NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 Basis of Presentation
Basis of Presentation
In the opinion of management, the unaudited interim consolidated condensed financial statements of Applied Materials, Inc. and its subsidiaries (Applied or the Company) included herein have been prepared on a basis consistent with the October 25, 2015 audited consolidated financial statements and include all material adjustments, consisting of normal recurring adjustments, necessary to fairly present the information set forth therein. These unaudited interim consolidated condensed financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Applied’s Annual Report on Form 10-K for the fiscal year ended October 25, 2015 (2015 Form 10-K). Applied’s results of operations for the three and
nine
months ended
July 31, 2016
are not necessarily indicative of future operating results. Applied’s fiscal year ends on the last Sunday in October of each year. Fiscal 2016 and 2015 contain 53 weeks and 52 weeks, respectively, and the first
nine
months of fiscal 2016 and 2015 contained 40 weeks and 39 weeks, respectively.
Effective in the third quarter of fiscal 2016, Applied began to account for its roll-to-roll web coating systems (previously included in the Energy and Environmental Solutions segment) and display upgrade equipment (previously included in the Applied Global Services segment) under the Display and Adjacent Markets segment (previously Display). As a result of these changes, Applied's solar business (previously included in the Energy and Environmental Solutions segment) is included in Corporate and Other as it did not meet the threshold for a separate reportable segment. Results for prior periods have been recast to conform to the current presentation. As of July 31, 2016, Applied's
three
primary reportable segments are: Semiconductor Systems (previously Silicon Systems), Applied Global Services and Display and Adjacent Markets. See Note 14 of Notes to the Consolidated Condensed Financial Statements for further detail on reportable segments.
Certain prior year amounts have been reclassified to conform to current year presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. On an ongoing basis, Applied evaluates its estimates, including those related to accounts receivable and sales allowances, fair values of financial instruments, inventories, intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair values of share-based awards, and income taxes, among others. Applied bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.
Revenue Recognition
Applied recognizes revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; seller’s price to buyer is fixed or determinable; and collectability is probable. Applied’s shipping terms are customarily FOB Applied shipping point or equivalent terms. Applied’s revenue recognition policy generally results in revenue recognition at the following points: (1) for all transactions where legal title passes to the customer upon shipment or delivery, Applied recognizes revenue upon passage of title for all products that have been demonstrated to meet product specifications prior to shipment; the portion of revenue associated with certain installation-related tasks is deferred, and that revenue is recognized upon completion of the installation-related tasks; (2) for products that have not been demonstrated to meet product specifications prior to shipment, revenue is recognized at customer technical acceptance; (3) for transactions where legal title does not pass at shipment or delivery, revenue is recognized when legal title passes to the customer, which is generally at customer technical acceptance; and (4) for arrangements containing multiple elements, the revenue relating to the undelivered elements is deferred using the relative selling price method utilizing estimated sales prices until delivery of the deferred elements. Applied limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or adjustment. In cases where Applied has sold products that have been demonstrated to meet product specifications prior to shipment, Applied believes that at the time of delivery, it has an enforceable claim to amounts recognized as revenue. Spare parts revenue is generally recognized upon shipment, and services revenue is generally recognized over the period that the services are provided.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
When a sales arrangement contains multiple elements, such as hardware and services and/or software products, Applied allocates revenue to each element based on a selling price hierarchy. The selling price for a deliverable is based on its vendor specific objective evidence (VSOE) if available, third party evidence (TPE) if VSOE is not available, or estimated selling price (ESP) if neither VSOE nor TPE is available. Applied generally utilizes the ESP due to the nature of its products. In multiple element arrangements where more-than-incidental software deliverables are included, revenue is allocated to each separate unit of accounting for each of the non-software deliverables, and to the software deliverables as a group, using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is then allocated to each software deliverable using the guidance for recognizing software revenue.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (FASB) issued authoritative guidance that modifies the impairment model for certain financial assets by requiring use of an expected loss methodology, which will result in more timely recognition of credit losses. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2021. Early adoption is permitted beginning in the first quarter of fiscal 2020. Applied is currently evaluating the effect of this new guidance on Applied's consolidated financial statements.
In March 2016, the FASB issued authoritative guidance that simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2018. Early adoption is permitted as of the beginning of an interim or annual reporting period. Applied is currently evaluating the effect of this new guidance on Applied's consolidated financial statements.
In February 2016, the FASB issued authoritative guidance for lease accounting, which requires lessees to recognize lease assets and liabilities on the balance sheet for certain lease arrangements that are classified as operating leases under the previous standard, and to provide for enhanced disclosures. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2020 and should be applied using a modified retrospective approach. Early adoption is permitted. Applied is currently evaluating the effect of this new guidance on Applied's consolidated financial statements.
In January 2016, the FASB issued authoritative guidance that requires equity investments that do not result in consolidation, and are not accounted for under the equity method, to be measured at fair value, and requires recognition of any changes in fair value in net income unless the investments qualify for a new practicability exception. For financial liabilities measured at fair value, the change in fair value caused by a change in instrument-specific credit risk will be required to be presented separately in other comprehensive income. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2019. Early adoption is permitted only for the provisions related to the recognition of changes in fair value of financial liabilities caused by instrument-specific credit risk. Applied is currently evaluating the effect of this new guidance on Applied's consolidated financial statements.
In November 2015, the FASB issued authoritative guidance requiring all deferred tax assets and liabilities, and any related valuation allowance, to be classified as noncurrent on the balance sheet. Applied elected to prospectively adopt the authoritative guidance in the beginning of the first quarter of fiscal 2016. Prior periods were not retrospectively adjusted.
In July 2015, the FASB issued authoritative guidance that requires inventory to be measured at the lower of cost and net realizable value instead of at lower of cost or market. This guidance does not apply to inventory that is measured using last-in, first out (LIFO) or the retail inventory method but applies to all other inventory including those measured using first-in, first-out (FIFO) or the average cost method. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2018 and should be applied prospectively. Early adoption is permitted as of the beginning of an interim or annual reporting period. Applied is currently evaluating the effect of this new guidance on Applied's consolidated financial statements.
In May 2015, the FASB issued authoritative guidance to remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The new guidance also removes the requirement of certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. The guidance becomes effective retrospectively for Applied in the first quarter of fiscal 2017. Early adoption is permitted. The adoption of this guidance will only impact disclosures in Applied's financial statements.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
In April 2015, the FASB issued authoritative guidance for customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This guidance will not change accounting for service contracts. Applied will adopt this guidance in the first quarter of fiscal 2017 prospectively to all arrangements entered into or materially modified after the effective date. The adoption of this guidance is not expected to have a significant impact on Applied's consolidated financial statements.
In April 2015, the FASB issued authoritative guidance that requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts. The authoritative guidance is effective for Applied in the first quarter of fiscal 2017 and should be applied retrospectively. Early adoption is permitted. The adoption of this guidance is not expected to have a significant impact on Applied's consolidated financial statements.
In May 2014, the FASB issued authoritative guidance that requires revenue recognition to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This new standard will supersede most current revenue recognition guidance, including industry-specific guidance. Entities will have the option of using either a full retrospective or modified retrospective approach to adopting the guidance. Under the modified approach, an entity would recognize the cumulative effect of initially applying the guidance with an adjustment to the opening balance of retained earnings in the period of adoption. In addition, the modified approach will require additional disclosures. In August 2015, the FASB issued an amendment to defer the effective date by one year and allow entities to early adopt no earlier than the original effective date. With this amendment, the guidance will be effective for Applied in the first quarter of fiscal 2019. Subsequent to the amendment, the FASB issued additional clarifying implementation guidance. Applied is currently evaluating the effect of this new guidance on Applied's financial position, results of operations and its ongoing financial reporting, including the selection of a transition method.
