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				Nine Months Ended
	July 30, 2023		July 31, 2022		July 30, 2023		July 31, 2022

	(Unaudited)
Net sales	$	6,425	$	6,520	$	19,794	$	19,036
Cost of products sold	3,449		3,514		10,579		10,144
Gross profit	2,976		3,006		9,215		8,892
Operating expenses:
Research, development and engineering	767		705		2,313		2,045
Marketing and selling	193		180		584		520
General and administrative	214		197		635		537


Severance and related charges	—		—		—		(4)

Total operating expenses	1,174		1,082		3,532		3,098
Income from operations	1,802		1,924		5,683		5,794

Interest expense	60		56		180		171
Interest and other income (expense), net	64		(7)		41		27
Income before income taxes	1,806		1,861		5,544		5,650
Provision for income taxes	246		255		692		716
Net income	$	1,560	$	1,606	$	4,852	$	4,934
Earnings per share:
Basic	$	1.86	$	1.86	$	5.76	$	5.63
Diluted	$	1.85	$	1.85	$	5.73	$	5.59
Weighted average number of shares:
Basic	838		864		842		877
Diluted	843		869		846		883

See accompanying Notes to Consolidated Condensed Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)


	Three Months Ended				Nine Months Ended
	July 30, 2023		July 31, 2022		July 30, 2023		July 31, 2022

	(Unaudited)
Net income	$	1,560	$	1,606	$	4,852	$	4,934
Other comprehensive income (loss), net of tax:
Change in unrealized gain (loss) on available-for-sale investments	(3)		3		25		(45)

Change in unrealized net loss on derivative instruments	15		13		(46)		46


Other comprehensive income (loss), net of tax	12		16		(21)		1
Comprehensive income	$	1,572	$	1,622	$	4,831	$	4,935

See accompanying Notes to Consolidated Condensed Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(In millions)


	July 30, 2023		October 30, 2022


ASSETS
Current assets:
Cash and cash equivalents	$	6,025	$	1,995
Short-term investments	510		586
Accounts receivable, net	5,230		6,068
Inventories	5,809		5,932
Other current assets	1,305		1,344
Total current assets	18,879		15,925
Long-term investments	2,177		1,980
Property, plant and equipment, net	2,604		2,307
Goodwill	3,732		3,700
Purchased technology and other intangible assets, net	305		339
Deferred income taxes and other assets	2,713		2,475
Total assets	$	30,410	$	26,726

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt	$	199	$	—
Accounts payable and accrued expenses	4,528		4,237
Contract liabilities	3,497		3,142
Total current liabilities	8,224		7,379
Long-term debt	5,460		5,457
Income taxes payable	818		964
Other liabilities	815		732
Total liabilities	15,317		14,532
Stockholders’ equity:

Common stock	8		8
Additional paid-in capital	8,914		8,593
Retained earnings	41,988		37,892
Treasury stock	(35,594)		(34,097)
Accumulated other comprehensive loss	(223)		(202)
Total stockholders’ equity	15,093		12,194
Total liabilities and stockholders’ equity	$	30,410	$	26,726

Amounts as of July 30, 2023 are unaudited. Amounts as of October 30, 2022 are derived from the October 30, 2022 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 July 30, 2023	Shares	Amount				Shares		Amount

	(Unaudited)
Balance as of April 30, 2023	840	$	8	$	8,811	$	40,696	1,182	$	(35,151)	$	(235)	$	14,129

Net income	—	—		—		1,560		—	—		—		1,560
Other comprehensive income (loss), net of tax	—	—		—		—		—	—		12		12
Dividends declared ($0.32 per common share)	—	—		—		(268)		—	—		—		(268)
Share-based compensation	—	—		114		—		—	—		—		114

Net issuance under stock plans	—	—		(11)		—		—	—		—		(11)
Common stock repurchases	(4)	—		—		—		4	(443)		—		(443)
Balance as of July 30, 2023	836	$	8	$	8,914	$	41,988	1,186	$	(35,594)	$	(223)	$	15,093



	Common Stock			Additional Paid-In Capital		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Income (Loss)		Total
Nine Months Ended July 30, 2023	Shares	Amount				Shares		Amount

	(Unaudited)
Balance as of October 30, 2022	844	$	8	$	8,593	$	37,892	1,173	$	(34,097)	$	(202)	$	12,194

Net income	—	—		—		4,852		—	—		—		4,852
Other comprehensive income (loss), net of tax	—	—		—		—		—	—		(21)		(21)
Dividends declared ($0.90 per common share)	—	—		—		(756)		—	—		—		(756)
Share-based compensation	—	—		375		—		—	—		—		375

Net issuance under stock plans	5	—		(54)		—		—	—		—		(54)
Common stock repurchases	(13)	—		—		—		13	(1,497)		—		(1,497)
Balance as of July 30, 2023	836	$	8	$	8,914	$	41,988	1,186	$	(35,594)	$	(223)	$	15,093

APPLIED MATERIALS, INC

CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY - (Continued)

(In millions)


	Common Stock			Additional Paid-In Capital		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Income (Loss)		Total
Three Months Ended July 31, 2022	Shares	Amount				Shares		Amount

	(Unaudited)
Balance as of May 1, 2022	869	$	9	$	8,306	$	35,137	1,146	$	(31,598)	$	(275)	$	11,579

Net income	—	—		—		1,606		—	—		—		1,606
Other comprehensive income (loss), net of tax	—	—		—		—		—	—		16		16
Dividends declared ($0.26 per common share)	—	—		—		(223)		—	—		—		(223)
Share-based compensation	—	—		95		—		—	—		—		95

