		$	51		$	49
Provision	—			—			3
Deductions1	(1		)	(17		)	(1		)
Ending balance	$	33		$	34		$	51

1 Fiscal 2018, 2017 and 2016 deductions primarily represent releases of allowance for doubtful accounts credited to expense as a result of an overall lower risk profile of Applied’s customers and cash collections.

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 October 28, 2018, it continues to closely monitor customer liquidity and industry and economic conditions, which may result in changes to Applied’s estimates.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 7	Balance Sheet Detail



	October 28, 2018		October 29, 2017

	(In millions)
Inventories
Customer service spares	$	989	$	595
Raw materials	1,020		603
Work-in-process	505		468
Finished goods	1,208		1,264
	$	3,722	$	2,930

Included in finished goods inventory is $19 million at October 28, 2018 and $331 million at October 29, 2017, of newly-introduced systems at customer locations where the sales transaction did not meet Applied’s revenue recognition criteria as set forth in Note 1. Finished goods inventory includes $350 million and $281 million of evaluation inventory at October 28, 2018 and October 29, 2017, respectively.



	October 28, 2018		October 29, 2017

	(In millions)
Other Current Assets
Prepaid income taxes and income taxes receivable	$	40	$	57
Prepaid expenses and other	390		317
	$	430	$	374



	Useful Life	October 28, 2018			October 29, 2017

	(In years)	(In millions)
Property, Plant and Equipment, Net
Land and improvements		$	245		$	160
Buildings and improvements	3-30	1,448			1,315
Demonstration and manufacturing equipment	3-5	1,282			1,129
Furniture, fixtures and other equipment	3-5	634			572
Construction in progress		203			135
Gross property, plant and equipment		3,812			3,311
Accumulated depreciation		(2,405		)	(2,245		)
		$	1,407		$	1,066

Depreciation expense was $258 million, $214 million and $200 million for fiscal 2018, 2017 and 2016 respectively.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



	October 28, 2018		October 29, 2017

	(In millions)
Accounts Payable and Accrued Expenses
Accounts payable	$	996	$	945
Compensation and employee benefits	639		666
Warranty	209		199
Dividends payable	193		106
Income taxes payable	136		112
Other accrued taxes	112		70
Interest payable	38		38
Other	398		314
	$	2,721	$	2,450



	October 28, 2018		October 29, 2017

	(In millions)
Customer Deposits and Deferred Revenue
Customer deposits	$	444	$	381
Deferred revenue	903		1,284
	$	1,347	$	1,665

Applied typically receives deposits on future deliverables from customers in the Display and Adjacent Markets segment and, in certain instances, may also receive deposits from customers in the Applied Global Services segment.



	October 28, 2018		October 29, 2017

	(In millions)
Other Liabilities
Defined and postretirement benefit plans	$	177	$	160
Other	126		99
	$	303	$	259

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 8	Business Combinations

During fiscal 2017, Applied completed three acquisitions to complement Applied’s existing product offerings and to provide opportunities for future growth within Applied’s Display and Adjacent Markets and Applied Global Services segments.

Pro forma results of operations for these acquisitions have not been presented because they are not material to Applied’s consolidated results of operations. The acquired businesses are included in the results for the Display and Adjacent Markets and Applied Global Services segments.

The following table represents the final aggregated purchase price allocation for acquisitions completed in fiscal year 2017:



	Estimated Fair Values
	(In millions)
Fair value of net assets acquired	$	23
Goodwill	55
Purchased technology	31
Purchase price allocated	$	109

Intangible assets are being amortized on a straight-line basis over an estimated weighted-average useful life of 3.5 years. Total transaction costs related to these acquisitions were not material and were expensed as incurred in general and administrative expenses in the Consolidated Statement of Operations.


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 October 28, 2018, Applied’s reporting units include Semiconductor Product Group and Imaging and Process Control Group, which combine to form the Semiconductor Systems reporting segment, Applied Global Services, and Display and Adjacent Markets.

In the fourth quarter of fiscal 2018, Applied performed a qualitative assessment to test goodwill for all of its reporting units for impairment. Applied determined that it was more likely than not that each of its reporting units’ fair values exceeded their respective carrying values and that it was not necessary to perform the two-step goodwill impairment test for any of its reporting units.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 were as follows:



	October 28, 2018		October 29, 2017

	(In millions)
Semiconductor Systems	$	2,151	$	2,151
Applied Global Services	1,018		1,018
Display and Adjacent Markets	199		199
Carrying amount	$	3,368	$	3,368

A summary of Applied’s purchased technology and intangible assets is set forth below:



	October 28, 2018		October 29, 2017

	(In millions)
Purchased technology, net	$	109	$	288
Intangible assets - finite-lived, net	104		124
	$	213	$	412

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED 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:



	October 28, 2018									October 29, 2017
	Purchased Technology			Other Intangible Assets			Total			Purchased Technology			Other Intangible Assets			Total

	(In millions)
Gross carrying amount:
Semiconductor Systems	$	1,449		$	252		$	1,701		$	1,449		$	252		$	1,701
Applied Global Services	33			44			77			33			44			77
Display and Adjacent Markets	163			38			201			163			38			201
Corporate and Other	—			9			9			—			9			9
Gross carrying amount	$	1,645		$	343		$	1,988		$	1,645		$	343		$	1,988
Accumulated amortization:
Semiconductor Systems	$	(1,375	)	$	(150	)	$	(1,525	)	$	(1,210	)	$	(131	)	$	(1,341	)
Applied Global Services	(29		)	(44		)	(73		)	(28		)	(44		)	(72		)
Display and Adjacent Markets	(132		)	(36		)	(168		)	(119		)	(35		)	(154		)
Corporate and Other	—			(9		)	(9		)	—			(9		)	(9		)
Accumulated amortization	$	(1,536	)	$	(239	)	$	(1,775	)	$	(1,357	)	$	(219	)	$	(1,576	)
Carrying amount	$	109		$	104		$	213		$	288		$	124		$	412

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Details of amortization expense for each fiscal year by segment were as follows:



	2018		2017		2016

	(In millions)
Semiconductor Systems	$	184	$	185	$	185
Applied Global Services	1		1		1
Display and Adjacent Markets	14		7		—
Corporate and Other	—		—		3
Total	$	199	$	193	$	189

Amortization expense for each fiscal year was charged to the following categories:



	2018		2017		2016

	(In millions)
Cost of products sold	$	180	$	173	$	167
Research, development and engineering	1		1		2
Marketing and selling	18		19		20
Total	$	199	$	193	$	189

As of October 28, 2018, future estimated amortization expense is expected to be as follows:



	Amortization Expense
	(In millions)
2019	$	57
2020	52
2021	39
2022	65
Total	$	213

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED 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 $71 million are with Japanese banks. Applied’s ability to borrow under these facilities is subject to bank approval at the time of the borrowing request, and any advances will be at rates indexed to the banks’ prime reference rate denominated in Japanese yen. No amounts were outstanding under any of these facilities at both October 28, 2018 and October 29, 2017, and Applied has not utilized these credit facilities. In fiscal 2011, Applied established a short-term commercial paper program of up to $1.5 billion. At October 28, 2018 and October 29, 2017, Applied did not have any commercial paper outstanding.

