Item 16. Form 10-K Summary

None.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors

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 31, 2021 and October 25, 2020, 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 31, 2021, 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 31, 2021 and October 25, 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended October 31, 2021, 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 31, 2021, 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 17, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Changes in Accounting Principles

As discussed in note 1 to the consolidated financial statements, the Company changed its method of accounting for leases as of October 28, 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases. As discussed in note 16 to the consolidated financial statements, the Company changed its method of accounting for intra-entity transfers of assets other than inventory as of October 29, 2018 due to the adoption of Accounting Standards Update No. 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory.

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.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Evaluation of net realizable value adjustments to inventories for excess or obsolescence

As discussed in notes 1 and 8 to the consolidated financial statements, the Company has inventories with a carrying value of $4,309 million as of October 31, 2021. The Company adjusts inventory carrying value for estimated excess or obsolescence equal to the difference between cost of inventory and the estimated net realizable value based upon assumptions about future demand and market conditions. If actual demand were to be substantially lower than estimated, there could be a significant adverse impact on the carrying value of inventories and results of operations.

We identified the evaluation of net realizable value adjustments to inventories for excess or obsolescence as a critical audit matter. Evaluation of the Company’s estimates regarding forecasted sales and inventory consumption involved a high degree of auditor judgment.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s process for determining net realizable value adjustments for inventory excess or obsolescence, including controls related to estimating forecasted sales and inventory consumption. We evaluated certain inventories for excess or obsolescence by comparing the Company’s sales and inventory consumption forecast to historical sales, historical inventory usage, known customer orders, and industry outlook reports. In addition, for certain inventories, we compared the Company’s historical estimates of net realizable value adjustments for excess and obsolescence to the actual physical inventory disposals to evaluate the Company’s ability to accurately estimate the net realizable value adjustments.


/S/ KPMG LLP
KPMG LLP

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

Santa Clara, California

December 17, 2021

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors

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 31, 2021, 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 31, 2021, 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 31, 2021 and October 25, 2020, 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 31, 2021, and the related notes (collectively, the consolidated financial statements), and our report dated December 17, 2021 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. 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 17, 2021

APPLIED MATERIALS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except per share amounts)


Fiscal Year	2021		2020		2019

Net sales	$	23,063	$	17,202	$	14,608
Cost of products sold	12,149		9,510		8,222
Gross profit	10,914		7,692		6,386
Operating expenses:
Research, development and engineering	2,485		2,234		2,054
Marketing and selling	609		526		521
General and administrative	620		567		461


Severance and related charges	157		—		—
Deal termination fee	154		—		—
Total operating expenses	4,025		3,327		3,036
Income from operations	6,889		4,365		3,350

Interest expense	236		240		237
Interest and other income, net	118		41		156
Income before income taxes	6,771		4,166		3,269
Provision for income taxes	883		547		563
Net income	$	5,888	$	3,619	$	2,706
Earnings per share:
Basic	$	6.47	$	3.95	$	2.89
Diluted	$	6.40	$	3.92	$	2.86
Weighted average number of shares:
Basic	910		916		937
Diluted	919		923		945

See accompanying Notes to Consolidated Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)


Fiscal Year	2021		2020		2019

Net income	$	5,888	$	3,619	$	2,706
Other comprehensive income (loss), net of tax:
Change in unrealized gain (loss) on available-for-sale investments	(21)		9		21
Change in unrealized net loss on derivative instruments	30		(117)		(7)
Change in defined and postretirement benefit plans	30		(11)		(51)
Change in cumulative translation adjustments	—		—		(1)
Other comprehensive income (loss), net of tax	39		(119)		(38)
Comprehensive income	$	5,927	$	3,500	$	2,668

See accompanying Notes to Consolidated Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except per share amounts)


	October 31, 2021		October 25, 2020

ASSETS
Current assets:
Cash and cash equivalents	$	4,995	$	5,351
Short-term investments	464		387
Accounts receivable, net	4,953		2,963
Inventories	4,309		3,904
Other current assets	1,386		764
Total current assets	16,107		13,369
Long-term investments	2,055		1,538
Property, plant and equipment, net	1,934		1,604
Goodwill	3,479		3,466
Purchased technology and other intangible assets, net	104		153
Deferred income taxes and other assets	2,146		2,223
Total assets	$	25,825	$	22,353

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:

Accounts payable and accrued expenses	$	4,268	$	3,138
Contract liabilities	2,076		1,321
Total current liabilities	6,344		4,459
Long-term debt	5,452		5,448
Income taxes payable	1,090		1,206
Other liabilities	692		662
Total liabilities	13,578		11,775
Commitments and contingencies (Note 17)
Stockholders’ equity:
Preferred stock: $0.01 par value per share; 1 shares authorized; no shares issued	—		—
Common stock: $0.01 par value per share; 2,500 shares authorized; 892 and 914 shares outstanding at 2021 and 2020, respectively	9		9
Additional paid-in capital	8,247		7,904
Retained earnings	32,246		27,209
Treasury stock: 1,119 and 1,091 shares at 2021 and 2020, respectively	(27,995)		(24,245)
Accumulated other comprehensive loss	(260)		(299)
Total stockholders’ equity	12,247		10,578
Total liabilities and stockholders’ equity	$	25,825	$	22,353

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 (a)		Treasury Stock			Accumulated Other Comprehensive Income (Loss)		Total
	Shares	Amount				Shares		Amount

Balance at October 28, 2018	967	$	10	$	7,274	$	20,880	1,019	$	(21,194)	$	(125)	$	6,845
Adoption of new accounting standards (b)	—	—		—		1,570		—	—		(17)		1,553
Net income	—	—		—		2,706		—	—		—		2,706
Other comprehensive loss, net of tax	—	—		—		—		—	—		(38)		(38)
Dividends declared ($0.83 per common share)	—	—		—		(770)		—	—		—		(770)
Share-based compensation	—	—		263		—		—	—		—		263
Issuance under stock plans	9	—		58		—		—	—		—		58
Common stock repurchases	(60)	(1)		—		—		60	(2,402)		—		(2,403)
Balance at October 27, 2019	916	$	9	$	7,595	$	24,386	1,079	$	(23,596)	$	(180)	$	8,214

Net income	—	—		—		3,619		—	—		—		3,619
Other comprehensive loss, net of tax	—	—		—		—		—	—		(119)		(119)
Dividends declared ($0.87 per common share)	—	—		—		(796)		—	—		—		(796)
Share-based compensation	—	—		307		—		—	—		—		307
Issuance under stock plans	10	—		2		—		—	—		—		2
Common stock repurchases	(12)	—		—		—		12	(649)		—		(649)
Balance at October 25, 2020	914	$	9	$	7,904	$	27,209	1,091	$	(24,245)	$	(299)	$	10,578
Net income	—	—		—		5,888		—	—		—		5,888
Other comprehensive income, net of tax	—	—		—		—		—	—		39		39
Dividends declared ($0.94 per common share)	—	—		—		(851)		—	—		—		(851)
Share-based compensation	—	—		346		—		—	—		—		346
Issuance under stock plans	6	—		(3)		—		—	—		—		(3)
Common stock repurchases	(28)	—		—		—		28	(3,750)		—		(3,750)
Balance at October 31, 2021	892	$	9	$	8,247	$	32,246	1,119	$	(27,995)	$	(260)	$	12,247

(a) - Retained earnings balance as of October 28, 2018 included an increase of $6 million related to the adoption of the standard related to revenue recognition.

(b) - Represents the adjustment related to the adoption of Accounting Standard Update (ASU) 2016-01 Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and ASU 2016-16 Income Tax (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.

See accompanying Notes to Consolidated Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)


Fiscal Year	2021		2020		2019

Cash flows from operating activities:
Net income	$	5,888	$	3,619	$	2,706
Adjustments required to reconcile net income to cash provided by operating activities:
Depreciation and amortization	394		376		363



Severance and related charges	148		—		—


Deferred income taxes	80		80		49
Other	(70)		60		(19)


Share-based compensation	346		307		263
Changes in operating assets and liabilities, net of amounts acquired:
Accounts receivable	(1,989)		(427)		(207)
Inventories	(405)		(421)		248
Other current and non-current assets	(602)		(161)		(86)

Accounts payable and accrued expenses	465		327		(247)
Contract liabilities	755		(16)		135
Income taxes payable	396		(10)		44
Other liabilities	36		70		(2)
Cash provided by operating activities	5,442		3,804		3,247
Cash flows from investing activities:
Capital expenditures	(668)		(422)		(441)
Cash paid for acquisitions, net of cash acquired	(12)		(107)		(28)

Proceeds from sales and maturities of investments	1,471		1,754		1,940
Purchases of investments	(2,007)		(1,355)		(1,914)
Cash used in investing activities	(1,216)		(130)		(443)
Cash flows from financing activities:
Debt borrowings, net of issuance costs	—		2,979		—
Debt repayments	—		(2,882)		—
Proceeds from common stock issuances	175		174		145
Common stock repurchases	(3,750)		(649)		(2,403)
Tax withholding payments for vested equity awards	(178)		(172)		(86)
Payments of dividends to stockholders	(838)		(787)		(771)

Cash used in financing activities	(4,591)		(1,337)		(3,115)

Increase (decrease) in cash, cash equivalents and restricted cash equivalents	(365)		2,337		(311)
Cash, cash equivalents and restricted cash equivalents — beginning of period	5,466		3,129		3,440
Cash, cash equivalents and restricted cash equivalents — end of period	$	5,101	$	5,466	$	3,129
Reconciliation of cash, cash equivalents, and restricted cash equivalents
Cash and cash equivalents	$	4,995	$	5,351	$	3,129
Restricted cash equivalents included in deferred income taxes and other assets	106		115		—
Total cash, cash equivalents, and restricted cash equivalents	$	5,101	$	5,466	$	3,129
Supplemental cash flow information:
Cash payments for income taxes	$	851	$	542	$	522
Cash refunds from income taxes	$	27	$	68	$	22
Cash payments for interest	$	205	$	219	$	219

See accompanying 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 2021, 2020 and 2019 contained 53, 52 and 52 weeks, respectively. The first fiscal quarter of 2021 contained 14 weeks, while the second, third and fourth quarters of fiscal 2021 contained 13 weeks. Each fiscal quarter of 2020 and 2019 contained 13 weeks.

