UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January ~~28, 2018~~27, 2019


¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-06920

Applied Materials, Inc.

(Exact name of registrant as specified in its charter)



Delaware	94-1655526
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

3050 Bowers Avenue,	95052-8039
P.O. Box 58039 Santa Clara, California (Address of principal executive offices)	(Zip Code)

(408) 727-5555

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer þ		Accelerated filer ¨
Non-accelerated filer ¨~~(Do not check if a smaller reporting company)~~		Smaller reporting company ¨
		Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

Number of shares outstanding of the issuer’s common stock as of January ~~28, 2018: 1,050,687,501~~27, 2019: 949,392,609

APPLIED MATERIALS, INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JANUARY ~~28, 2018~~27, 2019

TABLE OF CONTENTS



		Page
	PART I. FINANCIAL INFORMATION
Item 1:	Financial Statements (Unaudited)	3
	Consolidated Condensed Statements of Operations for the Three Months Ended January ~~28, 2018~~27, 2019 and January ~~29, 2017~~28, 2018	3
	Consolidated Condensed Statements of Comprehensive Income for the Three Months Ended January ~~28, 2018~~27, 2019 and January ~~29, 2017~~28, 2018	4
	Consolidated Condensed Balance Sheets atas of January ~~28, 2018~~27, 2019 and October ~~29, 2017~~28, 2018	5
	Consolidated Condensed Statement of Stockholders’ Equity for the Three Months Ended January ~~28, 2018~~27, 2019 and January ~~29, 2017~~28, 2018	6
	Consolidated Condensed Statements of Cash Flows for the Three Months Ended January ~~28, 2018~~27, 2019 and January ~~29, 2017~~28, 2018	7
	Notes to Consolidated Condensed Financial Statements	8
Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3236
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	4953
Item 4:	Controls and Procedures	4953

	PART II. OTHER INFORMATION
Item 1:	Legal Proceedings	5054
Item 1A:	Risk Factors	5054
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	6165
Item 6:	Exhibits	6266
	Signatures	6367

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(In millions, except per share amounts)


	Three Months Ended				Three Months Ended
	January 28, 2018		January 29, 2017		January 27, 2019		January 28, 2018

	(Unaudited)				(Unaudited)
Net sales	$	4,204	$	3,278	$	3,753	$	4,205
Cost of products sold	2,284		1,833		2,088		2,265
Gross profit	1,920		1,445		1,665		1,940
Operating expenses:
Research, development and engineering	488		417		516		489
Marketing and selling	126		118		131		126
General and administrative	110		103		110		110
Total operating expenses	724		638		757		725
Income from operations	1,196		807		908		1,215
Interest expense	59		38		60		59
Interest and other income, net	25		2		40		27
Income before income taxes	1,162		771		888		1,183
Provision for income taxes	1,027		68		117		1,018
Net income	$	135	$	703	$	771	$	165
Earnings per share:
Basic and diluted	$	0.13	$	0.65
Basic					$	0.81	$	0.16
Diluted					$	0.80	$	0.15
Weighted average number of shares:
Basic	1,056		1,078		957		1,056
Diluted	1,071		1,089		965		1,071

See accompanying Notes to Consolidated Condensed Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)


	Three Months Ended						Three Months Ended
	January 28, 2018			January 29, 2017			January 27, 2019			January 28, 2018

	(Unaudited)						(Unaudited)
Net income	$	135		$	703		$	771		$	165
Other comprehensive income (loss), net of tax:
Change in unrealized net gain on investments	6			1
Change in unrealized gain (losses) on available-for-sale investments							5			6
Change in unrealized net loss on derivative instruments	(19		)	15			(17		)	(19		)
Change in defined and postretirement benefit plans	(2		)	(7		)	—			(2		)
Other comprehensive (loss) income, net of tax	(15		)	9
Other comprehensive income (loss), net of tax							(12		)	(15		)
Comprehensive income	$	120		$	712		$	759		$	150

See accompanying Notes to Consolidated Condensed Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

(In millions)


	January 28, 2018			October 29, 2017			January 27, 2019			October 28, 2018


ASSETS
Current assets:
Cash and cash equivalents	$	6,799		$	5,010		$	3,192		$	3,440
Short-term investments	655			2,266			520			590
Accounts receivable, net	2,182			2,338			2,444			2,323
Inventories	3,125			2,930			3,703			3,721
Other current assets	268			374			426			530
Total current assets	13,029			12,918			10,285			10,604
Long-term investments	1,203			1,143			1,588			1,568
Property, plant and equipment, net	1,195			1,066			1,456			1,407
Goodwill	3,368			3,368			3,368			3,368
Purchased technology and other intangible assets, net	362			412			199			213
Deferred income taxes and other assets	506			512			2,026			473
Total assets	$	19,663		$	19,419		$	18,922		$	17,633

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	2,381		$	2,450		$	2,420		$	2,721
Customer deposits and deferred revenue	2,018			1,665
Contract liabilities							1,356			1,201
Total current liabilities	4,399			4,115			3,776			3,922
Income taxes payable	1,158			392			1,303			1,254
Long-term debt	5,305			5,304			5,310			5,309
Other liabilities	295			259			324			303
Total liabilities	11,157			10,070			10,713			10,788
Stockholders’ equity:
Common stock	11			11			9			10
Additional paid-in capital	6,980			7,056			7,265			7,274
Retained earnings	18,288			18,258			23,032			20,880
Treasury stock	(16,694		)	(15,912		)	(21,943		)	(21,194		)
Accumulated other comprehensive loss	(79		)	(64		)	(154		)	(125		)
Total stockholders’ equity	8,506			9,349			8,209			6,845
Total liabilities and stockholders’ equity	$	19,663		$	19,419		$	18,922		$	17,633

Amounts as of January ~~28, 2018~~27, 2019 are unaudited. Amounts as of October ~~29, 2017~~28, 2018 are derived from the October ~~29, 2017~~28, 2018 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			Common Stock					Additional Paid-In Capital			Retained Earnings			Treasury Stock						Accumulated Other Comprehensive Income (Loss)				Total
Three Months Ended January 28, 2018	Shares		Amount					Shares				Amount																					Retained Earnings									Accumulated Other Comprehensive Income (Loss)				Total
Three Months Ended January 27, 2019																									Shares		Amount			Additional Paid-In Capital	Additional Paid-In Capital			Retained Earnings			Shares		Amount				Accumulated Other Comprehensive Income (Loss)				Total
					Additional Paid-In Capital																	Total												Retained Earnings									Accumulated Other Comprehensive Income (Loss)				Total
	(Unaudited)																								(Unaudited)
Balance at October 29, 2017	1,060		$	11	$	7,056			Retained Earnings	$	18,258		917		$	(15,912	)	Accumulated Other Comprehensive Income (Loss)		$	(64	)		$	9,349
Balance as of October 28, 2018																									967		$	10		$	Additional Paid-In Capital	7,274		$	20,880		1,019		$	(21,194	)		$	(125	)		$	6,845
Adoption of new accounting standards (a)																									—		—			—			1,570			—		—				(17		)		1,553
Net income	—		—		—				135			—		—				—				135			—		—			—			771			—		—				—				771
Other comprehensive loss, net of tax	—		—		—				—			—		—				(15		)		(15		)	—		—			—			—			—		—				(12		)		(12		)
Dividends	—		—		—				(105		)	—		—				—				(105		)
Dividends declared ($0.20 per common share)																									—		—			—			(189		)	—		—				—				(189		)
Share-based compensation	—		—		65				—			—		—				—				65			—		—			65			—			—		—				—				65
Issuance under stock plans	5		—		(141		)		—			—		—				—				(141		)	4		—			(74		)	—			—		—				—				(74		)
Common stock repurchases	(15	)	—		—				—			15		(782		)		—				(782		)	(22	)	(1		)	—			—			22		(749		)		—				(750		)
Balance at January 28, 2018	1,050		$	11	$	6,980			$	18,288		932		$	(16,694	)		$	(79	)		$	8,506
Balance as of January 27, 2019																									949		$	9		$	7,265		$	23,032		1,041		$	(21,943	)		$	(154	)		$	8,209

(a) - Represents the reclassification adjustment related to the adoption of Accounting Standard Update (ASU) 2016-01 Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities and ASU 2016-16 Income Tax (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. See Note 1.

Common Stock
Additional
Paid-In
Capital

Retained
Earnings
Treasury Stock
Accumulated
Other
Comprehensive
Income (Loss)
Total
Three Months Ended January 29, 2017 Shares Amount Shares Amount

(Unaudited)
Balance at October 30, 2016 1,078
$ 11
$ 6,809
$ 15,252
889
$ (14,740 ) $ (115 ) $ 7,217
Net income —
—
—
703
—
—
—
703
Other comprehensive income, net of tax —
—
—
—
—
—
9
9
Dividends —
—
—
(108 ) —
—
—
(108 )
Share-based compensation —
—
54
—
—
—
—
54
Issuance under stock plans, net of tax benefit of $44 and other 6
—
(58 ) —
—
—
—
(58 )
Common stock repurchases (4 ) —
—
—
4
(130 ) —
(130 )
Balance at January 29, 2017 1,080
$ 11
$ 6,805
$ 15,847
893
$ (14,870 ) $ (106 ) $ 7,687



	Common Stock				Additional Paid-In Capital			Retained Earnings (b)			Treasury Stock				Accumulated Other Comprehensive Income (Loss)			Total
Three Months Ended January 28, 2018	Shares		Amount		Additional Paid-In Capital			Retained Earnings (b)			Shares	Amount			Accumulated Other Comprehensive Income (Loss)			Total

	(Unaudited)
Balance as of October 29, 2017	1,060		$	11	$	7,056		$	18,539		917	$	(15,912	)	$	(64	)	$	9,630
Net income	—		—		—			165			—	—			—			165
Other comprehensive loss, net of tax	—		—		—			—			—	—			(15		)	(15		)
Dividends declared ($0.10 per common share)	—		—		—			(105		)	—	—			—			(105		)
Share-based compensation	—		—		65			—			—	—			—			65
Issuance under stock plans	5		—		(141		)	—			—	—			—			(141		)
Common stock repurchases	(15	)	—		—			—			15	(782		)	—			(782		)
Balance as of January 28, 2018	1,050		$	11	$	6,980		$	18,599		932	$	(16,694	)	$	(79	)	$	8,817

(b) - Retained earnings balance as of October 29, 2017 included adjustment of $281 million related to the adoption of the standard related to revenue recognition.

See accompanying Notes to Consolidated Condensed Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In millions)


	Three Months Ended						Three Months Ended
	January 28, 2018			January 29, 2017			January 27, 2019			January 28, 2018

	(Unaudited)						(Unaudited)
Cash flows from operating activities:
Net income	$	135		$	703		$	771		$	165
Adjustments required to reconcile net income to cash provided by operating activities:
Depreciation and amortization	119			97			88			119
Share-based compensation	65			54			65			65
Deferred income taxes	41			25			41			32
Other	—			9			1			—
Changes in operating assets and liabilities:
Accounts receivable	156			(89		)	(121		)	156
Inventories	(195		)	(231		)	18			(211		)
Other current and non-current assets	78			(42		)	76			78
Accounts payable and accrued expenses	(125		)	(56		)	(313		)	(127		)
Customer deposits and deferred revenue	353			293
Contract liabilities							155			350
Income taxes payable	807			15			41			807
Other liabilities	32			14			12			32
Cash provided by operating activities	1,466			792			834			1,466
Cash flows from investing activities:
Capital expenditures	(203		)	(64		)	(133		)	(203		)
Cash paid for acquisitions, net of cash acquired	(5		)	—			—			(5		)
Proceeds from sales and maturities of investments	1,944			286			464			1,944
Purchases of investments	(384		)	(589		)	(397		)	(384		)
Cash provided by (used in) investing activities	1,352			(367		)	(66		)	1,352
Cash flows from financing activities:
Common stock repurchases	(782		)	(130		)	(750		)	(782		)
Tax withholding payments for vested equity awards	(141		)	(102		)	(74		)	(141		)
Payments of dividends to stockholders	(106		)	(108		)	(192		)	(106		)
Cash used in financing activities	(1,029		)	(340		)	(1,016		)	(1,029		)
Increase in cash and cash equivalents	1,789			85
Increase (decrease) in cash and cash equivalents							(248		)	1,789
Cash and cash equivalents — beginning of period	5,010			3,406			3,440			5,010
Cash and cash equivalents — end of period	$	6,799		$	3,491		$	3,192		$	6,799
Supplemental cash flow information:
Cash payments for income taxes	$	78		$	35		$	34		$	78
Cash refunds from income taxes	$	40		$	2		$	8		$	40
Cash payments for interest	$	34		$	34		$	34		$	34

See accompanying Notes to Consolidated Condensed Financial Statements.

APPLIED MATERIALS, INC.

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 ~~29, 2017~~28, 2018 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 ~~29, 2017 (2017~~28, 2018 (2018 Form 10-K). Applied’s results of operations for the three months ended January ~~28, 2018~~27, 2019 are not necessarily indicative of future operating results. Applied’s fiscal year ends on the last Sunday in October of each year. Fiscal ~~2018~~2019 and ~~2017~~2018 each contain 52 weeks, and the first three months of fiscal ~~2018~~2019 and ~~2017~~2018 each contained 13 weeks.

~~Certain prior year amounts~~At the beginning of the first quarter of fiscal 2019, Applied adopted the new revenue recognition standard using the full retrospective method. All financial statements and disclosures have been ~~reclassified~~recast to ~~conform to current year presentation.~~comply with this new guidance. See "Recent Accounting Pronouncements - Accounting Standards Adopted" section below for further information.

Use of Estimates

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

~~Revenue Recognition~~Changes to Significant Accounting Policies

Applied ~~recognizes revenue when all four revenue recognition criteria~~adopted various amended guidance during the first quarter of fiscal 2019. The following accounting policies 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 completionupdated as part 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 deliveryadoption of the ~~deferred elements.~~ new standards.

Allowance for Doubtful Accounts

Applied ~~limits~~maintains an allowance for doubtful accounts for estimated losses resulting from the ~~amount~~inability of ~~revenue recognition for delivered elements~~its customers to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified return or adjustment. In cases where Applied has sold products that have been demonstrated to meet product specifications prior to shipment, Applied believes that at the time of delivery, it has an enforceable claim to amounts recognized as revenue. Spare parts revenue is generally recognized upon shipment, and services revenue is generally recognized over the period that the services are provided.

When a sales arrangement contains multiple elements, such as hardware and services and/or software products, Applied allocates revenue to each element based on a selling price hierarchy. The selling price for a deliverablemake required payments. This allowance is based on historical experience, credit evaluations, specific customer collection history and any customer-specific issues Applied has identified. Changes in circumstances, such as an unexpected material adverse change in a major customer’s ability to meet its ~~vendor specific objective evidence (VSOE) if available, third party evidence (TPE) if VSOE is not available,~~financial obligation to Applied or ~~estimated selling price (ESP) if neither VSOE nor TPE is available.~~its payment trends, may require Applied ~~generally utilizes~~to further adjust its estimates of the ~~ESP~~recoverability of amounts due to Applied. Bad debt expense and any reversals are recorded in marketing and selling expenses in the ~~nature~~Consolidated Condensed Statement of ~~its~~Operations.

Sales and Value Added Taxes

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

Shipping and Handling Costs

Applied accounts for shipping and handling activities related to contracts with customers as costs to fulfill our promise to transfer the associated products. ~~In multiple element arrangements where more-than-incidental software deliverables~~Accordingly, amounts billed for shipping and handling costs are ~~included,~~recorded as a component of net sales and costs as a component of cost of products sold.

Warranty

Applied provides for the estimated cost of warranty when revenue is ~~allocated to each separate unit of accounting for each of~~recognized. Estimated warranty costs are determined by analyzing specific product, current and historical configuration statistics and regional warranty support costs. Applied’s warranty obligation is affected by product and component failure rates, material usage and labor costs incurred in correcting product failures during the ~~non-software deliverables, and~~warranty period. If actual warranty costs differ substantially from Applied’s estimates, revisions 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.

estimated warranty liability would be required.

~~Table~~

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

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

Revenue Recognition from Contracts with Customers

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

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

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

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

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

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

The incremental costs to obtain a contract are not material.

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

Investments

All of Applied’s investments, except equity investments held in privately-held companies, are classified as available-for-sale at the respective balance sheet dates. Investments classified as available-for-sale are measured and recorded at fair value with changes in fair value recorded in the accompanying Consolidated Statements of Operations. Interest earned on cash and investments, as well as realized gains and losses on sale of securities, are included in interest and other income, net in the accompanying Consolidated Condensed Statements of Operations.

Equity investments without readily determinable fair value are measured at cost, less impairment, adjusted by observable price changes. Adjustments resulting from impairments and observable prices changes will be recorded in the accompanying Consolidated Condensed Statements of Operations.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Recent Accounting Pronouncements

Accounting Standards Adopted

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

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

Income Taxes: Intra-Entity Asset Transfers. In October 2016, the FASB issued authoritative guidance that changed the tax accounting for intra-entity transfers of assets other than inventory. After adoption, the income tax effect of intra-entity transfers is realized at the time of the transfer instead of over the life of the asset. Applied adopted this guidance in the first quarter of fiscal 2019 using a modified retrospective approach, resulting in a cumulative effect adjustment to retained earnings. Upon adoption, deferred tax assets increased by $1.6 billion related to the estimated income tax effects of future amortization of intra-entity intangible asset transfers, with an offset to retained earnings.

Classification of Certain Cash Receipts and Cash Payments. In August 2016, the FASB issued authoritative guidance which addresses classification of certain cash receipts and cash payments related to the statement of cash flows. Effective in the first quarter of fiscal 2019, Applied adopted the authoritative guidance retrospectively. The adoption of this guidance did not have a significant impact and only impacts disclosures in Applied' s consolidated condensed statements of cash flow.

Financial Instruments: Classification and Measurement. In ~~July 2015,~~January 2016, the ~~Financial Accounting Standard Board (FASB)~~FASB issued authoritative guidance that requires ~~inventory~~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 ~~lower~~investments qualify for a new measurement alternative. For financial liabilities measured at fair value, the change in fair value caused by a change in instrument-specific credit risk will be required to be presented separately in other comprehensive income. Applied adopted this standard in the first quarter of fiscal year 2019. Upon adoption, Applied elected to apply the measurement alternative for equity investments without readily determinable fair value. Under the alternative, Applied measures investments without readily determinable fair value at 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~~less impairment, adjusted by observable price changes prospectively to all equity investments that exist as of adoption and will reassess at each reporting period whether an investment qualifies for the alternative. Adopting this standard required Applied to record a cumulative net increase to retained earnings of approximately $21 million with the corresponding $17 million decrease in accumulated other ~~inventory including~~comprehensive income, net of tax, for the unrealized gains and losses associated with equity investments with readily determinable fair values, as the authoritative guidance is required to be adopted prospectively. Going forward, the impact of this new standard could result in volatility in Applied's consolidated statement of operations.

Revenue Recognition. In May 2014, the FASB issued authoritative guidance that requires revenue recognition to depict the transfer of promised goods or services to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those ~~measured using first-in, first-out (FIFO)~~goods or ~~the average cost method.~~services and requires certain additional disclosures. Applied adopted this authoritative guidance in the first quarter of fiscal ~~2018 prospectively~~2019 using the full retrospective method, which required restating each prior reporting period presented. Refer to ~~measurement~~the Impacts to Previously Reported Results section below for the impact of ~~inventory after~~ the ~~effective date. The~~adoption of the standard to Applied’s consolidated financial statements.