|
|
Note 2
|
Earnings Per Share
|
Basic earnings per share is determined using the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined using the weighted average number of common shares and potential common shares (representing the dilutive effect of stock options, restricted stock units, and employee stock purchase plan shares) outstanding during the period. Applied's net income has not been adjusted for any period presented for purposes of computing basic or diluted earnings per share due to the Company's non-complex capital structure.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 31,
2016
|
|
July 26,
2015
|
|
July 31,
2016
|
|
July 26,
2015
|
|
|
|
|
|
|
|
|
|
(In millions, except per share amounts)
|
Numerator:
|
|
|
|
|
|
|
|
Net income
|
$
|
505
|
|
|
$
|
329
|
|
|
$
|
1,111
|
|
|
$
|
1,041
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
1,083
|
|
|
1,221
|
|
|
1,115
|
|
|
1,225
|
|
Effect of dilutive stock options, restricted stock units and employee stock purchase plan shares
|
10
|
|
|
10
|
|
|
8
|
|
|
13
|
|
Denominator for diluted earnings per share
|
1,093
|
|
|
1,231
|
|
|
1,123
|
|
|
1,238
|
|
Basic earnings per share
|
$
|
0.47
|
|
|
$
|
0.27
|
|
|
$
|
1.00
|
|
|
$
|
0.85
|
|
Diluted earnings per share
|
$
|
0.46
|
|
|
$
|
0.27
|
|
|
$
|
0.99
|
|
|
$
|
0.84
|
|
Potentially dilutive securities
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Potentially dilutive securities attributable to outstanding stock options and restricted stock units were excluded from the calculation of diluted earnings per share because the combined exercise price, average unamortized fair value and assumed tax benefits upon the exercise of options and the vesting of restricted stock units were greater than the average market price of Applied common stock, and therefore their inclusion would have been 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2016
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Cash
|
$
|
1,084
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,084
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market funds
|
1,380
|
|
|
—
|
|
|
—
|
|
|
1,380
|
|
U.S. Treasury and agency securities
|
40
|
|
|
—
|
|
|
—
|
|
|
40
|
|
Municipal securities
|
167
|
|
|
—
|
|
|
—
|
|
|
167
|
|
Commercial paper, corporate bonds and medium-term notes
|
157
|
|
|
—
|
|
|
—
|
|
|
157
|
|
Total Cash equivalents
|
1,744
|
|
|
—
|
|
|
—
|
|
|
1,744
|
|
Total Cash and Cash equivalents
|
$
|
2,828
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,828
|
|
Short-term and long-term investments:
|
|
|
|
|
|
|
|
U.S. Treasury and agency securities
|
$
|
253
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
253
|
|
Non-U.S. government securities*
|
20
|
|
|
—
|
|
|
—
|
|
|
20
|
|
Municipal securities
|
409
|
|
|
3
|
|
|
—
|
|
|
412
|
|
Commercial paper, corporate bonds and medium-term notes
|
306
|
|
|
1
|
|
|
—
|
|
|
307
|
|
Asset-backed and mortgage-backed securities
|
264
|
|
|
1
|
|
|
1
|
|
|
264
|
|
Total fixed income securities
|
1,252
|
|
|
5
|
|
|
1
|
|
|
1,256
|
|
Publicly traded equity securities
|
33
|
|
|
48
|
|
|
4
|
|
|
77
|
|
Equity investments in privately-held companies
|
65
|
|
|
—
|
|
|
—
|
|
|
65
|
|
Total short-term and long-term investments
|
$
|
1,350
|
|
|
$
|
53
|
|
|
$
|
5
|
|
|
$
|
1,398
|
|
Total Cash, Cash equivalents and Investments
|
$
|
4,178
|
|
|
$
|
53
|
|
|
$
|
5
|
|
|
$
|
4,226
|
|
_________________________
* Includes agency debt securities guaranteed by non-U.S. governments, which consist of Canada and Germany.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 25, 2015
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Cash
|
$
|
1,010
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,010
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
Money market funds
|
3,272
|
|
|
—
|
|
|
—
|
|
|
3,272
|
|
Non-U.S. government securities
|
60
|
|
|
—
|
|
|
—
|
|
|
60
|
|
Municipal securities
|
73
|
|
|
—
|
|
|
—
|
|
|
73
|
|
Commercial paper, corporate bonds and medium-term notes
|
382
|
|
|
—
|
|
|
—
|
|
|
382
|
|
Total Cash equivalents
|
3,787
|
|
|
—
|
|
|
—
|
|
|
3,787
|
|
Total Cash and Cash equivalents
|
$
|
4,797
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,797
|
|
Short-term and long-term investments:
|
|
|
|
|
|
|
|
U.S. Treasury and agency securities
|
$
|
84
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
84
|
|
Non-U.S. government securities
|
9
|
|
|
—
|
|
|
—
|
|
|
9
|
|
Municipal securities
|
384
|
|
|
2
|
|
|
—
|
|
|
386
|
|
Commercial paper, corporate bonds and medium-term notes
|
250
|
|
|
—
|
|
|
—
|
|
|
250
|
|
Asset-backed and mortgage-backed securities
|
262
|
|
|
—
|
|
|
—
|
|
|
262
|
|
Total fixed income securities
|
989
|
|
|
2
|
|
|
—
|
|
|
991
|
|
Publicly traded equity securities
|
28
|
|
|
17
|
|
|
—
|
|
|
45
|
|
Equity investments in privately-held companies
|
78
|
|
|
—
|
|
|
—
|
|
|
78
|
|
Total short-term and long-term investments
|
$
|
1,095
|
|
|
$
|
19
|
|
|
$
|
—
|
|
|
$
|
1,114
|
|
Total Cash, Cash equivalents and Investments
|
$
|
5,892
|
|
|
$
|
19
|
|
|
$
|
—
|
|
|
$
|
5,911
|
|
Maturities of Investments
The following table summarizes the contractual maturities of Applied’s investments at
July 31, 2016
:
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Estimated
Fair Value
|
|
|
|
|
|
(In millions)
|
Due in one year or less
|
$
|
422
|
|
|
$
|
422
|
|
Due after one through five years
|
566
|
|
|
570
|
|
No single maturity date**
|
362
|
|
|
406
|
|
|
$
|
1,350
|
|
|
$
|
1,398
|
|
_________________________
** 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 31, 2016
and
July 26, 2015
, gross realized gains and losses on investments were not material.
At
July 31, 2016
and
October 25, 2015
, gross unrealized losses related to Applied's investment portfolio were not material. Applied regularly reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether an unrealized loss is considered to be temporary, or other-than-temporary and therefore impaired, include: the length of time and extent to which fair value has been lower than the cost basis; the financial condition, credit quality and near-term prospects of the investee; and whether it is more likely than not that Applied will be required to sell the security prior to recovery. Generally, the contractual terms of investments in marketable securities do not permit settlement at prices less than the amortized cost of the investments. Applied determined that the gross unrealized losses on its marketable securities at
July 31, 2016
and
July 26, 2015
were temporary in nature and therefore it did not recognize any impairment of its marketable securities during the three and
nine
months ended
July 31, 2016
or
July 26, 2015
. Impairment charges on equity investments in privately-held companies during the three and
nine
months ended
July 31, 2016
and
July 26, 2015
were not material. These impairment charges are included in interest and other income, net in the Consolidated Condensed Statement of Operations.
Unrealized gains and temporary losses on investments classified as available-for-sale are included within accumulated other comprehensive income (loss), net of any related tax effect. Upon realization, those amounts are reclassified from accumulated other comprehensive income (loss) to results of operations.
|
|
Note 4
|
Fair Value Measurements
|
Applied’s financial assets are measured and recorded at fair value, except for equity investments in privately-held companies. These equity investments are generally accounted for under the cost method of accounting and are periodically assessed for other-than-temporary impairment when events or circumstances indicate that an other-than-temporary decline in value may have occurred. Applied’s nonfinancial assets, such as goodwill, intangible assets, and property, plant and equipment, are recorded at cost and are assessed for impairment when events or circumstances indicate that an other-than-temporary decline in value may have occurred.
Fair Value Hierarchy
Applied uses the following fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
|
|
•
|
Level 1 — Quoted prices in active markets for identical assets or liabilities;
|
|
|
•
|
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
|
|
|
•
|
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
|
Applied’s investments consist primarily of debt securities that are classified as available-for-sale and recorded at their fair values. In determining the fair value of investments, Applied uses pricing information from pricing services that value securities based on quoted market prices and models that utilize observable market inputs. In the event a fair value estimate is unavailable from a pricing service, Applied generally obtains non-binding price quotes from brokers. Applied then reviews the information provided by the pricing services or brokers to determine the fair value of its short-term and long-term investments. In addition, to validate pricing information obtained from pricing services, Applied periodically performs supplemental analysis on a sample of securities. Applied reviews any significant unanticipated differences identified through this analysis to determine the appropriate fair value.