Use of Estimates

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

As of October 31, 2021, the COVID-19 pandemic and worldwide response remains fluid. As a result, many of Applied’s estimates and assumptions are subject to increased judgment and volatility. These estimates may differ materially in future periods as the pandemic continues to evolve and additional information becomes available.

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, are classified as available-for-sale at the respective balance sheet dates. Investments classified as available-for-sale are measured and recorded in the Consolidated Balance Sheets at fair value, and unrealized gains and losses, net of tax, is reported as a separate component of other comprehensive income. 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 Consolidated Statements of Operations.

Applied’s equity investments with readily determinable values consist of publicly traded equity securities. These investments are measured at fair value using quoted prices for identical assets in an active market. Privately-held equity investments without readily determinable fair value are measured at cost, less impairment, adjusted by observable price changes. Adjustments resulting from impairments and observable prices changes are recorded in the Consolidated Statements of Operations.

Allowance for Credit Losses

Applied maintains an allowance for credit losses 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.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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.

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.

Revenue Recognition from Contracts with Customers

Applied recognizes revenue when promised goods or services are transferred to a customer in an amount that reflects the consideration to which Applied expects to be entitled in exchange for those goods or services. Applied determines revenue recognition through the following five steps: (1) identification of the contract(s) with customers, (2) identification of the performance obligations in the contract, (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations in the contract, and (5) recognition of revenue when, or as, a performance obligation is satisfied.

Identifying the contract(s) with customers. Applied sells manufacturing equipment, services, and spare parts directly to its customers in the semiconductor, display, and related industries. The Company generally considers written documentation including, but not limited to, signed purchase orders, master agreements, and sales orders as contracts provided that collection is probable. Collectability is assessed based on the customer’s creditworthiness determined by reviewing the customer’s published credit and financial information, historical payment experience, as well as other relevant factors.

Identifying the performance obligations. Applied’s performance obligations include delivery of manufacturing equipment, service agreements, spare parts, installation, extended warranty and training. Applied’s service agreements are considered one performance obligation and may include multiple goods and services that Applied provides to the customer to deliver against a performance metric. Judgment is used to determine whether multiple promised goods or services in a contract should be accounted for separately or as a group.

Determine the transaction price. The transaction price for Applied’s contracts with customers may include fixed and variable consideration. Applied includes variable consideration in the transaction price to the extent that it is probable that a significant reversal of revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

Allocate the transaction price to the performance obligations. A contract’s transaction price is allocated to each distinct performance obligation identified within the contract. Applied generally estimates the standalone selling price of a distinct performance obligation based on historical cost plus an appropriate margin. For contracts with multiple performance obligations, Applied allocates the contract’s transaction price to each performance obligation using the relative standalone selling price of each distinct good or service in the contract.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Recognizing the revenue as performance obligations are satisfied. Applied recognizes revenue from equipment and spares parts at a point in time when Applied has satisfied its performance obligation by transferring control of the goods to the customer which typically occurs at shipment or delivery. Revenue from service agreements is recognized over time, typically within 12 months, as customers receive the benefits of services.

The incremental costs to obtain a contract are not material.

Payment Terms. Payment terms vary by contract. Generally, the majority of payments are due within a certain number of days from shipment of goods or performance of service. The remainder is typically due upon customer technical acceptance. Applied typically receives deposits on future deliverables from customers in the Display and Adjacent Markets segment and, in certain instances, may also receive deposits from customers in the Applied Global Services segment. Applied’s payment terms do not generally contain a significant financing component.

Shipping and Handling Costs

Applied accounts for shipping and handling activities related to contracts with customers as costs to fulfill our promise to transfer the associated products. Accordingly, amounts billed for shipping and handling costs are recorded as a component of net sales and costs as a component of cost of products sold.

Warranty

Applied provides for the estimated cost of warranty when revenue is recognized. Estimated warranty costs are determined by analyzing specific product, current and historical configuration statistics and regional warranty support costs. Applied’s warranty obligation is affected by product and component failure rates, material usage and labor costs incurred in correcting product failures during the warranty period. If actual warranty costs differ substantially from Applied’s estimates, revisions to the estimated warranty liability would be required.

Applied also sells extended warranty contracts to its customers which provide an extension of the standard warranty coverage period of up to 2 years. Applied receives payment at the inception of the contract and recognizes revenue ratably over the extended warranty coverage period, as the customer simultaneously receives and consumes the benefits of the extended warranty.

Sales and Value Added Taxes

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

Research, Development and Engineering Costs

Research, development and engineering costs are expensed as incurred.

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)

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. Applied’s derivative financial instruments are recorded as assets or liabilities at fair value. For derivative instruments designated and qualifying as cash flow hedges, the gain or loss 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. Any portion excluded from the assessment of effectiveness is recognized in the same line as the hedged transaction but may be recognized in a different manner, e.g. amortized. If a hedged transaction becomes probable of not occurring according to the original strategy, the hedge relationship is discontinued and the gain or loss on the associated derivative is recorded promptly in earnings. For hedges of existing foreign currency denominated assets or liabilities, the gain or loss is recorded promptly in earnings to offset the changes in the fair value of the assets or liabilities being hedged.

Foreign Currency

As of October 31, 2021, 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 the non-monetary assets and liabilities, which are remeasured using historical exchange rates. The resulting remeasurement gains and losses are included in interest and other income, net in the Consolidated Statements of Operations as incurred.

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 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. 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 deposits and/or letters of credit to mitigate credit risk when considered appropriate.

Recent Accounting Pronouncements

Accounting Standards Adopted

Leases. In February 2016, the Financial Accounting Standard Board (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. Applied adopted this guidance in the first quarter of fiscal 2020 using the modified retrospective transition method which required applying the new standard as of the beginning of the period of adoption with no adjustment to comparative prior periods. Applied elected the package of practical expedients permitted under the transition guidance, which allow Applied not to reassess whether a contract contains a lease, initial direct costs and lease classification for leases existing prior to adoption. Applied also elected to combine the lease and non-lease components as a single lease component and not to use hindsight in determining the lease term. Upon adoption, Applied recognized right-of-use assets of $160 million, net of deferred rent of $4 million and lease liabilities of $164 million.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Retirement Benefits: Changes to the Disclosure Requirements for Defined Benefit and other Postretirement Plans. In August 2018, the Financial Accounting Standard Board (FASB) issued authoritative guidance that adds, removes, and clarifies disclosure requirements for defined benefit and other postretirement plans. Applied adopted this guidance in the first quarter of fiscal 2021 on a retrospective basis. The adoption of this guidance did not have a significant impact on Applied’s defined benefit and other postretirement disclosures.

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

Financial Instruments: Credit Losses. In June 2016, the FASB issued authoritative guidance that modifies the impairment model for certain financial assets by requiring use of an expected loss methodology, which will result in more timely recognition of credit losses. Applied adopted this guidance in the first quarter of fiscal 2021 on a modified retrospective basis. The adoption of this guidance did not have a significant impact on Applied’s consolidated condensed financial statements.

Accounting Standards Not Yet Adopted

Simplifying the Accounting for Income Taxes. In December 2019, the FASB issued an accounting standard update to simplify the accounting for income taxes (Topic 740). This amendment removes certain exceptions and improves consistent application of accounting principles for certain areas in Topic 740. Applied will adopt this authoritative guidance in the first quarter of fiscal 2022. The adoption of this guidance is not expected to have a significant impact on Applied’s consolidated financial statements.

Contract Assets and Contract Liabilities from Revenue Contracts with Customers in a Business Combination. In October 2021, the FASB issued an accounting standard update to improve the accounting for contract assets and contract liabilities from revenue contracts with customers in a business combination (Topic 805). This amendment improves comparability for both the recognition and measurement of acquired revenue contracts with customers at the date of and after a business combination. This authoritative guidance will be effective for Applied in the first quarter of fiscal 2024, with early adoption permitted. Applied is currently evaluating the effect of this new guidance on Applied’s consolidated financial statements.