For all periods prior to the date of initial adoption of this ~~guidance~~standard, Applied elected to use the practical expedient pursuant to which Applied excluded disclosures of both transaction prices allocated to remaining performance obligations and when these performance obligations are expected to be recognized as revenue.

The most significant impact from the adoption of this standard is fewer constraints on revenue recognition upon shipment of manufacturing equipment.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Impacts to Previously Reported Results

Adoption of the standards related to revenue recognition and retirement benefits impacted Applied’s Consolidated Condensed Statement of Operations for the first quarter of fiscal 2018 as follows:



	Three Months Ended
	January 28, 2018
	As Previously Reported		Revenue Recognition Adjustment			Retirement Benefit Adjustment			As Adjusted
	(In millions, except per share amounts)

Net sales	$	4,204	$	1		$	—		$	4,205
Cost of products sold	$	2,284	$	(20	)	$	1		$	2,265
Gross profit	$	1,920	$	21		$	(1	)	$	1,940
Research, development and engineering	$	488	$	—		$	1		$	489
Interest and other income, net	$	25	$	—		$	2		$	27
Income before income taxes	$	1,162	$	21		$	(2	)	$	1,183
Provision for income taxes	$	1,027	$	(9	)	$	—		$	1,018
Net income	$	135	$	30		$	—		$	165
Earnings per share: basic	$	0.13	$	0.03		$	—		$	0.16
Earnings per share: diluted	$	0.13	$	0.02		$	—		$	0.15

Adoption of the retirement benefits standard did not have any impact on Applied’s Consolidated Balance Sheet or Consolidated Condensed Statement of Cash Flows.

Adoption of the standard related to revenue recognition impacted Applied’s Consolidated Balance Sheet at October 28, 2018 as follows:



	October 28, 2018
	As Previously Reported		Adjustment			As Adjusted
	(In millions)

Accounts receivable, net	$	2,565	$	(242	)	$	2,323
Inventories	$	3,722	$	(1	)	$	3,721
Other current assets	$	430	$	100		$	530
Deferred income taxes and other assets	$	470	$	3		$	473
Customer deposits and deferred revenue	$	1,347	$	(1,347	)	$	—
Contract liabilities	$	—	$	1,201		$	1,201
Retained earnings	$	20,874	$	6		$	20,880

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Adoption of the revenue recognition standard did not impact cash provided by or used in investing or financing activities in Applied’s consolidated Condensed Statement of Cash Flows for the first quarter of fiscal 2018. The adoption did not impact total cash provided by operating activities, however it impacted individual components of cash provided by operating activities for the first quarter of fiscal 2018 as follows:



	Three Months Ended
	January 28, 2018
	As Previously Reported			Adjustment			As Adjusted
	(In millions)

Cash flows from operating activities:
Net income	$	135		$	30		$	165
Adjustments required to reconcile net income to cash provided by operating activities:
Deferred income taxes	$	41		$	(9	)	$	32
Changes in operating assets and liabilities:
Inventories	$	(195	)	$	(16	)	$	(211	)
Accounts payable and accrued expenses	$	(125	)	$	(2	)	$	(127	)
Contract liabilities	$	353		$	(3	)	$	350

Accounting Standards Not Yet Adopted

Retirement Benefits: Changes to the Disclosure Requirements for Defined Benefit and other Postretirement Plans. In August 2018, the FASB issued authoritative guidance that adds, removes, and clarifies disclosure requirements for defined benefit and other postretirement plans. This authoritative guidance will be effective for Applied in fiscal 2021 on a ~~material impact~~retrospective basis, with early adoption permitted. Applied is currently evaluating the effect of this new guidance on Applied’s consolidated financial statements.

~~Share-Based Compensation.~~Fair Value Measurement: Changes to the Disclosure Requirements for Fair Value Measurement. In ~~March 2016,~~August 2018, the FASB issued authoritative guidance that ~~simplifies several aspects~~eliminates, amends, and adds disclosure requirements for fair value measurements. While the amended and new disclosure requirements primarily relate to Level 3 fair value measurements, the authoritative guidance also eliminates disclosure requirements related to the amount and reasons for transfer between Level 1 and Level 2 of fair value hierarchy, policy for timing of transfer between levels, and the ~~accounting~~valuation processes for ~~share-based payment transactions, including forfeitures, income tax, and classification on the statement of cash flows.~~Level 3 fair value measurements. The authoritative guidance will be effective for Applied ~~adopted this guidance~~ in the first quarter of fiscal ~~2018. Upon~~2020. Early adoption ~~Applied elected to continue to estimate forfeitures expected to occur to determine~~is permitted only for the ~~amount~~removal and amendment of ~~compensation costs~~certain disclosures, while the new disclosures requirements are to be ~~recognized in each period. The~~applied prospectively. Applied is currently evaluating the effect of this new standard also required recognition of excess tax benefits in the provision for income taxes rather than additional paid-in capital prospectively. In the first quarter of fiscal 2018, Applied recognized excess tax benefits of $51 million in the Consolidated Condensed Statements of Operations. Additionally, Applied elected to apply the presentation requirements for cash flows related to excess tax benefits and employee taxes paid for withheld shares retrospectively. Adopting this guidance ~~increased cash provided by operating activities by a net $146 million with a corresponding net increase in cash used in financing activities for the three months ended January 29, 2017.~~on Applied’s consolidated financial statements.

~~Accounting Standards Not Yet Adopted~~

Derivatives and Hedging.In August 2017, the FASB issued authoritative guidance that modifies the recognition and presentation of hedge accounting to better align an entity’s risk management strategies and financial reporting for hedging relationships. The authoritative guidance expands the application of hedge accounting for non-financial and financial risk components and eases certain hedge effectiveness assessment requirements. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2020, with early adoption permitted. Applied is currently evaluating the effect of this new guidance on Applied’s consolidated financial statements.

~~Share-Based Compensation: Modification Accounting.~~ In May 2017, the FASB issued an update to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award changes as a result of the change in terms or conditions. This authoritative guidance will be applied prospectively to awards modified following adoption and will be effective for Applied in the first quarter of fiscal 2019 with early adoption permitted. The impact of the adoption of this guidance will depend on whether the Company makes any future modifications of share-based payment awards.

Receivables: Nonrefundable Fees and Other Costs. In March 2017, the FASB issued authoritative guidance that will shorten the amortization period for certain callable debt securities held at a premium to the earliest call date to more closely align with expectations incorporated in market pricing. This authoritative guidance will be effective for Applied in the first quarter of fiscal 2020 on a modified retrospective basis, with early adoption permitted. Applied is currently evaluating the impact of adopting this new accounting guidance on Applied’s consolidated financial statements.

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

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

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

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

~~Income Taxes: Intra-Entity Asset Transfers.~~ In October 2016, the FASB issued authoritative guidance that requires entities to recognize at the transaction date the income tax effects of intercompany asset transfers other than inventory. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2019. Applied is currently evaluating the effect of this new guidance on Applied’s consolidated financial statements.

~~Classification of Certain Cash Receipts and Cash Payments.~~ In August 2016, a new authoritative guidance was issued which addresses classification of certain cash receipts and cash payments related to the statement of cash flows. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2019. The adoption of this guidance is not expected to have a significant impact on Applied’s consolidated financial statements.

Financial Instruments: Credit Losses. In June 2016, the FASB issued authoritative guidance that modifies the impairment model for certain financial assets by requiring use of an expected loss methodology, which will result in more timely recognition of credit losses. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2021. Early adoption is permitted beginning in the first quarter of fiscal 2020. Applied is currently evaluating the effect of this new guidance on Applied’s consolidated financial statements.

Leases. In February 2016, the FASB issued authoritative guidance for lease accounting, which requires lessees to recognize lease assets and liabilities on the balance sheet for certain lease arrangements that are classified as operating leases under the previous standard, and to provide for enhanced disclosures. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2020 and should be applied using a modified retrospective approach. Early adoption is permitted. Applied is currently evaluating the effect of this new guidance on Applied’s consolidated financial statements.

~~Financial Instruments: Classification and Measurement.~~ In January 2016, the FASB issued authoritative guidance that requires equity investments that do not result in consolidation, and are not accounted for under the equity method, to be measured at fair value, and requires recognition of any changes in fair value in net income unless the investments qualify for a new practicability exception. For financial liabilities measured at fair value, the change in fair value caused by a change in instrument-specific credit risk will be required to be presented separately in other comprehensive income. 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.

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

In fiscal 2016, Applied established a project steering committee and cross-functional implementation team to identify potential differences that would result from applying the requirements of the new standard to Applied’s revenue contracts. In addition, the implementation team is also responsible for identifying and implementing changes to business processes, systems and controls to support recognition and disclosure under the new standard. While the Company’s evaluation of the impact of this new guidance is not complete, Applied currently expects the timing of revenue recognition for certain products to be earlier than under current revenue recognition guidance. Applied will continue to complete its evaluation of the effect of this new guidance on Applied’s financial position, results of operations and its ongoing financial reporting, and its preliminary assessments are subject to change.

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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 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				Three Months Ended
	January 28, 2018		January 29, 2017		January 27, 2019		January 28, 2018

	(In millions, except per share amounts)				(In millions, except per share amounts)
Numerator:
Net income	$	135	$	703	$	771	$	165
Denominator:
Weighted average common shares outstanding	1,056		1,078		957		1,056
Effect of dilutive stock options, restricted stock units and employee stock purchase plan shares	15		11
Effect of weighted dilutive stock options, restricted stock units and employee stock purchase plan shares					8		15
Denominator for diluted earnings per share	1,071		1,089		965		1,071
Basic and diluted earnings per share	$	0.13	$	0.65
Potentially dilutive securities	—		—
Basic earnings per share					$	0.81	$	0.16
Diluted earnings per share					$	0.80	$	0.15
Potentially weighted dilutive securities					8		—

Potentially weighted dilutive securities attributable to outstanding stock options and restricted stock units are excluded from the calculation of diluted earnings per share where the combined exercise price and average unamortized fair value are greater than the average market price of Applied common stock, and therefore their inclusion would be anti-dilutive. Prior to the first quarter of fiscal 2018 and the adoption of the Accounting Standards Update (“ASU”) 2016-09 related to share-based compensation, the assumed tax benefits upon the exercise of options and vesting of restricted stock units were also included in this calculation.

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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:~~investments:


January 28, 2018	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
January 27, 2019									Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value

	(In millions)								(In millions)
Cash	$	1,469	$	—	$	—	$	1,469	$	1,016	$	—	$	—	$	1,016
Cash equivalents:
Money market funds	3,766		—		—		3,766		1,911		—		—		1,911
Non-U.S. government securities*	40		—		—		40
Municipal securities	836		—		—		836
Commercial paper, corporate bonds and medium-term notes	688		—		—		688		265		—		—		265
Total Cash equivalents	5,330		—		—		5,330		2,176		—		—		2,176
Total Cash and Cash equivalents	$	6,799	$	—	$	—	$	6,799	$	3,192	$	—	$	—	$	3,192
Short-term and long-term investments:
U.S. Treasury and agency securities	$	255	$	—	$	1	$	254	$	375	$	—	$	—	$	375
Non-U.S. government securities*	10		—		—		10		9		—		—		9
Municipal securities	452		—		2		450		402		1		2		401
Commercial paper, corporate bonds and medium-term notes	563		—		2		561		628		1		3		626
Asset-backed and mortgage-backed securities	397		—		3		394		565		—		3		562
Total fixed income securities	1,677		—		8		1,669		1,979		2		8		1,973
Publicly traded equity securities	22		93		1		114		15		20		4		31
Equity investments in privately-held companies	75		—		—		75		104		—		—		104
Total equity investments									119		20		4		135
Total short-term and long-term investments	$	1,774	$	93	$	9	$	1,858	$	2,098	$	22	$	12	$	2,108

Total Cash, Cash equivalents and Investments	$	8,573	$	93	$	9	$	8,657	$	5,290	$	22	$	12	$	5,300

_________________________

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

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


October 29, 2017	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
October 28, 2018									Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value

	(In millions)								(In millions)
Cash	$	1,346	$	—	$	—	$	1,346	$	1,489	$	—	$	—	$	1,489
Cash equivalents:
Money market funds	2,658		—		—		2,658		1,599		—		—		1,599
U.S. Treasury and agency securities	15		—		—		15
Non-U.S. government securities*	55		—		—		55
Municipal securities	341		—		—		341
Commercial paper, corporate bonds and medium-term notes	595		—		—		595		352		—		—		352
Total Cash equivalents	3,664		—		—		3,664		1,951		—		—		1,951
Total Cash and Cash equivalents	$	5,010	$	—	$	—	$	5,010	$	3,440	$	—	$	—	$	3,440
Short-term and long-term investments:
U.S. Treasury and agency securities	$	667	$	—	$	1	$	666	$	335	$	—	$	2	$	333
Non-U.S. government securities*	161		—		—		161		10		—		—		10
Municipal securities	1,007		—		—		1,007		399		—		4		395
Commercial paper, corporate bonds and medium-term notes	1,024		1		1		1,024		705		—		3		702
Asset-backed and mortgage-backed securities	379		—		1		378		595		—		4		591
Total fixed income securities	3,238		1		3		3,236		2,044		—		13		2,031
Publicly traded equity securities	22		78		1		99		17		25		4		38
Equity investments in privately-held companies	74		—		—		74		89		—		—		89
Total equity investments									106		25		4		127
Total short-term and long-term investments	$	3,334	$	79	$	4	$	3,409	$	2,150	$	25	$	17	$	2,158

Total Cash, Cash equivalents and Investments	$	8,344	$	79	$	4	$	8,419	$	5,590	$	25	$	17	$	5,598

_________________________

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

Canada.

Maturities of Investments

The following table summarizes the contractual maturities of Applied’s investments atas of January ~~28, 2018~~27, 2019:


	Cost		Estimated Fair Value		Cost		Estimated Fair Value

	(In millions)				(In millions)
Due in one year or less	$	606	$	606	$	429	$	428
Due after one through five years	674		668		985		983
No single maturity date**	494		584		684		697
	$	1,774	$	1,858
Total					$	2,098	$	2,108

_________________________

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

~~Table of Contents~~

~~APPLIED MATERIALS, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)~~

Gains and Losses on Investments

During the three months ended January ~~28, 2018~~27, 2019 and January ~~29, 2017,~~28, 2018, gross realized gains and losses on investments for these periods were not material.

At As of January 27, 2019, and October 28, 2018, ~~and October 29, 2017,~~ gross unrealized losses related to Applied’s debt investment portfolio were not material. Applied regularly reviews its debt investment portfolio to identify and evaluate investments that have indications of possible impairment. 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 MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Applied determined that the gross unrealized losses on its marketable fixed-income securities atas of January 27, 2019 and January 28, 2018 ~~and January 29, 2017~~ were temporary in nature and therefore it did not recognize any impairment of its marketable fixed-income securities during the three months ended January ~~28, 2018~~27, 2019 or January ~~29, 2017.~~28, 2018. Impairment charges on equity investments in privately-held companies during the three months ended January ~~28, 2018~~27, 2019 and January ~~29, 2017~~28, 2018 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~~equity investments are recognized in other income (expense), net in the Consolidated Condensed Statement of Operations. Prior to the adoption of Accounting Standards Update (ASU) 2016-01 Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities in the first quarter of fiscal 2019, these unrealized gains and temporary losses were 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~~

The components of ~~operations.~~gain (losses) on equity investments for the three months ended January 27, 2019 were as follows:



	Three Months Ended
	January 27, 2019

	(In millions)
Publicly traded equity securities
Unrealized gain	$	6
Unrealized loss	(2		)
Gain on sales	1
Loss on sales	—
Equity investments in privately-held companies
Unrealized gain	7
Unrealized loss	(1		)
Gain on sales	1
Loss on sales	—
Total gain on equity investments, net	$	12

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


Note 4	Fair Value Measurements

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

Fair Value Hierarchy

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

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

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

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

Applied’s investments consist primarily of debt securities that are classified as available-for-sale and recorded at their fair values. In determining the fair value of investments, Applied uses pricing information from pricing services that value securities based on quoted market prices and models that utilize observable market inputs. In the event a fair value estimate is unavailable from a pricing service, Applied generally obtains non-binding price quotes from brokers. Applied then reviews the information provided by the pricing services or brokers to determine the fair value of its short-term and long-term investments. In addition, to validate pricing information obtained from pricing services, Applied periodically performs supplemental analysis on a sample of securities. Applied reviews any significant unanticipated differences identified through this analysis to determine the appropriate fair value. As of January 27, 2019, substantially all of Applied’s available-for-sale, short-term and long-term investments were recognized at fair value that was determined based upon observable inputs.

Applied’s equity investments with readily determinable values consist of publicly traded equity securities. Upon adoption of ASU 2016-01, 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. Applied adopted the standard using a modified retrospective transition method, and reclassified the unrealized gains on these equity investments of $21 million to retained earnings as a cumulative-effect adjustment on the condensed consolidated balance sheets.

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~~ ~~January 28, 2018, substantially all of Applied’s available-for-sale, short-term and long-term investments were recognized at fair value that was determined based upon observable inputs.~~

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Assets Measured at Fair Value on a Recurring Basis

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


	January 28, 2018						October 29, 2017						January 27, 2019						October 28, 2018
	Level 1		Level 2		Total		Level 1		Level 2		Total		Level 1		Level 2		Total		Level 1		Level 2		Total

	(In millions)												(In millions)
Assets:
Available-for-sale debt security investments
Money market funds	$	3,766	$	—	$	3,766	$	2,658	$	—	$	2,658	$	1,911	$	—	$	1,911	$	1,599	$	—	$	1,599
U.S. Treasury and agency securities	227		27		254		192		489		681		343		32		375		297		36		333
Non-U.S. government securities	—		50		50		—		216		216		—		9		9		—		10		10
Municipal securities	—		1,286		1,286		—		1,348		1,348		—		401		401		—		395		395
Commercial paper, corporate bonds and medium-term notes	—		1,249		1,249		—		1,619		1,619		—		891		891		—		1,054		1,054
Asset-backed and mortgage-backed securities	—		394		394		—		378		378		—		562		562		—		591		591
Total available-for-sale debt security investments													$	2,254	$	1,895	$	4,149	$	1,896	$	2,086	$	3,982
Equity investments with readily determinable values
Publicly traded equity securities	114		—		114		99		—		99		$	31	$	—	$	31	$	38	$	—	$	38
Total equity investments with readily determinable values													$	31	$	—	$	31	$	38	$	—	$	38

Total	$	4,107	$	3,006	$	7,113	$	2,949	$	4,050	$	6,999	$	2,285	$	1,895	$	4,180	$	1,934	$	2,086	$	4,020

There were no transfers between Level 1 and Level 2 fair value measurements during the three months ended January ~~28, 2018~~27, 2019 or January ~~29, 2017.~~28, 2018. Applied did not have any financial assets measured at fair value on a recurring basis within Level 3 fair value measurements as of January ~~28, 2018~~27, 2019 or October ~~29, 2017.~~28, 2018.