Net issuance under stock plans	1	—		(3)		—		—	—		—		(3)
Common stock repurchases	(10)	—		—		—		10	(1,000)		—		(1,000)
Balance as of July 31, 2022	860	$	9	$	8,398	$	36,520	1,156	$	(32,598)	$	(259)	$	12,070



	Common Stock			Additional Paid-In Capital		Retained Earnings		Treasury Stock			Accumulated Other Comprehensive Income (Loss)		Total
Nine Months Ended July 31, 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	—	—		—		4,934		—	—		—		4,934
Other comprehensive income (loss), net of tax	—	—		—		—		—	—		1		1
Dividends declared ($0.76 per common share)	—	—		—		(660)		—	—		—		(660)
Share-based compensation	—	—		314		—		—	—		—		314
Net issuance under stock plans	5	—		(163)		—		—	—		—		(163)
Common stock repurchases	(37)	—		—		—		37	(4,603)		—		(4,603)
Balance as of July 31, 2022	860	$	9	$	8,398	$	36,520	1,156	$	(32,598)	$	(259)	$	12,070

See accompanying Notes to Consolidated Condensed Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

**(**In millions)


	Nine Months Ended
	July 30, 2023		July 31, 2022

	(Unaudited)
Cash flows from operating activities:
Net income	$	4,852	$	4,934
Adjustments required to reconcile net income to cash provided by operating activities:
Depreciation and amortization	385		321



Severance and related charges	—		(4)



Share-based compensation	375		314

Deferred income taxes	(174)		(209)
Other	189		14
Changes in operating assets and liabilities:
Accounts receivable	838		3
Inventories	123		(1,164)
Other current and non-current assets	27		(19)

Accounts payable and accrued expenses	(441)		195
Contract liabilities	355		725
Income taxes payable	545		(597)
Other liabilities	71		29
Cash provided by operating activities	7,145		4,542
Cash flows from investing activities:
Capital expenditures	(797)		(564)
Cash paid for acquisitions, net of cash acquired	(25)		(441)

Proceeds from sales and maturities of investments	971		1,013
Purchases of investments	(1,195)		(1,175)

Cash used in investing activities	(1,046)		(1,167)
Cash flows from financing activities:


Proceeds from commercial paper	892		—
Repayments of commercial paper	(700)		—
Proceeds from common stock issuances	111		96
Common stock repurchases	(1,489)		(4,603)

Tax withholding payments for vested equity awards	(165)		(259)
Payments of dividends to stockholders	(707)		(650)
Repayments of principal on finance leases	(8)		—
Cash used in financing activities	(2,066)		(5,416)

Increase (decrease) in cash, cash equivalents and restricted cash equivalents	4,033		(2,041)
Cash, cash equivalents and restricted cash equivalents — beginning of period	2,100		5,101
Cash, cash equivalents and restricted cash equivalents — end of period	$	6,133	$	3,060

Reconciliation of cash, cash equivalents and restricted cash equivalents
Cash and cash equivalents	$	6,025	$	2,956
Restricted cash equivalents included in deferred income taxes and other assets	108		104
Total cash, cash equivalents and restricted cash equivalents	$	6,133	$	3,060

Supplemental cash flow information:
Cash payments for income taxes	$	418	$	1,623
Cash refunds from income taxes	$	51	$	133
Cash payments for interest	$	137	$	137

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 our management, the unaudited interim consolidated condensed financial statements of Applied Materials, Inc. and its subsidiaries (we, us, and our) included herein have been prepared on a basis consistent with the October 30, 2022 audited consolidated financial statements and include all material adjustments, consisting of normal recurring adjustments, necessary to fairly state 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 our Annual Report on Form 10-K for the fiscal year ended October 30, 2022 (2022 Form 10-K).

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. Our results of operations for the three and nine months ended July 30, 2023 are not necessarily indicative of future operating results. Our fiscal year ends on the last Sunday in October of each year. Fiscal 2023 and 2022 contain 52 weeks each and the first nine months of fiscal 2023 and 2022 each contained 39 weeks.

Recent Accounting Pronouncements

Accounting Standards Not Yet Adopted

Disclosures by Business Entities about Government Assistance. In November 2021, the Financial Accounting Standards Board (FASB) issued an accounting standard update which requires annual disclosures related to certain government assistance received by business entities (Topic 832) including (1) the types of assistance, (2) the entity’s accounting for the assistance, and (3) the effect of the assistance on an entity’s financial statements. This authoritative guidance is effective for us in our fiscal 2023 Form 10-K. The adoption of this authoritative guidance is not expected to have a significant impact to our financial results and only impacts the disclosures in our notes to consolidated financial statements.

Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. In June 2022, the FASB issued an accounting standard update which clarifies how the fair value of equity securities subject to contractual sale restrictions is determined (Topic 820). The amendment clarifies that a contractual sale restriction should not be considered in measuring fair value. It also requires certain qualitative and quantitative disclosures related to equity securities subject to contractual sale restrictions. This authoritative guidance will be effective for us in the first quarter of fiscal 2025, with early adoption permitted. We are currently evaluating the effect of this new guidance on our consolidated condensed 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 us in the first quarter of fiscal 2024, with early adoption permitted. We are currently evaluating the effect of this new guidance on our consolidated condensed 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. Our net income has not been adjusted for any period presented for purposes of computing basic or diluted earnings per share due to our non-complex capital structure.