In March 2017, Applied issued senior unsecured notes in the aggregate principal amount of $2.2 billion and in May 2017, used a portion of the net proceeds to redeem the outstanding $200 million in principal amount of its 7.125% senior notes due in October 2017.

Debt outstanding as of October 28, 2018 and October 29, 2017 was as follows:



	Principal Amount
	October 28, 2018			October 29, 2017			Effective Interest Rate	Interest Pay Dates
	(In millions)
Long-term debt:
2.625% Senior Notes Due 2020	$	600		$	600		2.640%	April 1, October 1
4.300% Senior Notes Due 2021	750			750			4.326%	June 15, December 15
3.900% Senior Notes Due 2025	700			700			3.944%	April 1, October 1
3.300% Senior Notes Due 2027	1,200			1,200			3.342%	April 1, October 1
5.100% Senior Notes Due 2035	500			500			5.127%	April 1, October 1
5.850% Senior Notes Due 2041	600			600			5.879%	June 15, December 15
4.350% Senior Notes Due 2047	1,000			1,000			4.361%	April 1, October 1
	5,350			5,350
Total unamortized discount	(11		)	(12		)
Total unamortized debt issuance costs	(30		)	(34		)
Total long-term debt	$	5,309		$	5,304

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 11	Stockholders’ Equity, Comprehensive Income and Share-Based Compensation

Accumulated Other Comprehensive Income (Loss)

Changes in the components of accumulated other comprehensive income (AOCI), net of tax, were as follows:



	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 at October 25, 2015	$	14		$	(15	)	$	(105	)	$	14	(92		)
Other comprehensive income (loss) before reclassifications	14			(33		)	(42		)	—		(61		)
Amounts reclassified out of AOCI	2			30			6			—		38
Other comprehensive income (loss), net of tax	16			(3		)	(36		)	—		(23		)
Balance at October 30, 2016	$	30		$	(18	)	$	(141	)	$	14	$	(115	)
Other comprehensive income (loss) before reclassifications	24			13			29			—		66
Amounts reclassified out of AOCI	(1		)	(6		)	(8		)	—		(15		)
Other comprehensive income, net of tax	23			7			21			—		51
Balance at October 29, 2017	$	53		$	(11	)	$	(120	)	$	14	$	(64	)
Adoption of new accounting standards (a)	5			(2		)	—			—		3

Other comprehensive income (loss) before reclassifications	(66		)	5			(23		)	—		(84		)
Amounts reclassified out of AOCI	15			(1		)	6			—		20
Other comprehensive income (loss), net of tax	(51		)	4			(17		)	—		(64		)
Balance at October 28, 2018	$	7		$	(9	)	$	(137	)	$	14	$	(125	)

The tax effects on net income of amounts reclassified from AOCI for fiscal 2016 was $22 million. The tax effects on net income of amounts reclassified from AOCI for the fiscal years 2018 and 2017, were not material.

Stock Repurchase Programs

In September 2017, Applied’s Board of Directors approved a common stock repurchase program authorizing up to $3.0 billion in repurchases. In February 2018, the Board of Directors approved a new common stock repurchase program authorizing up to an additional $6.0 billion in repurchases. At October 28, 2018, $4.3 billion remained available for future stock repurchases under this repurchase program.

The following table summarizes Applied’s stock repurchases for each fiscal year:



	2018		2017		2016

	(In millions, except per share amounts)
Shares of common stock repurchased	102		28		96
Cost of stock repurchased	$	5,283	$	1,172	$	1,892
Average price paid per share	$	51.55	$	42.08	$	19.82

Applied records treasury stock purchases under the cost method using the first-in, first-out (FIFO) method. Upon reissuance of treasury stock, amounts in excess of the acquisition cost are credited to additional paid in capital. If Applied reissues treasury stock at an amount below its acquisition cost and additional paid in capital associated with prior treasury stock transactions is insufficient to cover the difference between the acquisition cost and the reissue price, this difference is recorded against retained earnings.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Dividends

During fiscal 2018, Applied's Board of Directors declared three quarterly cash dividends of $0.20 per share and one quarterly cash dividend of $0.10 per share. During each of fiscal 2017 and 2016, Applied’s Board of Directors declared four quarterly cash dividends in the amount of $0.10 per share. Dividends paid during fiscal 2018, 2017 and 2016 amounted to $605 million, $430 million and $444 million, respectively. Applied currently anticipates that cash dividends will continue to be paid on a quarterly basis, although the declaration of any future cash dividend is at the discretion of the Board of Directors and will depend on Applied’s financial condition, results of operations, capital requirements, business conditions and other factors, as well as a determination by the Board of Directors that cash dividends are in the best interests of Applied’s stockholders.

Share-Based Compensation

Applied has a stockholder-approved equity plan, the Employee Stock Incentive Plan, which permits grants to employees of share-based awards, including stock options, restricted stock, restricted stock units, performance shares and performance units. In addition, the plan provides for the automatic grant of restricted stock units to non-employee directors and permits the grant of share-based awards to non-employee directors and consultants. Share-based awards made under the plan may be subject to accelerated vesting under certain circumstances in the event of a change in control of Applied. Applied also has two Employee Stock Purchase Plans, one generally for United States employees and a second for employees of international subsidiaries (collectively, ESPP), which enable eligible employees to purchase Applied common stock.

Applied recognized share-based compensation expense related to stock options, ESPP shares, restricted stock, restricted stock units, performance shares and performance units, and related tax benefits for each fiscal year as follows:



	2018		2017		2016

	(In millions)
Share-based compensation	$	258	$	220	$	201
Tax benefit recognized	$	45	$	60	$	63

The effect of share-based compensation on the results of operations for each fiscal year was as follows:



	2018		2017		2016

	(In millions)
Cost of products sold	$	87	$	69	$	62
Research, development, and engineering	96		83		76
Marketing and selling	31		28		26
General and administrative	44		40		37
Total share-based compensation	$	258	$	220	$	201

The cost associated with share-based awards that are subject solely to time-based vesting requirements, less expected forfeitures, is recognized over the awards’ service period for the entire award on a straight-line basis. The cost associated with performance-based equity awards is recognized for each tranche over the service period, based on an assessment of the likelihood that the applicable performance goals will be achieved.