Investments with remaining effective maturities of
12 months or less
from the balance sheet date are classified as short-term investments. Investments with remaining effective maturities of
more than 12 months
from the balance sheet date are classified as long-term investments. As of
July 31, 2016
, 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 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 31, 2016
|
|
October 25, 2015
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
1,380
|
|
|
$
|
—
|
|
|
$
|
1,380
|
|
|
$
|
3,272
|
|
|
$
|
—
|
|
|
$
|
3,272
|
|
U.S. Treasury and agency securities
|
90
|
|
|
203
|
|
|
293
|
|
|
72
|
|
|
12
|
|
|
84
|
|
Non-U.S. government securities
|
—
|
|
|
20
|
|
|
20
|
|
|
—
|
|
|
69
|
|
|
69
|
|
Municipal securities
|
—
|
|
|
579
|
|
|
579
|
|
|
—
|
|
|
459
|
|
|
459
|
|
Commercial paper, corporate bonds and medium-term notes
|
—
|
|
|
464
|
|
|
464
|
|
|
—
|
|
|
632
|
|
|
632
|
|
Asset-backed and mortgage-backed securities
|
—
|
|
|
264
|
|
|
264
|
|
|
—
|
|
|
262
|
|
|
262
|
|
Publicly traded equity securities
|
77
|
|
|
—
|
|
|
77
|
|
|
45
|
|
|
—
|
|
|
45
|
|
Total
|
$
|
1,547
|
|
|
$
|
1,530
|
|
|
$
|
3,077
|
|
|
$
|
3,389
|
|
|
$
|
1,434
|
|
|
$
|
4,823
|
|
There were
no
transfers between Level 1 and Level 2 fair value measurements during the three and
nine
months ended
July 31, 2016
or
July 26, 2015
. Applied did not have any financial assets measured at fair value on a recurring basis within Level 3 fair value measurements as of
July 31, 2016
or
October 25, 2015
.
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
Equity investments in privately-held companies are generally accounted for under the cost method of accounting and are periodically assessed for other-than-temporary impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred. If Applied determines that an other-than-temporary impairment has occurred, the investment will be written down to its estimated fair value based on available information, such as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operational performance and any other readily available market data. At
July 31, 2016
, equity investments in privately-held companies totaled
$65 million
, of which
$58 million
of investments were accounted for under the cost method of accounting and
$7 million
of investments had been measured at fair value on a non-recurring basis within Level 3 fair value measurements due to an other-than-temporary decline in value. At
October 25, 2015
, equity investments in privately-held companies totaled
$78 million
, of which
$70 million
of investments were accounted for under the cost method of accounting and
$8 million
of investments had been measured at fair value on a non-recurring basis within Level 3 fair value measurements due to an other-than-temporary decline in value. Impairment charges on equity investments in privately-held companies during the three and
nine
months ended
July 31, 2016
and
July 26, 2015
were not material.
Other
The carrying amounts of Applied’s financial instruments, including cash and cash equivalents, accounts receivable, notes payable - short term, and accounts payable and accrued expenses, approximate fair value due to their short maturities. At
July 31, 2016
, the carrying amount of long-term debt was
$3.3 billion
and the estimated fair value was
$3.8 billion
. At
October 25, 2015
, the carrying amount of long-term debt was
$3.3 billion
and the estimated fair value was
$3.5 billion
. The estimated fair value of long-term debt is determined by Level 2 inputs and is based primarily on quoted market prices for the same or similar issues. See Note 9 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, euro, Israeli shekel and Taiwanese dollar. Applied uses derivative financial instruments, such as forward exchange contracts and currency option contracts, to hedge certain forecasted foreign currency denominated transactions expected to occur typically within the next
24 months
. The purpose of Applied’s foreign currency management is to mitigate the effect of exchange rate fluctuations on certain foreign currency denominated revenues, costs and eventual cash flows. The terms of currency instruments used for hedging purposes are generally consistent with the timing of the transactions being hedged.
During fiscal 2015, Applied entered into and settled a series of forward-starting interest rate swap agreements, with a total notional amount of
$600 million
to hedge against the variability of cash flows due to changes in the benchmark interest rate of fixed rate debt. These instruments were designated as cash flow hedges at inception and settled in conjunction with the issuance of debt in September 2015. The loss from the settlement of the interest rate swap agreement that was included in accumulated other comprehensive income (AOCI) in stockholders' equity is being amortized to interest expense over the term of the senior unsecured
10
-year notes issued in September 2015.
Applied does not use derivative financial instruments for trading or speculative purposes. Derivative instruments and hedging activities, including foreign currency exchange contracts and interest rate swap agreements, are recognized on the balance sheet at fair value. Changes in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of any hedges, are recognized currently in earnings. All of Applied’s derivative financial instruments are recorded at their fair value in other current assets or in accounts payable and accrued expenses.
Hedges related to anticipated transactions are designated and documented at the inception of the hedge as cash flow hedges and foreign exchange derivatives are typically entered into once per month. Cash flow hedges are evaluated for effectiveness quarterly. The effective portion of the gain or loss on these hedges is reported as a component of AOCI in stockholders’ equity and is reclassified into earnings when the hedged transaction affects earnings. The majority of the after-tax net income or loss related to foreign exchange derivative instruments included in AOCI at
July 31, 2016
is expected to be reclassified into earnings within
12 months
. Changes in the fair value of currency forward exchange and option contracts due to changes in time value are excluded from the assessment of effectiveness. Both ineffective hedge amounts and hedge components excluded from the assessment of effectiveness are recognized in earnings. If the transaction being hedged is no longer probable to occur, or if a portion of any derivative is deemed to be ineffective, Applied promptly recognizes the gain or loss on the associated financial instrument in earnings. The amount recognized due to discontinuance of cash flow hedges that were probable not to occur by the end of the originally specified time period was not significant for the three and
nine
months ended
July 31, 2016
and
July 26, 2015
.
Additionally, forward exchange contracts are generally used to hedge certain foreign currency denominated assets or liabilities. These derivatives are typically entered into once per month and are not designated for hedge accounting treatment. Accordingly, changes in the fair value of these hedges are recorded in earnings to offset the changes in the fair value of the assets or liabilities being hedged.
In September 2013, Applied purchased foreign exchange option contracts to limit its foreign exchange risk associated with the then-anticipated business combination with Tokyo Electron Limited (TEL). These derivatives did not qualify for hedge accounting treatment and were marked to market at the end of each reporting period with gains and losses recorded as part of operating expenses. Due to the termination of the then-anticipated business combination with TEL on April 26, 2015, these foreign exchange option contracts were sold during the third quarter of fiscal 2015. During the three and
nine
months ended
July 26, 2015
, Applied recorded a loss of
$3 million
and a gain of
$89 million
, respectively, related to these contracts. The cash flow impact of these derivatives has been classified as operating cash flows in the Consolidated Condensed Statements of Cash Flows.
The fair values of foreign exchange derivative instruments at
July 31, 2016
and
October 25, 2015
were not material.