	Three Months Ended				Nine Months Ended
	July 30, 2023		July 31, 2022		July 30, 2023		July 31, 2022

	(In millions, except per share amounts)
Numerator:
Net income	$	1,560	$	1,606	$	4,852	$	4,934
Denominator:
Weighted average common shares outstanding	838		864		842		877
Effect of weighted dilutive restricted stock units and employee stock purchase plan shares	5		5		4		6
Denominator for diluted earnings per share	843		869		846		883
Basic earnings per share	$	1.86	$	1.86	$	5.76	$	5.63
Diluted earnings per share	$	1.85	$	1.85	$	5.73	$	5.59
Potentially weighted dilutive securities	—		3		2		2

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 our 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 our cash, cash equivalents and investments by security type:


July 30, 2023	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value

	(In millions)
Cash	$	1,397	$	—	$	—	$	1,397
Cash equivalents:
Money market funds*	3,525		—		—		3,525




Commercial paper, corporate bonds and medium-term notes	1,103		—		—		1,103

Total Cash equivalents	4,628		—		—		4,628
Total Cash and Cash equivalents	$	6,025	$	—	$	—	$	6,025
Short-term and long-term investments:
Bank certificates of deposit and time deposits	$	9	$	—	$	—	$	9
U.S. Treasury and agency securities	411		—		9		402
Non-U.S. government securities**	6		—		—		6
Municipal securities	438		—		11		427
Commercial paper, corporate bonds and medium-term notes	591		—		12		579
Asset-backed and mortgage-backed securities	448		—		14		434
Total fixed income securities	1,903		—		46		1,857
Publicly traded equity securities	79		51		13		117
Equity investments in privately held companies	660		78		25		713
Total equity investments	739		129		38		830
Total short-term and long-term investments	$	2,642	$	129	$	84	$	2,687
Total Cash, Cash equivalents and Investments	$	8,667	$	129	$	84	$	8,712

*Excludes restricted cash equivalents invested in money market funds related to deferred compensation plans.

**Includes Canadian provincial government debt.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


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

	(In millions)
Cash	$	1,199	$	—	$	—	$	1,199
Cash equivalents:
Money market funds*	660		—		—		660
U.S. Treasury and agency securities	4		—		—		4

Municipal securities	13		—		—		13
Commercial paper, corporate bonds and medium-term notes	119		—		—		119
Total Cash equivalents	796		—		—		796
Total Cash and Cash equivalents	$	1,995	$	—	$	—	$	1,995
Short-term and long-term investments:
Bank certificates of deposit	$	7	$	—	$	—	$	7
U.S. Treasury and agency securities	435		—		13		422
Non-U.S. government securities**	7		—		1		6
Municipal securities	389		—		16		373
Commercial paper, corporate bonds and medium-term notes	595		—		21		574
Asset-backed and mortgage-backed securities	432		—		19		413
Total fixed income securities	1,865		—		70		1,795
Publicly traded equity securities	85		63		26		122
Equity investments in privately held companies	567		86		4		649
Total equity investments	652		149		30		771
Total short-term and long-term investments	$	2,517	$	149	$	100	$	2,566
Total Cash, Cash equivalents and Investments	$	4,512	$	149	$	100	$	4,561

*Excludes restricted cash equivalents invested in money market funds related to deferred compensation plans.

**Includes Canadian provincial government debt.

Maturities of Investments

The following table summarizes the contractual maturities of our investments as of July 30, 2023:


	Cost		Estimated Fair Value

	(In millions)
Due in one year or less	$	488	$	482
Due after one through five years	964		938
Due after five years	3		3
No single maturity date*	1,187		1,264
Total	$	2,642	$	2,687

*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 and nine months ended July 30, 2023 and July 31, 2022 gross realized gains and losses on our fixed income portfolio were not material.

As of July 30, 2023 and October 30, 2022, gross unrealized losses related to our fixed income portfolio were not material. We regularly review our fixed income 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 we 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 (expense), net. Any additional changes in fair value that are not related to credit losses are recognized in accumulated other comprehensive income (loss) (AOCI). During the three and nine months ended July 30, 2023 and July 31, 2022, we did not recognize material credit losses and the ending allowance for credit losses was not material to our fixed income portfolio.

The components of gain (loss) on equity investments for the three and nine months ended July 30, 2023 and July 31, 2022 were as follows:


	Three Months Ended				Nine Months Ended
	July 30, 2023		July 31, 2022		July 30, 2023		July 31, 2022

	(In millions)
Publicly traded equity securities
Unrealized gain	$	12	$	3	$	31	$	21
Unrealized loss	(1)		(23)		(28)		(33)
Realized gain on sales and dividends	4		3		5		5
Realized loss on sales	—		—		(2)		—
Equity investments in privately held companies
Unrealized gain	1		7		13		32
Unrealized loss	(18)		(5)		(29)		(5)
Realized gain on sales and dividends	2		—		7		2
Realized loss on sales and impairments	(2)		(2)		(119)		(6)
Total gain (loss) on equity investments, net	$	(2)	$	(17)	$	(122)	$	16

Impairment losses on equity investments in privately held companies, included in the above table, were not material during the three months ended July 30, 2023 and were $119 million during the nine months ended July 30, 2023. Impairment losses on equity investments were not material during the three and nine months ended July 31, 2022. These impairment losses are included in interest and other income (expense), net in the Consolidated Condensed Statement of Operations.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Note 4 Fair Value Measurements

Our 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. Our 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

We use 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.

Our 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, we use 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, we generally obtain non-binding price quotes from brokers. In addition, to validate pricing information obtained from pricing services, we periodically perform supplemental analysis on a sample of securities. We review any significant unanticipated differences identified through this analysis to determine the appropriate fair value. As of July 30, 2023, substantially all of our available-for-sale, short-term and long-term investments were recognized at fair value that was determined based upon observable inputs or quoted prices.