At October 28, 2018, Applied had $368 million in total unrecognized compensation expense, net of estimated forfeitures, related to grants of share-based awards and shares issued under Applied’s ESPP, which will be recognized over a weighted average period of 2.4 years. At October 28, 2018, there were 81 million shares available for grants of share-based awards under the Employee Stock Incentive Plan, and an additional 17 million shares available for issuance under the ESPP.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock Options

Stock options are rights to purchase, at future dates, shares of Applied common stock. The exercise price of each stock option equals the fair market value of Applied common stock on the date of grant. Options typically vest over three to four years, subject to the grantee’s continued service with Applied through the scheduled vesting date, and expire no later than seven years from the grant date. There were no stock options granted during fiscal 2018, 2017 and 2016. Outstanding stock options at the end of fiscal 2018 were not material to the consolidated financial statements.

Restricted Stock Units, Restricted Stock, Performance Shares and Performance Units

Restricted stock units are converted into shares of Applied common stock upon vesting on a one-for-one basis. Restricted stock has the same rights as other issued and outstanding shares of Applied common stock except these shares generally have no right to dividends and are held in escrow until the award vests. Performance shares and performance units are awards that result in a payment to a grantee, generally in shares of Applied common stock on a one-for-one basis, if performance goals and/or other vesting criteria established by the Human Resources and Compensation Committee of Applied’s Board of Directors are achieved or the awards otherwise vest. Restricted stock units, restricted stock, performance shares and performance units typically vest over four years and vesting is usually subject to the grantee’s continued service with Applied and, in some cases, achievement of specified performance goals. The compensation expense related to the service-based awards is determined using the fair market value of Applied common stock on the date of the grant, and the compensation expense is recognized over the vesting period.

Certain executive officers were granted awards that are subject to the achievement of specified performance goals (performance-based awards). These awards become eligible to vest only if performance goals are achieved and will vest only if the grantee remains employed by Applied through each applicable vesting date. The fair value of these awards is estimated on the date of grant. If the goals are achieved, the awards will vest, provided that the grantee remains employed by Applied through each scheduled vesting date. If the performance goals are not met as of the end of the performance period, no compensation expense is recognized and any previously recognized compensation expense is reversed. The expected cost is based on the awards that are probable to vest and is reflected over the service period and reduced for estimated forfeitures.

For performance-based awards granted in fiscal 2018 and 2017, certain awards require the achievement of positive adjusted operating profit and vest ratably over three years. Other awards require the achievement of targeted levels of adjusted operating profit margin and wafer fabrication equipment market share, and the number of shares that may vest in full after three years ranges from 0% to 200% of the target amount. Performance-based awards granted in fiscal 2016 require the achievement of targeted levels of adjusted annual operating profit margin, and additional shares become eligible for time-based vesting if Applied achieves certain levels of total shareholder return relative to a peer group, comprised of companies in the Standard & Poor’s 500 Information Technology Index, measured at the end of a two-year period.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of the changes in restricted stock units, restricted stock, performance shares and performance units outstanding under Applied’s equity compensation plans is presented below:



	Shares		Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value

	(In millions, except per share amounts)
Non-vested restricted stock units, restricted stock, performance shares and performance units at October 25, 2015	27		$	16.41	2.2 years	$	440
Granted	11		$	18.54
Vested	(11	)	$	14.25
Canceled	(2	)	$	17.57
Non-vested restricted stock units, restricted stock, performance shares and performance units at October 30, 2016	25		$	18.28	2.3 years	$	718
Granted	8		$	31.79
Vested	(10	)	$	16.50
Canceled	(1	)	$	21.25
Non-vested restricted stock units, restricted stock, performance shares and performance units at October 29, 2017	22		$	23.96	2.2 years	$	1,239
Granted	6		$	50.62
Vested	(9	)	$	22.15
Canceled	(1	)	$	30.19
Non-vested restricted stock units, restricted stock, performance shares and performance units at October 28, 2018	18		$	32.64	2.0 years	$	600
Non-vested restricted stock units, restricted stock, performance shares and performance units expected to vest	16		$	31.11	1.9 years	$	523

At October 28, 2018, 1 million additional performance-based awards could be earned based upon achievement of certain levels of specified performance goals.

Employee Stock Purchase Plans

Under the ESPP, substantially all employees may purchase Applied common stock through payroll deductions at a price equal to 85 percent of the lower of the fair market value of Applied common stock at the beginning or end of each 6-month purchase period, subject to certain limits. Applied issued 3 million shares in each of fiscal 2018 and 2017, and 6 million shares during fiscal 2016, under the ESPP. Compensation expense is calculated using the fair value of the employees’ purchase rights under the Black-Scholes model. Underlying assumptions used in the model are outlined in the following table:



	2018		2017		2016
ESPP:
Dividend yield	1.68	%	0.99	%	1.76	%
Expected volatility	34.4	%	26.3	%	29.3	%
Risk-free interest rate	2.09	%	0.92	%	0.47	%
Expected life (in years)	0.5		0.5		0.5
Weighted average estimated fair value	$12.02		$9.14		$5.48

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 12 Employee Benefit Plans

Employee Bonus Plans

Applied has various employee bonus plans. A discretionary bonus plan provides for the distribution of a percentage of pre-tax income to Applied employees who are not participants in other performance-based incentive plans, up to a maximum percentage of eligible compensation. Other plans provide for bonuses to Applied’s executives and other key contributors based on the achievement of profitability and/or other specified performance criteria. Charges under these plans for fiscal 2018, 2017 and 2016 were $382 million, $449 million and $312 million, respectively.

Employee Savings and Retirement Plan

Applied’s Employee Savings and Retirement Plan (the 401(k) Plan) is qualified under Sections 401(a) and (k) of the Internal Revenue Code (the Code). Eligible employees may make salary deferral and catch-up contributions under the 401(k) Plan on a pre-tax basis and on a Roth basis, subject to an annual dollar limit established by the Code. Applied matches 100% of participant salary and/or Roth deferral contributions up to the first 3% of eligible contribution and then 50% of every dollar between 4% and 6% of eligible contribution. Applied does not make matching contributions on any catch-up contributions made by participants. Plan participants who were employed by Applied or any of its affiliates became 100% vested in their Applied matching contribution account balances. Applied’s matching contributions under the 401(k) Plan were approximately $45 million for fiscal 2018 and $38 million for each of fiscal 2017 and 2016.

Defined Benefit Pension Plans of Foreign Subsidiaries and Other Post-Retirement Benefits

Several of Applied’s foreign subsidiaries have defined benefit pension plans covering substantially all of their eligible employees. Benefits under these plans are typically based on years of service and final average compensation levels. The plans are managed in accordance with applicable local statutes and practices. Applied deposits funds for certain of these plans with insurance companies, pension trustees, government-managed accounts, and/or accrues the expense for the unfunded portion of the benefit obligation on its Consolidated Financial Statements. Applied’s practice is to fund the various pension plans in amounts sufficient to meet the minimum requirements as established by applicable local governmental oversight and taxing authorities. Depending on the design of the plan, local custom and market circumstances, the liabilities of a plan may exceed the qualified plan assets. The differences between the aggregate projected benefit obligations and aggregate plan assets of these plans have been recorded as liabilities by Applied and are included in other liabilities and accrued expenses in the Consolidated Balance Sheets.