Assets and Liabilities without Readily Determinable Values Measured ~~at Fair Value~~ on a Non-recurring Basis

~~Equity~~Applied’s equity investments without readily determinable values consist of equity investments in privately-held ~~companies are~~companies. Upon adoption of ASU 2016-01, Applied elected the measurement alternative, defined as cost, less impairments, adjusted for subsequent observable price changes on a prospective basis for certain equity investments without readily determinable fair values and is required to account for any subsequent observable changes in fair value within the statements of operations. Applied adopted the guidance prospectively, effective October 29, 2018, and there was no impact to Applied’s condensed consolidated financial statements. Prior to the adoption of ASU 2016-01, these investments were generally accounted for under the cost method of ~~accounting and~~accounting. These investments are periodically assessed for ~~other-than-temporary~~ impairment when an event or circumstance indicates that ~~an other-than-temporary~~a 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 ~~January 28, 2018~~, equity investments in privately-held companies totaled $75 million, of which $65 million of these investments were accounted for under the cost method of accounting and $10 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 29, 2017, equity investments in privately-held companies totaled $74 million, of which $65 million of these investments were accounted for under the cost method of accounting and $9 million of investments had been measured at fair value on a non-recurring basis within Level 3 fair value measurements due to an other-than-temporary decline in value. Impairment charges on equity investments in privately-held companies during the three months ended January ~~28, 2018~~27, 2019 and January ~~29, 2017~~28, 2018 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. AtAs of January ~~28, 2018 and October 29, 2017,~~27, 2019, the ~~carrying~~aggregate principal amount of long-term debt was ~~$5.3~~$5.4 billion and the estimated fair value was ~~$5.8~~$5.5 billion. As of October 28, 2018, the aggregate principal and estimated fair value amounts of long-term debt were both $5.4 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 910 of the Notes to the Consolidated Condensed Financial Statements for further detail of existing debt.

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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 2017, Applied entered into and settled interest rate lock agreements, with a total notional amount of $700 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 March 2017. The $14 million loss from the settlement of the interest rate lock agreement, which was included in AOCI in stockholders’ equity, is being amortized to interest expense over the term of the senior unsecured 10-year notes issued in March 2017.

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

Hedges related to anticipated transactions are designated and documented at the inception of the hedge as cash flow hedges and foreign exchange derivatives are typically entered into once per month. Cash flow hedges are evaluated for effectiveness quarterly. The effective portion of the gain or loss on these hedges is reported as a component of AOCI in stockholders’ equity and is reclassified into earnings when the hedged transaction affects earnings. The majority of the after-tax net income or loss related to foreign exchange derivative instruments included in AOCI atas of January ~~28, 2018~~27, 2019 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 months ended January ~~28, 2018~~27, 2019 and January ~~29, 2017.~~28, 2018.

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

The fair values of foreign exchange derivative instruments atas of January ~~28, 2018~~27, 2019 and October ~~29, 2017~~28, 2018 were not material.

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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																		Three Months Ended
		January 28, 2018									January 29, 2017									January 27, 2019									January 28, 2018
		Effective Portion						Ineffective Portion and Amount Excluded from Effectiveness Testing			Effective Portion					Ineffective Portion and Amount Excluded from Effectiveness Testing				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)	Gain or (Loss)			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			Location of Gain or (Loss)	Gain or (Loss)			Gain or (Loss) Reclassified from AOCI into Income			Gain or (Loss) Recognized in Income			Gain or (Loss)			Gain or (Loss) Reclassified from AOCI into Income			Gain or (Loss) Recognized in Income

		(In millions)																		(In millions)
Derivatives in Cash Flow Hedging Relationships
Foreign exchange contracts	AOCI	$	(18	)	$	—		$	—		$	16	$	—		$	—		AOCI	$	(16	)	$	—		$	—		$	(18	)	$	—		$	—
Foreign exchange contracts	Cost of products sold	—			8			2			—		(4		)	(2		)	Cost of products sold	—			12			5			—			8			2
Foreign exchange contracts	General and administrative	—			(1		)	(2		)	—		(3		)	—			General and administrative	—			(5		)	(1		)	—			(1		)	(2		)
Interest rate contracts	Interest expense	—			(1		)	—			—		(1		)	—			Interest expense	—			—			—			—			(1		)	—
Total		$	(18	)	$	6		$	—		$	16	$	(8	)	$	(2	)		$	(16	)	$	7		$	4		$	(18	)	$	6		$	—


		Amount of Gain or (Loss) Recognized in Income						Amount of Gain or (Loss) Recognized in Income
		Three Months Ended						Three Months Ended
	Location of Gain or (Loss) Recognized in Income	January 28, 2018			January 29, 2017		Location of Gain or (Loss) Recognized in Income	January 27, 2019			January 28, 2018

		(In millions)						(In millions)
Derivatives Not Designated as Hedging Instruments
Foreign exchange contracts	General and administrative	$	(8	)	$	31	General and administrative	$	(10	)	$	(8	)
Total		$	(8	)	$	31		$	(10	)	$	(8	)

Credit Risk Contingent Features

If Applied’s credit rating were to fall below investment grade, it would be in violation of credit risk contingent provisions of the derivative instruments discussed above, and certain counterparties to the derivative instruments could request immediate payment on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a net liability position was immaterial as of January ~~28, 2018.~~27, 2019.

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.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


Note 6	Accounts Receivable, Net

Applied sold ~~$376~~$464 million and ~~$63~~$376 million of accounts receivable during the three months ended January ~~28, 2018~~27, 2019 and January ~~29, 2017,~~28, 2018, respectively. Applied did not discount letters of credit issued by customers or discount promissory notes during the three months ended January ~~28, 2018~~27, 2019 and January ~~29, 2017.~~28, 2018. 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 ~~$34~~$33 million atas of January ~~28, 2018~~27, 2019 and October ~~29, 2017.~~28, 2018. 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 January ~~28, 2018,~~27, 2019, it continues to closely monitor customer liquidity and industry and economic conditions, which may result in changes to Applied’s estimates.


Note 7	Contract Balances

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

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

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



	January 27, 2019		October 28, 2018
	(In millions)

Contract assets	$	100	$	99
Contract liabilities	$	1,356	$	1,201

The increase in net contract liabilities was primarily due to netted contract assets being classified to accounts receivable as conditions for payments were met.

During the three months ended January 27, 2019, Applied recognized revenue of approximately $288 million related to contract liabilities at October 28, 2018.

There were no impairment losses recognized on Applied's accounts receivables and contract assets during the three months ended January 27, 2019.

As of January 27, 2019, the amount of remaining unsatisfied performance obligations on contracts with an original estimated duration of one year or more was approximately $232 million, which is expected to be recognized within the next 36 months. Applied has elected the available practical expedient to exclude the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


Note 78	Balance Sheet Detail


	January 28, 2018		October 29, 2017		January 27, 2019		October 28, 2018

	(In millions)				(In millions)
Inventories
Customer service spares	$	626	$	595	$	1,093	$	989
Raw materials	712		603		1,018		1,020
Work-in-process	524		468		526		505
Finished goods	1,263		1,264		1,066		1,207
	$	3,125	$	2,930	$	3,703	$	3,721

Included in finished goods inventory are ~~$317~~$8 million atas of January ~~28, 2018~~27, 2019, and $~~331~~19 million atas of October ~~29, 2017,~~28, 2018, 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 ~~$280~~$341 million and ~~$281~~$350 million of evaluation inventory atas of January ~~28, 2018~~27, 2019 and October ~~29, 2017,~~28, 2018, respectively.


	January 28, 2018		October 29, 2017		January 27, 2019		October 28, 2018

	(In millions)				(In millions)
Other Current Assets
Prepaid income taxes and income taxes receivable	$	22	$	57	$	32	$	40
Prepaid expenses and other	246		317		394		490
	$	268	$	374	$	426	$	530


	Useful Life	January 28, 2018			October 29, 2017			Useful Life	January 27, 2019			October 28, 2018

	(In years)	(In millions)						(In years)	(In millions)
Property, Plant and Equipment, Net
Land and improvements		$	221		$	160			$	245		$	245
Buildings and improvements	3-30	1,371			1,315			3-30	1,460			1,448
Demonstration and manufacturing equipment	3-5	1,170			1,129			3-5	1,335			1,282
Furniture, fixtures and other equipment	3-15	576			572			3-5	639			634
Construction in progress		162			135				243			203
Gross property, plant and equipment		3,500			3,311				3,922			3,812
Accumulated depreciation		(2,305		)	(2,245		)		(2,466		)	(2,405		)
		$	1,195		$	1,066			$	1,456		$	1,407



	January 27, 2019		October 28, 2018

	(In millions)
Deferred Income Taxes and Other Assets
Non-current deferred income taxes and income taxes receivable	$	1,856	$	319
Other assets	170		154
	$	2,026	$	473

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


	January 28, 2018		October 29, 2017		January 27, 2019		October 28, 2018

	(In millions)				(In millions)
Accounts Payable and Accrued Expenses
Accounts payable	$	1,041	$	945	$	978	$	996
Compensation and employee benefits	407		666		426		639
Warranty	204		199		200		208
Dividends payable	105		106		190		193
Income taxes payable	153		112		129		136
Other accrued taxes	64		70		73		112
Interest payable	59		38		59		38
Other	348		314		365		399
	$	2,381	$	2,450	$	2,420	$	2,721

January 28,
2018 October 29,
2017

(In millions)
Customer Deposits and Deferred Revenue
Customer deposits $ 626
$ 381
Deferred revenue 1,392
1,284
$ 2,018
$ 1,665

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


	January 28, 2018		October 29, 2017		January 27, 2019		October 28, 2018

	(In millions)				(In millions)
Other Liabilities
Defined and postretirement benefit plans	$	167	$	160	$	178	$	177
Other	128		99		146		126
	$	295	$	259	$	324	$	303

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


Note 89	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 January ~~28, 2018,~~27, 2019, Applied’s reporting units include Semiconductor Product Group and Imaging and Process Control Group, which combine to form the Semiconductor Systems reporting segment, Applied Global Services, and Display and Adjacent Markets.

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 as of January ~~28, 2018~~27, 2019 and October ~~29, 2017~~28, 2018 were as follows:


	January 28, 2018		October 29, 2017		January 27, 2019		October 28, 2018

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

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


	January 28, 2018		October 29, 2017		January 27, 2019		October 28, 2018

	(In millions)				(In millions)
Purchased technology, net	$	244	$	288	$	99	$	109
Intangible assets - finite-lived, net	118		124		100		104
Total	$	362	$	412	$	199	$	213

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Finite-Lived Purchased Intangible Assets

Applied amortizes purchased intangible assets with finite lives using the straight-line method over the estimated economic lives of the assets, ranging from 1 to 15 years.

Applied evaluates long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset group may not be recoverable. Applied assesses the fair value of the assets based on the amount of the undiscounted future cash flow that the assets are expected to generate and recognizes an impairment loss when estimated undiscounted future cash flow expected to result from the use of the asset, plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. When Applied identifies an impairment, Applied reduces the carrying value of the group of assets to comparable market values, when available and appropriate, or to its estimated fair value based on a discounted cash flow approach.

Intangible assets, such as purchased technology, are generally recorded in connection with a business acquisition. The value assigned to intangible assets is usually based on estimates and judgments regarding expectations for the success and life cycle of products and technology acquired. Applied evaluates the useful lives of its intangible assets each reporting period to determine whether events and circumstances require revising the remaining period of amortization. In addition, Applied reviews intangible assets for impairment when events or changes in circumstances indicate their carrying value may not be recoverable. Management considers such indicators as significant differences in actual product acceptance from the estimates, changes in the competitive and economic environments, technological advances, and changes in cost structure.

Details of finite-lived intangible assets were as follows:


	January 28, 2018									October 29, 2017									January 27, 2019									October 28, 2018
	Purchased Technology			Other Intangible Assets			Total			Purchased Technology			Other Intangible Assets			Total			Purchased Technology			Other Intangible Assets			Total			Purchased Technology			Other Intangible Assets			Total

	(In millions)																		(In millions)
Gross carrying amount:
Semiconductor Systems	$	1,449		$	252		$	1,701		$	1,449		$	252		$	1,701		$	1,449		$	252		$	1,701		$	1,449		$	252		$	1,701
Applied Global Services	33			44			77			33			44			77			33			44			77			33			44			77
Display and Adjacent Markets	163			38			201			163			38			201			163			38			201			163			38			201
Corporate and Other	—			9			9			—			9			9			—			9			9			—			9			9
Gross carrying amount	$	1,645		$	343		$	1,988		$	1,645		$	343		$	1,988		$	1,645		$	343		$	1,988		$	1,645		$	343		$	1,988
Accumulated amortization:
Semiconductor Systems	$	(1,251	)	$	(136	)	$	(1,387	)	$	(1,210	)	$	(131	)	$	(1,341	)	$	(1,382	)	$	(154	)	$	(1,536	)	$	(1,375	)	$	(150	)	$	(1,525	)
Applied Global Services	(28		)	(44		)	(72		)	(28		)	(44		)	(72		)	(29		)	(44		)	(73		)	(29		)	(44		)	(73		)
Display and Adjacent Markets	(122		)	(36		)	(158		)	(119		)	(35		)	(154		)	(135		)	(36		)	(171		)	(132		)	(36		)	(168		)
Corporate and Other	—			(9		)	(9		)	—			(9		)	(9		)	—			(9		)	(9		)	—			(9		)	(9		)
Accumulated amortization	$	(1,401	)	$	(225	)	$	(1,626	)	$	(1,357	)	$	(219	)	$	(1,576	)	$	(1,546	)	$	(243	)	$	(1,789	)	$	(1,536	)	$	(239	)	$	(1,775	)
Carrying amount	$	244		$	118		$	362		$	288		$	124		$	412		$	99		$	100		$	199		$	109		$	104		$	213

Details of amortization expense by segment were as follows:


	Three Months Ended				Three Months Ended
	January 28, 2018		January 29, 2017		January 27, 2019		January 28, 2018

	(In millions)				(In millions)
Semiconductor Systems	$	46	$	47	$	11	$	46
Display and Adjacent Markets	4		1		3		4
Total	$	50	$	48	$	14	$	50

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Amortization expense was charged to the following categories:


	Three Months Ended				Three Months Ended
	January 28, 2018		January 29, 2017		January 27, 2019		January 28, 2018

	(In millions)				(In millions)
Cost of products sold	$	45	$	42	$	9	$	45
Research, development and engineering	—		1
Marketing and selling	5		5		5		5
Total	$	50	$	48	$	14	$	50

As of January ~~28, 2018,~~27, 2019, future estimated amortization expense is expected to be as follows:


	Amortization Expense		Amortization Expense
	(In millions)		(In millions)
2018 (remaining 9 months)	$	148
2019	57
2019 (remaining 9 months)			$	43
2020	52		52
2021	40		39
2022	65		24
2023			11
Thereafter			30
Total	$	362	$	199

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


Note 910	Borrowing Facilities and Debt

Applied has credit facilities for unsecured borrowings in various currencies of up to $1.6 billion, of which $1.5 billion is comprised of a committed revolving credit agreement with a group of banks that is scheduled to expire in September 2021. This agreement provides for borrowings in United States dollars at interest rates keyed to one of various benchmark rates selected by Applied for each advance, plus a margin based on Applied’s public debt rating and includes financial and other covenants. Remaining credit facilities in the amount of approximately $73 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 atas of both January ~~28, 2018~~27, 2019 and October ~~29, 2017,~~28, 2018, and Applied has not utilized these credit facilities. In fiscal 2011, Applied established a short-term commercial paper program of up to $1.5 billion. AtAs of January ~~28, 2018,~~27, 2019, Applied did not have any commercial paper outstanding.

Debt outstanding as of January ~~28, 2018~~27, 2019 and October ~~29, 2017~~28, 2018 was as follows:


	Principal Amount								Principal Amount
	January 28, 2018			October 29, 2017			Effective Interest Rate	Interest Pay Dates	January 27, 2019			October 28, 2018			Effective Interest Rate	Interest Pay Dates

	(In millions)								(In millions)
Long-term debt:
2.625% Senior Notes Due 2020	$	600		$	600		2.640%	April 1, October 1	$	600		$	600		2.640%	April 1, October 1
4.300% Senior Notes Due 2021	750			750			4.326%	June 15, December 15	750			750			4.326%	June 15, December 15
3.900% Senior Notes Due 2025	700			700			3.944%	April 1, October 1	700			700			3.944%	April 1, October 1
3.300% Senior Notes Due 2027	1,200			1,200			3.342%	April 1, October 1	1,200			1,200			3.342%	April 1, October 1
5.100% Senior Notes Due 2035	500			500			5.127%	April 1, October 1	500			500			5.127%	April 1, October 1
5.850% Senior Notes Due 2041	600			600			5.879%	June 15, December 15	600			600			5.879%	June 15, December 15
4.350% Senior Notes Due 2047	1,000			1,000			4.361%	April 1, October 1	1,000			1,000			4.361%	April 1, October 1
	5,350			5,350					5,350			5,350
Total unamortized discount	(12		)	(12		)			(10		)	(11		)
Total unamortized debt issuance costs	(33		)	(34		)			(30		)	(30		)
Total long-term debt	5,305			5,304					$	5,310		$	5,309

Total debt	$	5,305		$	5,304

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


Note 1011	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			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)													(in millions)
Balance at October 29, 2017	$	53	$	(11	)	$	(120	)	$	14	$	(64	)
Balance as of October 28, 2018														$	7		$	(9	)	$	(137	)	$	14	$	(125	)
Adoption of new accounting standards (a)														(17		)	—			—			—		(17		)

Other comprehensive income (loss) before reclassifications	6		(14		)	—			—		(8		)	5			(12		)	—			—		(7		)
Amounts reclassified out of AOCI	—		(5		)	(2		)	—		(7		)	—			(5		)	—			—		(5		)
Other comprehensive income (loss), net of tax	6		(19		)	(2		)	—		(15		)	5			(17		)	—			—		(12		)
Balance at January 28, 2018	$	59	$	(30	)	$	(122	)	$	14	$	(79	)

Balance as of January 27, 2019														$	(5	)	$	(26	)	$	(137	)	$	14	$	(154	)


	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			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)													(in millions)
Balance at October 30, 2016	$	30	$	(18	)	$	(141	)	$	14	$	(115	)
Balance as of October 29, 2017														$	53	$	(11	)	$	(120	)	$	14	$	(64	)
Other comprehensive income (loss) before reclassifications	—		10			—			—		10			6		(14		)	—			—		(8		)
Amounts reclassified out of AOCI	1		5			(7		)	—		(1		)	—		(5		)	(2		)	—		(7		)
Other comprehensive income (loss), net of tax	1		15			(7		)	—		9			6		(19		)	(2		)	—		(15		)
Balance at January 29, 2017	$	31	$	(3	)	$	(148	)	$	14	$	(106	)
Balance as of January 28, 2018														$	59	$	(30	)	$	(122	)	$	14	$	(79	)

The tax effects on net income of amounts reclassified from AOCI for the three months ended January ~~28, 2018~~27, 2019 and January ~~29, 2017~~28, 2018 were not material.