Our 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:


	July 30, 2023				October 30, 2022
	Level 1		Level 2		Total		Level 1		Level 2		Total

	(In millions)
Assets:
Available-for-sale debt security investments
Money market funds*	$	3,633	$	—	$	3,633	$	765	$	—	$	765
Bank certificates of deposit and time deposits	—		9		9		—		7		7
U.S. Treasury and agency securities	353		49		402		404		22		426
Non-U.S. government securities	—		6		6		—		6		6
Municipal securities	—		427		427		—		386		386
Commercial paper, corporate bonds and medium-term notes	—		1,682		1,682		—		693		693
Asset-backed and mortgage-backed securities	—		434		434		—		413		413
Total available-for-sale debt security investments	$	3,986	$	2,607	$	6,593	$	1,169	$	1,527	$	2,696
Equity investments with readily determinable values

Publicly traded equity securities	$	117	$	—	$	117	$	122	$	—	$	122
Total equity investments with readily determinable values	$	117	$	—	$	117	$	122	$	—	$	122
Total	$	4,103	$	2,607	$	6,710	$	1,291	$	1,527	$	2,818

*Amounts as of July 30, 2023 and October 30, 2022 include $108 million and $105 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.

We did not have any financial assets measured at fair value on a recurring basis within Level 3 fair value measurements as of July 30, 2023 or October 30, 2022.

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

Our equity investments without readily determinable values consist of equity investments in privately held companies. We 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 losses on equity investments in privately held companies were not material during the three months ended July 30, 2023 and were $119 million during the nine months ended July 30, 2023. Impairment losses on equity investments in privately held companies were not material during the three and nine months ended July 31, 2022. These impairment losses are included in interest and other income (expense), net in the Consolidated Condensed Statement of Operations.

Other

The carrying amounts of our financial instruments, including cash and cash equivalents, restricted cash equivalents, accounts receivable, commercial paper notes, and accounts payable and accrued expenses, approximate fair value due to their short maturities. As of July 30, 2023, the aggregate principal amount of long-term senior unsecured notes was $5.5 billion and the estimated fair value was $5.1 billion. As of October 30, 2022, the aggregate principal amount of long-term senior unsecured notes was $5.5 billion and the estimated fair value was $4.8 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

We conduct 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. We use 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 our 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.

We do not use derivative financial instruments for trading or speculative purposes. Derivative instruments and hedging activities, including foreign 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 our 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 July 30, 2023 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, we immediately recognize 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 and nine months ended July 30, 2023 and July 31, 2022.

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 July 30, 2023 and October 30, 2022, the total outstanding notional amounts of foreign exchange contracts were $1.8 billion and $2.1 billion, respectively. The fair values of foreign exchange derivative instruments as of July 30, 2023 and October 30, 2022 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				Nine Months Ended
	July 30, 2023		July 31, 2022		July 30, 2023		July 31, 2022
	(In millions)
Derivatives in Cash Flow Hedging Relationships:
Foreign exchange contracts	$	15	$	35	$	(32)	$	94

Total	$	15	$	35	$	(32)	$	94

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
	July 30, 2023						July 31, 2022
			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	$	6,425	$	8	$	—	$	6,520	$	32	$	—
Cost of products sold	$	3,449	—		—		$	3,514	(4)		—
Research, development and engineering	$	767	(5)		—		$	705	(4)		—
Marketing and selling	$	193	(1)		—		$	180	(1)		—
General and administrative	$	214	(1)		—		$	197	(1)		—
Interest Rate Contracts:
Interest expense	$	60	(4)		—		$	56	(4)		—
			$	(3)	$	—			$	18	$	—



	Nine Months Ended
	July 30, 2023						July 31, 2022
			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	$	19,794	$	47	$	—	$	19,036	$	59	$	—
Cost of products sold	$	10,579	2		—		$	10,144	(7)		—
Research, development and engineering	$	2,313	(8)		—		$	2,045	(4)		(1)
Marketing and selling	$	584	(1)		—		$	520	(2)		—
General and administrative	$	635	(2)		—		$	537	(1)		—
Interest Rate Contracts:
Interest expense	$	180	(10)		—		$	171	(10)		—
			$	28	$	—			$	35	$	(1)

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


			Amount of Gain or (Loss) Recognized in Consolidated Condensed Statement of Operations
		Three Months Ended						Nine Months Ended
Location of Gain or (Loss) Recognized in Consolidated Condensed Statement of Operations		July 30, 2023			July 31, 2022			July 30, 2023			July 31, 2022

			(In millions)
Derivatives Not Designated as Hedging Instruments


Foreign exchange contracts	Interest and other income, net		$	11		$	21		$	(25)		$	41
Total return swaps - deferred compensation	Cost of products sold		2			—			3			(2)
Total return swaps - deferred compensation	Operating expenses		15			—			29			(19)
Total return swaps - deferred compensation	Interest and other income, net		(4)			(1)			(8)			(1)
Total			$	24		$	20		$	(1)		$	19

Credit Risk Contingent Features

If our credit rating were to fall below investment grade, we 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 July 30, 2023.

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

Note 6 Accounts Receivable, Net

We have agreements with various financial institutions to sell accounts receivable and discount promissory notes from selected customers. We sell our accounts receivable generally without recourse. From time to time, we also discount 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.