Through December 31, 2017, Applied also sponsored a U.S. post-retirement plan that provided covered medical and vision benefits to certain eligible retirees. An eligible retiree also could elect coverage for an eligible spouse or domestic partner who was not eligible for Medicare. Coverage ended entirely for all participants when the plan terminated on December 31, 2017. In addition, Applied also has a post-retirement benefit plan as a result of the acquisition of Varian. Applied’s liability under these post-retirement plans, which was included in other liabilities in the Consolidated Balance Sheets, were immaterial at each of October 28, 2018 and October 29, 2017.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of the changes in benefit obligations and plan assets, which includes post-retirement benefits, for each fiscal year is presented below:



	2018			2017			2016

	(In millions, except percentages)
Change in projected benefit obligation
Beginning projected benefit obligation	$	506		$	495		$	471
Service cost	12			13			13
Interest cost	11			10			13
Plan participants’ contributions	1			2			1
Actuarial (gain) loss	24			(35		)	77
Curtailments, settlements and special termination benefits	(1		)	(1		)	(6		)
Foreign currency exchange rate changes	(16		)	34			(42		)
Benefits paid	(12		)	(12		)	(10		)
Plan amendments and business combinations	(1		)	—			(22		)
Ending projected benefit obligation	$	524		$	506		$	495
Ending accumulated benefit obligation	$	490		$	472		$	460
Range of assumptions to determine benefit obligations
Discount rate	0.6% - 3.1%			0.5% - 3.4%			0.5% - 3.1%
Rate of compensation increase	2.4% - 3.5%			2.2% - 3.5%			1.6% - 3.6%
Change in plan assets
Beginning fair value of plan assets	$	361		$	310		$	281
Return on plan assets	17			18			37
Employer contributions	11			16			50
Plan participants’ contributions	1			2			1
Foreign currency exchange rate changes	(12		)	28			(45		)
Divestitures, settlements and business combinations	(1		)	(1		)	(4		)
Benefits paid	(12		)	(12		)	(10		)
Ending fair value of plan assets	$	365		$	361		$	310
Funded status	$	(159	)	$	(145	)	$	(185	)
Amounts recognized in the consolidated balance sheets
Noncurrent asset	$	19		$	17		$	11
Current liability	(1		)	(1		)	(2		)
Noncurrent liability	(177		)	(161		)	(194		)
Total	$	(159	)	$	(145	)	$	(185	)
Estimated amortization from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal period
Actuarial loss	$	8		$	6		$	6
Prior service credit	(1		)	(4		)	(16		)
Total	$	7		$	2		$	(10	)
Amounts recognized in accumulated other comprehensive loss
Net actuarial loss	$	161		$	141		$	186
Prior service credit	(2		)	(4		)	(21		)
Total	$	159		$	137		$	165
Plans with projected benefit obligations in excess of plan assets
Projected benefit obligation	$	365		$	326		$	341
Fair value of plan assets	$	186		$	142		$	145
Plans with accumulated benefit obligations in excess of plan assets
Accumulated benefit obligation	$	331		$	293		$	307
Fair value of plan assets	$	186		$	142		$	145

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



	2018		2017
Plan assets — allocation
Equity securities	47	%	47	%
Debt securities	32	%	39	%
Insurance contracts	10	%	11	%
Other investments	10	%	3	%
Cash	1	%	—	%

The following table presents a summary of the ending fair value of the plan assets:



	October 28, 2018								October 29, 2017
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total

	(In millions)
Equity securities	$	86	$	—	$	—	$	86	$	83	$	—	$	—	$	83
Debt securities	19		—		—		19		16		—		—		16
Insurance contracts	—		—		36		36		—		—		38		38
Other investments	—		14		—		14		—		13		—		13
Cash	2		—		—		2		2		—		—		2
Total assets at fair value	$	107	$	14	$	36	157		$	101	$	13	$	38	152
Assets measured at net asset value							208								209
Total							$	365							$	361

The following table presents the activity in Level 3 instruments for each fiscal year:



	2018			2017

	(In millions)
Balance, beginning of year	$	38		$	38
Actual return on plan assets:
Relating to assets still held at reporting date	(1		)	(3		)
Purchases, sales, settlements, net	—			1
Currency impact	(1		)	2
Balance, end of year	$	36		$	38

Applied’s investment strategy for its defined benefit plans is to invest plan assets in a prudent manner, maintaining well-diversified portfolios with the long-term objective of meeting the obligations of the plans as they come due. Asset allocation decisions are typically made by plan fiduciaries with input from Applied’s international pension committee. Applied’s asset allocation strategy incorporates a sufficient equity exposure in order for the plans to benefit from the expected better long-term performance of equities relative to the plans’ liabilities. Applied retains investment managers, where appropriate, to manage the assets of the plans. Performance of investment managers is monitored by plan fiduciaries with the assistance of local investment consultants. The investment managers make investment decisions within the guidelines set forth by plan fiduciaries. Risk management practices include diversification across asset classes and investment styles, and periodic rebalancing toward target asset allocation ranges. Investment managers may use derivative instruments for efficient portfolio management purposes. Plan assets do not include any of Applied’s own equity or debt securities.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of the components of net periodic benefit costs and the weighted average assumptions used for net periodic benefit cost calculations for each fiscal year is presented below:



	2018			2017			2016

	(In millions, except percentages)
Components of net periodic benefit cost
Service cost	$	12		$	13		$	13
Interest cost	11			10			13
Expected return on plan assets	(20		)	(18		)	(14		)
Amortization of actuarial loss and prior service credit	3			(10		)	3
Settlement and curtailment loss	—			—			(5		)
Net periodic benefit cost (income)	$	6		$	(5	)	$	10
Weighted average assumptions
Discount rate	2.16		%	1.88		%	2.82		%
Expected long-term return on assets	5.41		%	5.38		%	5.38		%
Rate of compensation increase	2.66		%	2.69		%	2.71		%

Asset return assumptions are derived based on actuarial and statistical methodologies, from analysis of long-term historical data relevant to the country in which each plan is in effect and the investments applicable to the corresponding plan. The discount rate for each plan was derived by reference to appropriate benchmark yields on high quality corporate bonds, allowing for the approximate duration of both plan obligations and the relevant benchmark yields.

Future expected benefit payments for the pension plans and the post-retirement plan over the next ten fiscal years are as follows:



	Benefit Payments
	(In millions)
2019	$	12
2020	12
2021	13
2022	13
2023	12
2024-2028	77
	$	139

Company contributions to these plans for fiscal 2019 are expected to be approximately $15 million.