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 31, 2016
|
|
July 26, 2015
|
Effective Portion
|
|
Ineffective Portion and Amount
Excluded from
Effectiveness
Testing
|
|
Effective Portion
|
|
Ineffective Portion and Amount
Excluded from
Effectiveness
Testing
|
|
Location of Gain or
(Loss) Reclassified
from AOCI into
Income
|
|
Gain or
(Loss)
Recognized
in AOCI
|
|
Gain or (Loss)
Reclassified
from AOCI into
Income
|
|
Gain or (Loss)
Recognized in
Income
|
|
Gain or
(Loss)
Recognized
in AOCI
|
|
Gain or (Loss)
Reclassified
from AOCI into
Income
|
|
Gain or (Loss)
Recognized in
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Derivatives in Cash Flow Hedging Relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Cost of products sold
|
|
$
|
(26
|
)
|
|
$
|
(13
|
)
|
|
$
|
1
|
|
|
$
|
5
|
|
|
$
|
2
|
|
|
$
|
(1
|
)
|
Foreign exchange contracts
|
General and administrative
|
|
—
|
|
|
1
|
|
|
(1
|
)
|
|
—
|
|
|
3
|
|
|
—
|
|
Interest rate swaps
|
Interest expense
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
$
|
(8
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Total
|
|
|
$
|
(26
|
)
|
|
$
|
(13
|
)
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
$
|
5
|
|
|
$
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
July 31, 2016
|
|
July 26, 2015
|
Effective Portion
|
|
Ineffective Portion and Amount
Excluded from
Effectiveness
Testing
|
|
Effective Portion
|
|
Ineffective Portion and Amount
Excluded from
Effectiveness
Testing
|
|
Location of Gain or
(Loss) Reclassified
from AOCI into
Income
|
|
Gain or
(Loss)
Recognized
in AOCI
|
|
Gain or (Loss)
Reclassified
from AOCI into
Income
|
|
Gain or (Loss)
Recognized in
Income
|
|
Gain or
(Loss)
Recognized
in AOCI
|
|
Gain or (Loss)
Reclassified
from AOCI into
Income
|
|
Gain or (Loss)
Recognized in
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Derivatives in Cash Flow Hedging Relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Cost of products sold
|
|
$
|
(49
|
)
|
|
$
|
(21
|
)
|
|
$
|
1
|
|
|
$
|
10
|
|
|
$
|
15
|
|
|
$
|
(3
|
)
|
Foreign exchange contracts
|
General and administrative
|
|
—
|
|
|
(1
|
)
|
|
(2
|
)
|
|
—
|
|
|
(5
|
)
|
|
(1
|
)
|
Interest rate swaps
|
Interest expense
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(8
|
)
|
|
—
|
|
|
—
|
|
Total
|
|
|
$
|
(49
|
)
|
|
$
|
(23
|
)
|
|
$
|
(1
|
)
|
|
$
|
2
|
|
|
$
|
10
|
|
|
$
|
(4
|
)
|
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss)
Recognized in Income
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
Location of Gain or
(Loss) Recognized
in Income
|
|
July 31, 2016
|
|
July 26, 2015
|
|
July 31, 2016
|
|
July 26, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Derivatives Not Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
Gain on derivatives associated with terminated business combination
|
|
$
|
—
|
|
|
$
|
(3
|
)
|
|
$
|
—
|
|
|
$
|
89
|
|
Foreign exchange contracts
|
General and
administrative
|
|
(31
|
)
|
|
11
|
|
|
(67
|
)
|
|
31
|
|
Total
|
|
|
$
|
(31
|
)
|
|
$
|
8
|
|
|
$
|
(67
|
)
|
|
$
|
120
|
|
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
July 31, 2016
.
Entering into derivative contracts with banks exposes Applied to credit-related losses in the event of the banks’ nonperformance. However, Applied’s exposure is not considered significant.
|
|
Note 6
|
Accounts Receivable, Net
|
Applied has agreements with various financial institutions to sell accounts receivable and discount promissory notes from selected customers. Applied sells its accounts receivable 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
$57 million
of accounts receivable during the three and
nine
months ended
July 31, 2016
. Applied did not sell accounts receivable during the three and nine months ended
July 26, 2015
. Applied did not discount letters of credit issued by customers or discount promissory notes during the three and
nine
months ended
July 31, 2016
and
July 26, 2015
. 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 doubtful accounts of
$48 million
at
July 31, 2016
and
$49 million
at
October 25, 2015
. Applied sells its products principally to manufacturers within the semiconductor and display industries. While Applied believes that its allowance for doubtful accounts is adequate and represents its best estimate as of
July 31, 2016
, it continues to closely monitor customer liquidity and industry and economic conditions, which may result in changes to Applied’s estimates.
|
|
Note 7
|
Balance Sheet Detail
|
|
|
|
|
|
|
|
|
|
|
July 31,
2016
|
|
October 25,
2015
|
|
|
|
|
|
(In millions)
|
Inventories
|
|
|
|
Customer service spares
|
$
|
432
|
|
|
$
|
382
|
|
Raw materials
|
461
|
|
|
461
|
|
Work-in-process
|
392
|
|
|
271
|
|
Finished goods
|
741
|
|
|
719
|
|
|
$
|
2,026
|
|
|
$
|
1,833
|
|
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
Included in finished goods inventory are
$183 million
at
July 31, 2016
, and
$155 million
at
October 25, 2015
, 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
$205 million
and
$185 million
of evaluation inventory at
July 31, 2016
and
October 25, 2015
, respectively.
|
|
|
|
|
|
|
|
|
|
July 31,
2016
|
|
October 25,
2015
|
|
|
|
|
|
(In millions)
|
Other Current Assets
|
|
|
|
Deferred income taxes, net
1
|
$
|
—
|
|
|
$
|
403
|
|
Prepaid income taxes and income taxes receivable
|
76
|
|
|
127
|
|
Prepaid expenses and other
|
179
|
|
|
194
|
|
|
$
|
255
|
|
|
$
|
724
|
|
1
July 31, 2016
balance reflects the effects of the prospective adoption of the authoritative guidance in the first quarter of fiscal 2016, which required all deferred tax assets and liabilities, and any related valuation allowance to be classified as noncurrent on the balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
|
|
July 31,
2016
|
|
October 25,
2015
|
|
|
|
|
|
|
|
(In years)
|
|
(In millions)
|
Property, Plant and Equipment, Net
|
|
|
|
Land and improvements
|
|
|
$
|
159
|
|
|
$
|
157
|
|
Buildings and improvements
|
3-30
|
|
1,259
|
|
|
1,247
|
|
Demonstration and manufacturing equipment
|
3-5
|
|
1,017
|
|
|
920
|
|
Furniture, fixtures and other equipment
|
3-15
|
|
569
|
|
|
574
|
|
Construction in progress
|
|
|
54
|
|
|
48
|
|
Gross property, plant and equipment
|
|
|
3,058
|
|
|
2,946
|
|
Accumulated depreciation
|
|
|
(2,153
|
)
|
|
(2,054
|
)
|
|
|
|
$
|
905
|
|
|
$
|
892
|
|
|
|
|
|
|
|
|
|
|
|
July 31,
2016
|
|
October 25,
2015
|
|
|
|
|
|
(In millions)
|
Accounts Payable and Accrued Expenses
|
|
|
|
Accounts payable
|
$
|
717
|
|
|
$
|
658
|
|
Compensation and employee benefits
|
449
|
|
|
509
|
|
Warranty
|
139
|
|
|
126
|
|
Dividends payable
|
108
|
|
|
116
|
|
Income taxes payable
|
23
|
|
|
60
|
|
Other accrued taxes
|
45
|
|
|
58
|
|
Interest payable
|
35
|
|
|
36
|
|
Other
|
284
|
|
|
270
|
|
|
$
|
1,800
|
|
|
$
|
1,833
|
|
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
|
|
|
|
|
|
|
|
|
|
July 31,
2016
|
|
October 25,
2015
|
|
|
|
|
|
(In millions)
|
Customer Deposits and Deferred Revenue
|
|
|
|
Customer deposits
|
$
|
383
|
|
|
$
|
132
|
|
Deferred revenue
|
781
|
|
|
633
|
|
|
$
|
1,164
|
|
|
$
|
765
|
|
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.
|
|
|
|
|
|
|
|
|
|
July 31,
2016
|
|
October 25,
2015
|
|
|
|
|
|
(In millions)
|
Other Liabilities
|
|
|
|
Deferred income taxes
|
$
|
16
|
|
|
$
|
56
|
|
Income taxes payable
|
284
|
|
|
227
|
|
Defined and postretirement benefit plans
|
190
|
|
|
187
|
|
Other
|
83
|
|
|
85
|
|
|
$
|
573
|
|
|
$
|
555
|
|
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
|
|
Note 8
|
Goodwill, Purchased Technology and Other Intangible Assets
|
Goodwill and Purchased Intangible Assets
Applied’s methodology for allocating the purchase price relating to purchase acquisitions is determined through established and generally accepted valuation techniques. Goodwill is measured as the excess of the purchase price over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. Applied assigns assets acquired (including goodwill) and liabilities assumed to one or more reporting units as of the date of acquisition. Typically, acquisitions relate to a single reporting unit and thus do not require the allocation of goodwill to multiple reporting units. If the products obtained in an acquisition are assigned to multiple reporting units, the goodwill is distributed to the respective reporting units as part of the purchase price allocation process.