We sold $90 million and $619 million of account receivables during the three and nine months ended July 30, 2023, respectively. We sold $251 million and $821 million of account receivables during the three and nine months ended July 31, 2022, respectively. We did not discount letters of credit issued by customers or discount promissory notes during the nine months ended July 30, 2023 and July 31, 2022. 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 July 30, 2023 and as of October 30, 2022. We sell our products principally to manufacturers within the semiconductor and display industries. While we believe that our allowance for credit losses is adequate and represents our best estimate as of July 30, 2023, we continue to closely monitor customer liquidity and industry and economic conditions, which may result in changes to our estimates.

Note 7 Contract Balances and Performance Obligations

Contract Assets and Liabilities

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. Our 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.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

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


	July 30, 2023		October 30, 2022
	(In millions)

Contract assets	$	213	$	173
Contract liabilities	$	3,497	$	3,142

The increase in contract assets during the nine months ended July 30, 2023 was primarily due to an increase in unsatisfied performance obligations related to goods transferred to customers where payment was conditional upon technical sign off.

During the nine months ended July 30, 2023, we recognized revenue of approximately $2.6 billion related to contract liabilities at October 30, 2022. Contract liabilities increased during the nine months ended July 30, 2023 due to new billings for products and services for which there were unsatisfied performance obligations to customers and revenue had not yet been recognized as of July 30, 2023, partially offset by revenue recognized related to contract liabilities at October 30, 2022.

There were no credit losses recognized on our accounts receivables and contract assets during both the nine months ended July 30, 2023 and July 31, 2022.

Performance Obligations

As of July 30, 2023, the amount of remaining unsatisfied performance obligations on contracts, primarily consisting of written purchase orders received from customers, with an original estimated duration of one year or more was approximately $4.9 billion, of which approximately 56% is expected to be recognized within 12 months and the remainder is expected to be recognized within the following 24 months thereafter.

We have 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


	July 30, 2023		October 30, 2022

	(In millions)
Inventories
Customer service spares	$	1,605	$	1,409
Raw materials	1,762		1,807
Work-in-process	989		1,029
Finished goods
Deferred cost of sales	493		704
Evaluation inventory	443		422
Manufactured on-hand inventory	517		561
Total finished goods	1,453		1,687
Total inventories	$	5,809	$	5,932


	July 30, 2023		October 30, 2022

	(In millions)
Other Current Assets


Prepaid income taxes and income taxes receivable	$	418	$	461
Prepaid expenses and other	887		883
	$	1,305	$	1,344

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


	Useful Life	July 30, 2023		October 30, 2022

	(In years)	(In millions)
Property, Plant and Equipment, Net
Land and improvements		$	393	$	387
Buildings and improvements	3-30	2,143		2,027
Demonstration and manufacturing equipment	3-5	2,296		2,083
Furniture, fixtures and other equipment	3-5	711		743
Construction in progress		679		389
Gross property, plant and equipment		6,222		5,629
Accumulated depreciation		(3,618)		(3,322)
		$	2,604	$	2,307


	July 30, 2023		October 30, 2022

	(In millions)
Deferred Income Taxes and Other Assets
Non-current deferred income taxes	$	1,813	$	1,395
Operating lease right-of-use assets	371		389
Finance lease right-of-use assets	108		—
Income tax receivables and other assets	421		691
	$	2,713	$	2,475


	July 30, 2023		October 30, 2022

	(In millions)
Accounts Payable and Accrued Expenses
Accounts payable	$	1,433	$	1,755

Compensation and employee benefits	853		905

Warranty	313		286
Dividends payable	268		220
Income taxes payable	927		319

Other accrued taxes	40		30
Interest payable	55		39

Operating lease liabilities, current	84		85
Finance lease liabilities, current	15		—
Other	540		598
	$	4,528	$	4,237

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


	July 30, 2023		October 30, 2022

	(In millions)
Other Liabilities


Defined and postretirement benefit plans	$	116	$	107
Operating lease liabilities, non-current	255		287
Finance lease liabilities, non-current	86		—
Other	358		338
	$	815	$	732

Note 9 Goodwill and Intangible Assets

Goodwill and 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.

Goodwill

As of July 30, 2023, our reporting units include Semiconductor Products Group and Imaging and Process Control Group, Applied Global Services, Display and Adjacent Markets and other reporting units recorded under Corporate and Other. The Semiconductor Products Group and Imaging and Process Control Group combine to form the Semiconductor Systems reporting segment.

Details of goodwill as of July 30, 2023 and October 30, 2022 were as follows:


	July 30, 2023		October 30, 2022

	(In millions)
Goodwill by reportable segment
Semiconductor Systems	$	2,460	$	2,428
Applied Global Services	1,032		1,032
Display and Adjacent Markets	199		199
Corporate and Other	41		41
	$	3,732	$	3,700

From time to time, we acquire companies related to our existing or new markets. During the first nine months of fiscal 2023, goodwill increased primarily due to the preliminary purchase accounting for acquisitions, net of adjustments, which were not material to our results of operations or to our balance sheet.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Intangible Assets

Details of intangible assets other than goodwill were as follows:


	July 30, 2023						October 30, 2022
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount

	(In millions)
Intangible assets with finite lives:
Semiconductor Systems	$	2,000	$	(1,704)	$	296	$	1,985	$	(1,675)	$	310
Applied Global Services	79		(78)		1		79		(77)		2
Display and Adjacent Markets	194		(194)		—		194		(194)		—
Corporate and Other	36		(30)		6		36		(26)		10
Total intangible assets with finite lives	$	2,309	$	(2,006)	$	303	$	2,294	$	(1,972)	$	322
Intangible assets with indefinite lives:
Semiconductor Systems	$	—	$	—	$	—	$	16	$	—	$	16


Corporate and Other	2		—		2		1		—		1
Total intangible assets with indefinite lives	$	2	$	—	$	2	$	17	$	—	$	17

Total intangible assets	$	2,311	$	(2,006)	$	305	$	2,311	$	(1,972)	$	339

The increase in intangible assets with finite lives during the first nine months of fiscal 2023 was primarily due to the preliminary purchase accounting for acquisitions during the first nine months of fiscal 2023, which were not material to our results of operations.