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 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	2021		2020		2019

	(In millions, except per share amounts)
Numerator:
Net income	$	5,888	$	3,619	$	2,706
Denominator:
Weighted average common shares outstanding	910		916		937
Effect of weighted dilutive stock options, restricted stock units and employee stock purchase plan shares	9		7		8
Denominator for diluted earnings per share	919		923		945
Basic earnings per share	$	6.47	$	3.95	$	2.89
Diluted earnings per share	$	6.40	$	3.92	$	2.86
Potentially weighted dilutive securities	—		—		3

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

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 31, 2021	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value

	(In millions)
Cash	$	1,407	$	—	$	—	$	1,407
Cash equivalents:
Money market funds	3,556		—		—		3,556


Municipal securities	22		—		—		22
Commercial paper, corporate bonds and medium-term notes	10		—		—		10

Total Cash equivalents	3,588		—		—		3,588
Total Cash and Cash equivalents	$	4,995	$	—	$	—	$	4,995
Short-term and long-term investments:
U.S. Treasury and agency securities	$	314	$	—	$	—	$	314
Non-U.S. government securities*	5		—		—		5
Municipal securities	367		3		1		369
Commercial paper, corporate bonds and medium-term notes	587		2		2		587
Asset-backed and mortgage-backed securities	555		3		1		557
Total fixed income securities	1,828		8		4		1,832
Publicly traded equity securities	22		39		3		58
Equity investments in privately-held companies	561		82		14		629
Total equity investments	583		121		17		687
Total short-term and long-term investments	$	2,411	$	129	$	21	$	2,519
Total Cash, Cash equivalents and Investments	$	7,406	$	129	$	21	$	7,514

Includes Canadian provincial government debt

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


October 25, 2020	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value

	(In millions)
Cash	$	1,136	$	—	$	—	$	1,136
Cash equivalents:
Money market funds	4,209		—		—		4,209


Municipal securities	6		—		—		6

Total Cash equivalents	4,215		—		—		4,215
Total Cash and Cash equivalents	$	5,351	$	—	$	—	$	5,351
Short-term and long-term investments:
U.S. Treasury and agency securities	$	394	$	4	$	—	$	398

Municipal securities	359		6		—		365
Commercial paper, corporate bonds and medium-term notes	492		8		1		499
Asset-backed and mortgage-backed securities	470		9		—		479
Total fixed income securities	1,715		27		1		1,741
Publicly traded equity securities	11		36		2		45
Equity investments in privately-held companies	121		25		7		139
Total equity investments	132		61		9		184
Total short-term and long-term investments	$	1,847	$	88	$	10	$	1,925
Total Cash, Cash equivalents and Investments	$	7,198	$	88	$	10	$	7,276

Maturities of Investments

The following table summarizes the contractual maturities of Applied’s investments at October 31, 2021:


	Cost		Estimated Fair Value

	(In millions)
Due in one year or less	$	393	$	395
Due after one through five years	878		878
Due after five years	2		2
No single maturity date**	1,138		1,244
Total	$	2,411	$	2,519

** 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

At October 31, 2021, gross unrealized losses related to Applied’s debt investment portfolio were not material. Applied regularly reviews its debt investment portfolio to identify and evaluate investments that have indications of possible impairment from credit losses or other factors. Factors considered in determining whether an unrealized loss is considered to be a credit loss include: the significance of the decline in value compared to the cost basis; the financial condition; credit quality and near-term prospects of the investee; and whether it is more likely than not that Applied will be required to sell the security prior to recovery. Credit losses related to available-for-sale debt securities are recorded as an allowance for credit losses through interest and other income, net. Any additional changes in fair value that are not related to credit losses are recognized in accumulated other comprehensive income.

During fiscal 2021, with the adoption of credit losses authoritative guidance, Applied did not recognize significant credit losses and the ending allowance for credit losses was not material. Applied determined that the gross unrealized losses on its marketable fixed-income securities at October 25, 2020 and October 27, 2019 were temporary in nature and therefore it did not recognize any impairment of its marketable fixed-income securities for fiscal 2020 or 2019. During fiscal 2021, 2020 and 2019, impairment charges on equity investments in privately-held companies were not material. These impairment charges are included in interest and other income, net in the Consolidated Statement of Operations.

The components of gain (loss) on equity investments for each fiscal year were as follows:


	2021		2020		2019

	(In millions)
Publicly traded equity securities
Unrealized gain	$	14	$	14	$	28
Unrealized loss	(11)		(17)		(5)
Realized gain on sales	2		1		2

Equity investments in privately-held companies
Unrealized gain	65		18		13
Unrealized loss	(12)		(7)		(6)
Realized gain on sales	48		8		5
Realized loss on sales or impairment	(7)		(8)		(1)
Total gain (loss) on equity investments, net	$	99	$	9	$	36

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 on a recurring basis, except for equity investments in privately-held companies. These equity investments are generally accounted for under the measurement alternative, defined as cost, less impairments, adjusted for subsequent observable price changes and are periodically assessed for impairment when events or circumstances indicate that a decline in value may have occurred. Applied’s nonfinancial assets, such as goodwill, intangible assets, and property, plant and equipment, are recorded at cost and are assessed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.

Fair Value Hierarchy

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

Level 1 — Quoted prices in active markets for identical assets or liabilities;
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Applied’s investments consist primarily of debt securities that are classified as available-for-sale and recorded at their fair values. In determining the fair value of investments, Applied uses pricing information from pricing services that value securities based on quoted market prices and models that utilize observable market inputs. In the event a fair value estimate is unavailable from a pricing service, Applied generally obtains non-binding price quotes from brokers. Applied then reviews the information provided by the pricing services or brokers to determine the fair value of its short-term and long-term investments. In addition, to validate pricing information obtained from pricing services, Applied periodically performs supplemental analysis on a sample of securities. Applied reviews any significant unanticipated differences identified through this analysis to determine the appropriate fair value. As of October 31, 2021, substantially all of Applied’s available-for-sale, short-term and long-term investments were recognized at fair value that was determined based upon observable inputs.

Applied’s equity investments with readily determinable values consist of publicly traded equity securities. These investments are measured at fair value using quoted prices for identical assets in an active market and the changes in fair value of these equity investments are recognized in the consolidated statements of operations.

Investments with remaining effective maturities of 12 months or less from the balance sheet date are classified as short-term investments. Investments with remaining effective maturities of more than 12 months from the balance sheet date are classified as long-term investments.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Assets Measured at Fair Value on a Recurring Basis

Financial assets (excluding cash balances) measured at fair value on a recurring basis are summarized below:


	October 31, 2021				October 25, 2020
	Level 1		Level 2		Total		Level 1		Level 2		Total

	(In millions)
Assets:
Available-for-sale debt security investments
Money market funds*	$	3,662	$	—	$	3,662	$	4,324	$	—	$	4,324
U.S. Treasury and agency securities	296		18		314		375		23		398
Non-U.S. government securities	—		5		5		—		—		—
Municipal securities	—		391		391		—		371		371
Commercial paper, corporate bonds and medium-term notes	—		597		597		—		499		499
Asset-backed and mortgage-backed securities	—		557		557		—		479		479
Total available-for-sale debt security investments	$	3,958	$	1,568	$	5,526	$	4,699	$	1,372	$	6,071
Equity investments with readily determinable values

Publicly traded equity securities	$	58	$	—	$	58	$	45	$	—	$	45
Total equity investments with readily determinable values	$	58	$	—	$	58	$	45	$	—	$	45
Total	$	4,016	$	1,568	$	5,584	$	4,744	$	1,372	$	6,116

Amounts as of October 31, 2021 and October 25, 2020 include $106 million and $115 million, respectively, invested in money market funds related to deferred compensation plans. Due to restrictions on the distribution of these funds, they are classified as restricted cash equivalents and are included in deferred income taxes and other assets in the Consolidated Condensed Balance Sheets.

Applied did not have any financial assets measured at fair value on a recurring basis within Level 3 fair value measurements as of October 31, 2021 or October 25, 2020.

Assets and Liabilities without Readily Determinable Values Measured on a Non-recurring Basis

Applied’s equity investments without readily determinable values consist of equity investments in privately-held companies. Applied elected the measurement alternative, defined as cost, less impairments, adjusted for subsequent observable price changes on a prospective basis for certain equity investments without readily determinable fair values and is required to account for any subsequent observable changes in fair value within the statements of operations. These investments are classified as Level 3 within the fair value hierarchy and periodically assessed for impairment when an event or circumstance indicates that a decline in value may have occurred.

During fiscal 2021, 2020 and 2019, impairment charges on equity investments in privately-held companies were not material.

Other

The carrying amounts of Applied’s financial instruments, including cash and cash equivalents, restricted cash equivalents, accounts receivable, notes payable - short term, and accounts payable and accrued expenses, approximate fair value due to their short maturities. At October 31, 2021, the aggregate principal amount of long-term senior unsecured notes was $5.5 billion, and the estimated fair value was $6.4 billion. At October 25, 2020, the aggregate principal amount of long-term senior unsecured notes was $5.5 billion and the estimated fair value was $6.6 billion. The estimated fair value of long-term senior unsecured notes is determined by Level 2 inputs and is based primarily on quoted market prices for the same or similar issues. See Note 11 of the Notes to the Consolidated 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, Israeli shekel, euro and Taiwanese dollar. Applied uses derivative financial instruments, such as forward exchange contracts and currency option contracts, to hedge certain forecasted foreign currency denominated transactions expected to occur typically within the next 24 months. The purpose of Applied’s foreign currency management is to mitigate the effect of exchange rate fluctuations on certain foreign currency denominated revenues, costs and eventual cash flows. The terms of currency instruments used for hedging purposes are generally consistent with the timing of the transactions being hedged.

