Item 1. Financial Statements

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Item 1. Financial Statements

APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(In millions, except per share amounts)


	Three Months Ended
	January 30, 2022		January 31, 2021

	(Unaudited)
Net sales	$	6,271	$	5,162
Cost of products sold	3,312		2,813
Gross profit	2,959		2,349
Operating expenses:
Research, development and engineering	654		606
Marketing and selling	167		147
General and administrative	166		161


Severance and related charges	(4)		152

Total operating expenses	983		1,066
Income from operations	1,976		1,283

Interest expense	57		61
Interest and other income, net	6		18
Income before income taxes	1,925		1,240
Provision for income taxes	133		110
Net income	$	1,792	$	1,130
Earnings per share:
Basic	$	2.02	$	1.23
Diluted	$	2.00	$	1.22
Weighted average number of shares:
Basic	889		915
Diluted	897		925

See accompanying Notes to Consolidated Condensed Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)


	Three Months Ended
	January 30, 2022		January 31, 2021

	(Unaudited)
Net income	$	1,792	$	1,130
Other comprehensive income (loss), net of tax:
Change in unrealized gain (loss) on available-for-sale investments	(15)		(2)

Change in unrealized net loss on derivative instruments	(3)		4


Other comprehensive income (loss), net of tax	(18)		2
Comprehensive income	$	1,774	$	1,132

See accompanying Notes to Consolidated Condensed Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(In millions)


	January 30, 2022		October 31, 2021


ASSETS
Current assets:
Cash and cash equivalents	$	5,264	$	4,995
Short-term investments	473		464
Accounts receivable, net	4,405		4,953
Inventories	4,526		4,309
Other current assets	1,039		1,386
Total current assets	15,707		16,107
Long-term investments	2,026		2,055
Property, plant and equipment, net	1,974		1,934
Goodwill	3,479		3,479
Purchased technology and other intangible assets, net	94		104
Deferred income taxes and other assets	2,148		2,146
Total assets	$	25,428	$	25,825

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:

Accounts payable and accrued expenses	$	3,867	$	4,268
Contract liabilities	2,397		2,076
Total current liabilities	6,264		6,344
Long-term debt	5,454		5,452
Income taxes payable	1,068		1,090
Other liabilities	752		692
Total liabilities	13,538		13,578
Stockholders’ equity:

Common stock	9		9
Additional paid-in capital	8,130		8,247
Retained earnings	33,827		32,246
Treasury stock	(29,798)		(27,995)
Accumulated other comprehensive loss	(278)		(260)
Total stockholders’ equity	11,890		12,247
Total liabilities and stockholders’ equity	$	25,428	$	25,825

Amounts as of January 30, 2022 are unaudited. Amounts as of October 31, 2021 are derived from the October 31, 2021 audited consolidated financial statements.

See accompanying Notes to Consolidated Condensed Financial Statements.

APPLIED MATERIALS, INC

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In millions)


	Common Stock			Additional Paid-In Capital		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Income (Loss)		Total
Three Months Ended January 30, 2022	Shares	Amount				Shares		Amount

	(Unaudited)
Balance as of October 31, 2021	892	$	9	$	8,247	$	32,246	1,119	$	(27,995)	$	(260)	$	12,247

Net income	—	—		—		1,792		—	—		—		1,792
Other comprehensive income (loss), net of tax	—	—		—		—		—	—		(18)		(18)
Dividends declared ($0.24 per common share)	—	—		—		(211)		—	—		—		(211)
Share-based compensation	—	—		118		—		—	—		—		118

Issuance under stock plans	3	—		(235)		—		—	—		—		(235)
Common stock repurchases	(12)	—		—		—		12	(1,803)		—		(1,803)
Balance as of January 30, 2022	883	$	9	$	8,130	$	33,827	1,131	$	(29,798)	$	(278)	$	11,890


	Common Stock			Additional Paid-In Capital		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Income (Loss)		Total
Three Months Ended January 31, 2021	Shares	Amount				Shares		Amount

	(Unaudited)
Balance as of October 25, 2020	914	$	9	$	7,904	$	27,209	1,091	$	(24,245)	$	(299)	$	10,578

Net income	—	—		—		1,130		—	—		—		1,130
Other comprehensive income (loss), net of tax	—	—		—		—		—	—		2		2
Dividends declared ($0.22 per common share)	—	—		—		(202)		—	—		—		(202)
Share-based compensation	—	—		107		—		—	—		—		107