Intangible assets with indefinite lives that are not subject to amortization consist primarily of in-process technology, which will be subject to amortization upon commercialization. If an in-process technology project is abandoned, the acquired technology attributable to the project will be written-off.

Amortization expense of intangible assets were $11 million and $34 million during the three and nine months ended months ended July 30, 2023, respectively. Amortization expense of intangible assets were $11 million and $30 million during the three and nine months ended and July 31, 2022, respectively.

As of July 30, 2023, future estimated amortization expense of intangible assets with finite lives is expected to be as follows:


	Amortization Expense
	(In millions)
2023 (remaining 3 months)	$	11
2024	41
2025	40
2026	38
2027	25
Thereafter	148
Total	$	303

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Note 10 Borrowing Facilities and Debt

Revolving Credit Facilities

In February 2020, we 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 we 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. In February 2023, we entered into an agreement with our lenders to extend the termination date of the Revolving Credit Agreement to February 2026. The termination date may be further 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 us, plus an applicable margin, which varies according to our public debt credit ratings.

No amounts were outstanding under the Revolving Credit Agreement as of July 30, 2023 and October 30, 2022.

In addition, we have revolving credit facilities with Japanese banks pursuant to which we may borrow up to approximately $57 million in aggregate at any time. Our 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 July 30, 2023 and October 30, 2022, no amounts were outstanding under these revolving credit facilities.

Short-term Commercial Paper

We have a short-term commercial paper program under which we may issue unsecured commercial paper notes of up to a total amount of $1.5 billion. The proceeds from the issuances of the commercial paper program are used for general corporate purposes. As of July 30, 2023, we had commercial paper notes outstanding with an aggregate principal amount of $200 million, which were recorded as short-term debt with a weighted-average interest rate of 5.26% and maturities of 63 days. We did not have any commercial paper notes outstanding as of October 30, 2022.

Senior Unsecured Notes

Debt outstanding as of July 30, 2023 and October 30, 2022 was as follows:


	Principal Amount
	July 30, 2023		October 30, 2022		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	(11)		(12)
Total unamortized debt issuance costs	(29)		(31)



Total long-term debt	$	5,460	$	5,457

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Note 11 Leases

A contract contains a lease when we have the right to control the use of an identified asset for a period of time in exchange for consideration. A majority of our lease arrangements are operating leases. We also have certain leases that qualify as finance leases. We lease 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. Our finance leases are those that contain a purchase option which we are reasonably certain to exercise at the end of the lease term. Our 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, we use 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. Finance lease expense is generally recognized on a straight-line basis over the life of the underlying leased asset.

We 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, we 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				Nine Months Ended
	July 30, 2023		July 31, 2022		July 30, 2023		July 31, 2022
	(In millions, except percentages)
Operating lease cost	$	25	$	26	$	78	$	69
Finance lease cost:
Amortization of right-of-use assets					$	1	$	—
Interest on lease liabilities					$	2	$	—
Weighted-average remaining lease term (in years) - operating leases					5.8		7.2
Weighted-average remaining lease term (in years) - finance leases					1.1		n/a
Weighted-average discount rate - operating leases					2.9%		2.3%
Weighted-average discount rate - finance leases					4.6%		n/a

Supplemental cash flow information related to leases are as follows:


	Nine Months Ended
		July 30, 2023		July 31, 2022
		(In millions)
Operating cash flows paid for operating leases		$	89	$	69
Operating cash flows paid for finance leases		$	2	$	—
Financing cash flows paid for finance leases		$	8	$	—
Right-of-use assets obtained in exchange for operating lease liabilities		$	83	$	192
Right-of-use assets obtained in exchange for finance lease liabilities		$	109	$	—

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

As of July 30, 2023, the maturities of lease liabilities are as follows:


	Operating Leases		Finance Leases
Fiscal	(In millions)
2023 (remaining 3 months)	$	21	$	—
2024	94		106
2025	77		—
2026	43		—
2027	33		—
Thereafter	105		—
Total lease payments	$	373	$	106
Less imputed interest	(34)		(5)
Total	$	339	$	101

Note 12 Stockholders’ Equity, Comprehensive Income and Share-Based Compensation

Accumulated Other Comprehensive Income (Loss)

Changes in the components of accumulated other comprehensive income (loss) (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 30, 2022	$	(75)	$	(52)	$	(88)	$	13	$	(202)


Other comprehensive income (loss) before reclassifications	16		(25)		—		—		(9)
Amounts reclassified out of AOCI	9		(21)		—		—		(12)
Other comprehensive income (loss), net of tax	25		(46)		—		—		(21)
Balance as of July 30, 2023	$	(50)	$	(98)	$	(88)	$	13	$	(223)


	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	(36)		73		—		—		37
Amounts reclassified out of AOCI	(9)		(27)		—		—		(36)
Other comprehensive income (loss), net of tax	(45)		46		—		—		1
Balance as of July 31, 2022	$	(46)	$	(57)	$	(169)	$	13	$	(259)

The tax effects on net income of amounts reclassified from AOCI for the three and nine months ended July 30, 2023 and July 31, 2022 were not material.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Stock Repurchase Program

In March 2023, our Board of Directors approved a common stock repurchase program authorizing $10.0 billion in repurchases, which supplemented the previously existing $6.0 billion authorization approved in March 2022. As of July 30, 2023, approximately $13.4 billion remained available for future stock repurchases under the repurchase program.