Executive Deferred Compensation Plans

Applied sponsors two unfunded deferred compensation plans, the Executive Deferred Compensation Plan (Predecessor EDCP) and the 2016 Deferred Compensation Plan (2016 DCP) (formerly known as the 2005 Executive Deferred Compensation Plan), under which certain employees may elect to defer a portion of their following year’s eligible earnings. The Predecessor EDCP was frozen as of December 31, 2004 such that no new deferrals could be made under the plan after that date and the plan would qualify for “grandfather” relief under Section 409A of the Code. The Predecessor EDCP participant accounts continue to be maintained under the plan and credited with deemed interest. The 2016 DCP was originally implemented by Applied effective as of January 1, 2005, and amended and restated as of October 12, 2015, and is intended to comply with the requirements of Section 409A of the Code. In addition, Applied also sponsors a non-qualified deferred compensation plan as a result of the acquisition of Varian. Amounts payable, including accrued deemed interest, totaled $92 million and $63 million at October 28, 2018 and October 29, 2017, respectively, which were included in other liabilities in the Consolidated Balance Sheets.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 13	Income Taxes

The components of income before income taxes for each fiscal year were as follows:



	2018		2017		2016

	(In millions)
U.S.	$	439	$	514	$	199
Foreign	4,255		3,217		1,814
	$	4,694	$	3,731	$	2,013

The components of the provision for income taxes for each fiscal year were as follows:



	2018			2017			2016

	(In millions)
Current:
U.S.	$	1,035		$	67		$	(36	)
Foreign	126			233			351
State	22			9			(2		)
	1,183			309			313
Deferred:
U.S.	151			(11		)	55
Foreign	57			(7		)	(89		)
State	(10		)	6			13
	198			(12		)	(21		)
	$	1,381		$	297		$	292

A reconciliation between the statutory U.S. federal income tax rate and Applied’s actual effective income tax rate for each fiscal year is presented below:



	2018		2017		2016
Tax provision at U.S. statutory rate	23.4	%	35.0	%	35.0	%
Changes in U.S. tax law	23.7		—		—
Resolutions of prior years’ income tax filings	(0.7	)	(1.9	)	3.9
Effect of foreign operations taxed at various rates	(15.6	)	(24.9	)	(24.1	)
State income taxes, net of federal benefit	0.2		0.3		0.6
Research and other tax credits	(0.7	)	(0.7	)	(1.3	)
U.S. domestic production deduction	(0.1	)	(0.2	)	(0.2	)
Share-based compensation	(0.7	)	0.4		0.4
Other	(0.1	)	—		0.2
	29.4	%	8.0	%	14.5	%

On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act includes a reduction to the U.S. federal corporate tax rate from 35.0 percent to 21.0 percent and requires a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries payable over eight years. U.S. deferred tax assets and liabilities were subject to remeasurement due to the reduction of the U.S. federal corporate tax rate. Applied has a blended U.S. federal corporate tax rate of 23.4 percent for fiscal 2018 based on the number of days before and after the effective date of the Tax Act.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (SAB 118), which provides guidance on accounting for the income tax effects of the Tax Act. SAB 118 provides a measurement period for companies to complete this accounting. Pursuant to SAB 118, provisional adjustments were recorded when reasonable estimates could be determined. These provisional estimates will be revised as information becomes available and as guidance is issued by the Internal Revenue Service. The accounting for the income tax effects of the Tax Act will be completed during the measurement period, which will not extend beyond one year from the Tax Act enactment date. Applied continues to evaluate certain unrepatriated earnings of foreign subsidiaries used to calculate the transition tax. The remeasurement of U.S. deferred tax assets and liabilities is complete.

The Tax Act also includes provisions that do not affect Applied in fiscal 2018, including a provision designed to tax global intangible low-taxed income (“GILTI”). Due to the complexity of the GILTI tax rules, this provision and related tax accounting will continue to be evaluated. An accounting policy choice is allowed to either treat taxes due on future U.S. inclusions related to GILTI in taxable income as a current-period expense when incurred (the “period cost method”) or factor such amounts into the measurement of deferred taxes (the “deferred method”). The calculation of the deferred balance with respect to the new GILTI tax provisions will depend, in part, on analyzing global income to determine whether future U.S. inclusions in taxable income are expected related to GILTI and, if so, what the impact is expected to be. An accounting policy choice has not yet been made.

Before the Tax Act, U.S. income tax had not been provided for certain unrepatriated earnings that were considered indefinitely reinvested. Income tax is now provided for all unrepatriated earnings.

The effective tax rate for fiscal 2018 was higher than fiscal 2017 primarily due to tax expense of $1.1 billion for the transition tax and remeasurement of deferred tax assets as a result of the Tax Act, partially offset by changes in the geographical composition of income, tax benefits from the lower U.S. federal corporate tax rate, adoption of authoritative guidance for share-based compensation, and the resolution of tax liabilities for uncertain tax positions. In addition, fiscal 2017 included tax benefits from the recognition of previously unrecognized foreign tax credits.

The effective tax rate for fiscal 2017 was lower than fiscal 2016 primarily due to the recognition of previously unrecognized foreign tax credits and changes in the geographical composition of income. In addition, fiscal 2016 included unfavorable resolutions and changes related to income tax liabilities for uncertain tax positions as well as the reinstatement of the U.S. federal R&D tax credit retroactive to its expiration in December of 2015 which did not reoccur in fiscal 2017.

In the reconciliation between the statutory U.S. federal income tax rate and the effective income tax rate, the effect of foreign operations taxed at various rates represents the difference between an income tax provision at the U.S. federal statutory income tax rate and the recorded income tax provision, with the difference expressed as a percentage of worldwide income before income taxes. This effect is substantially related to the tax effect of pre-tax income in jurisdictions with lower statutory tax rates. The foreign operations with the most significant effective tax rate impact are in Singapore. The statutory tax rate for fiscal 2018 for Singapore is 17%. Applied has been granted conditional reduced tax rates that expire in fiscal 2025, excluding potential renewal and subject to certain conditions with which Applied expects to comply. The tax benefit arising from these tax rates was $272 million for fiscal 2018 or $0.28 per diluted share.

Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences between the book and tax bases of assets and liabilities. Deferred tax assets are also recognized for net operating loss and tax credit carryovers. Deferred tax assets are offset by a valuation allowance to the extent it is more likely than not that they are not expected to be realized. The components of deferred income tax assets and liabilities were as follows:

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



	October 28, 2018			October 29, 2017

	(In millions)
Deferred tax assets:
Allowance for doubtful accounts	$	8		$	13
Inventory reserves and basis difference	117			156
Installation and warranty reserves	7			1
Accrued liabilities	20			31
Deferred revenue	9			15
Tax credits	236			317
Deferred compensation	79			81
Share-based compensation	37			53
Other	48			67
Gross deferred tax assets	561			734
Valuation allowance	(230		)	(227		)
Total deferred tax assets	331			507
Deferred tax liabilities:
Fixed assets	(48		)	(36		)
Intangible assets	(38		)	(76		)
Undistributed foreign earnings	(32		)	(11		)
Foreign exchange	(3		)	(4		)
Total gross deferred tax liabilities	(121		)	(127		)
Net deferred tax assets	$	210		$	380

The following table presents a summary of non-current deferred tax assets and liabilities:



	October 28, 2018			October 29, 2017

	(In millions)
Non-current deferred tax asset	$	222		$	385
Non-current deferred tax liability	(12		)	(5		)
	$	210		$	380

A valuation allowance is recorded to reflect the estimated amount of net deferred tax assets that may not be realized. Changes in the valuation allowance in each fiscal year were as follows:



	2018			2017		2016

	(In millions)
Beginning balance	$	227		$	207	$	207
Increases	8			20		27
Decreases	(5		)	—		(27		)
Ending balance	$	230		$	227	$	207

At October 28, 2018, Applied has state research and development tax credit carryforwards of $236 million, including $227 million of credits that are carried over until exhausted and $9 million that are carried over for 15 years and begin to expire in fiscal 2028. Management believes it is more likely than not that all tax credit carryforwards, net of valuation allowance, will be utilized.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Applied maintains liabilities for uncertain tax positions. These liabilities involve considerable judgment and estimation and are continuously monitored by management based on the best information available. Gross unrecognized tax benefits are classified as non-current income taxes payable. A reconciliation of the beginning and ending balances of gross unrecognized tax benefits in each fiscal year is as follows:



	2018			2017			2016

	(In millions)
Beginning balance of gross unrecognized tax benefits	$	391		$	320		$	177
Settlements with tax authorities	(152		)	(42		)	(25		)
Lapses of statutes of limitation	(37		)	(15		)	(2		)
Increases in tax positions for current year	91			95			62
Increases in tax positions for prior years	83			33			109
Decreases in tax positions for prior years	(2		)	—			(1		)
Ending balance of gross unrecognized tax benefits	$	374		$	391		$	320

Tax expense for interest and penalties on unrecognized tax benefits for fiscal 2018, 2017 and 2016 was $12 million, $17 million and $24 million, respectively. The income tax liability for interest and penalties for fiscal 2018, 2017 and 2016 was $26 million, $46 million and $33 million, respectively, and was classified as non-current income taxes payable.

Included in the balance of unrecognized tax benefits for fiscal 2018, 2017 and 2016 are $294 million, $284 million, and $302 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate.

In fiscal 2018, Applied paid $158 million, including interest and penalties, as a result of a settlement in Israel for fiscal 2011 through fiscal 2015 resulting in the recognition of a tax benefit of $6 million. In fiscal 2017, Applied paid $29 million, including interest and penalties, as a result of a settlement in Italy for fiscal 2011 resulting in the recognition of a tax expense of $6 million. In fiscal 2016, Applied paid $25 million, including interest and penalties, as a result of a settlement in Switzerland for fiscal 2011 through fiscal 2015 resulting in the recognition of a tax expense of $19 million.

Applied’s tax returns remain subject to examination by taxing authorities. These include U.S. returns for fiscal 2010 and later years, and foreign tax returns for fiscal 2009 and later years.

The timing of the resolution of income tax examinations, as well as the amounts and timing of various tax payments that may be part of the settlement process, is highly uncertain. This could cause fluctuations in Applied’s financial condition and results of operations. Applied continues to have ongoing negotiations with various taxing authorities throughout the year.


Note 14	Warranty, Guarantees, Commitments and Contingencies

Leases

Applied leases some of its facilities and equipment under non-cancelable operating leases and has options to renew most leases, with rentals to be negotiated. Total rent expense for fiscal 2018, 2017 and 2016, was $50 million, $34 million and $38 million, respectively.

As of October 28, 2018, future minimum lease payments are expected to be as follows:



	Lease Payments
Fiscal	(In millions)
2019	$	50
2020	40
2021	28
2022	20
2023	13
Thereafter	22
	$	173

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Warranty

Changes in the warranty reserves during each fiscal year were as follows:



	2018			2017			2016

	(In millions)
Beginning balance	$	199		$	153		$	126
Provisions for warranty	183			166			135
Changes in reserves related to preexisting warranty	3			1			(12		)
Consumption of reserves	(176		)	(121		)	(96		)
Ending balance	$	209		$	199		$	153

Applied products are generally sold with a warranty for a 12-month period following installation. The provision for the estimated cost of warranty is recorded when revenue is recognized. Parts and labor are covered under the terms of the warranty agreement. The warranty provision is based on historical experience by product, configuration and geographic region. Quarterly warranty consumption is generally associated with sales that occurred during the preceding four quarters, and quarterly warranty provisions are generally related to the current quarter’s sales.

Guarantees

In the ordinary course of business, Applied provides standby letters of credit or other guarantee instruments to third parties as required for certain transactions initiated by either Applied or its subsidiaries. As of October 28, 2018, the maximum potential amount of future payments that Applied could be required to make under these guarantee agreements was approximately $58 million. Applied has not recorded any liability in connection with these guarantee agreements beyond that required to appropriately account for the underlying transaction being guaranteed. Applied does not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under these guarantee agreements.

Applied also has agreements with various banks to facilitate subsidiary banking operations worldwide, including overdraft arrangements, issuance of bank guarantees, and letters of credit. As of October 28, 2018, Applied has provided parent guarantees to banks for approximately $149 million to cover these arrangements.

Legal Matters

From time to time, Applied receives notification from third parties, including customers and suppliers, seeking indemnification, litigation support, payment of money or other actions by Applied in connection with claims made against them. In addition, from time to time, Applied receives notification from third parties claiming that Applied may be or is infringing or misusing their intellectual property or other rights. Applied also is subject to various other legal proceedings and claims, both asserted and unasserted, that arise in the ordinary course of business.

Although the outcome of the above-described matters, claims and proceedings cannot be predicted with certainty, Applied does not believe that any will have a material effect on its consolidated financial condition or results of operations.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 15	Industry Segment Operations

Applied’s three reportable segments are: Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets. As defined under the accounting literature, Applied’s chief operating decision-maker has been identified as the President and Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Segment information is presented based upon Applied’s management organization structure as of October 28, 2018 and the distinctive nature of each segment. Future changes to this internal financial structure may result in changes to Applied’s reportable segments.

The Semiconductor Systems reportable segment includes semiconductor capital equipment for etch, rapid thermal processing, deposition, chemical mechanical planarization, metrology and inspection, wafer packaging, and ion implantation.

The Applied Global Services segment provides integrated solutions to optimize equipment and fab performance and productivity, including spares, upgrades, services, certain remanufactured earlier generation equipment and factory automation software for semiconductor, display and other products.