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Stock Repurchase Program

In ~~September 2017,~~February 2018, the Board of Directors approved a common stock repurchase program authorizing up to ~~$3.0~~an aggregate of $6.0 billion in ~~repurchases, which was in addition to a $2.0 billion common stock repurchase program approved in June 2016. At~~repurchases. As of January ~~28, 2018, $2.8~~27, 2019, $3.6 billion remained available for future stock repurchases under this repurchase program. ~~In February 2018, the Board of Directors approved a new common stock repurchase program authorizing up to an additional $6.0 billion in repurchases.~~

The following table summarizes Applied’s stock repurchases for the three months ended January ~~28, 2018~~27, 2019 and January ~~29, 2017:~~28, 2018:


	Three Months Ended				Three Months Ended
	January 28, 2018		January 29, 2017		January 27, 2019		January 28, 2018

	(in millions, except per share amount)				(in millions, except per share amount)
Shares of common stock repurchased	15		4		22		15
Cost of stock repurchased	$	782	$	130	$	750	$	782
Average price paid per share	$	53.41	$	31.80	$	34.04	$	53.41

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

Dividends

In December ~~2017,~~2018, Applied’s Board of Directors declared a quarterly cash dividend, payable in March 2019, in the amount of ~~$0.10~~$0.20 per ~~share, to be paid in March 2018.~~share. Dividends paid during the three months ended January 27, 2019 and January 28, 2018 totaled $192 million and ~~January 29, 2017 totaled~~ $106 million ~~and $108 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. ~~In February 2018, the Board of Directors approved a quarterly cash dividend of $0.20 per share to be paid in June 2018.~~

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 months ended January ~~28, 2018~~27, 2019 and January ~~29, 2017,~~28, 2018, Applied recognized share-based compensation expense related ~~to stock options,~~equity awards and ESPP ~~shares, restricted stock, restricted stock units, performance shares and performance units.~~shares. The effect of share-based compensation on the results of operations was as follows:


	Three Months Ended				Three Months Ended
	January 28, 2018		January 29, 2017		January 27, 2019		January 28, 2018

	(In millions)				(In millions)
Cost of products sold	$	22	$	17	$	22	$	22
Research, development and engineering	24		20		24		24
Marketing and selling	8		7		8		8
General and administrative	11		10		11		11
Total share-based compensation	$	65	$	54	$	65	$	65

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APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

The cost associated with share-based awards that are subject solely to time-based vesting requirements, less expected forfeitures, is recognized over the awards’ service period for the entire award on a straight-line basis. The cost associated with performance-based equity awards, which include both performance and market goals, is recognized for each tranche over the service ~~period,~~period. The cost of equity awards related to performance goals is based on an assessment of the likelihood that the applicable performance goals will be achieved. For the equity awards based on market goals, the cost is recognized based upon the assumption of 100% achievement of the goal.

AtAs of January ~~28, 2018~~27, 2019, Applied had $~~481~~514 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 2.9 years. AtAs of January ~~28, 2018~~27, 2019, there were 8267 million shares available for grants of share-based awards under the Employee Stock Incentive Plan, and an additional 2017 million shares available for issuance under the ESPP.

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

A summary of the changes in any restricted stock units, restricted stock, performance shares and performance units outstanding under Applied’s equity compensation plans during the three months ended January ~~28, 2018~~27, 2019 is presented below:


	Shares		Weighted Average Grant Date Fair Value		Shares		Weighted Average Grant Date Fair Value

	(In millions, except per share amounts)				(In millions, except per share amounts)
Outstanding at October 29, 2017	22		$	23.96
Outstanding as of October 28, 2018					18		$	32.64
Granted	5		$	51.84	7		$	35.39
Vested	(8	)	$	21.72	(7	)	$	27.83
Canceled	—		$	26.81	—		$	32.06
Outstanding at January 28, 2018	19		$	31.65
Outstanding as of January 27, 2019					18		$	35.46

AtAs of January ~~28, 2018, 1~~27, 2019, 1.6 million additional performance-based awards could be earned based upon achievement of certain levels of specified performance goals.

During the first quarter of fiscal ~~2018,~~2019, certain executive officers were granted awards that are subject to the achievement of ~~specified performance goals. These~~targeted levels of adjusted operating margin and targeted levels of total shareholder return relative to a peer group, comprised of companies in the Standard & Poor's 500 Index. Each metric will be weighted 50% and will be measured over a three-year period.

The awards become eligible to vest only if performance goals are achieved and will vest only if the grantee remains employed by Applied through each applicable vesting date. Certain awards require the achievement of positive adjusted operating profit and vest ratably over three years. Other awards require the achievement of targeted levels of adjusted operating margin and wafer fabrication equipment market share, and thedate, subject to a qualifying retirement described below. The number of shares that may vest in full after three years ranges from 0% to 200% of the target amount. The awards provide for a partial payout based on actual performance at the conclusion of the three-year performance period in the event of a qualifying retirement based on age and years of service.

The fair value of ~~these~~the portion of the awards subject to targeted levels of adjusted operating margin is estimated on the date of grant. ~~If the goals are achieved, the awards will vest, provided that the grantee remains employed by Applied through each applicable vesting date.~~ If the performance goals are not met as of the end of the performance period, no compensation expense is recognized and any previously recognized compensation expense is reversed. The expected cost is based on the portion of the awards that ~~are~~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 the targeted levels of relative total shareholder return is estimated on the date of grant using a Monte Carlo simulation model. Compensation expense is recognized based upon the assumption of 100% achievement of the TSR goal and will not be reversed even if the threshold level of TSR is never achieved, and is reflected over the service period and reduced for estimated forfeitures.

Employee Stock Purchase Plans

Under the ESPP, substantially all employees may purchase Applied common stock through payroll deductions at a price equal to 85 percent of the lower of the fair market value of Applied common stock at the beginning or end of each 6-month purchase period, subject to certain limits. There was no purchase during both of the three months ended January 27, 2019 and January 28, 2018, respectively. Compensation expense is calculated using the fair value of the employees’ purchase rights under the Black-Scholes model.

~~Table of Contents~~

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Note 1112 Income Taxes

The U.S. Securities and Exchange Commission ~~(the “SEC”) staff~~ issued Staff Accounting Bulletin ~~(“SAB”)~~ No. 118, which ~~provides~~provided guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that will not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification (“ASC”) 740. Pursuant to this guidance, provisional adjustments were recorded when reasonable estimates could be determined. No adjustments were recorded when reasonable estimates could not be determined. These provisional estimates will be revised as information becomes available and as guidance is issued by the Internal Revenue Service. The accounting for theincome tax effects of the Tax Act ~~will be~~and a measurement period for companies to complete this accounting. Applied completed the accounting for the Tax Act during the measurement ~~period.~~

~~The transition tax is a tax on previously untaxed accumulated and current earnings and profits (“E&P”)~~period, which ended one year after the enactment date of certain foreign subsidiaries. To determine the amount of the transition tax, the amount of post-1986 E&P of relevant subsidiaries, as well as the amount of foreign income taxes paid on such earnings, must be calculated. A transition tax expense was recorded in the first fiscal quarter 2018 based on reasonable estimates of foreign subsidiaries E&P. Additional information is being gathered to more precisely compute the transition tax which will be completed during the measurement period.

Tax expense was also recorded based on the decrease in U.S. deferred tax assets due to the reduction of the U.S. federal corporate tax rate from 35.0 percent to 21.0 percent. Tax expense from the decrease in net U.S. deferred tax assets may be affected by other analyses related to the Tax Act, including the ~~calculation of deemed repatriation~~accounting for the remeasurement of deferred ~~foreign income~~tax assets completed in the fourth quarter of fiscal 2018 and the ~~state~~accounting for the transition tax ~~effect~~completed in the first quarter of adjustments made to federal temporary differences. Valuation allowance analyses are affected by various provisions of the Tax Act (e.g., deemed repatriation of deferred foreign income, global intangible low taxed income inclusions and new categories of foreign tax credits). Since Applied has recorded provisional estimates related to certain portions of the Tax Act, any corresponding determination of the need for or change in a valuation allowance is also provisional.fiscal 2019.

The Tax Act also includes provisions that ~~do not affect~~impact Applied starting in fiscal ~~2018,~~2019, including a provision designed to tax global intangible low-taxed income (“GILTI”). ~~Due~~On September 13, 2018, the U.S. government issued proposed regulations that, if finalized, would significantly affect how the Tax Act is interpreted related to a tax benefit of $46 million realized by Applied in the ~~complexity~~first quarter of fiscal 2019. Proposed regulations are not authoritative and may change in the ~~GILTI~~regulatory review process. Pursuant to our accounting policies for uncertain tax ~~rules, this provision and related~~positions, the tax ~~accounting will continue to be evaluated.~~benefit might reverse if the regulations are finalized as proposed. An accounting policy choice is allowed to either treat taxes due on future U.S. inclusions related to GILTI in taxable income ~~related to GILTI~~ as a current-period expense when incurred (the “period cost method”) or factor such amounts into the measurement of deferred taxes (the “deferred method”). ~~The calculation of~~Applied has chosen the deferred balance with respect to the new GILTI tax provisions will depend, in part, on analyzing global income to determine whether future U.S. inclusions in taxable income are expected related to GILTI and, if so, what the impact is expected to be, and an accounting policy choice has not yet been made.period cost method.

Applied’s effective tax rates for the first ~~quarters~~quarter of fiscal 2019 and 2018 ~~and 2017~~ were ~~88.4~~13.2 percent and ~~8.8~~86.1 percent, respectively. The effective tax rate for the first quarter of fiscal ~~2018~~2019 was ~~higher compared to~~lower than the same ~~quarter~~period in the prior fiscal year primarily due to tax expense of $1.0 billion in the first quarter of ~~income tax expense related to the Tax Act~~fiscal 2018 for the transition tax and ~~the decrease in U.S.~~remeasurement of deferred tax ~~assets.~~assets as a result of the Tax Act. This decrease was partially offset by tax expense in the first quarter of fiscal ~~2018 was partially offset by adoption~~2019 related to the resolution of ~~authoritative guidance~~tax liabilities for ~~share-based compensation that resulted in the recognition of excess~~uncertain tax ~~benefits of $51 million in provision for income taxes rather than paid-in capital,~~positions and by the ~~effect~~excess tax benefit from share-based compensation being lower in the first quarter of fiscal 2019 than in the ~~lower U.S. federal corporate~~same period in the prior fiscal year. The first quarter of fiscal 2019 also included tax ~~rate~~expense related to GILTI and changes in the geographical composition of ~~income.~~

~~During the next twelve months, it is reasonably possible that existing liabilities for unrecognized~~income which includes jurisdictions with differing tax ~~benefits could be reduced by approximately $13 million as a result of negotiations with taxing authorities and the expiration of statutes of limitation.~~rates.

~~Table of Contents~~

~~APPLIED MATERIALS, INC.~~

~~NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)~~


Note 1213	Warranty, Guarantees and Contingencies

Warranty

Changes in the warranty reserves are presented below:


	Three Months Ended						Three Months Ended
	January 28, 2018			January 29, 2017			January 27, 2019			January 28, 2018

	(In millions)						(In millions)
Beginning balance	$	199		$	153		$	208		$	206
Warranties issued	46			40			39			45
Change in reserves related to preexisting warranty	2			3			1			2
Consumption of reserves	(43		)	(26		)	(48		)	(43		)
Ending balance	$	204		$	170		$	200		$	210

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.

APPLIED MATERIALS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Guarantees

In the ordinary course of business, Applied provides standby letters of credit or other guarantee instruments to third parties as required for certain transactions initiated by either Applied or its subsidiaries. As of January ~~28, 2018~~27, 2019, the maximum potential amount of future payments that Applied could be required to make under these guarantee agreements was approximately ~~$72~~$68 million. Applied has not recorded any liability in connection with these guarantee agreements beyond that required to appropriately account for the underlying transaction being guaranteed. Applied does not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under these guarantee agreements.

Applied also has agreements with various banks to facilitate subsidiary banking operations worldwide, including overdraft arrangements, issuance of bank guarantees, and letters of credit. As of January ~~28, 2018,~~27, 2019, Applied has provided parent guarantees to banks for approximately ~~$141~~$150 million to cover these arrangements.

Legal Matters

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

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

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


Note 1314	Industry Segment Operations

Applied’s three reportable segments are: Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets. As defined under the accounting literature, Applied’s chief operating decision-maker has been identified as the President and Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Segment information is presented based upon Applied’s management organization structure as of January ~~28, 2018~~27, 2019 and the distinctive nature of each segment. Future changes to this internal financial structure may result in changes to Applied’s reportable segments.

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

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

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

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

The Corporate and Other category includes revenues from products, as well as costs of products sold, for fabricating solar photovoltaic cells and modules, and certain operating expenses that are not allocated to its reportable segments and are managed separately at the corporate level. These operating expenses include costs related to share-based compensation; certain management, finance, legal, human resources, and research, development and engineering functions provided at the corporate level; and unabsorbed information technology and occupancy. In addition, Applied does not allocate to its reportable segments restructuring 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.

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



	Three Months Ended
	Net Sales		Operating Income (Loss)

	(In millions)
January 27, 2019:
Semiconductor Systems	$	2,268	$	631
Applied Global Services	962		285
Display and Adjacent Markets	507		115
Corporate and Other	16		(123		)
Total	$	3,753	$	908
January 28, 2018:
Semiconductor Systems	$	2,852	$	1,024
Applied Global Services	881		255
Display and Adjacent Markets	443		90
Corporate and Other	29		(154		)
Total	$	4,205	$	1,215

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Net sales ~~and operating income (loss) for each reportable segment~~by geographic region, determined by the location of customers’ facilities to which products were shipped to, were as follows:

Three Months Ended
Net Sales
Operating
Income (Loss)

(In millions)
January 28, 2018:
Semiconductor Systems $ 2,847
$ 995
Applied Global Services 880
254
Display and Adjacent Markets 455
101
Corporate and Other 22
(154 )
Total $ 4,204
$ 1,196
January 29, 2017:
Semiconductor Systems $ 2,150
$ 690
Applied Global Services 676
178
Display and Adjacent Markets 422
115
Corporate and Other 30
(176 )
Total $ 3,278
$ 807



	Three Months Ended
	January 27, 2019				January 28, 2018

	(In millions, except percentages)
China	$	968	26	%	$	964	23	%
Korea	572		15	%	1,203		29	%
Taiwan	656		18	%	741		18	%
Japan	651		17	%	482		11	%
Southeast Asia	160		4	%	193		4	%
Asia Pacific	3,007		80	%	3,583		85	%
United States	450		12	%	370		9	%
Europe	296		8	%	252		6	%
Total	$	3,753	100	%	$	4,205	100	%

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



	Three Months Ended
	January 27, 2019		January 28, 2018
Foundry, logic and other	44	%	37	%
Dynamic random-access memory (DRAM)	21	%	26	%
Flash memory	35	%	37	%
	100	%	100	%

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


	Three Months Ended						Three Months Ended
	January 28, 2018			January 29, 2017			January 27, 2019			January 28, 2018

	(In millions)						(In millions)
Unallocated net sales	$	22		$	30		$	16		$	29
Unallocated cost of products sold and expenses	(111		)	(152		)	(74		)	(118		)
Share-based compensation	(65		)	(54		)	(65		)	(65		)
Total	$	(154	)	$	(176	)	$	(123	)	$	(154	)

The following customers accounted for at least 10 percent of Applied’s net sales for the three months ended January ~~28, 2018,~~27, 2019, and sales to these customers included products and services from multiple reportable segments.



	Percentage of Net Sales
~~Samsung Electronics Co., Ltd.~~Toshiba	2014	%
SK Hynix Inc.	13	%
Intel Corporation	13	%
Taiwan Semiconductor Manufacturing Company Limited	1311	%

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following management’s discussion and analysis is provided in addition to the accompanying consolidated condensed financial statements and notes, ~~to assist in~~and for a full understanding of Applied’s results of operations and financial ~~condition. Financial information as of~~ ~~January 28, 2018~~condition should be read in conjunction with the consolidated condensed financial statements and notes included in this Form 10-Q and the financial statements and notes for the fiscal year ended October ~~29, 2017~~28, 2018 contained in the Company’s Form 10-K filed December ~~15, 2017.~~13, 2018.

This report contains forward-looking statements that involve a number of risks and uncertainties. Examples of forward-looking statements include those regarding Applied’s future financial or operating results, customer demand and spending, end-use demand, market and industry trends and outlooks, cash flows and cash deployment strategies, declaration of dividends, share repurchases, business strategies and priorities, costs and cost controls, products, competitive positions, management’s plans and objectives for future operations, research and development, strategic acquisitions and investments, growth opportunities, restructuring activities, backlog, working capital, liquidity, investment portfolio and policies, taxes, supply chain, manufacturing, properties, legal proceedings and claims, ~~customer demand and spending, end-use demand, market and industry trends and outlooks, general economic conditions~~ and other statements that are not historical facts, as well as their underlying assumptions. Forward-looking statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “potential” and “continue,” the negative of these terms, or other comparable terminology. All forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed in Part II, Item 1A, “Risk Factors,” below and elsewhere in this report. These and many other factors could affect Applied’s future financial condition and operating results and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by Applied or on its behalf. Forward-looking statements are based on management’s estimates, projections and expectations as of the date hereof, and Applied undertakes no obligation to revise or update any such statements.

Overview

Applied provides manufacturing equipment, services and software to the semiconductor, display, and related industries. Applied’s customers include manufacturers of semiconductor wafers and chips, liquid crystal and organic light-emitting diode (OLED) displays, and other electronic devices. These customers may use what they manufacture in their own end products or sell the items to other companies for use in advanced electronic components. Each of Applied’s businesses is subject to variable industry conditions, as demand for manufacturing equipment and services can change depending on supply and demand for chips, display technologies, and other electronic devices, as well as other factors, such as global economic and market conditions, and the nature and timing of technological advances in fabrication processes.

Applied operates in three reportable segments: Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets. A summary of financial information for each reportable segment is found in Note 1314 of Notes to Consolidated Condensed Financial Statements. A discussion of factors that could affect Applied’s operations is set forth under “Risk Factors” in Part II, Item 1A, which is incorporated herein by reference. Product development and manufacturing activities occur primarily in the United States, Europe, Israel, and Asia. Applied’s broad range of equipment and service products are highly technical and are sold primarily through a direct sales force.

Applied’s results are driven primarily by customer spending on capital equipment and services to support key technology transitions or to increase production volume in response to worldwide demand for semiconductors and displays. While certain existing technologies may be adapted to new requirements, some applications create the need for an entirely different technological approach. The timing of customer investment in manufacturing equipment is also affected by the timing of ~~next generation production schedules,~~next-generation process development, and the timing of capacity expansion to meet ~~end market~~end-market demand. In light of these conditions, Applied’s results can vary significantly year-over-year, as well as quarter-over-quarter.

The following table presents certain significant measurements for the periods indicated:


	Three Months Ended									Three Months Ended
	January 28, 2018			January 29, 2017			Change			January 27, 2019			January 28, 2018			Change

	(In millions, except per share amounts and percentages)									(In millions, except per share amounts and percentages)
Net sales	$	4,204		$	3,278		$	926		$	3,753		$	4,205		$	(452	)
Gross margin	45.7		%	44.1		%	1.6 points			44.4		%	46.1		%	(1.7) points
Operating income	$	1,196		$	807		$	389		$	908		$	1,215		$	(307	)
Operating margin	28.4		%	24.6		%	3.8 points			24.2		%	28.9		%	(4.7) points
Net income	$	135		$	703		$	(568	)	$	771		$	165		$	606
Earnings per diluted share	$	0.13		$	0.65		$	(0.52	)	$	0.80		$	0.15		$	0.65

Fiscal ~~2018~~2019 and ~~2017~~2018 each contains 52 weeks, and the first three months of fiscal ~~2018~~2019 and ~~2017~~2018 each contained 13 weeks.