Goodwill and purchased intangible assets with indefinite useful lives are not amortized, but are reviewed for impairment annually during the fourth quarter of each fiscal year and whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The process of evaluating the potential impairment of goodwill and intangible assets requires significant judgment, especially in emerging markets. Applied regularly monitors current business conditions and considers other factors including, but not limited to, adverse industry or economic trends, restructuring actions and lower projections of profitability that may impact future operating results.
To test goodwill for impairment, Applied first performs a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, Applied then performs the two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. Under the two-step goodwill impairment test, Applied would in the first step compare the estimated fair value of each reporting unit to its carrying value. Applied determines the fair value of each of its reporting units based on a weighting of income and market approaches. If the carrying value of a reporting unit exceeds its fair value, Applied would then perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. If Applied determines that the carrying value of a reporting unit’s goodwill exceeds its implied fair value, Applied would record an impairment charge equal to the difference.
As of
July 31, 2016
, Applied's reporting units include Transistor and Interconnect Group, Patterning and Packaging Group, and Imaging and Process Control Group, which combine to form the Semiconductor Systems reporting segment, Applied Global Services, and Display and Adjacent Markets.
Effective in the third quarter of fiscal 2016, Applied began to account for its roll-to-roll web coating systems (previously included in the Energy and Environmental Solutions segment) and display upgrade equipment (previously included in the Applied Global Services segment) under the Display and Adjacent Markets segment (previously Display). See Note 14, Industry Segment Operations. These changes did not affect the Semiconductor Systems reporting segment.
Due to this change, Applied performed a goodwill impairment test for Applied Global Services and Display and Adjacent Markets immediately before the changes in the composition of the segments, reallocated
$31 million
of goodwill from Applied Global Services associated with the display upgrade equipment business to Display and Adjacent Markets based on the estimated relative fair value of each business unit and, then performed another goodwill impairment test for Applied Global Services and Display and Adjacent Markets after the change. There was no goodwill associated with the roll-to-roll web coating systems business. Prior period information in the tables below has been reclassified to conform to current presentation, which reflects the new organizational structure.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
In performing the goodwill impairment test, Applied utilized both the discounted cash flow method (weighted 75%) and the guideline company method (weighted 25%) to estimate the fair value of the reporting units. The estimates used in the impairment testing were consistent with the discrete forecasts that Applied uses to manage its business, and considered any significant developments that occurred during the quarter. Under the discounted cash flow method, cash flows beyond the discrete forecast were estimated using a terminal growth rate, which considered the long-term earnings growth rate specific to the reporting units. The estimated future cash flows were discounted to present value using each reporting unit's weighted average cost of capital. The weighted average cost of capital measures a reporting unit's cost of debt and equity financing weighted by the percentage of debt and equity in a reporting unit's target capital structure. In addition, the weighted average cost of capital was derived using both known and estimated market metrics, and was adjusted to reflect both the timing and risks associated with the estimated cash flows. The tax rate used in the discounted cash flow method was the median tax rate of comparable companies which reflected Applied's current international structure, which is consistent with the market participant perspective. Under the guideline company method, market multiples were applied to forecasted revenues and earnings before interest, taxes, depreciation and amortization. The market multiples used were consistent with comparable publicly-traded companies and considered each reporting unit's size, growth and profitability relative to its comparable companies. Based on Applied's analysis, the estimated fair value exceeded the carrying value for Applied Global Services and Display and Adjacent Markets segments before and after the change in their compositions, and therefore, the second step of the goodwill impairment test was not required.
The evaluation of goodwill and intangible assets for impairment requires the exercise of significant judgment. In the event of future changes in business conditions, Applied will be required to reassess and update its forecasts and estimates used in future impairment analyses. If the results of these future analyses are lower than current estimates, a material impairment charge may result at that time.
Details of goodwill and other indefinite-lived intangible assets as of
July 31, 2016
and
October 25, 2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2016
|
|
October 25, 2015
|
|
Goodwill
|
|
Other
Intangible
Assets
|
|
Total
|
|
Goodwill
|
|
Other
Intangible
Assets
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Semiconductor Systems
|
$
|
2,151
|
|
|
$
|
—
|
|
|
$
|
2,151
|
|
|
$
|
2,151
|
|
|
$
|
—
|
|
|
$
|
2,151
|
|
Applied Global Services
|
999
|
|
|
5
|
|
|
1,004
|
|
|
996
|
|
|
5
|
|
|
1,001
|
|
Display and Adjacent Markets
|
155
|
|
|
20
|
|
|
175
|
|
|
155
|
|
|
20
|
|
|
175
|
|
Carrying amount
|
$
|
3,305
|
|
|
$
|
25
|
|
|
$
|
3,330
|
|
|
$
|
3,302
|
|
|
$
|
25
|
|
|
$
|
3,327
|
|
From time to time, Applied makes acquisitions of and investments in companies related to existing or new markets for Applied.
Other intangible assets that are not subject to amortization consist primarily of in-process technology, which will be subject to amortization upon commercialization. The fair value assigned to in-process technology was determined using the income approach taking into account estimates and judgments regarding risks inherent in the development process, including the likelihood of achieving technological success and market acceptance. If an in-process technology project is abandoned, the acquired technology attributable to the project will be written-off.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
A summary of Applied's purchased technology and intangible assets is set forth below:
|
|
|
|
|
|
|
|
|
|
July 31,
2016
|
|
October 25,
2015
|
|
|
|
|
|
(In millions)
|
Purchased technology, net
|
$
|
450
|
|
|
$
|
575
|
|
Intangible assets - finite-lived, net
|
146
|
|
|
162
|
|
Intangible assets - indefinite-lived
|
25
|
|
|
25
|
|
Total
|
$
|
621
|
|
|
$
|
762
|
|
Finite-Lived Purchased Intangible Assets
Applied amortizes purchased intangible assets with finite lives using the straight-line method over the estimated economic lives of the assets, ranging from
1
to
15
years.
Applied evaluates long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset group may not be recoverable. Applied assesses the fair value of the assets based on the amount of the undiscounted future cash flow that the assets are expected to generate and recognizes an impairment loss when estimated undiscounted future cash flow expected to result from the use of the asset, plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When Applied identifies an impairment, Applied reduces the carrying value of the group of assets to comparable market values, when available and appropriate, or to its estimated fair value based on a discounted cash flow approach.
Intangible assets, such as purchased technology, are generally recorded in connection with a business acquisition. The value assigned to intangible assets is usually based on estimates and judgments regarding expectations for the success and life cycle of products and technology acquired. Applied evaluates the useful lives of its intangible assets each reporting period to determine whether events and circumstances require revising the remaining period of amortization. In addition, Applied reviews intangible assets for impairment when events or changes in circumstances indicate their carrying value may not be recoverable. Management considers such indicators as significant differences in actual product acceptance from the estimates, changes in the competitive and economic environments, technological advances, and changes in cost structure.