Issuance under stock plans	4	—		(142)		—		—	—		—		(142)

Balance as of January 31, 2021	918	$	9	$	7,869	$	28,137	1,091	$	(24,245)	$	(297)	$	11,473

See accompanying Notes to Consolidated Condensed Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In millions)


	Three Months Ended
	January 30, 2022		January 31, 2021

	(Unaudited)
Cash flows from operating activities:
Net income	$	1,792	$	1,130
Adjustments required to reconcile net income to cash provided by operating activities:
Depreciation and amortization	102		94



Severance and related charges	(4)		148



Share-based compensation	118		107

Deferred income taxes	1		28
Other	16		—
Changes in operating assets and liabilities:
Accounts receivable	548		(81)
Inventories	(217)		(21)
Other current and non-current assets	347		94

Accounts payable and accrued expenses	(393)		(335)
Contract liabilities	321		251
Income taxes payable	(34)		(8)
Other liabilities	61		14
Cash provided by operating activities	2,658		1,421
Cash flows from investing activities:
Capital expenditures	(144)		(121)
Cash paid for acquisitions, net of cash acquired	—		(12)

Proceeds from sales and maturities of investments	318		358
Purchases of investments	(312)		(441)
Cash used in investing activities	(138)		(216)
Cash flows from financing activities:



Common stock repurchases	(1,803)		—

Tax withholding payments for vested equity awards	(235)		(142)
Payments of dividends to stockholders	(214)		(201)
Cash used in financing activities	(2,252)		(343)

Increase in cash, cash equivalents and restricted cash equivalents	268		862
Cash, cash equivalents and restricted cash equivalents — beginning of period	5,101		5,466
Cash, cash equivalents and restricted cash equivalents — end of period	$	5,369	$	6,328

Reconciliation of cash, cash equivalents, and restricted cash equivalents
Cash and cash equivalents	$	5,264	$	6,213
Restricted cash equivalents included in deferred income taxes and other assets	105		115
Total cash, cash equivalents, and restricted cash equivalents	$	5,369	$	6,328

Supplemental cash flow information:
Cash payments for income taxes	$	80	$	110
Cash refunds from income taxes	$	123	$	19
Cash payments for interest	$	34	$	35

See accompanying Notes to Consolidated Condensed Financial Statements.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Note 1 Basis of Presentation

Basis of Presentation

In the opinion of management, the unaudited interim consolidated condensed financial statements of Applied Materials, Inc. and its subsidiaries (Applied or the Company) included herein have been prepared on a basis consistent with the October 31, 2021 audited consolidated financial statements and include all material adjustments, consisting of normal recurring adjustments, necessary to fairly present the information set forth therein. These unaudited interim consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Applied’s Annual Report on Form 10-K for the fiscal year ended October 31, 2021 (2021 Form 10-K). Applied’s results of operations for the three months ended January 30, 2022 are not necessarily indicative of future operating results. Applied’s fiscal year ends on the last Sunday in October of each year. Fiscal 2022 and 2021 contain 52 weeks and 53 weeks, respectively, and the first three months of fiscal 2022 and 2021 contained 13 and 14 weeks, respectively.

Use of Estimates

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

As of January 30, 2022, the COVID-19 pandemic and worldwide response remains fluid. As a result, many of Applied’s estimates and assumptions are subject to increased judgment and volatility. These estimates may differ materially in future periods as the pandemic continues to evolve and additional information becomes available.

Revenue Recognition from Contracts with Customers

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

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

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

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

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

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

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

The incremental costs to obtain a contract are not material.

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

Recent Accounting Pronouncements

Accounting Standards Adopted

Simplifying the Accounting for Income Taxes. In December 2019, the Financial Accounting Standard Board (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 adopted this authoritative guidance in the first quarter of fiscal 2022. The adoption of this guidance did not have a significant impact on Applied’s consolidated condensed financial statements.

Accounting Standards Not Yet Adopted

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 CONDENSED FINANCIAL STATEMENTS - (Continued)

Note 2 Earnings Per Share

Basic earnings per share is determined using the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined using the weighted average number of common shares and potential common shares (representing the dilutive effect of restricted stock units and employee stock purchase plan shares) outstanding during the period. Applied’s net income has not been adjusted for any period presented for purposes of computing basic or diluted earnings per share due to the Company’s non-complex capital structure.