~~During the first three months of fiscal 2018, healthy investment~~Investment in semiconductor and display manufacturing equipment and services continued to be ~~a strong~~the main driver of ~~revenue. Overall semiconductor systems~~ revenue ~~increased as foundry, logic and NAND demand remained strong, and DRAM demand increased, reflecting increasing memory requirements~~during the first three months of fiscal 2019. Semiconductor equipment customers made investments in ~~smartphones and servers. Foundry customers invested in technology upgrades and~~ new capacity and technology transitions, although overall spending decreased compared to ~~meet demand for advanced mobile chips and high-performance computing, and we saw continued demand for additional capacity at trailing geometries.~~the same period in the prior year. Display equipment spending during the first quarter of fiscal 2019 reflected continued investment in new technology and manufacturing ~~equipment. Customers prepared for broader adoption of OLED for mobile applications and invested in a new generation of~~ equipment for producing larger LCD ~~TVs.~~TVs and in new equipment for mobile devices. Applied also continued to see strong growth in demand for services and continued demand for spares from customers as compared to the same period in the prior year.

While Applied anticipates major technology trends to continue driving long-term growth in the semiconductor industry, the trends characterizing the second half of 2018 continued into early fiscal 2019, with lower spending by memory customers, and foundry and logic customers prioritizing spending on longer lead-time equipment not in Applied’s product portfolio. Applied also expects lower spending for display manufacturing equipment in fiscal 2019, although long-term demand drivers remain in place. Applied anticipates continued growth in semiconductor services spending in fiscal 2019.

The ~~first quarter of fiscal~~three months ended January 28, 2018 included a one-time expense related to the enactment of recent U.S. tax legislation that reduced diluted earnings per share by $0.94.

Applied adopted the authoritative guidance related to revenue recognition in the first quarter of fiscal 2019 using the full retrospective method. Applied also adopted authoritative guidance related to retirement benefits in the first quarter of fiscal 2019 using the retrospective method. The adoption of these guidance required restating each prior reporting period presented.

Results of Operations

Net Sales

Net sales for the periods indicated were as follows:


	Three Months Ended										Three Months Ended
	January 28, 2018				January 29, 2017				Change		January 27, 2019				January 28, 2018				Change

	(In millions, except percentages)										(In millions, except percentages)
Semiconductor Systems	$	2,847	68	%	$	2,150	65	%	32	%	$	2,268	60	%	$	2,852	68	%	(20	)%
Applied Global Services	880		21	%	676		21	%	30	%	962		26	%	881		21	%	9	%
Display and Adjacent Markets	455		11	%	422		13	%	8	%	507		14	%	443		11	%	14	%
Corporate and Other	22		—	%	30		1	%	(27	)%	16		—	%	29		—	%	(45	)%
Total	$	4,204	100	%	$	3,278	100	%	28	%	$	3,753	100	%	$	4,205	100	%	(11	)%

For the ~~first quarter of fiscal 2018~~three months ended January 27, 2019 compared to the same period in the prior year, net sales ~~increased~~decreased primarily due to ~~increased~~decreased customer ~~investments in all segments, with majority of the increases resulting from~~ investments in semiconductor equipment. The Semiconductor Systems segment’s relative share of total net sales ~~increased in the first quarter of fiscal 2018 compared to the same period in the prior year, and~~ continued to represent the largest contributor of net sales.

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


	Three Months Ended									Three Months Ended
	January 28, 2018				January 29, 2017				Change	January 27, 2019				January 28, 2018				Change

	(In millions, except percentages)									(In millions, except percentages)
China										$	968	26	%	$	964	23	%	—	%
Korea	$	1,230	29	%	$	670	20	%	84%	572		15	%	1,203		29	%	(52	)%
Taiwan	756		18	%	1,103		34	%	(31)%	656		18	%	741		18	%	(11	)%
China	917		22	%	647		20	%	42%
Japan	481		12	%	235		7	%	105%	651		17	%	482		11	%	35	%
Southeast Asia	185		4	%	97		3	%	91%	160		4	%	193		4	%	(17	)%
Asia Pacific	3,569		85	%	2,752		84	%	30%	3,007		80	%	3,583		85	%	(16	)%
United States	371		9	%	317		10	%	17%	450		12	%	370		9	%	22	%
Europe	264		6	%	209		6	%	26%	296		8	%	252		6	%	17	%
Total	$	4,204	100	%	$	3,278	100	%	28%	$	3,753	100	%	$	4,205	100	%	(11	)%

The changes in net sales ~~from customers~~ in all regions in the ~~first quarter of fiscal 2018~~three months ended January 27, 2019 compared to the same period in the prior year primarily reflected changes in semiconductor equipment spending and customer ~~mix~~ and ~~spending in semiconductor spares and services.~~product mix. The increase in net sales ~~from~~to customers in Japan, United States and Europe, for the three months ended January 27, 2019 compared to the same period in the prior year was primarily due to increased investments in semiconductor equipment. The decrease in net sales to customers in Korea ~~China, and Japan~~ for the ~~first quarter of fiscal 2018~~three months ended January 27, 2019 compared to the same period in the prior year primarily reflected ~~increased~~decrease in investments in semiconductor equipment and changes in semiconductor equipment customer mix. The decrease in net sales from customers in Taiwan primarily reflected decreased investments in semiconductor equipment, partially offset by increased investments in display manufacturing equipment.

Gross Margin

Gross margins for the periods indicated were as follows:

Three Months Ended
January 28,
2018 January 29,
2017 Change

Gross margin 45.7 % 44.1 % 1.6 points



	Three Months Ended
	January 27, 2019		January 28, 2018		Change


Gross margin	44.4	%	46.1	%	(1.7) points

Gross margin in the first ~~quarter~~three months of fiscal ~~2018 increased~~2019 decreased compared to the same period in the prior year primarily due to the ~~increase~~decrease in net sales and ~~favorable~~unfavorable changes in customer and product ~~mix and materials cost savings.~~mix. Gross margin during the three months ended January 27, 2019 and January 28, 2018 ~~and January 29, 2017~~each included $22 ~~million and $17~~ million of share-based compensation ~~expense, respectively.~~expense.

Research, Development and Engineering

Research, Development and Engineering (RD&E) expenses for the periods indicated were as follows:

Three Months Ended
January 28,
2018 January 29,
2017 Change

(In millions)
Research, development and engineering $ 488
$ 417
$ 71



	Three Months Ended
	January 27, 2019		January 28, 2018		Change

	(In millions)
Research, development and engineering	$	516	$	489	$	27

Applied’s future operating results depend to a considerable extent on its ability to maintain a competitive advantage in the equipment and service products it provides. Development cycles range from 12 to 36 months depending on whether the product is an enhancement of an existing product, which typically has a shorter development cycle, or a new product, which typically has a longer development cycle. Most of Applied’s existing products resulted from internal development activities and innovations involving new technologies, materials and processes. In certain instances, Applied acquires technologies, either in existing or new product areas, to complement its existing technology capabilities and to reduce time to market.

Management believes that it is critical to continue to make substantial investments in RD&E to assure the availability of innovative technology that meets the current and projected requirements of its customers’ most advanced designs. Applied has maintained and intends to continue its commitment to investing in RD&E in order to continue to offer new products and technologies.

RD&E expenses increased during the ~~first quarter of fiscal 2018~~three months ended January 27, 2019 compared to the same period in the prior year primarily due to additional headcount and increased ~~R&D~~research and development program spending in Semiconductor Systems ~~and Display and Adjacent Market segments.~~segment. This increase reflects Applied’s ongoing investment in product development initiatives, consistent with the Company’s strategy. Applied continued to prioritize existing RD&E investments in technical capabilities and critical research and development programs in current and new markets, with a focus on semiconductor technologies. RD&E expenses during the three months ended January 27, 2019 and January 28, 2018 ~~and January 29, 2017~~each included $24 ~~million and $20~~ million of share-based compensation ~~expense, respectively.~~expense.

Marketing and Selling

Marketing and selling expenses for the periods indicated were as follows:

Three Months Ended
January 28,
2018 January 29,
2017 Change

(In millions)
Marketing and selling $ 126
$ 118
$ 8



	Three Months Ended
	January 27, 2019		January 28, 2018		Change

	(In millions)
Marketing and selling	$	131	$	126	$	5

Marketing and selling expenses increased in the ~~first quarter of fiscal 2018~~three months ended January 27, 2019 compared to the same period in fiscal ~~2017,~~2018 primarily due to additional headcount. Marketing and selling expenses during the three months ended January 27, 2019 and January 28, 2018 ~~and January 29, 2017~~each included $8 ~~million and $7~~ million of share-based compensation ~~expense, respectively.~~expense.

General and Administrative

General and administrative (G&A) expenses for the periods indicated were as follows:

Three Months Ended
January 28,
2018 January 29,
2017 Change

(In millions)
General and administrative $ 110
$ 103
$ 7



	Three Months Ended
	January 27, 2019		January 28, 2018		Change

	(In millions)
General and administrative	$	110	$	110	$	—

G&A expenses in the ~~first quarter of fiscal 2018 increased~~three months ended January 27, 2019 remained flat compared to the same period in the prior ~~year primarily due to additional headcount.~~year. G&A expenses during the three months ended January 27, 2019 and January 28, 2018 ~~and January 29, 2017~~each included $11 ~~million and $10~~ million of share-based compensation ~~expense, respectively.~~expense.

Interest Expense and Interest and Other Income ~~(loss)~~(Loss), net

Interest expense and interest and other income (loss), net for the periods indicated were as follows:


	Three Months Ended						Three Months Ended
	January 28, 2018		January 29, 2017		Change		January 27, 2019		January 28, 2018		Change

	(In millions)						(In millions)
Interest expense	$	59	$	38	$	21	$	60	$	59	$	1
Interest and other income, net	$	25	$	2	$	23	$	40	$	27	$	13

Interest expenses incurred were primarily associated with ~~the~~issued senior unsecured ~~notes issued in June 2011, September 2015, and March 2017.~~notes. Interest expense in the ~~first quarter of~~three months ended January 27, 2019 remained relatively flat compared to the same period in fiscal ~~2018~~2018.

Interest and other income, net in the three months ended January 27, 2019 increased compared to the same period in fiscal ~~2017,~~2018, primarily ~~due~~driven by unrealized gains on equity investment securities. Effective the first quarter of fiscal 2019, unrealized gains and losses on investments classified as equity investments are recognized in other income (expense), net in the Consolidated Condensed Statement of Operations. Prior to the ~~issuance~~adoption of ~~senior unsecured notes in March 2017.~~

~~Interest~~Accounting Standards Update (ASU) 2016-01 Financial Instruments-Overall (Subtopic 825-10): Recognition and ~~other income, net~~Measurement of Financial Assets and Financial Liabilities in the first quarter of fiscal ~~2018 increased compared to the same period in fiscal 2017 primarily driven by higher interest~~2019, these unrealized gains and temporary losses were included within accumulated other comprehensive income ~~from investments. Interest and other income,~~(loss), net ~~in the first quarter~~ of ~~fiscal 2017 also included a $7 million loss~~any related ~~to impairment of certain strategic investments.~~

tax effect.

Income Taxes

Provision for income taxes and effective tax rates for the periods indicated were as follows:


	Three Months Ended								Three Months Ended
	January 28, 2018			January 29, 2017			Change		January 27, 2019			January 28, 2018			Change

	(In millions, except percentages)								(In millions, except percentages)
Provision for income taxes	$	1,027		$	68		$	959	$	117		$	1,018		$	(901	)
Effective tax rate	88.4		%	8.8		%	79.6 points		13.2		%	86.1		%	(72.9) points

On December 22, 2017, the U.S. government enacted ~~tax legislation referred to as~~ the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act ~~included a reduction to the U.S. federal corporate tax rate from 35.0 percent to 21.0 percent and~~ requires a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries payable over eight years. U.S. deferred tax assets and liabilities ~~will be~~were subject to remeasurement due to the reduction of the U.S. federal corporate tax rate. ~~Applied’s fiscal year 2018 will have a blended U.S. federal corporate tax rate of 23.4 percent based on the number of days before and after the effective date of the Tax Act.~~ The U.S. Securities and Exchange Commission ~~(the “SEC”) staff~~ issued Staff Accounting Bulletin ~~(“SAB”)~~ No. 118, which ~~provides~~provided guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that will not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification (“ASC”) 740. Pursuant to SAB 118, provisional adjustments were recorded when reasonable estimates could be determined. These provisional estimates will be revised as information becomes available and as guidance is issued by the Internal Revenue Service. The accounting for theincome tax effects of the Tax Act ~~will be~~and a measurement period for companies to complete this accounting. Applied completed the accounting for the Tax Act during the measurement ~~period.~~

~~Applied’s effective tax rates~~period, which ended one year after the enactment date of the Tax Act, including the accounting for the ~~first quarters~~remeasurement of deferred tax assets completed in the fourth quarter of fiscal 2018 and ~~2017 were 88.4 percent~~the accounting for the transition tax completed in the first quarter of fiscal 2019.

The Tax Act also includes provisions that impact Applied starting in fiscal 2019, including a provision designed to tax global intangible low-taxed income (“GILTI”). On September 13, 2018, the U.S. government issued proposed regulations that, if finalized, would significantly affect how the Tax Act is interpreted related to a tax benefit of $46 million realized by Applied in the first quarter of fiscal 2019. Proposed regulations are not authoritative and ~~8.8 percent, respectively. The~~may change in the regulatory review process. Pursuant to our accounting policies for uncertain tax positions, the tax benefit might reverse if the regulations are finalized as proposed. An accounting policy choice is allowed to either treat taxes due on future U.S. inclusions related to GILTI in taxable income as a current-period expense when incurred (the “period cost method”) or factor such amounts into the measurement of deferred taxes (the “deferred method”). Applied has chosen the period cost method.

Excluding the tax expense of $1.0 billion in the first quarter of fiscal 2018 for the transition tax and remeasurement of deferred tax assets as a result of the Tax Act, the effective tax rate for the first quarter of fiscal ~~2018~~2019 was higher ~~compared to~~than the same ~~quarter~~period in the prior fiscal year primarily due to ~~$1.0 billion of income~~ tax expense ~~related to the Tax Act for the transition tax and the decrease in U.S. deferred tax assets. Tax expense~~of $58 million in the first quarter of fiscal ~~2018 was partially offset by adoption of authoritative guidance for~~2019 related to changes in uncertain tax positions and due to the excess tax benefit from share-based compensation ~~that resulted~~ in the ~~recognition~~first quarter of ~~excess~~fiscal 2019 being $43 million less than in the same period in the prior fiscal year. The first quarter of fiscal 2019 also included tax ~~benefits of $51 million in provision for income taxes rather than paid-in capital, and by the effect of the lower U.S. federal corporate tax rate~~expense related to GILTI and changes in the geographical composition of ~~income.~~income which includes jurisdictions with differing tax rates.

Segment Information

Applied reports financial results in three segments: Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets. A description of the products and services, as well as financial data, for each reportable segment can be found in Note 1314 of Notes to Consolidated Condensed Financial Statements.

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 for share-based compensation; certain management, finance, legal, human resource, and RD&E 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.

The results for each reportable segment are discussed below.

Semiconductor Systems Segment

The Semiconductor Systems segment is comprised primarily of capital equipment used to fabricate semiconductor chips. Semiconductor industry spending on capital equipment is driven by demand for advanced electronic products, including smartphones and other mobile devices, servers, personal computers, automotive devices, storage, and other products, and the nature and timing of technological advances in fabrication processes, and as a result is subject to variable industry conditions. Development efforts are focused on solving customers’ key technical challenges in transistor, interconnect, patterning and packaging performance as devices scale to advanced technology nodes.

~~The market for~~ Semiconductor ~~Systems products and technologies has been characterized by continued investment by semiconductor manufacturers. During the first three months of fiscal 2018, healthy investment~~equipment customers made investments in semiconductor manufacturing equipment continued to be a strong driver of revenue. Overall semiconductor systems revenue increased as foundry, logic and NAND demand remained strong, and DRAM demand increased, reflecting increasing memory requirements in smartphones and servers. Foundry customers invested in technology upgrades and new capacity and technology transitions, although overall spending decreased compared to ~~meet demand for advanced mobile chips~~the same period in the prior year. Applied continues to see customers optimize existing capacity and ~~high performance computing, and we saw continued demand for additional capacity at trailing geometries.~~re-prioritize their capital spending plans on longer lead-time equipment not in Applied's product portfolio.

Certain significant measures for the periods indicated were as follows:


	Three Months Ended									Three Months Ended
	January 28, 2018			January 29, 2017			Change			January 27, 2019			January 28, 2018			Change

	(In millions, except percentages and ratios)									(In millions, except percentages and ratios)
Net sales	$	2,847		$	2,150		$	697	32%	$	2,268		$	2,852		$	(584	)	(20	)%
Operating income	$	995		$	690		$	305	44%	$	631		$	1,024		$	(393	)	(38	)%
Operating margin	34.9		%	32.1		%			2.8 points	27.8		%	35.9		%				(8.1) points

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


	Three Months Ended				Three Months Ended
	January 28, 2018		January 29, 2017		January 27, 2019		January 28, 2018
Foundry	25	%	50	%
Foundry, logic and other					44	%	37	%
Dynamic random-access memory (DRAM)	25	%	16	%	21	%	26	%
Flash memory	37	%	25	%	35	%	37	%
Logic and other	13	%	9	%
	100	%	100	%	100	%	100	%

Net sales for the ~~first quarter of fiscal 2018 increased~~three months ended January 27, 2019 decreased compared to the same period in the prior year ~~primarily due to higher spending from memory and logic customers, partially offset by lower spending from foundry~~for all end use application customers. Operating ~~income and operating~~ margin for the ~~first quarter of fiscal 2018 increased compared to the same period in the prior year~~three months ended January 27, 2019 decreased, primarily ~~due to favorable~~reflecting lower net sales, unfavorable changes in customer and product mix, ~~and higher net sales, partially offset by higher~~as well as increased RD&E expenses. ~~Three~~Four customers each accounted for at least 10 percent of this segment’s net sales, and together they accounted for approximately 5168 percent of this segment’s total net sales, in the ~~first quarter of fiscal 2018.~~three months ended January 27, 2019.

The following regions accounted for at least 30 percent of total net sales for the Semiconductor Systems segment for one or more of the periods indicated:

Three Months Ended
January 28,
2018 January 29,
2017 Change

(In millions, except percentages)
Korea $ 1,013
36% $ 500
23% 103%
Taiwan $ 540
19% $ 945
44% (43)%



	Three Months Ended
	January 27, 2019			January 28, 2018			Change

	(In millions, except percentages)
Korea	$	434	19%	$	1,040	36%	(58	)%

Applied Global Services Segment

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. Customer demand for products and services is fulfilled through a global distribution system with trained service engineers located in close proximity to customer sites.

Demand for Applied Global Services’ service solutions are driven by Applied’s large and growing installed base of manufacturing systems, and customers’ needs to shorten ramp times, improve device performance and yield, and optimize factory output and operating costs. Industry conditions that affect Applied Global Services’ sales of spares and services are primarily characterized by increases in semiconductor manufacturers’ wafer starts and continued strong utilization rates, growth of the installed base of equipment, growing service intensity of newer tools, and the company’s ability to sell more comprehensive service agreements.

Certain significant measures for the periods indicated were as follows:


	Three Months Ended									Three Months Ended
	January 28, 2018			January 29, 2017			Change			January 27, 2019			January 28, 2018			Change

	(In millions, except percentages and ratios)									(In millions, except percentages and ratios)
Net sales	$	880		$	676		$	204	30%	$	962		$	881		$	81	9	%
Operating income	$	254		$	178		$	76	43%	$	285		$	255		$	30	12	%
Operating margin	28.9		%	26.3		%			2.6 points	29.6		%	28.9		%			0.7 points

Net sales for the ~~first quarter of fiscal 2018~~three months ended January 27, 2019 increased compared to the same period in the prior year primarily due to higher customer spending for ~~spares~~services and ~~services.~~legacy systems. Operating income and operating margin for the ~~first quarter of fiscal 2018~~three months ended January 27, 2019 compared to the same period in the prior year increased due to higher net ~~sales.~~sales, partially offset by higher expenses related to an increase in headcount. In the ~~first quarter of fiscal 2018, two customers each~~three months ended January 27, 2019, one customer accounted for more than 10 percent of this segment’s total net sales.