Details of finite-lived intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2016
|
|
October 25, 2015
|
|
Purchased
Technology
|
|
Other
Intangible
Assets
|
|
Total
|
|
Purchased
Technology
|
|
Other
Intangible
Assets
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Gross carrying amount:
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor Systems
|
$
|
1,449
|
|
|
$
|
252
|
|
|
$
|
1,701
|
|
|
$
|
1,449
|
|
|
$
|
252
|
|
|
$
|
1,701
|
|
Applied Global Services
|
28
|
|
|
44
|
|
|
72
|
|
|
28
|
|
|
44
|
|
|
72
|
|
Display and Adjacent Markets
|
113
|
|
|
36
|
|
|
149
|
|
|
113
|
|
|
36
|
|
|
149
|
|
Corporate and Other
|
2
|
|
|
9
|
|
|
11
|
|
|
1
|
|
|
9
|
|
|
10
|
|
Gross carrying amount
|
$
|
1,592
|
|
|
$
|
341
|
|
|
$
|
1,933
|
|
|
$
|
1,591
|
|
|
$
|
341
|
|
|
$
|
1,932
|
|
Accumulated amortization:
|
|
|
|
|
|
|
|
|
|
|
|
Semiconductor Systems
|
$
|
(1,001
|
)
|
|
$
|
(109
|
)
|
|
$
|
(1,110
|
)
|
|
$
|
(876
|
)
|
|
$
|
(95
|
)
|
|
$
|
(971
|
)
|
Applied Global Services
|
(27
|
)
|
|
(44
|
)
|
|
(71
|
)
|
|
(26
|
)
|
|
(44
|
)
|
|
(70
|
)
|
Display and Adjacent Markets
|
(113
|
)
|
|
(34
|
)
|
|
(147
|
)
|
|
(113
|
)
|
|
(34
|
)
|
|
(147
|
)
|
Corporate and Other
|
(1
|
)
|
|
$
|
(8
|
)
|
|
(9
|
)
|
|
(1
|
)
|
|
(6
|
)
|
|
(7
|
)
|
Accumulated amortization
|
$
|
(1,142
|
)
|
|
$
|
(195
|
)
|
|
$
|
(1,337
|
)
|
|
$
|
(1,016
|
)
|
|
$
|
(179
|
)
|
|
$
|
(1,195
|
)
|
Carrying amount
|
$
|
450
|
|
|
$
|
146
|
|
|
$
|
596
|
|
|
$
|
575
|
|
|
$
|
162
|
|
|
$
|
737
|
|
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
Details of amortization expense by segment were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 31,
2016
|
|
July 26,
2015
|
|
July 31,
2016
|
|
July 26,
2015
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Semiconductor Systems
|
$
|
47
|
|
|
$
|
45
|
|
|
$
|
139
|
|
|
$
|
132
|
|
Applied Global Services
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
Display and Adjacent Markets
|
—
|
|
|
1
|
|
|
—
|
|
|
3
|
|
Corporate & Other
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
Total
|
$
|
47
|
|
|
$
|
46
|
|
|
$
|
142
|
|
|
$
|
138
|
|
Amortization expense was charged to the following categories:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 31,
2016
|
|
July 26,
2015
|
|
July 31,
2016
|
|
July 26,
2015
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Cost of products sold
|
$
|
42
|
|
|
$
|
40
|
|
|
$
|
126
|
|
|
$
|
120
|
|
Research, development and engineering
|
—
|
|
|
1
|
|
|
1
|
|
|
1
|
|
Marketing and selling
|
5
|
|
|
5
|
|
|
15
|
|
|
15
|
|
General and administrative
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Total
|
$
|
47
|
|
|
$
|
46
|
|
|
$
|
142
|
|
|
$
|
138
|
|
As of
July 31, 2016
, future estimated amortization expense is expected to be as follows:
|
|
|
|
|
|
Amortization
Expense
|
|
(In millions)
|
2016 (remaining 3 months)
|
$
|
47
|
|
2017
|
187
|
|
2018
|
185
|
|
2019
|
44
|
|
2020
|
39
|
|
Thereafter
|
94
|
|
Total
|
$
|
596
|
|
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
|
|
Note 9
|
Borrowing Facilities and Debt
|
Applied has credit facilities for unsecured borrowings in various currencies of up to
$1.6 billion
, of which
$1.5 billion
is comprised of a committed revolving credit agreement with a group of banks that is scheduled to expire in
September 2020
. This agreement provides for borrowings in United States dollars at interest rates keyed to one of various benchmark rates selected by Applied for each advance, plus a margin based on Applied's public debt rating and includes financial and other covenants. Remaining credit facilities in the amount of approximately
$76 million
are with Japanese banks. Applied’s ability to borrow under these facilities is subject to bank approval at the time of the borrowing request, and any advances will be at rates indexed to the banks’ prime reference rate denominated in Japanese yen.
No
amounts were outstanding under any of these facilities at both
July 31, 2016
and
October 25, 2015
, and Applied has not utilized these credit facilities.
In September 2015, Applied issued senior unsecured notes in the aggregate principal amount of
$1.8 billion
and used a portion of the net proceeds to redeem
$400 million
in principal amount of its
2.650%
senior notes due in 2016 at a redemption price of
$405 million
in November 2015. After adjusting for the carrying value of debt issuance costs and discounts, Applied recorded a
$5 million
loss on the prepayment of the
$400 million
debt, which is included in interest and other income, net in the Consolidated Condensed Statement of Operations for the first quarter of fiscal 2016.
In October 2015, a wholly-owned foreign subsidiary of Applied entered into a short-term loan agreement with multiple lenders, under which it borrowed
$800 million
to facilitate the return of capital to Applied. In January 2016, the
$800 million
aggregated principal amount of the loan was repaid.
Debt outstanding as of
July 31, 2016
and
October 25, 2015
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Amount
|
|
|
|
|
|
July 31,
2016
|
|
October 25,
2015
|
|
Effective
Interest Rate
|
|
Interest
Pay Dates
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
|
|
|
Short-term debt:
|
|
|
|
|
|
|
|
2.650% Senior Notes Due 2016
|
$
|
—
|
|
|
$
|
400
|
|
|
2.666%
|
|
June 15, December 15
|
Other debt
|
—
|
|
|
800
|
|
|
1.0% - 1.25%
|
|
|
Total short-term debt
|
—
|
|
|
1,200
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
7.125% Senior Notes Due 2017
|
200
|
|
|
200
|
|
|
7.190%
|
|
April 15, October 15
|
2.625% Senior Notes Due 2020
|
600
|
|
|
600
|
|
|
2.640%
|
|
April 1, October 1
|
4.300% Senior Notes Due 2021
|
750
|
|
|
750
|
|
|
4.326%
|
|
June 15, December 15
|
3.900% Senior Notes Due 2025
|
700
|
|
|
700
|
|
|
3.944%
|
|
April 1, October 1
|
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
|
|
3,350
|
|
|
3,350
|
|
|
|
|
|
Total unamortized discount
|
(7
|
)
|
|
(8
|
)
|
|
|
|
|
Total long-term debt
|
3,343
|
|
|
3,342
|
|
|
|
|
|
Total debt
|
$
|
3,343
|
|
|
$
|
4,542
|
|
|
|
|
|
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
|
|
Note 10
|
Stockholders’ Equity, Comprehensive Income and Share-Based Compensation
|
Accumulated Other Comprehensive Income (Loss)
Changes in the components of AOCI, net of tax, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain on Investments, Net
|
|
Unrealized Gain (Loss) on Derivative Instruments Qualifying as Cash Flow Hedges
|
|
Defined and Postretirement Benefit Plans
|
|
Cumulative Translation Adjustments
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Balance at October 25, 2015
|
$
|
14
|
|
|
$
|
(15
|
)
|
|
$
|
(105
|
)
|
|
$
|
14
|
|
|
$
|
(92
|
)
|
Other comprehensive income (loss) before reclassifications
|
21
|
|
|
(31
|
)
|
|
—
|
|
|
—
|
|
|
(10
|
)
|
Amounts reclassified out of AOCI
|
—
|
|
|
15
|
|
|
—
|
|
|
—
|
|
|
15
|
|
Other comprehensive income (loss), net of tax
|
21
|
|
|
(16
|
)
|
|
—
|
|
|
—
|
|
|
5
|
|
Balance at July 31, 2016
|
$
|
35
|
|
|
$
|
(31
|
)
|
|
$
|
(105
|
)
|
|
$
|
14
|
|
|
$
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gain on Investments, Net
|
|
Unrealized Gain (Loss) on Derivative Instruments Qualifying as Cash Flow Hedges
|
|
Defined and Postretirement Benefit Plans
|
|
Cumulative Translation Adjustments
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Balance at October 26, 2014
|
$
|
24
|
|
|
$
|
—
|
|
|
$
|
(105
|
)
|
|
$
|
5
|
|
|
$
|
(76
|
)
|
Other comprehensive income (loss) before reclassifications
|
(3
|
)
|
|
1
|
|
|
(45
|
)
|
|
—
|
|
|
(47
|
)
|
Amounts reclassified out of AOCI
|
—
|
|
|
(6
|
)
|
|
2
|
|
|
9
|
|
|
5
|
|
Other comprehensive income (loss), net of tax
|
(3
|
)
|
|
(5
|
)
|
|
(43
|
)
|
|
9
|
|
|
(42
|
)
|
Balance at July 26, 2015
|
$
|
21
|
|
|
$
|
(5
|
)
|
|
$
|
(148
|
)
|
|
$
|
14
|
|
|
$
|
(118
|
)
|
The tax effects on net income of amounts reclassified from AOCI for the three and
nine
months ended
July 31, 2016
and
July 26, 2015
were not material.