	Three Months Ended
	January 30, 2022		January 31, 2021

	(In millions, except per share amounts)
Numerator:
Net income	$	1,792	$	1,130
Denominator:
Weighted average common shares outstanding	889		915
Effect of weighted dilutive restricted stock units and employee stock purchase plan shares	8		10
Denominator for diluted earnings per share	897		925
Basic earnings per share	$	2.02	$	1.23
Diluted earnings per share	$	2.00	$	1.22
Potentially weighted dilutive securities	—		—

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

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Note 3 Cash, Cash Equivalents and Investments

Summary of Cash, Cash Equivalents and Investments

The following tables summarize Applied’s cash, cash equivalents and investments by security type:


January 30, 2022	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value

	(In millions)
Cash	$	1,260	$	—	$	—	$	1,260
Cash equivalents:
Money market funds	3,968		—		—		3,968


Municipal securities	14		—		—		14
Commercial paper, corporate bonds and medium-term notes	22		—		—		22

Total Cash equivalents	4,004		—		—		4,004
Total Cash and Cash equivalents	$	5,264	$	—	$	—	$	5,264
Short-term and long-term investments:

U.S. Treasury and agency securities	$	324	$	—	$	3	$	321
Non-U.S. government securities*	5		—		—		5
Municipal securities	371		1		3		369
Commercial paper, corporate bonds and medium-term notes	602		1		5		598
Asset-backed and mortgage-backed securities	516		2		4		514
Total fixed income securities	1,818		4		15		1,807
Publicly traded equity securities	21		34		7		48
Equity investments in privately-held companies	564		94		14		644
Total equity investments	585		128		21		692
Total short-term and long-term investments	$	2,403	$	132	$	36	$	2,499

Total Cash, Cash equivalents and Investments	$	7,667	$	132	$	36	$	7,763

*Includes Canadian provincial government debt

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


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

Maturities of Investments

The following table summarizes the contractual maturities of Applied’s investments as of January 30, 2022:


	Cost		Estimated Fair Value

	(In millions)
Due in one year or less	$	400	$	401
Due after one through five years	902		892

No single maturity date**	1,101		1,206
Total	$	2,403	$	2,499

** 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 CONDENSED FINANCIAL STATEMENTS - (Continued)

Gains and Losses on Investments

During the three months ended January 30, 2022 and January 31, 2021 gross realized gains and losses on investments were not material.

As of January 30, 2022, and 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 the three months ended January 30, 2022 and January 31, 2021, Applied did not recognize significant credit losses and the ending allowance for credit losses was not material on its debt investment portfolio. Impairment charges on equity investments in privately-held companies during the three months ended January 30, 2022 and January 31, 2021 were not material. These impairment charges are included in interest and other income, net in the Consolidated Condensed Statement of Operations.

The components of gain (loss) on equity investments for the three months ended January 30, 2022 and January 31, 2021 were as follows:


	Three Months Ended
	January 30, 2022		January 31, 2021

	(In millions)
Publicly traded equity securities
Unrealized gain	$	1	$	8
Unrealized loss	(8)		—
Realized gain on sales	2		—

Equity investments in privately-held companies
Unrealized gain	12		1
Unrealized loss	—		(3)
Realized gain on sales	—		2
Realized loss on sales or impairment	(4)		—
Total gain (loss) on equity investments, net	$	3	$	8

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Note 4 Fair Value Measurements

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

Fair Value Hierarchy

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

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

Applied’s investments consist primarily of debt securities that are classified as available-for-sale and recorded at their fair values. In determining the fair value of investments, Applied uses pricing information from pricing services that value securities based on quoted market prices and models that utilize observable market inputs. In the event a fair value estimate is unavailable from a pricing service, Applied generally obtains non-binding price quotes from brokers. Applied then reviews the information provided by the pricing services or brokers to determine the fair value of its short-term and long-term investments. In addition, to validate pricing information obtained from pricing services, Applied periodically performs supplemental analysis on a sample of securities. Applied reviews any significant unanticipated differences identified through this analysis to determine the appropriate fair value. As of January 30, 2022, 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 CONDENSED FINANCIAL STATEMENTS - (Continued)

Assets Measured at Fair Value on a Recurring Basis

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


	January 30, 2022				October 31, 2021
	Level 1		Level 2		Total		Level 1		Level 2		Total

	(In millions)
Assets:
Available-for-sale debt security investments
Money market funds*	$	4,073	$	—	$	4,073	$	3,662	$	—	$	3,662