There was no region that accounted for at least 30 percent of total net sales for the Applied Global Services segment for any of the periods presented.

Display and Adjacent Markets Segment

The Display and Adjacent Markets segment encompasses products for manufacturing liquid crystal and OLED displays, and other display technologies for TVs, monitors, laptops, personal computers, electronic tablets, smart phones, and other consumer-oriented devices, equipment upgrades and flexible coating systems. The segment is focused on expanding its presence through technologically-differentiated equipment for manufacturing large-scale ~~TVs; emerging technologies such as OLED,~~LCD TVs, OLEDs, low temperature polysilicon (LTPS), metal oxide, and touch panel sectors; and development of products that provide customers with improved performance and yields. Display industry growth depends primarily on consumer demand for increasingly larger and more advanced TVs as well as larger and higher resolution displays for next generation mobile devices.

The market environment for ~~Applied’s~~Applied's Display and Adjacent Markets segment ~~has been~~in the first three months of fiscal 2019 was characterized by ~~healthy~~increased demand for manufacturing equipment for ~~high-end~~TVs and continued demand for mobile ~~devices and TV~~ manufacturing equipment, ~~although these markets remain susceptible~~compared to ~~cyclical conditions.~~the same period in the prior year. Uneven ~~demand~~spending patterns by customers in the Display and Adjacent Markets segment can cause significant fluctuations quarter-over-quarter, as well as year-over-year.

Certain significant measures for the periods presented were as follows:


	Three Months Ended										Three Months Ended
	January 28, 2018			January 29, 2017			Change				January 27, 2019			January 28, 2018			Change

	(In millions, except percentages and ratios)										(In millions, except percentages and ratios)
Net sales	$	455		$	422		$	33		8%	$	507		$	443		$	64	14	%
Operating income	$	101		$	115		$	(14	)	(12)%	$	115		$	90		$	25	28	%
Operating margin	22.2		%	27.3		%				(5.1) points	22.7		%	20.3		%			2.4 points

Net sales for the ~~first quarter of fiscal 2018~~three months ended January 27, 2019 increased compared to the same period in the prior year primarily due to higher customer investments in ~~mobile device manufacturing equipment, partially offset by lower~~ TV display manufacturing equipment. Operating income and operating margin for the ~~first quarter of fiscal 2018 decreased~~three months ended January 27, 2019 increased compared to the same period in the prior year, reflecting ~~unfavorable product mix and~~ higher ~~RD&E spending,~~net sales, partially offset by ~~increased net sales.~~higher expenses related to an increase in headcount. In the ~~first quarter~~three months ended January 27, 2019, three customers each accounted for at least 10 percent of ~~fiscal 2018, three customers~~this segment’s net sales, and together they accounted for approximately 5279 percent of this segment’s total net sales.

The following region accounted for at least 30 percent of total net sales for the Display and Adjacent Markets segment for one or more of the periods presented:

Three Months Ended
January 28,
2018 January 29,
2017 Change

(In millions, except percentages)
China $ 268
59% $ 286
68% (6)%



	Three Months Ended
	January 27, 2019			January 28, 2018			Change

	(In millions, except percentages)
China	$	477	94%	$	311	70%	53%

Financial Condition, Liquidity and Capital Resources

Applied’s cash, cash equivalents and investments consist of the following:


	January 28, 2018		October 29, 2017		January 27, 2019		October 28, 2018

	(In millions)				(In millions)
Cash and cash equivalents	$	6,799	$	5,010	$	3,192	$	3,440
Short-term investments	655		2,266		520		590
Long-term investments	1,203		1,143		1,588		1,568
Total cash, cash-equivalents and investments	$	8,657	$	8,419	$	5,300	$	5,598

Sources and Uses of Cash

A summary of cash provided by (used in) operating, investing, and financing activities is as follows:


	Three Months Ended						Three Months Ended
	January 28, 2018			January 29, 2017			January 27, 2019			January 28, 2018

	(In millions)						(In millions)
Cash provided by operating activities	$	1,466		$	792		$	834		$	1,466
Cash provided by (used in) investing activities	$	1,352		$	(367	)	$	(66	)	$	1,352
Cash used in financing activities	$	(1,029	)	$	(340	)	$	(1,016	)	$	(1,029	)

Operating Activities

Cash from operating activities for the three months ended January ~~28, 2018~~27, 2019 was $~~1.5 billion~~834 million, which reflects net income adjusted for the effect of non-cash charges and changes in working capital components. Non-cash charges included depreciation, amortization, share-based compensation and deferred income taxes. Cash provided by operating activities ~~increased from~~decreased in the first ~~quarter~~three months of fiscal ~~2017~~2019 compared to the ~~first quarter of fiscal 2018~~same period in the prior year primarily due to ~~a decrease in accounts receivable, partially~~lower cash collections and higher payments to suppliers, offset by a lower ~~net income.~~change in inventory during the three months ended January 27, 2019, compared to the same period in the prior year.

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 ~~$376~~$464 million and ~~$63~~$376 million of accounts receivable during the three months ended January ~~28, 2018~~27, 2019 and January ~~29, 2017,~~28, 2018, respectively. Applied did not discount promissory notes or utilize programs to discount letters of credit issued by customers during the three months ended January ~~28, 2018~~27, 2019 or January ~~29, 2017.~~28, 2018.

Applied’s working capital was ~~$8.6~~$6.5 billion atas of January 27, 2019 and $6.7 billion as of October 28, ~~2018 and $8.8 billion at October 29, 2017.~~2018.

Days sales outstanding for the ~~first quarter of fiscal 2018~~three months ended January 27, 2019 was 4759 days, ~~a decrease~~an increase compared to 47 day sales outstanding ~~of 66 days~~ for the same period in the prior year. Days sales outstanding varies due to the timing of shipments and payment terms, and the ~~decrease~~increase was primarily due to better revenue linearity ~~and collection performance.~~for the same period in the prior year.

Investing Activities

Applied ~~generated $1.4 billion~~used $66 million of cash ~~from~~in investing activities during the three months ended January ~~28, 2018~~27, 2019. ~~Proceeds~~Capital expenditures totaled $133 million and were partially offset by the proceeds from sales and maturities of investments, net of purchases of investments ~~totaled~~ ~~$1.6 billion~~ ~~and were partially offset by capital expenditures~~ of ~~$203~~$67 million during the three months ended January ~~28, 2018~~27, 2019.

Applied’s investment portfolio consists principally of investment grade money market mutual funds, U.S. Treasury and agency securities, municipal bonds, corporate bonds and mortgage-backed and asset-backed securities, as well as equity securities. Applied regularly monitors the credit risk in its investment portfolio and takes appropriate measures, which may include the sale of certain securities, to manage such risks prudently in accordance with its investment policies. During the three months ended January 28, 2018, Applied did not recognize any impairment of its fixed income securities. At January 28, 2018, gross unrealized losses related to Applied’s investment portfolio were not material.

Financing Activities

Applied used $1.0 billion of cash in financing activities during the three months ended January ~~28, 2018~~27, 2019, consisting primarily of repurchases of common stock of ~~$782~~$750 million, cash dividends to stockholders of $192 million and tax withholding payments for vested equity awards of ~~$141 million and cash dividends to stockholders of $106~~$74 million.

In December ~~2017,~~2018, Applied’s Board of Directors declared a quarterly cash dividend payable in March 2019, in the amount of ~~$0.10~~$0.20 per ~~share, to be paid in March 2018.~~share. 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. ~~In February 2018, the Board of Directors approved a quarterly cash dividend of $0.20 per share to be paid in June 2018.~~

Applied has credit facilities for unsecured borrowings in various currencies of up to $1.6 billion, of which $1.5 billion is comprised of a committed revolving credit agreement with a group of banks that is scheduled to expire in September 2021. This agreement provides for borrowings in United States dollars at interest rates keyed to one of the two rates selected by Applied for each advance and includes financial and other covenants with which Applied was in compliance atas of January ~~28, 2018~~27, 2019. Remaining credit facilities in the amount of approximately $73 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 atas of both January ~~28, 2018~~27, 2019 and October ~~29, 2017,~~28, 2018, and Applied has not utilized these credit facilities.

In fiscal 2011, Applied established a short-term commercial paper program of up to $1.5 billion. AtAs of January ~~28, 2018,~~27, 2019, Applied did not have any commercial paper outstanding but may issue commercial paper notes under this program from time to time in the future.

In March 2017, Applied issued senior unsecured notes in the aggregate principal amount of $2.2 billion. Applied had senior unsecured notes in the aggregate principal amount of $5.4 billion outstanding as of January 28, 2018. The indentures governing these notes include covenants with which Applied was in compliance at ~~January 28, 2018. See~~ ~~Note 9~~ of Notes to Consolidated Condensed Financial Statements for additional discussion of long-term debt. Applied may seek to refinance its existing debt and may incur additional indebtedness depending on Applied’s capital requirements and the availability of financing.

In the ordinary course of business, Applied provides standby letters of credit or other guarantee instruments to third parties as required for certain transactions initiated by either Applied or its subsidiaries. As of January ~~28, 2018~~27, 2019, the maximum potential amount of future payments that Applied could be required to make under these guarantee agreements was approximately $7268 million. Applied has not recorded any liability in connection with these guarantee agreements beyond that required to appropriately account for the underlying transaction being guaranteed. Applied does not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under these guarantee agreements.

Applied also has agreements with various banks to facilitate subsidiary banking operations worldwide, including overdraft arrangements, issuance of bank guarantees, and letters of credit. As of January ~~28, 2018~~27, 2019, Applied ~~Materials, Inc.~~ has provided parent guarantees to banks for approximately $~~141~~150 million to cover these arrangements.

Others

During the three months ended January ~~28, 2018,~~27, 2019, Applied did not record a bad debt provision. While Applied believes that its allowance for doubtful accounts atas of January ~~28, 2018~~27, 2019 is adequate, it will continue to closely monitor customer liquidity and economic conditions.

On December 22, 2017, the U.S. government enacted ~~tax legislation referred to as~~ the Tax Cuts and Jobs ~~Act (the “Tax Act”).~~Act. The Tax Act requires a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries. ~~During the three months ended January 28, 2018,~~ Applied ~~recorded~~realized a transition tax expense of $1.0 billion ~~tax charge associated with the Tax Act,~~ which ~~included an estimate of a one-time transition tax and represents the tax~~is payable over eight years, with ~~8.0~~eight percent ~~of the balance~~ due in each of the first five ~~years. The transition tax eliminated~~years starting with fiscal 2018. Before the requirement that cash, cash equivalents and marketable securities held by certain foreign subsidiaries be subject to U.S income taxes if repatriated for U.S. operations. Accordingly, cash, cash equivalents and marketable securities held by all foreign subsidiaries may be repatriated for U.S. operation without being subject toTax Act, U.S. income ~~taxes. As of January 28, 2018, approximately $6.5 billion of cash, cash equivalents and marketable securities was held by foreign subsidiaries.~~tax had not been provided for certain unrepatriated earnings that were considered indefinitely reinvested. Income tax is now provided for all unrepatriated earnings.

Although cash requirements will fluctuate based on the timing and extent of factors such as those discussed above, Applied’s management believes that cash generated from operations, together with the liquidity provided by existing cash balances and borrowing capability, will be sufficient to satisfy Applied’s liquidity requirements for the next 12 months. For further details regarding Applied’s operating, investing and financing activities, see the Consolidated Condensed Statements of Cash Flows in this report.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make judgments, assumptions and estimates that affect the amounts reported. Note 1 of Notes to Consolidated Financial Statements in Applied’s Annual Report on Form 10-K and Note 1 of Notes to Consolidated Condensed Financial Statements in this report describe the significant accounting policies used in the preparation of the consolidated financial statements. Certain of these significant accounting policies are considered to be critical accounting policies.

A critical accounting policy is defined as one that is both material to the presentation of Applied’s consolidated financial statements and that requires management to make difficult, subjective or complex judgments that could have a material effect on Applied’s financial condition or results of operations. Specifically, these policies have the following attributes: (1) Applied is required to make assumptions about matters that are highly uncertain at the time of the estimate; and (2) different estimates Applied could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on Applied’s financial condition or results of operations.

Estimates and assumptions about future events and their effects cannot be determined with certainty. Applied bases its estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as Applied’s operating environment changes. These changes have historically been minor and have been included in the consolidated financial statements as soon as they became known. In addition, management is periodically faced with uncertainties, the outcomes of which are not within its control and will not be known for prolonged periods of time. These uncertainties include those discussed in Part II, Item 1A, “Risk Factors.” Based on a critical assessment of its accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that Applied’s consolidated financial statements are fairly stated in accordance with accounting principles generally accepted in the United States of America, and provide a meaningful presentation of Applied’s financial condition and results of operations.

Management believes that the following are critical accounting policies and estimates:

Revenue Recognition

~~Applied~~Applied recognizes revenue when ~~all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred~~promised goods or services ~~have been rendered; sales price is fixed~~(performance obligations) are transferred to a customer in an amount that reflects the consideration to which Applied expects to be entitled in exchange for those goods or ~~determinable; and collectability is probable. Each sale arrangement may contain commercial terms that differ from other arrangements. In addition,~~services. Applied ~~frequently enters into contracts that contain multiple deliverables. Judgment is required~~performs the following five steps to ~~properly identify the accounting units~~determine when to recognize revenue: (1) identification of the ~~multiple deliverable transactions~~contract(s) with customers, (2) identification of the performance obligations in the contract, (3) determination of the transaction price, (4) allocation of the transaction price to the performance obligations in the contract, and (5) recognition of revenue when, or as, a performance obligation is satisfied. Management uses judgment to identify performance obligations within a contract and to determine ~~the manner~~whether multiple promised goods or services in ~~which revenue~~a contract should be ~~allocated among the accounting units. Moreover, judgment~~accounted for separately or as a group. Judgment is also used in interpreting ~~the~~ commercial terms and determining when ~~all criteria~~transfer of ~~revenue recognition have been met in order for revenue recognition~~control occurs. Moreover, judgment is used to ~~occur in~~estimate the ~~appropriate accounting period. While~~contract’s transaction price and allocate it to each performance obligation. Any material changes in the identification of performance obligations, determination and allocation of the ~~estimated sales~~transaction price ~~between~~to performance obligations, and determination of when transfer of control occurs to the ~~units of accounting will not affect the amount of total revenue recognized for a particular sales arrangement, any material changes in these allocations~~customer, could impact the timing and amount of revenue recognition, which could have a material effect on Applied’s financial condition and results of operations.

Warranty Costs

Applied provides for the estimated cost of warranty when revenue is recognized. Estimated warranty costs are determined by analyzing specific product, current and historical configuration statistics and regional warranty support costs. Applied’s warranty obligation is affected by product and component failure rates, material usage and labor costs incurred in correcting product failures during the warranty period. As Applied’s customer engineers and process support engineers are highly trained and deployed globally, labor availability is a significant factor in determining labor costs. The quantity and availability of critical replacement parts is another significant factor in estimating warranty costs. Unforeseen component failures or exceptional component performance can also result in changes to warranty costs. If actual warranty costs differ substantially from Applied’s estimates, revisions to the estimated warranty liability would be required, which could have a material adverse effect on Applied’s business, financial condition and results of operations.

Allowance for Doubtful Accounts

Applied maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. This allowance is based on historical experience, credit evaluations, specific customer collection history and any customer-specific issues Applied has identified. Changes in circumstances, such as an unexpected material adverse change in a major customer’s ability to meet its financial obligation to Applied or its payment trends, may require Applied to further adjust its estimates of the recoverability of amounts due to Applied, which could have a material adverse effect on Applied’s business, financial condition and results of operations.

Inventory Valuation

Inventories are generally stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis. The carrying value of inventory is reduced for estimated obsolescence by the difference between its cost and the estimated net realizable value based upon assumptions about future demand. Applied evaluates the inventory carrying value for potential excess and obsolete inventory exposures by analyzing historical and anticipated demand. In addition, inventories are evaluated for potential obsolescence due to the effect of known and anticipated engineering change orders and new products. If actual demand were to be substantially lower than estimated, additional adjustments for excess or obsolete inventory may be required, which could have a material adverse effect on Applied’s business, financial condition and results of operations.

Goodwill and Intangible Assets

Applied reviews goodwill and intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable, and also annually reviews goodwill and intangibles with indefinite lives for impairment. 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. If actual product acceptance differs significantly from the estimates, Applied may be required to record an impairment charge to reduce the carrying value of the reporting unit to its estimated fair value.

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. If the carrying value of a reporting unit exceeds its estimated 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.

Applied determines the fair value of each reporting unit based on a weighting of an income and a market approach. Applied bases the fair value estimates on assumptions that it believes to be reasonable but that are unpredictable and inherently uncertain. Under the income approach, Applied estimates the fair value based on discounted cash flow method.

The estimates used in the impairment testing are consistent with the discrete forecasts that Applied uses to manage its business, and considers any significant developments during the period. Under the discounted cash flow method, cash flows beyond the discrete forecasts are estimated using a terminal growth rate, which considers the long-term earnings growth rate specific to the reporting units. The estimated future cash flows are 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 is derived using both known and estimated market metrics, and is adjusted to reflect both the timing and risks associated with the estimated cash flows. The tax rate used in the discounted cash flow method is the median tax rate of comparable companies and reflects Applied’s current international structure, which is consistent with the market participant perspective. Under the market approach, Applied uses the guideline company method which applies market multiples to forecasted revenues and earnings before interest, taxes, depreciation and amortization. Applied uses market multiples that are consistent with comparable publicly-traded companies and considers each reporting unit’s size, growth and profitability relative to its comparable companies.

Management uses significant judgment when assessing goodwill for potential impairment, especially in emerging markets. Indicators of potential impairment include, but are not limited to, challenging economic conditions, an unfavorable industry or economic environment or other severe decline in market conditions. Such conditions could have the effect of changing one of the critical assumptions or estimates used for the fair value calculation, resulting in an unexpected goodwill impairment charge, which could have a material adverse effect on Applied’s business, financial condition and results of operations. See Note 9 of Notes to Consolidated Financial Statements for additional discussion of goodwill impairment.

Income Taxes

Applied’s provision for income taxes and effective tax rate are affected by the geographical composition of pre-tax income which includes jurisdictions with differing tax rates, conditional reduced tax rates and other income tax incentives. It is also affected by events that are not consistent from period to period, such as changes to income tax laws and the resolution of prior years’ income tax filings. Applied recognizes a current tax liability for the estimated amount of income tax payable on tax returns for the current fiscal year. Deferred tax assets and liabilities are recognized for the estimated future tax effects of temporary differences between the book and tax bases of assets and liabilities. Deferred tax assets are also recognized for net operating loss and tax credit carryforwards. Deferred tax assets are offset by a valuation allowance to the extent it is more likely than not that they are not expected to be realized.

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

The calculation of Applied’s provision for income taxes and effective tax rate involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with Applied’s expectations could have an adverse material impact on Applied’s results of operations and financial condition.