Applied does not use derivative financial instruments for trading or speculative purposes. Derivative instruments and hedging activities, including foreign currency exchange and interest rate contracts, are recognized on the balance sheet at fair value. Changes in the fair value of derivatives that do not qualify for hedge accounting treatment 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 31, 2021 is expected to be reclassified into earnings within 12 months. Changes in fair value caused by changes in time value of option contracts designated as cash flow hedges are excluded from the assessment of effectiveness. The initial value of this excluded component is amortized on a straight-line basis over the life of the hedging instrument and recognized in the financial statement line item to which the hedge relates. If the transaction being hedged is probable not to occur, Applied promptly recognizes the gain or loss on the associated financial instrument in the consolidated condensed statement of operations. The amount recognized due to discontinuance of cash flow hedges that were probable of not occurring by the end of the originally specified time period was not significant for fiscal years 2021, 2020 or 2019.

Foreign currency forward contracts are generally used to hedge certain foreign currency denominated assets or liabilities. 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.

As of October 31, 2021 and October 25, 2020, the total outstanding notional amount of foreign exchange contracts was $2.1 billion and $1.6 billion, respectively. The fair values of foreign exchange derivative instruments at October 31, 2021 and October 25, 2020 were not material.

Applied is also exposed to interest rate risk associated with its potential future borrowings. During fiscal 2020, Applied entered into a series of interest rate contracts to hedge against the variability of cash flows due to changes in the benchmark interest rate of fixed rate debt. These instruments were designated as cash flow hedges at inception and were settled in conjunction with the issuance of debt in May 2020.

The gain (loss) on derivatives in cash flow hedging relationships recognized in AOCI for derivatives designated as hedging instruments for the indicated periods were as follows:


	Derivatives in Cash Flow Hedging Relationships
	2021		2020		2019
	(In millions)
Foreign exchange contracts	$	36	$	3	$	(14)
Interest rate contracts	—		(151)		—
Total	$	36	$	(148)	$	(14)

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:


			Derivatives in Cash Flow Hedging Relationships
	Total Amount Presented in the Consolidated Statement of Operations in which the Effects of Cash Flow Hedges are Recorded		Amount of Gain or (Loss) Reclassified from AOCI into Consolidated Statement of Operations		Amounts of Gain (Loss) Excluded from Effectiveness Testing Recognized in Consolidated Statement of Operations
	(In millions)
2021
Foreign Exchange Contracts:
Net Sales	$	23,063	$	4	$	—
Cost of products sold	$	12,149	2		(2)
Research, development and engineering	$	2,485	3		—

General and administrative	$	620	1		—
Interest Rate Contracts:
Interest expense	$	236	(13)		—
			$	(3)	$	(2)

2020
Foreign Exchange Contracts:
Net Sales	$	17,202	$	(2)	$	4
Cost of products sold	$	9,510	6		(3)
Research, development and engineering	$	2,234	4		—

General and administrative	$	567	1		—
Interest Rate Contracts:
Interest expense	$	240	(7)		—
			$	2	$	1

2019
Foreign Exchange Contracts:

Cost of products sold	$	8,222	$	2	$	15


General and administrative	$	461	(3)		(6)
Interest Rate Contracts:
Interest expense	$	237	(3)		—
			$	(4)	$	9


		Amount of Gain or (Loss) Recognized in Consolidated Statement of Operations
	Location of Gain or (Loss) Recognized in Consolidated Statement of Operations	2021		2020		2019

		(In millions)
Derivatives Not Designated as Hedging Instruments
Foreign exchange contracts	General and administrative	$	—	$	—	$	(8)
Foreign exchange contracts	Interest and other income, net	29		(10)		—
Total return swaps - deferred compensation	Cost of products sold	3		1		—
Total return swaps - deferred compensation	Operating expenses	29		6		—
Total return swaps - deferred compensation	Interest and other income, net	(1)		(1)		—
Total		$	60	$	(4)	$	(8)

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 31, 2021 and October 25, 2020.

Entering into derivative contracts with banks exposes Applied to credit-related losses in the event of the banks’ nonperformance. However, Applied’s exposure is not considered significant.

Note 6 Accounts Receivable, Net

Applied has agreements with various financial institutions to sell accounts receivable and discount promissory notes from selected customers. Applied sells its accounts receivable generally without recourse. Applied, from time to time, also discounts letters of credit issued by customers through various financial institutions. The discounting of letters of credit depends on many factors, including the willingness of financial institutions to discount the letters of credit and the cost of such arrangements.

Applied sold $1.3 billion, $1.2 billion and $1.5 billion of accounts receivable during fiscal 2021, 2020 and 2019, respectively. Applied did not discount letters of credit issued by customers in fiscal 2021. Applied discounted letters of credit issued by customers of $105 million and $48 million in fiscal 2020 and 2019, respectively. There was no discounting of promissory notes in each of fiscal 2021, 2020 and 2019. 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 credit losses of $29 million and $30 million at October 31, 2021 and October 25, 2020, respectively. Changes in allowance for credit losses in each fiscal year were as follows:


	2021		2020		2019

	(In millions)
Beginning balance	$	30	$	30	$	33
Provision	—		—		—
Deductions1	(1)		—		(3)
Ending balance	$	29	$	30	$	30

1 Deductions primarily represent releases of credit losses 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 credit losses is adequate and represents its best estimate as of October 31, 2021, it continues to closely monitor customer liquidity and industry and economic conditions, which may result in changes to Applied’s estimates.

Note 7 Contract Balances

Contract assets primarily result from receivables for goods transferred to customers where payment is conditional upon technical sign off and not just the passage of time. Contract liabilities consist of unsatisfied performance obligations related to advance payments received and billings in excess of revenue recognized. Applied’s contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period.

Contract assets are generally classified as current and are included in Other Current Assets in the Consolidated Balance Sheets. Contract liabilities are classified as current or non-current based on the timing of when performance obligations will be satisfied and associated revenue is expected to be recognized.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Contract balances at the end of each reporting period were as follows:


	October 31, 2021		October 25, 2020
	(In millions)

Contract assets	$	201	$	148
Contract liabilities	$	2,076	$	1,321

The increase in contract assets during fiscal 2021, was primarily due to goods transferred to customers where payment was conditional upon technical sign off, offset by the reclassification of contract assets to net accounts receivable upon meeting conditions to the right to payment.

During fiscal 2021, Applied recognized revenue of approximately $1.0 billion related to contract liabilities at October 25, 2020. This reduction in contract liabilities was offset by new billings for products and services for which there were unsatisfied performance obligations to customers and revenue had not yet been recognized as of October 31, 2021.

There were no credit losses recognized on Applied’s accounts receivables and contract assets during fiscal 2021 and 2020.

As of October 31, 2021, the amount of remaining unsatisfied performance obligations on contracts with an original estimated duration of one year or more was approximately $779 million, of which approximately 43% is expected to be recognized within 12 months and the remainder is expected to be recognized within the following 24 months thereafter.

Applied has elected the available practical expedient to exclude the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less.

Note 8 Balance Sheet Detail


	October 31, 2021		October 25, 2020

	(In millions)
Inventories
Customer service spares	$	1,251	$	1,270
Raw materials	1,136		870
Work-in-process	873		624
Finished goods	1,049		1,140
	$	4,309	$	3,904

Included in finished goods inventory are $58 million at October 31, 2021 and $16 million at October 25, 2020, 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 $380 million and $416 million of evaluation inventory at October 31, 2021 and October 25, 2020, respectively.


	October 31, 2021		October 25, 2020

	(In millions)
Other Current Assets


Prepaid income taxes and income taxes receivable	$	593	$	162
Prepaid expenses and other	793		602
	$	1,386	$	764

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	Useful Life	October 31, 2021		October 25, 2020

	(In years)	(In millions)
Property, Plant and Equipment, Net
Land and improvements		$	334	$	256
Buildings and improvements	3-30	1,780		1,655
Demonstration and manufacturing equipment	3-5	1,820		1,586
Furniture, fixtures and other equipment	3-5	720		646
Construction in progress		326		237
Gross property, plant and equipment		4,980		4,380
Accumulated depreciation		(3,046)		(2,776)
		$	1,934	$	1,604

Depreciation expense was $345 million, $320 million and $306 million for fiscal 2021, 2020 and 2019 respectively.