U.S. Treasury and agency securities	304		17		321		296		18		314
Non-U.S. government securities	—		5		5		—		5		5
Municipal securities	—		383		383		—		391		391
Commercial paper, corporate bonds and medium-term notes	—		620		620		—		597		597
Asset-backed and mortgage-backed securities	—		514		514		—		557		557
Total available-for-sale debt security investments	$	4,377	$	1,539	$	5,916	$	3,958	$	1,568	$	5,526
Equity investments with readily determinable values

Publicly traded equity securities	$	48	$	—	$	48	$	58	$	—	$	58
Total equity investments with readily determinable values	$	48	$	—	$	48	$	58	$	—	$	58

Total	$	4,425	$	1,539	$	5,964	$	4,016	$	1,568	$	5,584

Amounts as of January 30, 2022 and October 31, 2021, include $105 million and $106 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 January 30, 2022 or October 31, 2021.

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. Impairment charges on equity investments in privately-held companies during the three months ended January 30, 2022 and January 31, 2021 were not material.

Other

The carrying amounts of Applied’s financial instruments, including cash and cash equivalents, restricted cash equivalents, accounts receivable, notes payable - short term, and accounts payable and accrued expenses, approximate fair value due to their short maturities. As of January 30, 2022, the aggregate principal amount of long-term senior unsecured notes was $5.5 billion and the estimated fair value was $6.1 billion. As of 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. 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 10 of the Notes to the Consolidated Condensed Financial Statements for further detail of existing debt.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Note 5 Derivative Instruments and Hedging Activities

Derivative Financial Instruments

Applied conducts business in a number of foreign countries, with certain transactions denominated in local currencies, such as the Japanese yen, Israeli shekel, euro and Taiwanese dollar. Applied uses derivative financial instruments, such as foreign currency forward and 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 as of January 30, 2022 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 the three months ended January 30, 2022 and January 31, 2021.

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 January 30, 2022 and October 31, 2021, the total outstanding notional amount of foreign exchange contracts was $2.0 billion and $2.1 billion, respectively. The fair values of foreign exchange derivative instruments as of January 30, 2022 and October 31, 2021 were not material.

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


	Three Months Ended
	January 30, 2022		January 31, 2021
	(In millions)
Derivatives in Cash Flow Hedging Relationships:
Foreign exchange contracts	$	5	$	1

Total	$	5	$	1

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

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


	Three Months Ended
	January 30, 2022						January 31, 2021
			Derivatives in Cash Flow Hedging Relationships						Derivatives in Cash Flow Hedging Relationships
	Total Amount Presented in the Consolidated Condensed Statement of Operations in which the Effects of Cash Flow Hedges are Recorded		Amount of Gain or (Loss) Reclassified from AOCI into Consolidated Condensed Statement of Operations		Amount of Gain (Loss) Excluded from Effectiveness Testing Recognized in Consolidated Condensed Statement of Operations		Total Amount Presented in the Consolidated Condensed Statement of Operations in which the Effects of Cash Flow Hedges are Recorded		Amount of Gain or (Loss) Reclassified from AOCI into Consolidated Condensed Statement of Operations		Amount of Gain (Loss) Excluded from Effectiveness Testing Recognized in Consolidated Condensed Statement of Operations
	(In millions)
Foreign Exchange Contracts:
Net Sales	$	6,271	$	13	$	—	$	5,162	$	(4)	$	—
Cost of products sold	$	3,312	(2)		—		$	2,813	2		(1)
Research, development and engineering	$	654	1		—		$	606	1		—


Interest Rate Contracts:
Interest expense	$	57	(3)		—		$	61	(3)		—
			$	9	$	—			$	(4)	$	(1)


			Amount of Gain or (Loss) Recognized in Consolidated Condensed Statement of Operations
		Three Months Ended
Location of Gain or (Loss) Recognized in Consolidated Condensed Statement of Operations		January 30, 2022			January 31, 2021

			(In millions)
Derivatives Not Designated as Hedging Instruments



Total return swaps - deferred compensation	Cost of products sold		$	(1)		$	1
Total return swaps - deferred compensation	Operating expenses		(7)			7

Total			$	(8)		$	8

Credit Risk Contingent Features

If Applied’s credit rating were to fall below investment grade, it would be in violation of credit risk contingent provisions of the derivative instruments discussed above, and certain counterparties to the derivative instruments could request immediate payment on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a net liability position was immaterial as of January 30, 2022.