Non-GAAP Adjusted Financial Results

Management uses non-GAAP adjusted financial measures to evaluate the Company’s operating and financial performance and for planning purposes, and as performance measures in its executive compensation program. Applied believes these measures enhance an overall understanding of ~~our~~its performance and investors’ ability to review the Company’s business from the same perspective as the Company’s management and facilitate comparisons of this period’s results with prior periods on a consistent basis by excluding items that ~~we do~~management does not believe are indicative of ~~our~~Applied's ongoing operating performance.

The non-GAAP adjusted financial measures presented below are adjusted to exclude the impact of certain costs, expenses, gains and losses, including certain items related to mergers and acquisitions; restructuring charges and any associated adjustments; impairments of assets, or investments; gain or loss on sale of strategic investments; tax effect of share-based compensation; certain income tax items and other discrete adjustments. Additionally, ~~the first quarter of fiscal 2018~~ non-GAAP results exclude estimated discrete income tax expense items associated with recent U.S. tax legislation. Reconciliations of these non-GAAP measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are provided in the financial tables presented below. There are limitations in using non-GAAP financial measures because the non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles, may be different from non-GAAP financial measures used by other companies, and may exclude certain items that may have a material impact upon our reported financial results. The presentation of this additional information is not meant to be considered in isolation or as a substitute for the directly comparable financial measures prepared in accordance with GAAP.

The following tables present a reconciliation of the GAAP and non-GAAP adjusted consolidated results:

APPLIED MATERIALS, INC.

UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS


	Three Months Ended						Three Months Ended
(In millions, except percentages)	January 28, 2018			January 29, 2017			January 27, 2019			January 28, 2018
Non-GAAP Adjusted Gross Profit
Reported gross profit - GAAP basis	$	1,920		$	1,445		$	1,665		$	1,940
Certain items associated with acquisitions¹	45			42			10			45
Non-GAAP adjusted gross profit	$	1,965		$	1,487		$	1,675		$	1,985
Non-GAAP adjusted gross margin	46.7		%	45.4		%	44.6		%	47.2		%
Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis	$	1,196		$	807		$	908		$	1,215
Certain items associated with acquisitions¹	49			47			14			49
Acquisition integration costs	1			1
Other gains, losses or charges, net	—			(3		)
Acquisition integration and deal costs							3			1
Non-GAAP adjusted operating income	$	1,246		$	852		$	925		$	1,265
Non-GAAP adjusted operating margin	29.6		%	26.0		%	24.6		%	30.1		%
Non-GAAP Adjusted Net Income
Reported net income - GAAP basis	$	135		$	703		$	771		$	165
Certain items associated with acquisitions¹	49			47			14			49
Acquisition integration costs	1			1
Acquisition integration and deal costs							3			1
Impairment (gain on sale) of strategic investments, net	(1		)	5			—			(1		)
Other gains, losses or charges, net	—			(3		)
Loss (gain) on strategic investments, net							(12		)	—
Income tax effect of share-based compensation²	(39		)	—			(5		)	(39		)
Income tax effect of changes in applicable U.S. tax laws³	1,006			—			(24		)	1,006
Income tax effects related to amortization of intra-entity intangible asset transfers							(28		)	—
Resolution of prior years’ income tax filings and other tax items	(13		)	(16		)	59			(13		)
Income tax effect of non-GAAP adjustments⁴	(3		)	(5		)	1			(3		)
Non-GAAP adjusted net income	$	1,135		$	732		$	779		$	1,165



1	These items are incremental charges attributable to completed acquisitions, consisting of amortization of purchased intangible assets.
2	~~In the first quarter of fiscal 2018, Applied adopted the accounting standard~~GAAP basis tax benefit related to share-based compensation ~~(ASU 2016-09), which resulted in a $51 million tax benefit on a GAAP basis; this benefit~~ is being recognized ratably over the fiscal year on a non-GAAP basis.
3	Charges to income tax provision related to a one-time transition tax and a decrease in U.S. deferred tax assets as a result of the recent U.S. tax legislation.
4	Adjustment to provision for income taxes related to non-GAAP adjustments reflected in income before income taxes.

APPLIED MATERIALS, INC.

UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS


	Three Months Ended						Three Months Ended
(In millions, except per share amounts)	January 28, 2018			January 29, 2017			January 27, 2019			January 28, 2018

Non-GAAP Adjusted Earnings Per Diluted Share
Reported earnings per diluted share - GAAP basis	$	0.13		$	0.65		$	0.80		$	0.15
Certain items associated with acquisitions	0.04			0.04			0.01			0.04
Loss (gain) on strategic investments, net							(0.01		)	—
Income tax effect of share-based compensation	(0.04		)	—			—			(0.04		)
Income tax effect of changes in applicable U.S. tax laws	0.94			—			(0.02		)	0.94
Income tax effects related to amortization of intra-entity intangible asset transfers							(0.03		)	—
Resolution of prior years’ income tax filings and other tax items	(0.01		)	(0.02		)	0.06			(0.01		)
Non-GAAP adjusted earnings per diluted share	$	1.06		$	0.67		$	0.81		$	1.08
Weighted average number of diluted shares	1,071			1,089			965			1,071

The following table presents a reconciliation of the GAAP and non-GAAP adjusted segment results:

APPLIED MATERIALS, INC.

UNAUDITED RECONCILIATION OF GAAP TO NON-GAAP ADJUSTED RESULTS


	Three Months Ended						Three Months Ended
(In millions, except percentages)	January 28, 2018			January 29, 2017			January 27, 2019			January 28, 2018

Semiconductor Systems Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis	$	995		$	690		$	631		$	1,024
Certain items associated with acquisitions¹	46			46			11			46
Non-GAAP adjusted operating income	$	1,041		$	736		$	642		$	1,070
Non-GAAP adjusted operating margin	36.6		%	34.2		%	28.3		%	37.5		%
AGS Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis	$	254		$	178		$	285		$	255
Acquisition integration costs	1			1			—			1
Non-GAAP adjusted operating income	$	255		$	179		$	285		$	256
Non-GAAP adjusted operating margin	29.0		%	26.5		%	29.6		%	29.1		%
Display and Adjacent Markets Non-GAAP Adjusted Operating Income
Reported operating income - GAAP basis	$	101		$	115		$	115		$	90
Certain items associated with acquisitions¹	3			—			3			3
Non-GAAP adjusted operating income	$	104		$	115		$	118		$	93
Non-GAAP adjusted operating margin	22.9		%	27.3		%	23.3		%	21.0		%



1	These items are incremental charges attributable to completed acquisitions, consisting of amortization of purchased intangible assets.

Note: The reconciliation of GAAP and non-GAAP adjusted segment results above does not include certain revenues, costs of products sold and operating expenses that are reported within corporate and other and included in consolidated operating income.


Item 3:	Quantitative and Qualitative Disclosures About Market Risk

Applied is exposed to interest rate risk related to its investment portfolio and debt issuances. Applied’s investment portfolio includes fixed-income securities with a fair value of approximately $~~1.7~~2.0 billion atas of January ~~28, 2018~~27, 2019. These securities are subject to interest rate risk and will decline in value if interest rates increase. Based on Applied’s investment portfolio atas of January ~~28, 2018~~27, 2019, an immediate 100 basis point increase in interest rates would result in a decrease in the fair value of the portfolio of approximately ~~$22~~$26 million. While an increase in interest rates reduces the fair value of the investment portfolio, Applied will not realize the losses in the consolidated statement of operations unless the individual fixed-income securities are sold prior to recovery or the loss is determined to be other-than-temporary. AtAs of January ~~28, 2018~~27, 2019, the ~~carrying amount~~aggregate principal of long-term debt issued by Applied was ~~$5.3~~$5.4 billion with an estimated fair value of $~~5.8~~5.5 billion. A hypothetical decrease in interest rates of 100 basis points would result in an increase in the fair value of Applied’s long-term debt issuances of approximately ~~$588~~$501 million atas of January ~~28, 2018~~27, 2019.

Certain operations of Applied are conducted in foreign currencies, such as Japanese yen, euro, Israeli shekel and Taiwanese dollar. Applied enters into currency forward exchange and option contracts to hedge a portion of, but not all, existing and anticipated foreign currency denominated transactions generally expected to occur within the next 24 months. Gains and losses on these contracts are generally recognized in income at the time that the related transactions being hedged are recognized. Because the effect of movements in currency exchange rates on currency forward exchange and option contracts generally offsets the related effect on the underlying items being hedged, these financial instruments are not expected to subject Applied to risks that would otherwise result from changes in currency exchange rates. Applied does not use derivative financial instruments for trading or speculative purposes.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

As of the end of the period covered by this report, management of Applied conducted an evaluation, under the supervision and with the participation of Applied’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of Applied’s disclosure controls and procedures, as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the Exchange Act). Based upon that evaluation, Applied’s Chief Executive Officer and Chief Financial Officer concluded that Applied’s disclosure controls and procedures were effective as of the end of the period covered by this report in ensuring that information required to be disclosed was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to provide reasonable assurance that information required to be disclosed by Applied in such reports is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

During the first quarter of fiscal ~~2018, there~~2019, Applied implemented controls and processes relating to adoption of the new revenue recognition accounting standard that the Company adopted in the beginning of fiscal 2019. Throughout the implementation, Applied evaluated the impact of the adoption of the new standard on its internal control over financial reporting and made changes to controls where necessary to maintain the effectiveness of internal control over financial reporting in all material respects. There were no other changes in the internal control over financial reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act, that materially affected, or are reasonably likely to materially affect, Applied’s internal control over financial reporting.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information set forth under “Legal Matters” in Note 1213 in Notes to Consolidated Condensed Financial Statements is incorporated herein by reference.


Item 1A:	Risk Factors

The risk factors set forth below include any material changes to, and supersede the description of, the risk factors disclosed in Part I, Item 1A of Applied’s ~~2017~~2018 Form 10-K. These factors could materially and adversely affect Applied’s business, financial condition or results of operations and cause reputational harm, and should be carefully considered in evaluating the Company and its business, in addition to other information presented elsewhere in this report.

The industries that Applied serves can be volatile and difficult to predict.

As a supplier to the global semiconductor and display and related industries, Applied is subject to variable industry conditions, as demand for manufacturing equipment and services can change depending on several factors, including the nature and timing of technology inflections and advances in fabrication processes, the timing and requirements of new and emerging technologies and market drivers, production capacity relative to demand for chips and display technologies, end-user demand, customers’ capacity utilization, production volumes, access to affordable capital, consumer buying patterns and general economic conditions. Applied’s industries historically have been cyclical, and are subject to volatility and sudden changes in customer requirements for new manufacturing capacity and advanced technology. These changes can affect the timing and amounts of customer investments in technology and manufacturing equipment, and can have a significant impact on Applied’s net sales, operating expenses, gross margins and net income. The amount and mix of capital equipment spending between different products and technologies can have a significant impact on the Company’s results of operations.

To meet rapidly changing demand in the industries it serves, Applied must accurately forecast demand and effectively manage its resources and production capacity across its businesses, and may incur unexpected or additional costs to align its business operations. During periods of increasing demand for its products, Applied must have sufficient manufacturing capacity and inventory to meet customer demand; effectively manage its supply chain; attract, retain and motivate a sufficient number of qualified employees; and continue to control costs. During periods of decreasing demand, Applied must reduce costs and align its cost structure with prevailing market conditions; effectively manage its supply chain; and motivate and retain key employees. If Applied does not effectively manage these challenges during periods of changing demand, its business performance and results of operations may be adversely impacted. Even with effective allocation of resources and management of costs, during periods of decreasing demand, Applied’s gross margins and earnings may be adversely impacted.

Applied is exposed to risks associated with an uncertain global economy.

Uncertain global economic and business conditions, along with uncertainties and volatility in the financial markets, national debt and fiscal concerns in various regions, pose challenges to the industries in which Applied operates. Markets for semiconductors and displays depend largely on business and consumer spending and demand for electronic products. Economic uncertainty and related factors exacerbate negative trends in business and consumer spending and may cause certain Applied customers to push out, cancel, or refrain from purchasing for equipment or services, which may have an adverse impact on Applied’s revenues, results of operations and financial condition. Uncertain market conditions, difficulties in obtaining capital, or reduced profitability may also cause some customers to scale back operations, exit businesses, merge with other manufacturers, or file for bankruptcy protection and potentially cease operations, which can also result in lower sales, additional inventory or bad debt expense for Applied. Economic and industry uncertainty may similarly affect suppliers, which could impair their ability to deliver parts and negatively affect Applied’s ability to manage operations and deliver its products. These conditions may also lead to consolidation or strategic alliances among other equipment manufacturers, which could adversely affect Applied’s ability to compete effectively.

Uncertain economic and industry conditions also make it more challenging for Applied to forecast its operating results, make business decisions, and identify and prioritize the risks that may affect its businesses, sources and uses of cash, financial condition and results of operations. If Applied does not appropriately manage its business operations in response to changing economic and industry conditions, it could have a significant negative impact on its business performance and financial condition. Applied may be required to implement additional cost reduction efforts, including restructuring activities, which may adversely affect Applied’s ability to capitalize on opportunities. Even during periods of economic uncertainty or lower revenues, Applied must continue to invest in research and development and maintain a global business infrastructure to compete effectively and support its customers, which can have a negative impact on its operating margins and earnings.

Applied maintains an investment portfolio that is subject to general credit, liquidity, market and interest rate risks. The risks to Applied’s investment portfolio may be exacerbated if financial market conditions deteriorate and, as a result, the value and liquidity of the investment portfolio, as well as returns on pension assets, could be negatively impacted and lead to impairment charges. Applied also maintains cash balances in various bank accounts globally in order to fund normal operations. If any of these financial institutions becomes insolvent, it could limit Applied’s ability to access cash in the affected accounts, which could affect its ability to manage its operations.

Applied is exposed to the risks of operating a global business.

Applied has product development, engineering, manufacturing, sales and other operations distributed throughout many countries, and some of its business activities are concentrated in certain geographic areas. Moreover, in the three months ended January 27, 2019, approximately 88 percent of Applied’s net sales were to customers in regions outside the United States. As a result of the global nature of its operations, Applied’s business performance and results of operations may be adversely affected by a number of factors, including:

uncertain global economic and political business conditions and demands;

political and social attitudes, laws, rules, regulations and policies within countries that favor domestic companies over non-domestic companies, including customer- or government-supported efforts to promote the development and growth of local competitors;

global trade issues and changes in and uncertainties with respect to trade policies, including the ability to obtain required import and export licenses, trade sanctions, tariffs, and international trade disputes;

customer- or government-supported efforts to influence Applied to conduct more of its operations and sourcing in a particular country, such as Korea and China;

variations among, and changes in, local, regional, national or international laws and regulations, including contract, intellectual property, cybersecurity, data privacy, labor, tax, and import/export laws, and the interpretation and application of such laws and regulations;

ineffective or inadequate legal protection of intellectual property rights in certain countries;

positions taken by governmental agencies regarding possible national commercial and/or security issues posed by international business operations;

fluctuating raw material, commodity, energy and shipping costs;

delays or restrictions in shipping materials or finished products between countries;

geographically diverse operations and projects, and our ability to maintain appropriate business processes, procedures and internal controls, and comply with environmental, health and safety, anti-corruption and other regulatory requirements;

supply chain interruptions, and service interruptions from utilities, transportation, data hosting or telecommunications providers, or other events beyond our control;

a diverse workforce with different experience levels, languages, cultures, customs, business practices and worker expectations, and differing employment practices and labor issues;

variations in the ability to develop relationships with local customers, suppliers and governments;

fluctuations in interest rates and currency exchange rates, including the relative strength or weakness of the U.S. dollar against the Japanese yen, euro, Taiwanese dollar, Israeli shekel, Chinese yuan or Singapore dollar;

the need to provide sufficient levels of technical support in different locations around the world;

performance of third party providers of outsourced functions, including certain engineering, software development, manufacturing, information technology and other activities;

political instability, natural disasters, pandemics, social unrest, terrorism or acts of war in locations where Applied has operations, suppliers or sales, or that may influence the value chain of the industries that Applied serves;

challenges in hiring and integration of an increasing number of workers in new countries;

the increasing need for a mobile workforce to work in or travel to different regions; and

uncertainties with respect to economic growth rates in various countries, including for the manufacture and sale of semiconductors and displays in the developing economies of certain countries.

International trade disputes could result in increases in tariffs and other trade restrictions and protectionist measures that could have an adverse impact on our operations.

We sell a significant majority of our products into countries outside of the United States and we purchase a significant portion of equipment and supplies from suppliers outside of the United States. The United States and other countries have levied tariffs and taxes on certain goods. Increases in tariffs, additional taxes or other trade restrictions and retaliatory measures may impact end-user demand and customer investment in manufacturing equipment, increase our manufacturing costs, decrease margins, reduce the competitiveness of our products, or inhibit our ability to sell products or purchase necessary equipment and supplies, which could have a material adverse effect on our business, results of operations, or financial condition.

Certain international sales depend on our ability to obtain export licenses, and our inability to obtain such licenses could potentially limit our markets and impact our business. In addition, government authorities may impose conditions that require the use of local suppliers or partnerships with local companies, require the license or other transfer of intellectual property, or engage in other efforts to promote local businesses and local competitors, which could have a significant adverse impact on Applied’s business. Many of these challenges are present in China and Korea, markets that represent significant long-term growth opportunities for Applied businesses.

Applied is exposed to risks as a result of ongoing changes in the various industries in which it operates.

The global semiconductor, display and related industries in which Applied operates are characterized by ongoing changes affecting some or all of these industries that impact demand for and the profitability of Applied’s products and its consolidated results of operations, including:

the nature, timing and degree of visibility of changes in end demand for electronic products, including those related to fluctuations in consumer buying patterns tied to seasonality or the introduction of new products, and the effects of these changes on customers’ businesses and on demand for Applied’s products;

increasing capital requirements for building and operating new fabrication plants and customers’ ability to raise the necessary capital;

trade, regulatory or tax policies impacting the timing of customers’ investment in new or expanded fabrication plants;

differences in growth rates among the semiconductor, display and other industries in which Applied operates;

the increasing importance of establishing, improving and maintaining strong relationships with customers;

the increasing cost and complexity for customers to move from product design to volume manufacturing, which may slow the adoption rate of new manufacturing technology;

the need for customers to continually reduce the total cost of manufacturing system ownership;

the heightened importance to customers of system reliability and productivity and the effect on demand for fabrication systems as a result of their increasing productivity, device yield and reliability;

manufacturers’ ability to reconfigure and re-use fabrication systems which can reduce demand for new equipment;

the increasing importance of, and difficulties in, developing products with sufficient differentiation to influence customers’ purchasing decisions;

requirements for shorter cycle times for the development, manufacture and installation of manufacturing equipment;

price and performance trends for semiconductor devices and displays, and the corresponding effect on demand for such products;

the increasing importance of the availability of spare parts to maximize the time that customers’ systems are available for production;

the increasing role for and complexity of software in Applied products; and

the increasing focus on reducing energy usage and improving the environmental impact and sustainability associated with manufacturing operations.

Applied is exposed to risks as a result of ongoing changes specific to the semiconductor industry.