	October 31, 2021		October 25, 2020

	(In millions)
Deferred Income Taxes and Other Assets
Non-current deferred income taxes	$	1,623	$	1,711
Operating lease right-of-use assets	294		252
Income tax receivables and other assets	229		260
	$	2,146	$	2,223


	October 31, 2021		October 25, 2020

	(In millions)
Accounts Payable and Accrued Expenses
Accounts payable	$	1,472	$	1,124

Compensation and employee benefits	924		800

Warranty	242		201
Dividends payable	214		201
Income taxes payable	734		222
Other accrued taxes	24		33
Interest payable	39		36
Operating lease liabilities, current	73		64

Other	546		457
	$	4,268	$	3,138


	October 31, 2021		October 25, 2020

	(In millions)
Other Liabilities


Defined and postretirement benefit plans	$	193	$	241
Operating lease liabilities, non-current	228		195
Other	271		226
	$	692	$	662

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 9 Business Combination

Kokusai Electric Corporation

On June 30, 2019, Applied entered into a Share Purchase Agreement (SPA) with Kokusai Electric Corporation (Kokusai Electric) and KKR HKE Investment L.P. (KKR) providing for Applied’s acquisition of all outstanding shares of Kokusai Electric. The SPA, as subsequently amended, terminated as of March 19, 2021. Applied paid KKR a termination fee of $154 million during the second quarter of fiscal 2021.

Note 10 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. When reviewing 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.

In performing a qualitative assessment, Applied considers business conditions and other factors including, but not limited to (i) adverse industry or economic trends, (ii) restructuring actions and lower projections that may impact future operating results, (iii) sustained decline in share price, and (iv) overall financial performance and other events affecting the reporting units. If Applied concludes that is more likely than not that the fair value of a reporting unit is less than its carrying amount, then a quantitative impairment test is performed by estimating the fair value of the reporting unit and comparing it to its carrying value. If the carrying value of a reporting unit exceeds its fair value, Applied would record an impairment charge equal to the excess of the carrying value of the reporting unit’s goodwill over its fair value.

As of October 31, 2021, Applied’s reporting units include Semiconductor Products Group and Imaging and Process Control Group, which combine to form the Semiconductor Systems reporting segment, Applied Global Services, Display and Adjacent Markets and other reporting units recorded under Corporate and Other.

In the fourth quarter of fiscal 2021, 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 quantitative goodwill impairment test for any of its reporting units.

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.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Details of goodwill were as follows:


	October 31, 2021	October 25, 2020


	(In millions)
Semiconductor Systems		$	2,207	$	2,208
Applied Global Services		1,032		1,018
Display and Adjacent Markets		199		199
Corporate and Other		41		41
Carrying amount		$	3,479	$	3,466

From time to time, Applied makes acquisitions of companies related to existing or new markets for Applied. During fiscal 2021, goodwill increased by $13 million primarily due to an acquisition during the first quarter of fiscal 2021, which was not material to Applied’s results of operations.

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


	October 31, 2021		October 25, 2020

	(In millions)
Purchased technology, net	$	46	$	75
Intangible assets - finite-lived, net	58		78

Total	$	104	$	153

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.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Details of finite-lived intangible assets were as follows:


	October 31, 2021						October 25, 2020
	Purchased Technology		Other Intangible Assets		Total		Purchased Technology		Other Intangible Assets		Total

	(In millions)
Gross carrying amount:
Semiconductor Systems	$	1,476	$	256	$	1,732	$	1,476	$	256	$	1,732
Applied Global Services	35		44		79		35		44		79
Display and Adjacent Markets	163		38		201		163		38		201
Corporate and Other	13		16		29		13		16		29
Gross carrying amount	$	1,687	$	354	$	2,041	$	1,687	$	354	$	2,041
Accumulated amortization:
Semiconductor Systems	$	(1,446)	$	(203)	$	(1,649)	$	(1,423)	$	(185)	$	(1,608)
Applied Global Services	(32)		(44)		(76)		(31)		(44)		(75)
Display and Adjacent Markets	(161)		(38)		(199)		(157)		(37)		(194)
Corporate and Other	(2)		(11)		(13)		(1)		(10)		(11)
Accumulated amortization	$	(1,641)	$	(296)	$	(1,937)	$	(1,612)	$	(276)	$	(1,888)
Carrying amount	$	46	$	58	$	104	$	75	$	78	$	153

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


	2021		2020		2019

	(In millions)
Semiconductor Systems	$	41	$	40	$	43
Applied Global Services	1		1		1
Display and Adjacent Markets	5		13		13
Corporate and Other	2		2		—
Total	$	49	$	56	$	57

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


	2021		2020		2019

	(In millions)
Cost of products sold	$	29	$	37	$	38
Research, development and engineering	1		1		1
Marketing and selling	19		18		18

Total	$	49	$	56	$	57

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of October 31, 2021, future estimated amortization expense is expected to be as follows:


	Amortization Expense
	(In millions)
2022	$	33
2023	20
2024	17
2025	15
2026	15
Thereafter	4
Total	$	104

Note 11 Borrowing Facilities and Debt

Revolving Credit Facilities

In February 2020, Applied entered into a five-year $1.5 billion committed unsecured revolving credit agreement (Revolving Credit Agreement) with a group of banks. The Revolving Credit Agreement includes a provision under which Applied may request an increase in the amount of the facility of up to $500 million for a total commitment of no more than $2.0 billion, subject to the receipt of commitments from one or more lenders for any such increase and other customary conditions. The Revolving Credit Agreement is scheduled to expire in February 2025, unless extended as permitted under the Revolving Credit Agreement. The Revolving Credit Agreement provides for borrowings that bear interest for each advance at one of two rates selected by Applied, plus an applicable margin, which varies according to Applied’s public debt credit ratings.

No amounts were outstanding under the Revolving Credit Agreement as of October 31, 2021 and October 25, 2020.

In addition, Applied has revolving credit facilities with Japanese banks pursuant to which it may borrow up to approximately $70 million in aggregate at any time. 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. As of October 31, 2021 and October 25, 2020, no amounts were outstanding under these revolving credit facilities.

Term Loan and Short-term Commercial Paper

In August 2019, Applied entered into a term loan credit agreement (Term Loan Credit Agreement) with a group of lenders under which the lenders committed to make an unsecured term loan to Applied of up to $2.0 billion to finance in part Applied’s planned acquisition of all outstanding shares of Kokusai Electric, to pay related transaction fees and expenses and for general corporate purposes. In March 2021, the Term Loan Credit Agreement, as subsequently amended, terminated automatically in accordance with its terms upon the termination of the SPA. No amounts were borrowed under the Term Loan Credit Agreement.

Applied has a short-term commercial paper program under which Applied may issue unsecured commercial paper notes of up to a total amount of $1.5 billion. At October 31, 2021 and October 25, 2020, Applied did not have any commercial paper outstanding.

Senior Unsecured Notes

In May 2020, Applied issued $750 million aggregate principal amount of 1.750% senior unsecured notes due 2030 and $750 million aggregate principal amount of 2.750% senior unsecured notes due 2050, in a registered public offering. In June 2020, Applied used a portion of the net proceeds from the offering to redeem the outstanding $600 million in aggregate principal amount of its 2.625% senior unsecured notes due October 1, 2020 and $750 million in aggregate principal amount of its 4.300% senior unsecured notes due June 15, 2021, at a total aggregate redemption price of $1.4 billion. As a result, Applied recognized a $33 million loss on early extinguishment of these senior unsecured notes during the third quarter of fiscal 2020.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Debt outstanding as of October 31, 2021 and October 25, 2020 was as follows:


	Principal Amount
	October 31, 2021		October 25, 2020		Effective Interest Rate	Interest Pay Dates
	(In millions)



Long-term debt:

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
1.750% Senior Notes Due 2030	750		750		1.792%	June 1, December 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
2.750% Senior Notes Due 2050	750		750		2.773%	June 1, December 1
	5,500		5,500
Total unamortized discount	(14)		(15)
Total unamortized debt issuance costs	(34)		(37)
Total long-term debt	$	5,452	$	5,448

Note 12 Leases

A contract contains a lease when Applied has the right to control the use of an identified asset for a period of time in exchange for consideration. Applied leases certain facilities, vehicles and equipment under non-cancelable operating leases, many of which include options to renew. Options that are reasonably certain to be exercised are included in the calculation of the right-of-use asset and lease liability. Applied’s leases do not contain residual value guarantees or significant restrictions that impact the accounting for leases. As implicit rates are not available for the leases, Applied uses the incremental borrowing rate as of the lease commencement date in order to measure the right-of-use asset and liability. Operating lease expense is generally recognized on a straight-line basis over the lease term.

Applied elected the practical expedient to account for lease and non-lease components as a single lease component for all leases. For leases with a term of one year or less, Applied elected not to record a right-of-use asset or lease liability and to account for the associated lease payments as they become due.

The components of lease expense and supplemental information were as follows:


	2021			2020
	(In millions, except percentage)
Operating lease cost	$	79		$	69
Weighted-average remaining lease term (in years)	5.1			5.2
Weighted-average discount rate	1.7		%	1.8		%

Total rent expense for fiscal 2019 was $51 million.

Supplemental cash flow information related to leases are as follows:


	2021		2020
	(In millions)
Operating cash flows paid for operating leases	$	79	$	70
Right-of-use assets obtained in exchange for operating lease liabilities	$	123	$	156

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of October 31, 2021, the maturities of lease liabilities are as follows:


	Operating Leases
Fiscal	(In millions)
2022	$	78
2023	71
2024	61
2025	48
2026	18
Thereafter	39
Total lease payments	315
Less imputed interest	(14)
Total	$	301

Note 13 Severance and Related Charges

Fiscal 2021 Severance Plan

In the first quarter of fiscal 2021, Applied enacted a severance plan to realign its workforce. Under this plan, Applied implemented a one-time voluntary retirement program and other workforce reduction actions. The voluntary retirement program was available to certain U.S. employees who met minimum age and length of service requirements, as well as other business-specific criteria. The payments under this plan are paid at the time of termination and the related costs were not allocated to the segments. In addition, Applied implemented other workforce reduction actions globally across the Display and Adjacent Markets business. These costs were recorded under the Display and Adjacent Markets segment.