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

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Note 6 Accounts Receivable, Net

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

Applied sold $205 million and $369 million of account receivables during the three months ended January 30, 2022 and January 31, 2021, respectively. Applied did not discount letters of credit issued by customers or discount promissory notes during the three months ended January 30, 2022 and January 31, 2021. Financing charges on the sale of receivables and discounting of letters of credit are included in interest expense in the accompanying Consolidated Condensed Statements of Operations and were not material for all periods presented.

Accounts receivable are presented net of allowance for credit losses of $29 million as of January 30, 2022 and as of October 31, 2021. Applied sells its products principally to manufacturers within the semiconductor and display industries. While Applied believes that its allowance for credit losses is adequate and represents its best estimate as of January 30, 2022, it continues to closely monitor customer liquidity and industry and economic conditions, which may result in changes to Applied’s estimates.

Note 7 Contract Balances

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

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

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


	January 30, 2022		October 31, 2021
	(In millions)

Contract assets	$	174	$	201
Contract liabilities	$	2,397	$	2,076

The decrease in contract assets during the three months ended January 30, 2022 was primarily due to a reduction in goods transferred to customers where payment was conditional upon technical sign off.

During the three months ended January 30, 2022, Applied recognized revenue of approximately $1.0 billion related to contract liabilities at October 31, 2021. 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 January 30, 2022.

There were no credit losses recognized on Applied’s accounts receivables and contract assets during both the three months ended January 30, 2022 and January 31, 2021.

As of January 30, 2022, the amount of remaining unsatisfied performance obligations on contracts with an original estimated duration of one year or more was approximately $970 million, of which approximately 42% 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.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Note 8 Balance Sheet Detail


	January 30, 2022		October 31, 2021

	(In millions)
Inventories
Customer service spares	$	1,228	$	1,251
Raw materials	1,351		1,136
Work-in-process	974		873
Finished goods	973		1,049
	$	4,526	$	4,309

Included in finished goods inventory are $62 million as of January 30, 2022, and $58 million as of October 31, 2021, 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 $375 million and $380 million of evaluation inventory as of January 30, 2022 and October 31, 2021, respectively.


	January 30, 2022		October 31, 2021

	(In millions)
Other Current Assets


Prepaid income taxes and income taxes receivable	$	384	$	593
Prepaid expenses and other	655		793
	$	1,039	$	1,386


	Useful Life	January 30, 2022		October 31, 2021

	(In years)	(In millions)
Property, Plant and Equipment, Net
Land and improvements		$	334	$	334
Buildings and improvements	3-30	1,847		1,780
Demonstration and manufacturing equipment	3-5	1,914		1,820
Furniture, fixtures and other equipment	3-5	698		720
Construction in progress		308		326
Gross property, plant and equipment		5,101		4,980
Accumulated depreciation		(3,127)		(3,046)
		$	1,974	$	1,934


	January 30, 2022		October 31, 2021

	(In millions)
Deferred Income Taxes and Other Assets
Non-current deferred income taxes	$	1,590	$	1,623
Operating lease right-of-use assets	296		294
Income tax receivables and other assets	262		229
	$	2,148	$	2,146

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


	January 30, 2022		October 31, 2021

	(In millions)
Accounts Payable and Accrued Expenses
Accounts payable	$	1,502	$	1,472

Compensation and employee benefits	487		924

Warranty	254		242
Dividends payable	212		214
Income taxes payable	721		734

Other accrued taxes	17		24
Interest payable	55		39

Operating lease liabilities, current	76		73
Other	543		546
	$	3,867	$	4,268


	January 30, 2022		October 31, 2021

	(In millions)
Other Liabilities


Defined and postretirement benefit plans	$	191	$	193
Operating lease liabilities, non-current	227		228
Other	334		271
	$	752	$	692

Note 9 Goodwill, Purchased Technology and Other Intangible Assets

Goodwill and Purchased Intangible Assets

Applied’s methodology for allocating the purchase price relating to purchase acquisitions is determined through established and generally accepted valuation techniques. Goodwill is measured as the excess of the purchase price over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. Applied assigns assets acquired (including goodwill) and liabilities assumed to one or more reporting units as of the date of acquisition. Typically, acquisitions relate to a single reporting unit and thus do not require the allocation of goodwill to multiple reporting units. If the products obtained in an acquisition are assigned to multiple reporting units, the goodwill is distributed to the respective reporting units as part of the purchase price allocation process.