Stock Repurchase Program
On June 9, 2016, Applied's Board of Directors approved a new common stock repurchase program authorizing up to
$2.0 billion
in repurchases, which followed the completion of a
$3.0 billion
common stock repurchase program approved on April 26, 2015. At
July 31, 2016
,
$1.95 billion
remained available for future stock repurchases under the new repurchase program.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
The following table summarizes Applied’s stock repurchases for the three and
nine
months ended
July 31, 2016
and
July 26, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 31,
2016
|
|
July 26,
2015
|
|
July 31,
2016
|
|
July 26,
2015
|
|
|
|
|
|
|
|
|
|
(in millions, except per share amount)
|
|
|
Shares of common stock repurchased
|
9.0
|
|
|
32.1
|
|
|
89.5
|
|
|
32.1
|
|
Cost of stock repurchased
|
$
|
196
|
|
|
$
|
625
|
|
|
$
|
1,721
|
|
|
$
|
625
|
|
Average price paid per share
|
$
|
21.88
|
|
|
$
|
19.47
|
|
|
$
|
19.22
|
|
|
$
|
19.47
|
|
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 June 2016, March 2016 and December 2015, Applied's Board of Directors declared quarterly cash dividends in the amount of
$0.10
per share. Dividends paid during the
nine
months ended
July 31, 2016
and
July 26, 2015
totaled
$336 million
and
$368 million
, respectively. Applied currently anticipates that cash dividends will continue to be paid on a quarterly basis, although the declaration of any future cash dividend is at the discretion of the Board of Directors and will depend on Applied’s financial condition, results of operations, capital requirements, business conditions and other factors, as well as a determination by the Board of Directors that cash dividends are in the best interests of Applied’s stockholders.
Share-Based Compensation
Applied has a stockholder-approved equity plan, the Employee Stock Incentive Plan, which permits grants to employees of share-based awards, including stock options, restricted stock, restricted stock units, performance shares and performance units. In addition, the plan provides for the automatic grant of restricted stock units to non-employee directors and permits the grant of share-based awards to non-employee directors and consultants. Share-based awards made under the plan may be subject to accelerated vesting under certain circumstances in the event of a change in control of Applied. Applied also has
two
Employee Stock Purchase Plans,
one
generally for United States employees and a second for employees of international subsidiaries (collectively, ESPP), which enable eligible employees to purchase Applied common stock.
During the three and
nine
months ended
July 31, 2016
and
July 26, 2015
, Applied recognized share-based compensation expense related to stock options, ESPP shares, restricted stock, restricted stock units, performance shares and performance units. The effect of share-based compensation on the results of operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 31,
2016
|
|
July 26,
2015
|
|
July 31,
2016
|
|
July 26,
2015
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Cost of products sold
|
$
|
14
|
|
|
$
|
14
|
|
|
$
|
46
|
|
|
$
|
43
|
|
Research, development, and engineering
|
18
|
|
|
17
|
|
|
56
|
|
|
52
|
|
Marketing and selling
|
7
|
|
|
6
|
|
|
20
|
|
|
19
|
|
General and administrative
|
9
|
|
|
9
|
|
|
28
|
|
|
27
|
|
Total share-based compensation
|
$
|
48
|
|
|
$
|
46
|
|
|
$
|
150
|
|
|
$
|
141
|
|
The cost associated with share-based awards that are subject solely to time-based vesting requirements, less expected forfeitures, is recognized over the awards’ service period for the entire award on a straight-line basis. The cost associated with performance-based equity awards is recognized for each tranche over the service period, based on an assessment of the likelihood that the applicable performance goals will be achieved.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
At
July 31, 2016
, Applied had
$297 million
in total unrecognized compensation expense, net of estimated forfeitures, related to grants of share-based awards and shares issued under Applied’s ESPP, which will be recognized over a weighted average period of
2.6
years. At
July 31, 2016
, there were
107 million
shares available for grants of share-based awards under the Employee Stock Incentive Plan, and an additional
26 million
shares available for issuance under the ESPP.
Restricted Stock Units, Restricted Stock, Performance Shares and Performance Units
A summary of the changes in restricted stock units, restricted stock, performance shares and performance units outstanding under Applied’s equity compensation plans during the
nine
months ended
July 31, 2016
is presented below:
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
|
|
|
(In millions, except per share amounts)
|
Outstanding at October 25, 2015
|
27
|
|
|
$
|
16.41
|
|
Granted
|
11
|
|
|
$
|
18.36
|
|
Vested
|
(11
|
)
|
|
$
|
14.16
|
|
Canceled
|
(2
|
)
|
|
$
|
17.54
|
|
Outstanding at July 31, 2016
|
25
|
|
|
$
|
18.16
|
|
At
July 31, 2016
,
1 million
additional performance-based awards could be earned upon certain levels of achievement of Applied's total shareholder return relative to a peer group at a future date.
During the first quarter of fiscal 2016, certain executive officers were granted awards that are subject to the achievement of specified performance goals (performance-based awards). These performance-based 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. These performance-based awards require the achievement of a targeted level of adjusted annual operating profit margin. Additional shares become eligible for time-based vesting if Applied achieves certain levels of total shareholder return (TSR) relative to a peer group, comprised of companies in the Standard & Poor's 500 Information Technology Index, measured at the end of a
two
-year period.
The fair value of these performance-based awards is estimated on the date of grant and assumes that the specified performance goals will be achieved. If the goals are achieved, these awards vest over a specified remaining service period of generally
four years
, provided that the grantee remains employed by Applied through each scheduled vesting date. If the performance goals are not met as of the end of the performance period, no compensation expense is recognized and any previously recognized compensation expense is reversed. The expected cost of each award is reflected over the service period and is 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. Applied issued
3 million
shares during the
nine
months ended
July 31, 2016
and
2 million
shares during the
nine
months ended
July 26, 2015
. 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 31, 2016
|
|
July 26, 2015
|
ESPP:
|
|
|
|
Dividend yield
|
2.07%
|
|
1.56%
|
Expected volatility
|
29.8%
|
|
31.4%
|
Risk-free interest rate
|
0.49%
|
|
0.07%
|
Expected life (in years)
|
0.5
|
|
0.5
|
Weighted average estimated fair value
|
$4.47
|
|
$6.04
|
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
Note 11 Employee Benefit Plans
Applied sponsors a number of employee benefit plans, including defined benefit plans of certain foreign subsidiaries, and a plan that provides certain medical and vision benefits to eligible retirees. A summary of the components of net periodic benefit costs of these defined and postretirement benefit plans for the three and nine months ended
July 31, 2016
and
July 26, 2015
is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
July 31,
2016
|
|
July 26,
2015
|
|
July 31,
2016
|
|
July 26,
2015
|
|
|
|
|
|
|
|
(In millions)
|
Service cost
|
$
|
3
|
|
|
$
|
4
|
|
|
$
|
10
|
|
|
$
|
11
|
|
Interest cost
|
3
|
|
|
3
|
|
|
10
|
|
|
10
|
|
Expected return on plan assets
|
(4
|
)
|
|
(4
|
)
|
|
(12
|
)
|
|
(12
|
)
|
Amortization of actuarial loss
|
2
|
|
|
2
|
|
|
4
|
|
|
5
|
|
Curtailment and settlement gain
|
—
|
|
|
—
|
|
|
(5
|
)
|
|
(1
|
)
|
Net periodic benefit cost
|
$
|
4
|
|
|
$
|
5
|
|
|
$
|
7
|
|
|
$
|
13
|
|
Note 12 Income Taxes
Applied’s effective tax rates for the third quarters of fiscal 2016 and 2015 were
10.5 percent
and
12.3 percent
, respectively. Applied's effective tax rates for the first nine months of fiscal 2016 and 2015 were
12.7 percent
and
13.3 percent
, respectively. The effective tax rates for the third quarter and first nine months of fiscal 2016 were lower than in the same periods in the prior year primarily due to changes in the geographical composition of income, partially offset by resolutions and changes related to income tax liabilities for prior years. The effective tax rate for the first nine months of fiscal 2015 included the effect of an adjustment primarily to correct an error in the recognition of cost of sales in the U.S. related to intercompany sales. While this error had no impact on Applied’s consolidated cost of sales, it resulted in overstating profitability in the U.S. and the provision for income taxes, income taxes payable and other tax balance sheet accounts in each year since fiscal 2010. The impact of the adjustment to the first nine months of fiscal 2015 was a decrease in provision for income taxes of $
35 million
which was determined to be immaterial on the originating periods and fiscal 2015. Accordingly, a restatement was not considered necessary. In addition, the effective tax rates for the first nine months of fiscal 2015 included the tax benefit from acquisition costs that became deductible as a result of the termination of the proposed business combination with TEL. The effective tax rates for the first nine months of fiscal 2016 and 2015 both included the tax benefit from the reinstatement of the U.S. federal research and development tax credit during these periods retroactive to its expiration in December of the prior years.