During fiscal 2021, Applied recognized $157 million of severance and related charges in connection with the Fiscal 2021 Severance Plan, of which $17 million remains outstanding as of October 31, 2021.

Severance and related charges by segment were as follows:


	2021
	(In millions)
Display and Adjacent Markets	$	8
Corporate and Other	149
Total	$	157

Changes in severance and related charges reserves related to the Fiscal 2021 Severance Plan described above were as follows:


	Severance and Related Charges Reserves

	(In millions)
Balance as of October 25, 2020	$	—
Provision for severance	158
Adjustment to provision for severance	(1)
Consumption of reserves	(140)
Balance as of October 31, 2021	$	17

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 14 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 28, 2018	$	7	$	(9)	$	(137)	$	14	(125)
Adoption of new accounting standards (a)	(17)		—		—		—		(17)

Other comprehensive income (loss) before reclassifications	22		(10)		(57)		(1)		(46)
Amounts reclassified out of AOCI	(1)		3		6		—		8
Other comprehensive income (loss), net of tax	21		(7)		(51)		(1)		(38)
Balance at October 27, 2019	$	11	$	(16)	$	(188)	$	13	$	(180)


Other comprehensive income (loss) before reclassifications	16		(115)		(21)		—		(120)
Amounts reclassified out of AOCI	(7)		(2)		10		—		1
Other comprehensive income, net of tax	9		(117)		(11)		—		(119)
Balance at October 25, 2020	$	20	$	(133)	$	(199)	$	13	$	(299)


Other comprehensive income (loss) before reclassifications	(14)		28		20		—		34
Amounts reclassified out of AOCI	(7)		2		10		—		5
Other comprehensive income (loss), net of tax	(21)		30		30		—		39
Balance at October 31, 2021	$	(1)	$	(103)	$	(169)	$	13	$	(260)

(a) - Represents the reclassification adjustment related to the adoption of Accounting Standard Update (ASU) 2016-01 Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.

The tax effects on the unrealized loss on derivative instruments qualifying as cash flow hedges for fiscal 2020 was $33 million. The tax effects on net income of amounts reclassified from AOCI for the fiscal years 2021, 2020 and 2019 were not material.

Stock Repurchase Program

In March 2021, Applied’s Board of Directors approved a common stock repurchase program authorizing $7.5 billion in repurchases, which supplemented the previously existing $6.0 billion authorization approved in February 2018. At October 31, 2021, approximately $5.0 billion remained available for future stock repurchases under the repurchase program.

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


	2021		2020		2019

	(In millions, except per share amounts)
Shares of common stock repurchased	28		12		60
Cost of stock repurchased	$	3,750	$	649	$	2,403
Average price paid per share	$	134.03	$	56.32	$	39.86

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 2021, Applied's Board of Directors declared one quarterly cash dividend of $0.22 per share and three quarterly cash dividends of $0.24 per share. During fiscal 2020, Applied's Board of Directors declared one quarterly cash dividend of $0.21 per share and three quarterly cash dividends of $0.22 per share. During fiscal 2019, Applied’s Board of Directors declared one quarterly cash dividend of $0.20 per share and three quarterly cash dividends in the amount of $0.21 per share. Dividends paid during fiscal 2021, 2020 and 2019 amounted to $838 million, $787 million and $771 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 (ESIP), which permits grants to employees of share-based awards, including stock options, stock appreciation rights, restricted stock, restricted stock units, performance share units 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. On March 11, 2021, Applied’s shareholders approved an amendment and restatement of the ESIP to, among other changes, add 10 million shares to the number of shares of Applied common stock authorized for issuance.

In addition, prior to September 1, 2021, Applied had two Employee Stock Purchase Plans (ESPP), one generally for United States employees (U.S. ESPP) and a second for employees of international subsidiaries (Offshore ESPP), which enable eligible employees to purchase Applied common stock. On March 11, 2021, Applied’s shareholders approved an amendment and restatement of the U.S. ESPP (as amended, the Omnibus ESPP). The Omnibus ESPP became effective on September 1, 2021 (the Effective Date) in accordance with its terms, and amended the U.S. ESPP to, among other changes, (i) incorporate the Offshore ESPP as a sub-plan, and (ii) add 11.3 million shares to the number of shares of Applied common stock authorized for issuance. The Offshore ESPP was terminated as an independent plan on the Effective Date.

Applied recognized share-based compensation expense related to equity awards and ESPP shares. The effect of share-based compensation on the results of operations and the related tax benefits for each fiscal year were as follows:


	2021		2020		2019

	(In millions)
Cost of products sold	$	118	$	103	$	89
Research, development, and engineering	129		116		99
Marketing and selling	43		36		31
General and administrative	56		52		44

Total share-based compensation	$	346	$	307	$	263

Income tax benefits recognized	$	43	$	39	$	37

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. Share-based awards granted to certain executive officers allow partial accelerated vesting in the event of a qualifying retirement based on age and years of service. The cost associated with performance-based equity awards, which include both performance and market goals, is recognized for each tranche over the service period. The cost of equity awards related to performance goals is based on an assessment of the likelihood that the applicable performance goals will be achieved. For the equity awards based on market goals, the cost is recognized based upon the assumption of 100% achievement of the goal.

At October 31, 2021, Applied had $512 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 2.5 years. At October 31, 2021, there were 35 million shares available for grant of share-based awards under the ESIP, and an additional 16 million shares available for issuance under the Omnibus 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 2021, 2020 and 2019. There were no outstanding stock options at the end of fiscal 2021.

Restricted Stock Units, Restricted Stock, Performance Share Units 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 share units 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 share units and performance units typically vest over three to 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.

During fiscal 2021, 2020 and 2019, certain executive officers were granted awards that are subject to the achievement of certain levels specified performance goals.

Certain awards are subject to the achievement of targeted levels of adjusted operating margin and targeted levels of total shareholder return (TSR) relative to a peer group, comprised of companies in the Standard & Poor's 500 Index. Each metric will be weighted 50% and will be measured over a three-year period. The number of shares that may vest in full after three years ranges from 0% to 200% of the target amount. The 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, subject to a qualifying retirement based on age and years of service. The awards provide for a partial payout based on actual performance at the conclusion of the three-year performance period in the event of a qualifying retirement.

During fiscal 2021, certain executive officers were also granted non-recurring long-term performance-based awards that are subject to the achievement of targeted levels of Applied’s absolute TSR. The awards become eligible to vest only if targeted levels of TSR are achieved during the five-year performance period and will vest only if the grantee remains employed by Applied through the vesting date in October 2025, except in the event of involuntary termination of employment without cause, death or following a change of control. The number of shares that may vest in full after five years ranges from 0% to 200% of the target amount.

The fair value of the portion of the awards subject to targeted levels of adjusted operating margin is estimated on the date of grant. 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 portion of the awards that is probable to vest and is reflected over the service period and reduced for estimated forfeitures.

The fair value of the portion of the awards subject to targeted levels of relative TSR or absolute TSR is estimated on the date of grant using a Monte Carlo simulation model. Compensation expense is recognized based upon the assumption of 100% achievement of the TSR goal and will not be reversed even if the threshold level of TSR is never achieved, and is reflected over the service period and reduced for estimated forfeitures.

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 28, 2018	18	$	32.64	2.0 years	$	600
Granted	8	$	36.00
Vested	(7)	$	28.41
Canceled	(1)	$	34.59
Non-vested restricted stock units, restricted stock, performance shares and performance units at October 27, 2019	18	$	35.78	2.1 years	$	985
Granted	6	$	53.89
Vested	(8)	$	31.25
Canceled	(1)	$	42.61
Non-vested restricted stock units, restricted stock, performance shares and performance units at October 25, 2020	15	$	45.36	2.2 years	$	914
Granted	5	$	92.04
Vested	(6)	$	43.11
Canceled	(1)	$	59.41
Non-vested restricted stock units, restricted stock, performance shares and performance units at October 31, 2021	13	$	63.29	2.2 years	$	1,752
Non-vested restricted stock units, restricted stock, performance shares and performance units expected to vest	13	$	63.37	2.0 years	$	1,724

At October 31, 2021, 1.2 million additional performance-based awards could be earned based upon achievement of certain levels of specified performance goals.

Employee Stock Purchase Plans

Under the Omnibus 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 fiscal 2021, 3 million shares in fiscal 2020 and 4 million shares in fiscal 2019, 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:


	2021		2020		2019
ESPP:
Dividend yield	0.72	%	1.41	%	1.99	%
Expected volatility	41.3	%	48.2	%	35.5	%
Risk-free interest rate	0.05	%	0.58	%	2.21	%
Expected life (in years)	0.5		0.5		0.5
Weighted average estimated fair value	$33.77		$17.30		$10.61

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 15 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 2021, 2020 and 2019 were $631 million, $471 million and $292 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 $61 million for fiscal 2021, $52 million for fiscal 2020 and $49 million for fiscal 2019.