Goodwill and purchased intangible assets with indefinite useful lives are not amortized but are reviewed for impairment annually during the fourth quarter of each fiscal year and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The process of evaluating the potential impairment of goodwill and intangible assets requires significant judgment, especially in emerging markets. 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 January 30, 2022, 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.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Details of goodwill as of January 30, 2022 and October 31, 2021 were as follows:


	January 30, 2022		October 31, 2021


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

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


	January 30, 2022		October 31, 2021

	(In millions)
Purchased technology, net	$	40	$	46
Intangible assets - finite-lived, net	54		58

Total	$	94	$	104

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 CONDENSED FINANCIAL STATEMENTS - (Continued)

Details of finite-lived intangible assets were as follows:


	January 30, 2022						October 31, 2021
	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	$	(1,450)	$	(206)	$	(1,656)	$	(1,446)	$	(203)	$	(1,649)
Applied Global Services	(32)		(44)		(76)		(32)		(44)		(76)
Display and Adjacent Markets	(162)		(38)		(200)		(161)		(38)		(199)
Corporate and Other	(3)		(12)		(15)		(2)		(11)		(13)
Accumulated amortization	$	(1,647)	$	(300)	$	(1,947)	$	(1,641)	$	(296)	$	(1,937)
Carrying amount	$	40	$	54	$	94	$	46	$	58	$	104

Details of amortization expense by segment were as follows:


	Three Months Ended
	January 30, 2022		January 31, 2021
	(In millions)
Semiconductor Systems	$	7	$	12

Display and Adjacent Markets	1		1
Corporate & Other	2		—
Total	$	10	$	13

Amortization expense was charged to the following categories:


	Three Months Ended
	January 30, 2022		January 31, 2021

	(In millions)
Cost of products sold	$	7	$	8

Marketing and selling	3		5

Total	$	10	$	13

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

As of January 30, 2022, future estimated amortization expense is expected to be as follows:


	Amortization Expense
	(In millions)
2022 (remaining 9 months)	$	23
2023	20
2024	17
2025	15
2026	15
Thereafter	4
Total	$	94

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Note 10 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 January 30, 2022 and October 31, 2021.

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 January 30, 2022 and October 31, 2021, no amounts were outstanding under these revolving credit facilities.

Term Loan and Short-term Commercial Paper

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 January 30, 2022 and October 31, 2021, Applied did not have any commercial paper outstanding.

Senior Unsecured Notes

Debt outstanding as of January 30, 2022 and October 31, 2021 was as follows:


	Principal Amount
	January 30, 2022		October 31, 2021		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	(13)		(14)
Total unamortized debt issuance costs	(33)		(34)



Total long-term debt	$	5,454	$	5,452

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Note 11 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:


	Three Months Ended
	January 30, 2022	January 31, 2021
	(In millions, except percentages)
Operating lease cost	$21	$19
Weighted-average remaining lease term (in years)	4.9	5.0
Weighted-average discount rate	1.8%	1.8%

Supplemental cash flow information related to leases are as follows:


	Three Months Ended
		January 30, 2022		January 31, 2021
		(In millions)
Operating cash flows paid for operating leases		$	21	$	19
Right-of-use assets obtained in exchange for operating lease liabilities		$	21	$	4

As of January 30, 2022, the maturities of lease liabilities are as follows:


	Operating Leases
Fiscal	(In millions)
2022 (remaining 9 months)	$	62
2023	77
2024	66
2025	50
2026	20
Thereafter	42
Total lease payments	$	317
Less imputed interest	(14)
Total	$	303

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Note 12 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 the three months ended January 30, 2022 and January 31, 2021, Applied recorded an adjustment of $4 million and recognized a total expense of $152 million of severance and related charges, respectively, in connection with the Fiscal 2021 Severance Plan.