The Display and Adjacent Markets segment includes products for manufacturing liquid crystal displays (LCDs), organic light-emitting diodes (OLEDs), equipment upgrades and flexible coating systems and other display technologies for TVs, monitor, laptops, personal computers, smart phones, and other consumer-oriented devices.

Each operating segment is separately managed and has separate financial results that are reviewed by Applied’s chief operating decision-maker. Each reportable segment contains closely related products that are unique to the particular segment. Segment operating income is determined based upon internal performance measures used by Applied’s chief operating decision-maker. The chief operating decision-maker does not evaluate operating segments using total asset information.

Applied derives the segment results directly from its internal management reporting system. The accounting policies Applied uses to derive reportable segment results are substantially the same as those used for external reporting purposes. Management measures the performance of each reportable segment based upon several metrics including orders, net sales and operating income. Management uses these results to evaluate the performance of, and to assign resources to, each of the reportable segments.

The Corporate and Other category includes revenues from products, as well as costs of products sold, for fabricating solar photovoltaic cells and modules, and certain operating expenses that are not allocated to its reportable segments and are managed separately at the corporate level. These operating expenses include costs related to share-based compensation; certain management, finance, legal, human resources, and research, development and engineering functions provided at the corporate level; and unabsorbed information technology and occupancy. In addition, Applied does not allocate to its reportable segments restructuring and asset impairment charges and any associated adjustments related to restructuring actions, unless these actions pertain to a specific reportable segment. Segment operating income also excludes interest income/expense and other financial charges and income taxes. Management does not consider the unallocated costs in measuring the performance of the reportable segments.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Information for each reportable segment for and as of the end of each fiscal year were as follows:



	Net Sales		Operating Income (Loss)			Depreciation/ Amortization		Capital Expenditures		Accounts Receivable			Inventories

	(In millions)
2018:
Semiconductor Systems	$	10,903	$	3,634		$	303	$	168	$	1,755		$	2,213
Applied Global Services	3,754		1,102			21		33		610			1,243
Display and Adjacent Markets	2,498		679			20		39		248			249
Corporate and Other	98		(619		)	113		382		(48		)	17
Total	$	17,253	$	4,796		$	457	$	622	$	2,565		$	3,722
2017:
Semiconductor Systems	$	9,517	$	3,173		$	286	$	150	$	1,626		$	1,760
Applied Global Services	3,017		817			15		21		564			762
Display and Adjacent Markets	1,900		502			12		17		190			367
Corporate and Other	103		(624		)	94		157		(42		)	41
Total	$	14,537	$	3,868		$	407	$	345	$	2,338		$	2,930
2016:
Semiconductor Systems	$	6,873	$	1,807		$	277	$	114	$	1,524		$	1,188
Applied Global Services	2,589		682			12		14		559			594
Display and Adjacent Markets	1,206		245			5		6		238			215
Corporate and Other	157		(582		)	95		119		(42		)	53
Total	$	10,825	$	2,152		$	389	$	253	$	2,279		$	2,050

The reconciling items included in Corporate and Other were as follows:



	2018			2017			2016

	(In millions)
Unallocated net sales	$	98		$	103		$	157
Unallocated cost of products sold and expenses	(459		)	(507		)	(538		)
Share-based compensation	(258		)	(220		)	(201		)
Total	$	(619	)	$	(624	)	$	(582	)

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

For geographical reporting, revenue by geographic location is determined by the location of customers’ facilities to which products were shipped. Long-lived assets consist primarily of property, plant and equipment and are attributed to the geographic location in which they are located. Net sales and long-lived assets by geographic region for and as of each fiscal year were as follows:



	2018		2017		2016

	(In millions)
Net sales:
United States	$	1,532	$	1,474	$	1,143
China	5,113		2,746		2,259
Korea	3,603		4,052		1,883
Taiwan	2,732		3,291		2,843
Japan	2,405		1,518		1,279
Europe	1,066		816		615
Southeast Asia	802		640		803
Total outside United States	15,721		13,063		9,682
Consolidated total	$	17,253	$	14,537	$	10,825



	October 28, 2018		October 29, 2017

	(In millions)
Long-lived assets:
United States	$	1,414	$	915
China	13		47
Korea	21		21
Taiwan	29		50
Japan	9		8
Europe	50		47
Southeast Asia	25		98
Total outside United States	147		271
Consolidated total	$	1,561	$	1,186

The following customers accounted for at least 10 percent of Applied’s net sales in each fiscal year, which were for products and services in multiple reportable segments:



	2018		2017		2016
Samsung Electronics Co., Ltd.	13	%	23	%	13	%
Taiwan Semiconductor Manufacturing Company Limited	11	%	15	%	16	%
Intel Corporation	11	%	*		11	%
Micron Technology, Inc.	*		*		11	%

Less than 10%

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Note 16	Unaudited Quarterly Consolidated Financial Data



	Fiscal Quarter
	First		Second		Third		Fourth		Fiscal Year

	(In millions, except per share amounts)
2018:
Net sales	$	4,204	$	4,567	$	4,468	$	4,014	$	17,253
Gross profit	$	1,920	$	2,090	$	2,027	$	1,780	$	7,817
Net income	$	135	$	1,129	$	1,173	$	876	$	3,313
Earnings per diluted share	$	0.13	$	1.09	$	1.17	$	0.89	$	3.23
2017:
Net sales	$	3,278	$	3,546	$	3,744	$	3,969	$	14,537
Gross profit	$	1,445	$	1,600	$	1,700	$	1,787	$	6,532
Net income	$	703	$	824	$	925	$	982	$	3,434
Earnings per diluted share	$	0.65	$	0.76	$	0.85	$	0.91	$	3.17

INDEX TO EXHIBITS

These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K:



		Incorporated by Reference
Exhibit No.	Description	Form	File No.	Exhibit No.	Filing Date
3.1	Certificate of Incorporation of Applied Materials, Inc., as amended and restated through March 10, 2009	10-Q	000-06920	3.1	6/3/2009
3.2	Certificate of Designation, Preferences and Rights of the Terms of the Series A Junior Participating Preferred Stock dated as of July 9, 1999	10-Q	000-06920	3(i)(a)	9/14/1999
3.3	Amended and Restated Bylaws of Applied Materials, Inc., amended as of December 8, 2015	8-K	000-06920	3.1	12/11/2015
4.1	Indenture, dated June 8, 2011, by and between Applied Materials, Inc. and U.S. Bank National Association, as Trustee	8-K	000-06920	4.1	6/10/2011
4.2	First Supplemental Indenture, dated June 8, 2011, by and between Applied Materials, Inc. and U.S. Bank National Association, as Trustee	8-K	000-06920	4.2	6/10/2011
4.3	Second Supplemental Indenture, dated September 24, 2015, by and between Applied Materials, Inc. and U.S. Bank National Association, as Trustee	8-K	000-06920	4.1	9/24/2015
4.4	Third Supplemental Indenture, dated March 31, 2017, by and between Applied Materials, Inc. and U.S. Bank National Association, as Trustee	8-K	000-06920	4.1	3/31/2017
10.1	Form of Indemnification Agreement between Applied Materials, Inc. and Non-Employee Directors	10-K	000-06920	10.44	1/31/2000
10.2	Form of Indemnification Agreement between Applied Materials, Inc. and certain of its officers	10-K	000-06920	10.46	1/31/2000
10.3	Applied Materials, Inc. Profit Sharing Scheme (Ireland)	S-8	333-45011	4.1	1/27/1998
10.4*	Applied Materials, Inc. amended and restated Relocation Policy	8-K	000-06920	10.46	10/31/2005
10.5*	Applied Materials Inc. Employee Financial Assistance Plan, amended and restated as of December 18, 2008	10-Q	000-06920	10.58	3/3/2009