The following table summarizes our stock repurchases, including excise tax, for the three and nine months ended July 30, 2023 and July 31, 2022:


	Three Months Ended				Nine Months Ended
	July 30, 2023		July 31, 2022		July 30, 2023		July 31, 2022

	(in millions, except per share amount)
Shares of common stock repurchased	4		10		13		37
Cost of stock repurchased	$	443	$	1,000	$	1,497	$	4,603
Average price paid per share	$	131.09	$	102.09	$	117.35	$	125.85

Effective January 1, 2023, stock repurchase amounts in the above table include the 1% surcharge on stock repurchases under the Inflation Reduction Act’s excise tax. This excise tax is recorded in equity and reduces the amount available under the repurchase program, as applicable. Excluding this excise tax, total cost of stock repurchased were $439 million, or $129.86 per share, and $1,489 million, or $116.70 per share, for the three and nine months ended July 30, 2023, respectively.

We record 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 we reissue treasury stock at an amount below our 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 June 2023, March 2023 and December 2022, our Board of Directors declared quarterly cash dividends, in the amount of $0.32, $0.32, and $0.26 per share, respectively. The dividend declared in June 2023 is payable in September 2023. Dividends paid during the nine months ended July 30, 2023 and July 31, 2022 totaled $707 million and $650 million, respectively. We currently anticipate 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 our 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 our stockholders.

Share-Based Compensation

We have 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. In addition, we have an Omnibus Employees’ Stock Purchase Plan (ESPP), which enables eligible employees to purchase our common stock.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

During the three and nine months ended July 30, 2023 and July 31, 2022, we 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				Nine Months Ended
	July 30, 2023		July 31, 2022		July 30, 2023		July 31, 2022

	(In millions)
Cost of products sold	$	42	$	34	$	138	$	112
Research, development and engineering	42		35		137		115
Marketing and selling	13		11		42		37
General and administrative	17		15		58		50

Total share-based compensation	$	114	$	95	$	375	$	314

The cost associated with share-based awards is recognized over the awards’ service period for the entire award on a straight-line basis, adjusting for estimated forfeitures. We calculate estimated forfeiture rate on an annual basis, based on historical forfeiture activities. Share-based awards granted to certain members of senior management allow for 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 performance and/or market goals, is recognized for each tranche over the service period. The cost of the portion of performance-based equity awards subject to performance goals is recognized based on an assessment of the likelihood that the applicable performance goals will be achieved, and the cost of the portion of performance-based equity awards subject to market goals is recognized based on the assumption of 100% achievement of the goal.

As of July 30, 2023, we had $854 million in total unrecognized compensation expense, net of estimated forfeitures, related to grants of share-based awards under the ESIP and shares issued under the ESPP, which will be recognized over a weighted average period of 2.7 years. As of July 30, 2023, there were 25 million shares available for grant of share-based awards under the ESIP, and an additional 13 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 restricted stock units, restricted stock, performance share units and performance units outstanding under our equity compensation plans during the nine months ended July 30, 2023 is presented below:


	Shares	Weighted Average Grant Date Fair Value

	(In millions, except per share amounts)
Outstanding as of October 30, 2022	11	$	92.31
Granted	6	$	103.11
Vested	(5)	$	71.61
Canceled	—	$	103.92
Outstanding as of July 30, 2023	12	$	105.27

As of July 30, 2023, 0.8 million additional performance-based awards could be earned based upon achievement of certain levels of specified performance and/or market goals.

During the first quarter of fiscal 2023, certain members of senior management 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 the TSR of the companies in the Standard & Poor's 500 Index. Each of these two metrics will be weighted 50% and will be measured over a three-year period.

The awards become eligible to vest only if the goals are achieved and will vest only if the grantee remains employed by us 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 vesting based on actual performance at the conclusion of the three-year performance period in the event of a qualifying retirement.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

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 our common stock through payroll deductions at a price equal to 85 percent of the lower of the fair market value of our common stock at the beginning or end of each 6-month purchase period, subject to certain limits. Our purchasing cycles begin in March and September of each of fiscal year. We issued a total of 1 million shares in each of the nine months ended July 30, 2023 and July 31, 2022.

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:



	Nine Months Ended
	July 30, 2023	July 31, 2022

Dividend yield	1.09%	0.74%
Expected volatility	43.3%	45.2%
Risk-free interest rate	5.14%	0.60%
Expected life (in years)	0.5	0.5
Weighted average estimated fair value	$32.47	$35.79

Note 13 Income Taxes

Our 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 vary from period to period, such as changes in income tax laws and the resolution of prior years’ income tax filings.

Our effective tax rates for the third quarter of fiscal 2023 and 2022 were 13.6 percent and 13.7 percent, respectively.

Our effective tax rates for the first nine months of fiscal 2023 and 2022 were 12.5 percent and 12.7 percent, respectively. The effective tax rate for the first nine months of fiscal 2023 was lower than the same period in the prior fiscal year primarily due to a reduction of deferred tax assets related to a new tax incentive in Singapore in fiscal 2022, offset in part by larger excess tax benefits from share-based compensation in fiscal 2022.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Note 14 Warranty, Guarantees, Commitments and Contingencies

Warranty

Changes in the warranty reserves are presented below:


	Three Months Ended				Nine Months Ended
	July 30 2023		July 31 2022		July 30 2023		July 31 2022

	(In millions)
Beginning balance	$	310	$	262	$	286	$	242
Warranties issued	62		64		186		189
Change in reserves related to preexisting warranty	(2)		4		—		9
Consumption of reserves	(57)		(57)		(159)		(167)
Ending balance	$	313	$	273	$	313	$	273

Our 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, we provide standby letters of credit or other guarantee instruments to third parties as required for certain transactions initiated by either us or our subsidiaries. As of July 30, 2023, the maximum potential amount of future payments that we could be required to make under these guarantee agreements was approximately $422 million. We have not recorded any liability in connection with these guarantee agreements beyond that required to appropriately account for the underlying transaction being guaranteed. We do 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.