Severance and related charges and adjustments by segment were as follows:


	Three Months Ended
	January 30, 2022		January 31, 2021
	(In millions)
Display and Adjacent Markets	$	—	$	8
Corporate and Other	(4)		144
Total	$	(4)	$	152

Changes in severance and related charges reserves related to the Fiscal 2021 Severance Plan described above for the three months ended January 30, 2022 were as follows:


	Severance and Related Charges Reserves

	(In millions)
Balance as of October 31, 2021	$	17
Adjustment to provision for severance	(4)
Consumption of reserves	(12)
Balance as of January 30, 2022	$	1

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Note 13 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 as of October 31, 2021	$	(1)	$	(103)	$	(169)	$	13	$	(260)


Other comprehensive income (loss) before reclassifications	(12)		4		—		—		(8)
Amounts reclassified out of AOCI	(3)		(7)		—		—		(10)
Other comprehensive income (loss), net of tax	(15)		(3)		—		—		(18)

Balance as of January 30, 2022	$	(16)	$	(106)	$	(169)	$	13	$	(278)


	Unrealized Gain (Loss) on Investments, Net		Unrealized Gain (Loss) on Derivative Instruments Qualifying as Cash Flow Hedges		Defined and Postretirement Benefit Plans		Cumulative Translation Adjustments		Total

	(in millions)
Balance as of October 25, 2020	$	20	$	(133)	$	(199)	$	13	$	(299)


Other comprehensive income (loss) before reclassifications	(1)		1		—		—		—
Amounts reclassified out of AOCI	(1)		3		—		—		2
Other comprehensive income (loss), net of tax	(2)		4		—		—		2
Balance as of January 31, 2021	$	18	$	(129)	$	(199)	$	13	$	(297)

The tax effects on net income of amounts reclassified from AOCI for the three months ended January 30, 2022 and January 31, 2021 were not material.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Stock Repurchase Program

In March 2021, Applied’s Board of Directors approved a common stock repurchase program authorizing $7.5 billion in repurchases. As of January 30, 2022, approximately $3.2 billion remained available for future stock repurchases under the repurchase program.

The following table summarizes Applied’s stock repurchases for the three months ended January 30, 2022 and January 31, 2021:


	Three Months Ended
	January 30, 2022		January 31, 2021

	(in millions, except per share amount)
Shares of common stock repurchased	12		none
Cost of stock repurchased	$	1,803	$	—
Average price paid per share	$	145.85	$	—

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

Dividends

In December 2021, Applied’s Board of Directors declared a quarterly cash dividend, payable in March 2022, in the amount of $0.24 per share. Dividends paid during the three months ended January 30, 2022 and January 31, 2021 totaled $214 million and $201 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. In addition, Applied currently has an Omnibus Employees’ Stock Purchase Plan (ESPP) which enables eligible employees to purchase Applied common stock.

During the three months ended January 30, 2022 and January 31, 2021, Applied recognized share-based compensation expense related to equity awards and ESPP shares. The effect of share-based compensation on the results of operations was as follows:


	Three Months Ended
	January 30, 2022		January 31, 2021

	(In millions)
Cost of products sold	$	42	$	36
Research, development and engineering	43		40
Marketing and selling	14		13
General and administrative	19		18

Total share-based compensation	$	118	$	107

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

The cost associated with share-based awards that are subject solely to time-based vesting requirements, less expected forfeitures, is recognized over the awards’ service period for the entire award on a straight-line basis. 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.

As of January 30, 2022, Applied had $786 million in total unrecognized compensation expense, net of estimated forfeitures, related to grants of share-based awards and shares issued under the ESPP, which will be recognized over a weighted average period of 3.1 years. As of January 30, 2022, there were 31 million shares available for grant of share-based awards under the ESIP, and an additional 16 million shares available for issuance under the ESPP.

Restricted Stock Units, Restricted Stock, Performance Share Units and Performance Units

A summary of the changes in any restricted stock units, restricted stock, performance share units and performance units outstanding under Applied’s equity compensation plans during the three months ended January 30, 2022 is presented below:


	Shares	Weighted Average Grant Date Fair Value

	(In millions, except per share amounts)
Outstanding as of October 31, 2021	13	$	63.29
Granted	3	$	146.70
Vested	(5)	$	52.28
Canceled	—	$	68.98
Outstanding as of January 30, 2022	11	$	90.08

As of January 30, 2022, 0.9 million additional performance-based awards could be earned based upon achievement of certain levels of specified performance goals.

During the first quarter of fiscal 2022, certain executive officers were granted awards that 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 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 number of shares that may vest in full after three years ranges from 0% to 200% of the target amount. 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.

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 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.