		Incorporated by Reference
Exhibit No.	Description	Form	File No.	Exhibit No.	Filing Date
10.6	Deed of Amendment to Applied Materials Profit Sharing Scheme, dated February 7, 2006, to amend Clause 20 of the Trust Deed thereunder	10-K	000-06920	10.48	12/12/2008
10.7	Deed of Amendment to Applied Materials Profit Sharing Scheme, dated February 7, 2006, to amend the definition of Eligible Employee in the First Schedule to the Trust Deed thereunder.	10-K	000-06920	10.49	12/12/2008
10.8*	Form of Restricted Stock Unit Agreement for use under the amended and restated Applied Materials, Inc. Employee Stock Incentive Plan	10-Q	000-06920	10.1	8/23/2018
10.9*	Form of Restricted Stock Unit Agreement for Nonemployee Directors for use under the amended and restated Applied Materials, Inc. Employee Stock Incentive Plan	10-Q	000-06920	10.4	5/24/2012
10.10*	Form of Performance Shares Agreement for use under the amended and restated Applied Materials, Inc. Employee Stock Incentive Plan	10-Q	000-06920	10.5	5/24/2012
10.11*	Form of Restricted Stock Agreement for use under the amended and restated Applied Materials, Inc. Employee Stock Incentive Plan	10-Q	000-06920	10.3	8/23/2012
10.12*	Applied Materials, Inc. Employees’ Stock Purchase Plan, amended and restated effective October 28, 2012	10-K	000-06920	10.54	12/5/2012
10.13*	Offer Letter, dated August 14, 2013, between Applied Materials, Inc. and Gary E. Dickerson	10-Q	000-06920	10.2	8/22/2013
10.14*	Form of Non-Qualified Stock Option Agreement for Employees for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended	10-Q	000-06920	10.4	8/22/2013
10.15*	Form of Performance Unit Agreement for use under the Applied Materials, Inc. Employee Stock Incentive Plan, as amended	10-Q	000-06920	10.2	2/20/2014
10.16*	Form of Letter of Understanding for Long-Term Assignment	10-K	000-06920	10.49	12/17/2014
10.17*	Applied Materials, Inc. Applied Incentive Plan, amended and restated effective October 27, 2014	10-Q	000-06920	10.4	2/19/2015
10.18*	Form of Performance Shares Agreement for fiscal 2015 performance-based equity awards for certain executive officers under the amended and restated Applied Materials, Inc. Employee Stock Incentive Plan	10-Q	000-06920	10.5	2/19/2015
10.19	Credit Agreement, dated as of September 3, 2015, among Applied Materials, Inc., JPMorgan Chase Bank, N.A., as administrative agent, and other lenders named therein	8-K	000-06920	10.1	9/9/2015
10.20	Extension Agreement, dated as of September 3, 2017, to Credit Agreement, dated as of September 3, 2015, among Applied Materials, Inc., JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto.	8-K	000-06920	10.1	9/5/2017
10.21*	Applied Materials, Inc. Stock Purchase Plan for Offshore Employees, amended and restated effective July 15, 2015	10-K	000-06920	10.32	12/9/2015
10.22*	Applied Materials, Inc. 2016 Deferred Compensation Plan	10-K	000-06920	10.33	12/9/2015
10.23*	Applied Materials, Inc. Employee Stock Incentive Plan, as amended and restated effective March 9, 2017	10-Q	000-06920	10.1	5/25/2017
10.24*	Applied Materials, Inc. Senior Executive Bonus Plan, as amended and restated effective March 9, 2017	10-Q	000-06920	10.2	5/25/2017
21	Subsidiaries of Applied Materials, Inc.†
23	Consent of Independent Registered Public Accounting Firm, KPMG LLP†
24	Power of Attorney (included on the signature page of this Annual Report on Form 10-K)†



		Incorporated by Reference
Exhibit No.	Description	Form	File No.	Exhibit No.	Filing Date
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002†
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002†
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002‡
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002‡
101.INS	XBRL Instance Document‡
101.SCH	XBRL Taxonomy Extension Schema Document‡
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document‡
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document‡
101.LAB	XBRL Taxonomy Extension Label Linkbase Document‡
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document‡



*	Indicates a management contract or compensatory plan or arrangement, as required by Item 15(a)(3).



†	Filed herewith.



‡	Furnished herewith.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



APPLIED MATERIALS, INC.

By:	/S/ GARY E. DICKERSON
	Gary E. Dickerson
	President, Chief Executive Officer

Dated: December 13, 2018

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Gary E. Dickerson, Daniel J. Durn and Thomas F. Larkins, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



	Title	Date
/S/ GARY E. DICKERSON	President, Chief Executive Officer and Director (Principal Executive Officer)	December 13, 2018
Gary E. Dickerson
/S/ DANIEL J. DURN	Senior Vice President, Chief Financial Officer (Principal Financial Officer)	December 13, 2018
Daniel J. Durn
/S/ CHARLES W. READ	Corporate Vice President, Corporate Controller and Chief Accounting Officer (Principal Accounting Officer)	December 13, 2018
Charles W. Read

/S/ THOMAS J. IANNOTTI
Thomas J. Iannotti	Chairman of the Board	December 13, 2018
/S/ JUDY BRUNER
Judy Bruner	Director	December 13, 2018
/S/ XUN CHEN
Xun Chen	Director	December 13, 2018
/S/ AART J. DE GEUS
Aart J. de Geus	Director	December 13, 2018
/S/ STEPHEN R. FORREST
Stephen R. Forrest	Director	December 13, 2018
/S/ ALEXANDER A. KARSNER
Alexander A. Karsner	Director	December 13, 2018
/S/ ADRIANNA C. MA
Adrianna C. Ma	Director	December 13, 2018
/s/ SCOTT A. MCGREGOR
Scott A. McGregor	Director	December 13, 2018
/S/ DENNIS D. POWELL
Dennis D. Powell	Director	December 13, 2018

Previous: Item 15. Exhibits, Financial Statement Schedules