Defined Benefit Pension Plans of Foreign Subsidiaries and Other Postretirement 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.

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:


	2021		2020		2019

	(In millions, except percentages)
Change in projected benefit obligation
Beginning projected benefit obligation	$	674	$	617	$	524
Service cost	15		13		11
Interest cost	8		8		10
Plan participants’ contributions	1		1		1
Actuarial (gain) loss	(1)		6		84
Settlements	—		—		(1)
Foreign currency exchange rate changes	3		33		(5)
Benefits paid	(15)		(10)		(8)
Plan amendments and other adjustments	—		6		1
Ending projected benefit obligation	$	685	$	674	$	617
Ending accumulated benefit obligation	$	626	$	627	$	578
Range of assumptions to determine benefit obligations
Discount rate	0.6% - 6.6%		0.4% - 6.5%		0.5% - 3.1%
Rate of compensation increase	2.4% - 10.0%		2.3% - 10.0%		2.3% - 3.6%
Change in plan assets
Beginning fair value of plan assets	$	431	$	409	$	365
Return on plan assets	49		—		30
Employer contributions	22		12		27
Plan participants’ contributions	1		1		1
Foreign currency exchange rate changes	3		19		(5)
Settlements	—		—		(1)
Benefits paid	(15)		(10)		(8)
Ending fair value of plan assets	$	491	$	431	$	409
Funded status	$	(194)	$	(243)	$	(208)
Amounts recognized in the consolidated balance sheets
Noncurrent asset	$	1	$	—	$	5
Current liability	(2)		(2)		(1)
Noncurrent liability	(193)		(241)		(212)
Total	$	(194)	$	(243)	$	(208)
Estimated amortization from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal period
Actuarial loss	$	11	$	14	$	12
Prior service credit	—		—		—
Total	$	11	$	14	$	12
Amounts recognized in accumulated other comprehensive loss
Net actuarial loss	$	200	$	242	$	226
Prior service credit	1		—		—
Total	$	201	$	242	$	226
Plans with projected benefit obligations in excess of plan assets
Projected benefit obligation	$	472	$	674	$	424
Fair value of plan assets	$	277	$	431	$	211
Plans with accumulated benefit obligations in excess of plan assets
Accumulated benefit obligation	$	413	$	627	$	385
Fair value of plan assets	$	277	$	431	$	211

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


	2021		2020
Plan assets — allocation
Equity securities	35	%	38	%
Debt securities	33	%	43	%
Insurance contracts	23	%	9	%
Other investments	9	%	10	%

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


	October 31, 2021								October 25, 2020
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total

	(In millions)
Equity securities	$	137	$	—	$	—	$	137	$	103	$	—	$	—	$	103
Debt securities	79		—		—		79		72		—		—		72
Insurance contracts	—		—		110		110		—		—		39		39
Other investments	—		17		—		17		—		16		—		16
Cash	2		—		—		2		2		—		—		2
Total assets at fair value	$	218	$	17	$	110	345		$	177	$	16	$	39	232
Assets measured at net asset value							146								199
Total							$	491							$	431

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


	2021		2020

	(In millions)
Balance, beginning of year	$	39	$	36


Purchases, sales, settlements, net	72		1
Currency impact	(1)		2
Balance, end of year	$	110	$	39

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.

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:


	2021			2020			2019

	(In millions, except percentages)
Components of net periodic benefit cost
Service cost	$	15		$	13		$	11
Interest cost	8			8			10
Expected return on plan assets	(21)			(22)			(20)
Amortization of actuarial loss and prior service credit	14			12			7

Net periodic benefit cost	$	16		$	11		$	8
Weighted average assumptions
Discount rate	1.18		%	1.23		%	1.98		%
Expected long-term return on assets	4.80		%	5.10		%	5.40		%
Rate of compensation increase	2.74		%	2.69		%	2.74		%

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 postretirement plan over the next ten fiscal years are as follows:


	Benefit Payments
	(In millions)
2022	$	11
2023	13
2024	15
2025	14
2026	15
2027-2031	99
Total	$	167

Company contributions to these plans for fiscal 2022 are expected to be approximately $7 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 for all plans, including accrued deemed interest, totaled $206 million and $151 million at October 31, 2021 and October 25, 2020, respectively, which were included in other liabilities in the Consolidated Balance Sheets.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Note 16 Income Taxes

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


	2021		2020		2019

	(In millions)
U.S.	$	512	$	92	$	363
Foreign	6,259		4,074		2,906
	$	6,771	$	4,166	$	3,269

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


	2021		2020		2019

	(In millions)
Current:
U.S.	$	462	$	196	$	240
Foreign	344		263		260
State	17		20		12
	823		479		512
Deferred:
U.S.	(3)		(3)		8
Foreign	67		76		46
State	(4)		(5)		(3)
	60		68		51
	$	883	$	547	$	563

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:


	2021		2020		2019
Tax provision at U.S. statutory rate	21.0	%	21.0	%	21.0	%

Effect of foreign operations taxed at various rates	(7.0)		(5.9)		(5.9)
Changes in prior years’ unrecognized tax benefits	0.2		0.5		2.6
Resolutions of prior years’ income tax filings	(0.1)		(1.0)		(0.1)
Research and other tax credits	(0.9)		(1.3)		(1.1)




Other	(0.2)		(0.2)		0.7
	13.0	%	13.1	%	17.2	%

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.

Applied’s effective tax rate for fiscal 2021 was slightly lower than fiscal 2020 primarily due to higher proportion of pre-tax income in lower tax jurisdictions, partially offset by resolutions of prior years’ income tax filings. The effective tax rate for fiscal 2020 was lower than fiscal 2019 primarily due to a decline in the tax expense from changes to uncertain tax provisions year-over-year, an increased tax benefit from tax credits, and increased excess stock compensation tax benefits. This benefit was partly offset by an unfavorable settlement of an uncertain tax position in fiscal 2020.

On June 14, 2019, the U.S. government released regulations that significantly affect how the global intangible low-taxed income (GILTI) provision of the Tax Cuts and Jobs Act (Tax Act) is interpreted. As a result, Applied reversed a tax benefit of $96 million in the third quarter of fiscal 2019 that had been realized in the first half of fiscal 2019. An accounting policy may be selected to treat GILTI temporary differences in taxable income either as a current-period expense when incurred (period cost method) or factor such amounts into the measurement of deferred taxes (deferred method). Applied has chosen the period cost method.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 2021 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 benefits arising from these tax rates were $370 million or $0.40 per diluted share and $215 million or $0.23 per diluted share for fiscal 2021 and 2020, respectively.

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:


	October 31, 2021		October 25, 2020

	(In millions)
Deferred tax assets:
Allowance for doubtful accounts	$	4	$	4
Inventory reserves and basis difference	112		119
Installation and warranty reserves	29		14
Intangible assets	1,281		1,355
Accrued liabilities	31		24

Deferred revenue	25		32

Tax credits	369		326
Deferred compensation	133		130
Share-based compensation	34		30

Lease liability	61		55
Other	89		96
Gross deferred tax assets	2,168		2,185
Valuation allowance	(361)		(314)
Total deferred tax assets	1,807		1,871
Deferred tax liabilities:
Fixed assets	(93)		(76)
Right of use assets	(62)		(54)

Undistributed foreign earnings	(37)		(39)


Total deferred tax liabilities	(192)		(169)
Net deferred tax assets	$	1,615	$	1,702

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:


	2021		2020		2019

	(In millions)
Beginning balance	$	314	$	257	$	230
Increases	47		57		27
Decreases	—		—		—
Ending balance	$	361	$	314	$	257

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

At October 31, 2021, Applied has state research and development tax credit carryforwards of $369 million, including $345 million of credits that are carried over until exhausted and $20 million that are carried over for 15 years and begin to expire in fiscal 2033. It is more likely than not that all tax credit carryforwards, net of valuation allowance, will be utilized.

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


	2021		2020		2019

	(In millions)
Beginning balance of gross unrecognized tax benefits	$	496	$	845	$	374

Settlements with tax authorities	—		(446)		(1)
Lapses of statutes of limitation	(4)		(3)		(2)
Increases in tax positions for current year	26		44		33
Increases in tax positions for prior years	23		91		441
Decreases in tax positions for prior years	(4)		(35)		—
Ending balance of gross unrecognized tax benefits	$	537	$	496	$	845

In fiscal 2020, Applied settled tax audits in Singapore related to fiscal 2012 through fiscal 2019 for additional tax payments of $72 million and a reduction of future tax deductions of $374 million. The tax expense impact of these settlements was $26 million. In fiscal 2019, Applied paid an immaterial amount as a result of settlements with tax authorities.

The increases in tax positions for prior years of $441 million for fiscal 2019 include the effect of adoption of Accounting Standard Update 2016-16 Income Tax (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. Tax expense for interest and penalties on unrecognized tax benefits for fiscal 2021, 2020 and 2019 was $14 million, $24 million and $24 million, respectively. The income tax liability for interest and penalties for fiscal 2021, 2020 and 2019 was $88 million, $74 million and $50 million, respectively, and was classified as non-current income taxes payable.