Employee Stock Purchase Plans

Under the ESPP, substantially all employees may purchase Applied common stock through payroll deductions at a price equal to 85 percent of the lower of the fair market value of Applied common stock at the beginning or end of each 6-month purchase period, subject to certain limits. There was no purchase during both of the three months ended January 30, 2022 and January 31, 2021. Compensation expense is calculated using the fair value of the employees’ purchase rights under the Black-Scholes model.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Note 14 Income Taxes

Applied’s provision for income taxes and effective tax rate are affected by the geographical composition of pre-tax income which includes jurisdictions with differing tax rates, conditional reduced tax rates and other income tax incentives. It is also affected by events that are not consistent from period to period, such as changes in income tax laws and the resolution of prior years’ income tax filings.

Applied’s effective tax rates for the first quarter of fiscal 2022 and 2021 were 6.9 percent and 8.9 percent, respectively. The effective tax rate for the first quarter of fiscal 2022 was lower than the same period in the prior fiscal year primarily due to the settlement of uncertain tax positions, and larger excess tax benefits from share-based compensation.

Note 15 Warranty, Guarantees, Commitments and Contingencies

Warranty

Changes in the warranty reserves are presented below:


	Three Months Ended
	January 30, 2022		January 31, 2021

	(In millions)
Beginning balance	$	242	$	201
Warranties issued	65		49
Change in reserves related to preexisting warranty	3		2
Consumption of reserves	(56)		(56)
Ending balance	$	254	$	196

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

Guarantees

In the ordinary course of business, Applied provides standby letters of credit or other guarantee instruments to third parties as required for certain transactions initiated by either Applied or its subsidiaries. As of January 30, 2022, the maximum potential amount of future payments that Applied could be required to make under these guarantee agreements was approximately $574 million. Applied has not recorded any liability in connection with these guarantee agreements beyond that required to appropriately account for the underlying transaction being guaranteed. Applied does not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under these guarantee agreements.

Applied also has agreements with various banks to facilitate subsidiary banking operations worldwide, including overdraft arrangements, issuance of bank guarantees, and letters of credit. As of January 30, 2022, Applied has provided parent guarantees to banks for approximately $294 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.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Note 16 Industry Segment Operations

Applied’s three reportable segments are: Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets. As defined under the accounting literature, Applied’s chief operating decision-maker has been identified as the President and Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Segment information is presented based upon Applied’s management organization structure as of January 30, 2022 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.

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.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Net sales and operating income (loss) for each reportable segment were as follows:


	Three Months Ended
	Net Sales		Operating Income (Loss)

	(In millions)
January 30, 2022:
Semiconductor Systems	$	4,567	$	1,771
Applied Global Services	1,320		403
Display and Adjacent Markets	366		76
Corporate and Other	18		(274)
Total	$	6,271	$	1,976
January 31, 2021:
Semiconductor Systems	$	3,553	$	1,261
Applied Global Services	1,155		332
Display and Adjacent Markets	411		65
Corporate and Other	43		(375)
Total	$	5,162	$	1,283

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 both of the three months ended January 30, 2022 and January 31, 2021 included severance and related charges as discussed in Note 12, Severance and Related Charges.

Net sales by geographic region, determined by the location of customers’ facilities to which products were shipped to, were as follows:


	Three Months Ended
	January 30, 2022				January 31, 2021				Change

	(In millions, except percentages)
China	$	1,987	32	%	$	1,383	27	%	44	%
Korea	1,121		18	%	1,289		25	%	(13)	%
Taiwan	1,249		20	%	1,200		23	%	4	%
Japan	561		9	%	458		9	%	22	%
Southeast Asia	225		3	%	190		4	%	18	%
Asia Pacific	5,143		82	%	4,520		88	%	14	%
United States	847		14	%	343		6	%	147	%
Europe	281		4	%	299		6	%	(6)	%
Total	$	6,271	100	%	$	5,162	100	%	21	%

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

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


	Three Months Ended
	January 30, 2022		January 31, 2021
Foundry, logic and other	60	%	58	%
Dynamic random-access memory (DRAM)	25	%	17	%
Flash memory	15	%	25	%

	100	%	100	%

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


	Three Months Ended
	January 30, 2022		January 31, 2021

	(In millions)
Unallocated net sales	$	18	$	43
Unallocated cost of products sold and expenses	(178)		(167)
Share-based compensation	(118)		(107)


Severance and related charges	4		(144)

Total	$	(274)	$	(375)

The following customers accounted for at least 10 percent of Applied’s net sales for the three months ended January 30, 2022, and sales to these customers included products and services from multiple reportable segments.


	Percentage of Net Sales
Taiwan Semiconductor Manufacturing Company Limited	15	%
Samsung Electronics Co., Ltd.	13	%

Intel Corporation	11	%

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