We also have agreements with various banks to facilitate subsidiary banking operations worldwide, including overdraft arrangements, issuance of bank guarantees, and letters of credit. As of July 30, 2023, we have provided parent guarantees to banks for approximately $296 million to cover these arrangements.

Legal Matters

From time to time, we receive notification from third parties, including customers and suppliers, seeking indemnification, litigation support, payment of money or other actions by us in connection with claims made against them. In addition, from time to time, we receive notification from third parties claiming that we may be or are infringing or misusing their intellectual property or other rights. We also are subject to various other legal proceedings, regulatory investigations or inquiries, and claims, both asserted and unasserted, that arise in the ordinary course of business. These matters are subject to uncertainties, and we cannot predict the outcome of these matters, or governmental inquiries or proceedings that may occur. Although the outcome of the above-described matters, claims and proceedings cannot be predicted with certainty, we do not believe at this time that any of these matters will have a material effect on our consolidated financial condition or results of operations.

In August 2022, we received a subpoena from the U.S. Attorney’s Office for the District of Massachusetts requesting information relating to certain China customer shipments. We are cooperating fully with the government. This matter is subject to uncertainties, and we cannot predict the outcome, nor reasonably estimate a range of loss or penalties, if any, relating to this matter.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Note 15 Industry Segment Operations

Our three reportable segments are: Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets. As defined under the accounting literature, our 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 our management organization structure as of July 30, 2023 and the distinctive nature of each segment. Future changes to this internal financial structure may result in changes to our 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, other consumer-oriented devices and solar energy cells.

Each operating segment is separately managed and has separate financial results that are reviewed by our 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 our chief operating decision-maker. The chief operating decision-maker does not evaluate operating segments using total asset information.

We derive the segment results directly from our internal management reporting system. The accounting policies we use 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 our 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, we do not allocate to our 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				Nine Months Ended
	Net Sales		Operating Income (Loss)		Net Sales		Operating Income (Loss)

	(In millions)
July 30, 2023:
Semiconductor Systems	$	4,676	$	1,618	$	14,815	$	5,299
Applied Global Services	1,464		429		4,261		1,226
Display and Adjacent Markets	235		37		570		66
Corporate and Other	50		(282)		148		(908)
Total	$	6,425	$	1,802	$	19,794	$	5,683
July 31, 2022:
Semiconductor Systems	$	4,734	$	1,701	$	13,759	$	5,120
Applied Global Services	1,420		434		4,123		1,259
Display and Adjacent Markets	333		69		1,080		226
Corporate and Other	33		(280)		74		(811)
Total	$	6,520	$	1,924	$	19,036	$	5,794

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.

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


	Three Months Ended										Nine Months Ended
	July 30, 2023				July 31, 2022				Change		July 30, 2023				July 31, 2022				Change

	(In millions, except percentages)
China	$	1,734	27	%	$	1,797	27	%	(4)	%	$	4,284	22	%	$	5,917	31	%	(28)	%
Korea	988		15	%	1,224		19	%	(19)	%	3,864		19	%	3,313		18	%	17	%
Taiwan	1,345		21	%	1,537		24	%	(12)	%	4,748		24	%	4,194		22	%	13	%
Japan	478		8	%	438		7	%	9	%	1,394		7	%	1,406		7	%	(1)	%
Southeast Asia	180		3	%	270		4	%	(33)	%	590		3	%	633		3	%	(7)	%
Asia Pacific	4,725		74	%	5,266		81	%	(10)	%	14,880		75	%	15,463		81	%	(4)	%
United States	1,039		16	%	725		11	%	43	%	3,203		16	%	2,274		12	%	41	%
Europe	661		10	%	529		8	%	25	%	1,711		9	%	1,299		7	%	32	%
Total	$	6,425	100	%	$	6,520	100	%	(1)	%	$	19,794	100	%	$	19,036	100	%	4	%

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


	Three Months Ended				Nine Months Ended
	July 30, 2023		July 31, 2022		July 30, 2023		July 31, 2022
Foundry, logic and other	79	%	66	%	80	%	64	%
Dynamic random-access memory (DRAM)	17	%	15	%	14	%	20	%
Flash memory	4	%	19	%	6	%	16	%

	100	%	100	%	100	%	100	%

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

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


	Three Months Ended				Nine Months Ended
	July 30, 2023		July 31, 2022		July 30, 2023		July 31, 2022

	(In millions)
Unallocated net sales	$	50	$	33	$	148	$	74
Unallocated cost of products sold and expenses	(218)		(218)		(681)		(575)
Share-based compensation	(114)		(95)		(375)		(314)


Severance and related charges	—		—		—		4

Total	$	(282)	$	(280)	$	(908)	$	(811)

The following customers accounted for at least 10 percent of our net sales for the nine months ended July 30, 2023, and sales to these customers included products and services from multiple reportable segments.


	Percentage of Net Sales
Taiwan Semiconductor Manufacturing Company Limited	22	%
Samsung Electronics Co., Ltd.	17	%

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