Included in the balance of unrecognized tax benefits for fiscal 2021, 2020 and 2019 are $442 million, $410 million, and $758 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate.

Applied’s tax returns remain subject to examination by taxing authorities. These include U.S. returns for fiscal 2015 and later years, and foreign tax returns for fiscal 2011 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 17 Warranty, Guarantees, Commitments and Contingencies

Warranty

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


	2021		2020		2019

	(In millions)
Beginning balance	$	201	$	196	$	208
Provisions for warranty	223		165		148
Changes in reserves related to preexisting warranty	9		2		7
Consumption of reserves	(191)		(162)		(167)
Ending balance	$	242	$	201	$	196

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 31, 2021, the maximum potential amount of future payments that Applied could be required to make under these guarantee agreements was approximately $500 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 31, 2021, Applied has provided parent guarantees to banks for approximately $144 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, regulatory investigations or inquires, 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.

Note 18 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 31, 2021 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 other display technologies for TVs, monitors, 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.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, severance 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.

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)
2021:
Semiconductor Systems	$	16,286	$	6,311	$	194	$	228	$	3,886	$	2,586
Applied Global Services	5,013		1,508		32		29		922		1,561
Display and Adjacent Markets	1,634		314		27		32		207		153
Corporate and Other	130		(1,244)		141		379		(62)		9
Total	$	23,063	$	6,889	$	394	$	668	$	4,953	$	4,309
2020:
Semiconductor Systems	$	11,367	$	3,714	$	219	$	226	$	2,061	$	2,139
Applied Global Services	4,155		1,127		34		30		764		1,545
Display and Adjacent Markets	1,607		291		31		29		179		195
Corporate and Other	73		(767)		92		137		(41)		25
Total	$	17,202	$	4,365	$	376	$	422	$	2,963	$	3,904
2019:
Semiconductor Systems	$	9,027	$	2,464	$	202	$	168	$	1,543	$	1,703
Applied Global Services	3,854		1,101		25		47		790		1,535
Display and Adjacent Markets	1,651		294		22		43		246		214
Corporate and Other	76		(509)		114		183		(46)		22
Total	$	14,608	$	3,350	$	363	$	441	$	2,533	$	3,474

Semiconductor Systems and Display and Adjacent Markets revenues are recognized at a point in time. Applied Global Services revenue is recognized at a point in time for tangible goods such as spare parts and equipment, and over time for service agreements. The majority of revenue recognized over time is recognized within 12 months of the contract inception.

Operating income (loss) for fiscal 2021 included severance and related charges as discussed in Note 13, Severance and Related Charges and a deal termination fee as discussed in Note 9, Business Combination.

Net sales for Semiconductor Systems by end use application for the periods indicated were as follows:


	2021		2020		2019
Foundry, logic and other	60	%	59	%	52	%
Dynamic random-access memory (DRAM)	19	%	20	%	22	%
Flash memory	21	%	21	%	26	%

	100	%	100	%	100	%

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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


	2021		2020		2019

	(In millions)
Unallocated net sales	$	130	$	73	$	76
Unallocated cost of products sold and expenses	(725)		(533)		(322)
Share-based compensation	(346)		(307)		(263)
Severance and related charges	(149)		—		—
Deal termination fee	(154)		—		—
Total	$	(1,244)	$	(767)	$	(509)

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:


	2021		2020		2019

	(In millions)
Net sales:
United States	$	2,038	$	1,619	$	1,871
China	7,535		5,456		4,277
Korea	5,012		3,031		1,929
Taiwan	4,742		3,953		2,965
Japan	1,962		1,996		2,198
Europe	1,097		736		820
Southeast Asia	677		411		548
Total outside United States	21,025		15,583		12,737
Consolidated total	$	23,063	$	17,202	$	14,608


	October 31, 2021		October 25, 2020

	(In millions)
Long-lived assets:
United States	$	1,965	$	1,628
China	10		14
Korea	16		21
Taiwan	62		59
Japan	9		16
Europe	12		21
Southeast Asia	13		18
Total outside United States	122		149
Consolidated total	$	2,087	$	1,777

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:


	2021		2020		2019
Samsung Electronics Co., Ltd.	20	%	18	%	*
Taiwan Semiconductor Manufacturing Company Limited	15	%	18	%	14	%

Intel Corporation	*		*		12	%

Less than 10%

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
2.1	Amendment to Share Purchase Agreement, dated as of January 1, 2021, by and among Applied Materials, Inc., Kokusai Electric Corporation and KKR HKE Investment L.P.	8-K	000-06920	2.1	1/4/2021
3.1	Amended and Restated Certificate of Incorporation of Applied Materials, Inc., as amended and restated through March 16, 2020	8-K	000-06920	3.1	3/16/2020
3.2	Amended and Restated Bylaws of Applied Materials, Inc., as amended and restated through December 3, 2021	8-K	000-06920	3.1	12/8/2021
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
4.5	Fourth Supplemental Indenture dated May 29, 2020, by and between Applied Materials, Inc. and U.S. Bank National Association	8-K	000-06920	4.1	5/29/2020
4.6	Description of Registrant’s Securities Registered Under Section 12 of the Securities Exchange Act of 1934	10-K	000-06920	4.6	12/11/2020
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
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	10.3	5/27/2021
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	5/27/2021
10.10*	Form of Performance Shares Agreement for certain executive officers for use under the Applied Materials, Inc. Employee Stock Incentive Plan	10-Q	000-06920	10.3	2/25/2021
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


		Incorporated by Reference
Exhibit No.	Description	Form	File No.	Exhibit No.	Filing Date
10.12*	Applied Materials, Inc. Omnibus Employees’ Stock Purchase Plan, effective September 1, 2021	8-K	000-06920	10.2	3/16/2021
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
10.1 8 *	Applied Materials, Inc. 2016 Deferred Compensation Plan, as amended and restated on January 1, 2021	10-Q	000-06920	10.2	2/25/2021
10.19 *	Applied Materials, Inc. Employee Stock Incentive Plan, as amended and restated effective March 11 , 20 21	8-K	000-06920	10.1	3/16/2021
10.2 0 *	Applied Materials, Inc. Senior Executive Bonus Plan, as amended and restated effective March 9, 2017	10-Q	000-06920	10.2	5/25/2017
10.2 1 *	Form of Performance Share Unit Agreement for members of the Executive Staff for use under the amended and restated Applied Materials, Inc. Employee Stock Incentive Plan	10-Q	000-06920	10.5	5/27/2021
10.2 2 *	Form of Restricted Stock Unit Agreement for members of the Executive Staff for use under the amended and restated Applied Materials, Inc. Employee Stock Incentive Plan	10-Q	000-06920	10.6	5/27/2021
10.2 3 *	Share Purchase Agreement, dated as of June 30, 2019, among Applied Materials, Inc., Kokusai Electric Corporation and KKR HKE Investment L.P.	8-K	000-06920	2.1	7/1/2019
10.24	Term Loan Credit Agreement, dated as of August 19, 2019, among Applied Materials, Inc., JPMorgan Chase Bank, N.A., as administrative agent, and other lenders named therein	8-K	000-06920	10.1	8/21/2019
10.2 5	Credit Agreement, dated as of February 21, 2020, among Applied Materials, Inc., JPMorgan Chase Bank, N.A., as administrative agent, and other lenders named therein	8-K	000-06920	10.1	2/21/2020
10.2 6 *	Separation Agreement and Release, dated as of July 3, 2020 by and between Steve Ghanayem and Applied Materials, Inc.	8-K	000-06920	10.1	7/9/2020
10.27	Amendment No. 1 to Term Loan Credit Agreement, dated as of December 30, 2020, by and among Applied Materials, Inc., as borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders named therein	8-K	000-06920	10.1	1/4/2021
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)†
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‡


		Incorporated by Reference
Exhibit No.	Description	Form	File No.	Exhibit No.	Filing Date
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‡
104	Cover Page Interactive Data File (formatted as inline XBRL)


*			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 17, 2021

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 Teri Little, 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 17, 2021
Gary E. Dickerson
/S/ ROBERT J. HALLIDAY	Senior Vice President, Chief Financial Officer (Principal Financial Officer)	December 17, 2021
Robert J. Halliday
/S/ CHARLES W. READ	Corporate Vice President, Corporate Controller and Chief Accounting Officer (Principal Accounting Officer)	December 17, 2021
Charles W. Read


/S/ THOMAS J. IANNOTTI
Thomas J. Iannotti	Chairman of the Board	December 17, 2021
/S/ RANI BORKAR
Rani Borkar	Director	December 17, 2021
/S/ JUDY BRUNER
Judy Bruner	Director	December 17, 2021
/S/ XUN CHEN
Xun Chen	Director	December 17, 2021
/S/ AART J. DE GEUS
Aart J. de Geus	Director	December 17, 2021
/S/ ALEXANDER A. KARSNER
Alexander A. Karsner	Director	December 17, 2021
/S/ ADRIANNA C. MA
Adrianna C. Ma	Director	December 17, 2021
/s/ YVONNE MCGILL
Yvonne McGill	Director	December 17, 2021
/s/ SCOTT A. MCGREGOR
Scott A. McGregor	Director	December 17, 2021

Previous: Item 15. Exhibits, Financial Statement Schedules