During the next twelve months, it is reasonably possible that existing liabilities for unrecognized tax benefits could be reduced by up to
$15 million
as a result of the lapse of statutes of limitation.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
|
|
Note 13
|
Warranty, Guarantees and Contingencies
|
Warranty
Changes in the warranty reserves are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 31,
2016
|
|
July 26,
2015
|
|
July 31,
2016
|
|
July 26,
2015
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Beginning balance
|
$
|
121
|
|
|
$
|
123
|
|
|
$
|
126
|
|
|
$
|
113
|
|
Warranties issued
|
35
|
|
|
29
|
|
|
91
|
|
|
98
|
|
Change in reserves related to preexisting warranty
|
7
|
|
|
(2
|
)
|
|
(9
|
)
|
|
(4
|
)
|
Consumption of reserves
|
(24
|
)
|
|
(25
|
)
|
|
(69
|
)
|
|
(82
|
)
|
Ending balance
|
$
|
139
|
|
|
$
|
125
|
|
|
$
|
139
|
|
|
$
|
125
|
|
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
July 31, 2016
, the maximum potential amount of future payments that Applied could be required to make under these guarantee agreements was approximately
$50 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
July 31, 2016
, Applied has provided parent guarantees to banks for approximately
$100 million
to cover these arrangements.
Legal Matters
Korea Criminal Proceedings
In 2010, the Seoul Eastern District Court began hearings on indictments brought by the Seoul Prosecutor's Office for the Eastern District of Korea (the Prosecutor's Office) alleging that employees of several companies improperly received and used confidential information belonging to Samsung Electronics Co., Ltd. (Samsung), a major Applied customer based in Korea. The individuals charged included the former head of Applied Materials Korea (AMK), who at the time of the indictment was a vice president of Applied Materials, Inc., and certain other AMK employees. Neither Applied nor any of its subsidiaries was named as a party to the proceedings. Hearings on these matters concluded in November 2012 and the Court issued its decision on February 7, 2013. As part of the ruling,
nine
AMK employees (including the former head of AMK) were acquitted of all charges, while
one
AMK employee was found guilty on some of the charges and received a suspended jail sentence. The Prosecutor's Office and various individuals appealed the matter to the High Court. On June 20, 2014, the High Court rendered its decision, finding all defendants not guilty, including all
ten
AMK employees. The prosecutor has appealed the High Court decision to the Korean Supreme Court.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
Other Matters
From time to time, Applied receives notification from third parties, including customers and suppliers, seeking indemnification, litigation support, payment of money or other actions by Applied in connection with claims made against them. In addition, from time to time, Applied receives notification from third parties claiming that Applied may be or is infringing or misusing their intellectual property or other rights. Applied also is subject to various other legal proceedings and claims, both asserted and unasserted, that arise in the ordinary course of business.
Although the outcome of the above-described matters, claims and proceedings cannot be predicted with certainty, Applied does not believe that any will have a material effect on its consolidated financial condition or results of operations.
|
|
Note 14
|
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
July 31, 2016
and the distinctive nature of each segment. Future changes to this internal financial structure may result in changes to Applied’s reportable segments.
Effective in the third quarter of fiscal 2016, Applied began to account for its roll-to-roll web coating systems (previously included in the Energy and Environmental Solutions segment) and display upgrade equipment (previously included in the Applied Global Services segment) under the Display and Adjacent Markets segment (previously Display). As a result of these changes, Applied's solar business (previously in the Energy and Environmental Solutions segment) is included in Corporate and Other as it did not meet the threshold as a separate reportable segment. Results for prior periods have been recast to conform to the current presentation, which reflects the new organizational structure.
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 solar products.
The Display and Adjacent Markets segment includes products for manufacturing liquid crystal displays (LCDs), organic light-emitting diodes (OLEDs), upgrades and roll-to-roll web coating systems and other display technologies for TVs, 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.
Applied derives the segment results directly from its internal management reporting system. The accounting policies Applied uses to derive reportable segment results are substantially the same as those used for external reporting purposes. Management measures the performance of each reportable segment based upon several metrics including orders, net sales and operating income. Management uses these results to evaluate the performance of, and to assign resources to, each of the reportable segments.
The Corporate and Other category includes revenues from products, as well as costs of products sold, for fabricating solar photovoltaic cells and modules, and certain operating expenses that are not allocated to its reportable segments and are managed separately at the corporate level. These operating expenses include costs related to share-based compensation; certain management, finance, legal, human resources, and research, development and engineering functions provided at the corporate level; and unabsorbed information technology and occupancy. In addition, Applied does not allocate to its reportable segments restructuring and asset impairment charges and any associated adjustments related to restructuring actions, unless these actions pertain to a specific reportable segment. Segment operating income also excludes interest income/expense and other financial charges and income taxes. Management does not consider the unallocated costs in measuring the performance of the reportable segments.
APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED 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 31, 2016:
|
|
|
|
|
|
|
|
Semiconductor Systems
|
$
|
1,786
|
|
|
$
|
511
|
|
|
$
|
4,746
|
|
|
$
|
1,140
|
|
Applied Global Services
|
657
|
|
|
175
|
|
|
1,896
|
|
|
489
|
|
Display and Adjacent Markets
|
313
|
|
|
63
|
|
|
754
|
|
|
142
|
|
Corporate and Other
|
65
|
|
|
(153
|
)
|
|
132
|
|
|
(396
|
)
|
Total
|
$
|
2,821
|
|
|
$
|
596
|
|
|
$
|
7,528
|
|
|
$
|
1,375
|
|
July 26, 2015:
|
|
|
|
|
|
|
|
Semiconductor Systems
|
$
|
1,635
|
|
|
$
|
411
|
|
|
$
|
4,641
|
|
|
$
|
1,092
|
|
Applied Global Services
|
646
|
|
|
162
|
|
|
1,836
|
|
|
470
|
|
Display and Adjacent Markets
|
185
|
|
|
35
|
|
|
709
|
|
|
163
|
|
Corporate and Other
|
24
|
|
|
(212
|
)
|
|
105
|
|
|
(455
|
)
|
Total
|
$
|
2,490
|
|
|
$
|
396
|
|
|
$
|
7,291
|
|
|
$
|
1,270
|
|
The reconciling items included in Corporate and Other were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
July 31,
2016
|
|
July 26,
2015
|
|
July 31,
2016
|
|
July 26,
2015
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Unallocated net sales
|
$
|
65
|
|
|
$
|
24
|
|
|
$
|
132
|
|
|
$
|
105
|
|
Unallocated cost of products sold and expenses
|
(170
|
)
|
|
(186
|
)
|
|
(378
|
)
|
|
(458
|
)
|
Share-based compensation
|
(48
|
)
|
|
(46
|
)
|
|
(150
|
)
|
|
(141
|
)
|
Certain items associated with terminated business combination
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(50
|
)
|
Gain (loss) on derivatives associated with terminated business combination
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
89
|
|
Total
|
$
|
(153
|
)
|
|
$
|
(212
|
)
|
|
$
|
(396
|
)
|
|
$
|
(455
|
)
|
The following customers accounted for at least
10 percent
of Applied’s net sales for the
nine
months ended
July 31, 2016
, which were for products in multiple reportable segments.
|
|
|
|
|
Percentage of Net Sales
|
Taiwan Semiconductor Manufacturing Company Limited
|
13
|
%
|
Micron Technology, Inc.
|
13
|
%
|
Samsung Electronics Co., Ltd.
|
12
|
%
|
Intel Corporation
|
11
|
%
|