The largest proportion of Applied’s consolidated net sales and profitability is derived from sales of manufacturing equipment in the Semiconductor Systems segment to the global semiconductor industry. In addition, a majority of the revenues of Applied Global Services is from sales to semiconductor manufacturers. The semiconductor industry is characterized by ongoing changes particular to this industry that impact demand for and the profitability of Applied’s semiconductor equipment and service products, including:

the increasing frequency and complexity of technology transitions and inflections, and Applied’s ability to timely and effectively anticipate and adapt to these changes;

the increasing cost of research and development due to many factors, including shrinking geometries, the use of new materials, new and more complex device structures, more applications and process steps, increasing chip design costs, and the increasing cost and complexity of integrated manufacturing processes;

the need to reduce product development time, despite the increasing difficulty of technical challenges;

the growing number of types and varieties of semiconductors and number of applications across multiple substrate sizes;

the increasing cost and complexity for semiconductor manufacturers to move more technically advanced capability and smaller geometries to volume manufacturing, and the resulting impact on the rates of technology transition and investment in capital equipment;

challenges in generating organic growth given semiconductor manufacturers’ levels of capital expenditures and the allocation of capital investment to market segments that Applied does not serve, such as lithography, or segments where Applied’s products have lower relative market presence;

the importance of increasing market positions in segments with growing demand;

semiconductor manufacturer’s ability to reconfigure and re-use equipment, and the resulting effect on their need to purchase new equipment and services;

shorter cycle times between order placements by customers and product shipment require greater reliance on forecasting of customer investment, which may lead to inventory write-offs and manufacturing inefficiencies that decrease gross margin;

competitive factors that make it difficult to enhance position, including challenges in securing development-tool-of-record (DTOR) and production-tool-of-record (PTOR) positions with customers;

consolidation in the semiconductor industry, including among semiconductor manufacturers and among manufacturing equipment suppliers;

shifts in sourcing strategies by computer and electronics companies that impact the equipment requirements of Applied’s foundry customers;

the concentration of new wafer starts in Korea and Taiwan, where Applied’s service penetration and service-revenue-per-wafer-start have been lower than in other regions;

investment in semiconductor manufacturing capabilities in China, which may be affected by changes in economic conditions and governmental policies in China; and

the increasing fragmentation of semiconductor markets, leading certain markets to become too small to support the cost of a new fabrication plant, while others require less technologically advanced products.

If Applied does not accurately forecast, and allocate appropriate resources and investment towards addressing, key technology changes and inflections, successfully develop and commercialize products to meet demand for new technologies, and effectively address industry trends, its business and results of operations may be adversely impacted.

Applied is exposed to risks as a result of ongoing changes specific to the display industry.

The global display industry historically has experienced considerable volatility in capital equipment investment levels, due in part to the limited number of display manufacturers, the concentrated nature of end-use applications, production capacity relative to end-use demand, and panel manufacturer profitability. Industry growth depends primarily on consumer demand for increasingly larger and more advanced TVs, and on demand for advanced smartphones and mobile device displays, which demand is highly sensitive to cost and improvements in technologies and features. The display industry is characterized by ongoing changes particular to this industry that impact demand for and the profitability of Applied’s display products and services, including:

the importance of new types of display technologies, such as organic light-emitting diode (OLED), low temperature polysilicon (LTPS)~~, flexible displays~~ and metal oxide transistor backplanes, flexible displays, and new touch panel films;

the increasing cost of research and development, and complexity of technology transitions and inflections, and Applied’s ability to timely and effectively anticipate and adapt to these changes;

the timing and extent of an expansion of manufacturing facilities in China, which may be affected by changes in economic conditions and governmental policies in China;

the importance of increasing market positions in products and technologies with growing demand;

the rate of transition to larger substrate sizes for TVs and to new display technologies for TVs and mobile applications, and the resulting effect on capital intensity in the industry and on Applied’s product differentiation, gross margin and return on investment; and

the variability in demand for display manufacturing equipment, concentration of display manufacturer customers and their ability to successfully commercialize new products and technologies, and uncertainty with respect to future display technology end-use applications and growth drivers.

If Applied does not successfully develop and commercialize products to meet demand for new and emerging display technologies, or if industry demand for display manufacturing equipment and technologies slows, Applied’s business and its results of operations may be adversely impacted.

The industries in which Applied operates are highly competitive and subject to rapid technological and market changes.

Applied operates in a highly competitive environment in which innovation is critical, and its future success depends on many factors, including the development of new technologies and effective commercialization and customer acceptance of its equipment, services and related products, and its ability to increase its position in its current markets, expand into adjacent and new markets, and optimize operational performance. The development, introduction and support of a broadening set of products in a geographically diverse and competitive environment, and that may require greater collaboration with customers and other industry participants, have grown more complex and expensive over time. Furthermore, new or improved products may entail higher costs and lower profits. To compete successfully, Applied must:

identify and address technology inflections, market changes, new applications, customer requirements and end-use demand;

develop new products and disruptive technologies, improve and develop new applications for existing products, and adapt products for use by customers in different applications and markets with varying technical requirements;

differentiate its products from those of competitors, meet customers’ performance specifications, appropriately price products, and achieve market acceptance;

maintain operating flexibility to enable responses to changing markets, applications, customers and customer requirements;

enhance its worldwide operations across its businesses to reduce cycle time, enable continuous quality improvement, reduce costs, and enhance design for manufacturability and serviceability;

focus on product development and sales and marketing strategies that address customers’ high value problems and strengthen customer relationships;

effectively allocate resources between its existing products and markets, the development of new products, and expanding into new and adjacent markets;

improve the productivity of capital invested in R&D activities;

accurately forecast demand, work with suppliers and meet production schedules for its products;

improve its manufacturing processes and achieve cost efficiencies across product offerings;

adapt to changes in value offered by companies in different parts of the supply chain;

qualify products for evaluation and volume manufacturing with its customers; and

implement changes in its design engineering methodology to reduce material costs and cycle time, increase commonality of platforms and types of parts used in different systems, and improve product life cycle management.

If Applied does not successfully anticipate technology inflections, develop and commercialize new products and technologies, and respond to changes in customer requirements and market trends, its business performance and results of operations may be adversely impacted.

Applied is exposed to risks associated with a highly concentrated customer base.

Applied’s customer base is highly concentrated, and has become increasingly ~~concentrated~~so as a result of continued consolidation. Applied’s customer base is also geographically concentrated. A relatively limited number of manufacturers account for a substantial portion of Applied’s business. As a result, the actions of even a single customer can expose Applied’s business and results of operations to greater volatility. The mix and type of customers, and sales to any single customer, including as a result of changes in government policy, may vary significantly from quarter to quarter and from year to year, and have a significant impact on Applied’s net sales, gross margins and net income. Applied’s products are configured to customer specifications, and changing, rescheduling or canceling orders may result in significant, non-recoverable costs. If customers do not place orders, or they substantially reduce, delay or cancel orders, Applied may not be able to replace the business, which may have a significant adverse impact on its results of operations and financial condition. The concentration of Applied’s customer base increases its risks related to the financial condition of its customers, and the deterioration in financial condition of a single customer or the failure of a single customer to perform its obligations could have a material adverse effect on Applied’s results of operations and cash flow. To the extent its customers experience liquidity constraints, Applied may incur additional bad debt expense, which may have a significant impact on its results of operations. Major customers may also seek pricing, payment, intellectual property-related, or other commercial terms that are less favorable to Applied, which may have a negative impact on Applied’s business, cash flow, revenue and gross margins.

~~Applied is exposed to the risks of operating a global business.~~

Applied has product development, engineering, manufacturing, sales and other operations distributed throughout many countries, and some of its business activities are concentrated in certain geographic areas. Moreover, in the first quarter of fiscal 2018, approximately 91 percent of Applied’s net sales were to customers in regions outside the United States. As a result of the global nature of its operations, Applied’s business performance and results of operations may be adversely affected by a number of factors, including:

~~uncertain global economic and political business conditions and demands;~~

~~customer- or government-supported efforts to influence Applied to conduct more of its operations and sourcing in a particular country, such as Korea and China;~~

variations among, and changes in, local, regional, national or international laws and regulations, including contract, intellectual property, labor, tax, and import/export laws, and the interpretation and application of such laws and regulations;

~~global trade issues, including the ability to obtain required import and export licenses, trade sanctions, tariffs, and international trade disputes;~~

~~ineffective or inadequate legal protection of intellectual property rights in certain countries;~~

~~positions taken by governmental agencies regarding possible national commercial and/or security issues posed by international business operations;~~

~~fluctuating raw material, commodity, energy and shipping costs or shipping delays;~~

~~supply chain interruptions, and service interruptions from utilities, transportation, data hosting or telecommunications providers;~~

~~a diverse workforce with different experience levels, languages, cultures, customs, business practices and worker expectations, and differing employment practices and labor issues;~~

~~variations in the ability to develop relationships with local customers, suppliers and governments;~~

~~the need to provide sufficient levels of technical support in different locations around the world;~~

~~performance of third party providers of outsourced functions, including certain engineering, software development, manufacturing, information technology and other activities;~~

~~challenges in hiring and integration of an increasing number of workers in new countries;~~

~~the increasing need for a mobile workforce to work in or travel to different regions; and~~

~~uncertainties with respect to economic growth rates in various countries, including for the manufacture and sale of semiconductors and displays in the developing economies of certain countries.~~

Many of these challenges are present in China and Korea, which are experiencing significant growth of customers, suppliers and competitors to Applied. Applied further believes that China and Korea present large potential markets for its products and opportunity for growth over the long term, although at lower projected levels of profitability and margins for certain products than historically have been achieved in other regions. In addition, government authorities may impose conditions that require the use of local suppliers or partnerships with local companies, require the license or other transfer of intellectual property, or engage in other efforts to promote local businesses and local competitors, which could have a significant adverse impact on Applied’s business.

Applied is exposed to risks associated with business combinations, acquisitions and strategic investments.

Applied engages in acquisitions of or investments in companies, technologies or products in existing, related or new markets for Applied. Business combinations, acquisitions and investments involve numerous risks to Applied’s business, financial condition and operating results, including but not limited to:

diversion of management’s attention and disruption of ongoing businesses;

contractual restrictions on the conduct of Applied’s business during the pendency of a proposed transaction;

inability to complete proposed transactions due to the failure to obtain regulatory or other approvals, litigation or other disputes, and any ensuing obligation to pay a termination fee;

the failure to realize expected returns from acquired businesses;

requirements imposed by government regulators in connection with their review of a transaction, which may include, among other things, divestitures and restrictions on the conduct of Applied’s existing business or the acquired business;

ineffective integration of operations, systems, technologies, products or employees, which can impact the ability to realize anticipated synergies or other benefits;

failure to commercialize technologies from acquired businesses or developed through strategic investments;

dependence on unfamiliar supply chains or relatively small supply partners;

inability to capitalize on characteristics of new markets that may be significantly different from Applied’s existing markets and where competitors may have stronger market positions and customer relationships;

failure to retain and motivate key employees of acquired businesses;

the potential impact of the announcement or consummation of a proposed transaction on relationships with third parties;

potential changes in Applied’s credit rating, which could adversely impact the Company’s access to and cost of capital;

reductions in cash balances or increases in debt obligations to finance activities associated with a transaction, which reduce the availability of cash flow for general corporate or other purposes, including share repurchases and dividends;

exposure to new operational risks, rules, regulations, worker expectations, customs and practices to the extent acquired businesses are located in regions where Applied has not historically conducted business;

challenges associated with managing new, more diverse and more widespread operations, projects and people;

inability to obtain and protect intellectual property rights in key technologies;

inadequacy or ineffectiveness of an acquired company’s internal financial controls, disclosure controls and procedures, cybersecurity, privacy policies and procedures, or environmental, health and safety, anti-corruption, human resource, or other policies or practices;

impairment of acquired intangible assets and goodwill as a result of changing business conditions, technological advancements or worse-than-expected performance of the segment;

the risk of litigation or claims associated with a proposed or completed transaction;

unknown, underestimated or undisclosed commitments or liabilities; and

the inappropriate scale of acquired entities’ critical resources or facilities for business needs.

Applied also makes strategic investments in other companies, including companies formed as joint ventures, which may decline in value or not meet desired objectives. The success of these investments depends on various factors over which Applied may have limited or no control and, particularly with respect to joint ventures, requires ongoing and effective cooperation with strategic partners. In addition, new legislation or additional regulations may affect or impair our ability to invest in certain countries or require us to obtain regulatory approvals to do so. The risks to Applied’s strategic investment portfolio may be exacerbated by unfavorable financial market and macroeconomic conditions and, as a result, the value of the investment portfolio could be negatively impacted and lead to impairment charges.

Applied is exposed to risks associated with operating in jurisdictions with complex and changing tax laws.

Applied is subject to income taxes in the United States and foreign jurisdictions. Significant judgment is required to determine and estimate worldwide tax liabilities. Applied’s provision for income taxes and effective tax rates could be affected by numerous factors, including changes in applicable tax laws, interpretations of applicable tax laws, amount and composition of pre-tax income in jurisdictions with differing tax rates, and valuation of deferred tax assets. On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the “Tax Act”). On September 13, 2018, the U.S. government issued proposed regulations that, if finalized, would significantly affect how the Tax Act is interpreted related to a tax benefit of $46 million realized by Applied in the first quarter of fiscal 2019. Proposed regulations are not authoritative and may change in the regulatory review process. Pursuant to our accounting policies for uncertain tax positions, the tax benefit might reverse if the regulations are finalized as proposed. An increase in Applied’s provision for income taxes and effective tax rate could have a material adverse impact on Applied’s results of operations and financial condition.

Consistent with the international nature of its business, Applied conducts certain manufacturing, supply chain, and other operations in Asia, bringing these activities closer to customers and reducing operating costs. In certain foreign jurisdictions, conditional reduced income tax rates have been granted to Applied. To obtain the benefit of these tax incentives, Applied must meet requirements relating to various activities. Applied’s ability to realize benefits from these incentives could be materially affected if, among other things, applicable requirements are not met or Applied incurs net losses in these jurisdictions.

In addition, Applied is subject to examination by the Internal Revenue Service and other tax authorities, and from time to time amends previously filed tax returns. Applied regularly assesses the likelihood of favorable or unfavorable outcomes resulting from these examinations and amendments to determine the adequacy of its provision for income taxes, which requires estimates and judgments. Although Applied believes its tax estimates are reasonable, there can be no assurance that the tax authorities will agree with such estimates. Applied may have to engage in litigation to achieve the results reflected in the estimates, which may be time-consuming and expensive. There can be no assurance that Applied will be successful or that any final determination will not be materially different from the treatment reflected in Applied’s historical income tax provisions and effective tax rates.

Applied’s indebtedness and debt covenants could adversely affect its financial condition and business.

Applied has $5.4 billion in aggregate principal amount of senior unsecured notes outstanding. Under the indenture governing the senior unsecured notes, it may be required to offer to repurchase the notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest, upon a change of control of Applied and a contemporaneous downgrade of the notes below investment grade. Applied also has in place a $1.5 billion committed revolving credit agreement. While no amounts were outstanding under this credit agreement atas of January ~~28, 2018,~~27, 2019, Applied may borrow amounts in the future under the agreement. Applied may also enter into new financing arrangements. Applied’s ability to satisfy its debt obligations is dependent upon the results of its business operations and subject to other risks discussed in this section. Significant changes in Applied’s credit rating or changes in the interest rate environment could have a material adverse consequence on Applied’s access to and cost of capital for future financings, and financial condition. If Applied fails to satisfy its debt obligations, or comply with financial and other debt covenants, it may be in default and any borrowings may become immediately due and payable, and such default may also constitute a default under other of Applied’s obligations. There can be no assurance that Applied would have sufficient financial resources or be able to arrange financing to repay any borrowings at such time.

Applied is exposed to risks associated with expanding into new and related markets and industries.

As part of its growth strategy, Applied must successfully expand into related or new markets and industries, either with its existing products or with new products developed internally, or those developed in collaboration with third parties, or obtained through acquisitions. Applied’s ability to successfully expand its business into new and related markets and industries may be adversely affected by a number of factors, including:

the need to devote additional resources to develop new products for, and operate in, new markets;

the need to develop new sales and technical marketing strategies, cultivate relationships with new customers and meet different customer service requirements;

differing rates of profitability and growth among multiple businesses;

Applied’s ability to anticipate demand, capitalize on opportunities, and avoid or minimize risks;

the complexity of managing multiple businesses with variations in production planning, execution, supply chain management and logistics;

the adoption of new business models, business processes and systems;

the complexity of entering into and effectively managing strategic alliances or partnering opportunities;

new materials, processes and technologies;

the need to attract, motivate and retain employees with skills and expertise in these new areas;

new and more diverse customers and suppliers, including some with limited operating histories, uncertain or limited funding, evolving business models or locations in regions where Applied does not have, or has limited, operations;

new or different competitors with potentially more financial or other resources, industry experience and established customer relationships;

entry into new industries and countries, with differing levels of government involvement, laws and regulations, and business, employment and safety practices;

third parties’ intellectual property rights; and

the need to comply with, or work to establish, industry standards and practices.

In addition, Applied from time to time receives funding from United States and other government agencies for certain strategic development programs to increase its research and development resources and address new market opportunities. As a condition to this government funding, Applied may be subject to certain record-keeping, audit, intellectual property rights-sharing and/or other obligations.

Manufacturing interruptions or delays, or the failure to accurately forecast customer demand, could affect Applied’s ability to meet customer demand, lead to higher costs, or result in excess or obsolete inventory.

Applied’s business depends on its timely supply of equipment, services and related products that meet the rapidly changing technical and volume requirements of its customers, which depends in part on the timely delivery of parts, including components and subassemblies, from suppliers, including contract manufacturers. The inability to timely obtain sufficient quantities of parts can have an adverse impact on Applied’s manufacturing operations and ability to meet customer demand for equipment, spares and services. Some key parts are subject to long lead-times or obtainable only from a single supplier or limited group of suppliers, and some sourcing or subassembly is provided by suppliers located in countries other than the countries where Applied conducts its manufacturing. Variable industry conditions and the volatility of demand for manufacturing equipment increase capital, technical, operational and other risks for Applied and for companies throughout its supply chain. These conditions may cause some suppliers to scale back operations, exit businesses, merge with other companies, or file for bankruptcy protection and possibly cease operations. Applied may also experience significant interruptions of its manufacturing operations, delays in its ability to deliver products or services, increased costs or customer order cancellations as a result of:

the failure or inability to accurately forecast demand and obtain sufficient quantities of quality parts on a cost-effective basis;

volatility in the availability and cost of materials;

difficulties or delays in obtaining required import or export approvals;

shipment delays due to transportation interruptions or capacity constraints;

information technology or infrastructure ~~failures;~~failures, including those of a third party supplier or service provider; and

natural disasters or other events beyond Applied’s control (such as earthquakes, floods or storms, regional economic downturns, pandemics, social unrest, political instability, terrorism, or acts of war), particularly where it conducts manufacturing.

If a supplier fails to meet Applied’s requirements concerning quality, cost, protection of intellectual property, socially-responsible business practices, or other performance factors, Applied may transfer its business to alternative sources, which could entail manufacturing delays, additional costs, or other difficulties. If Applied is unable to meet its customers’ demand for a prolonged period due to its inability to obtain certain parts or components, it could affect its ability to manage its operations, and have an adverse impact on Applied’s business, results of operations and customer relationships. In addition, if Applied needs to rapidly increase its business and manufacturing capacity to meet increases in demand or expedited shipment schedules, this may exacerbate any interruptions in Applied’s manufacturing operations and supply chain and the associated effect on Applied’s working capital. Moreover, if actual demand for Applied’s products is different than expected, Applied may purchase more/fewer parts than necessary or incur costs for canceling, postponing or expediting delivery of parts. If Applied purchases inventory in anticipation of customer demand that does not materialize, or if customers reduce or delay orders, Applied may incur excess inventory charges.

The ability to attract, retain and motivate key employees is vital to Applied’s success.

Applied’s success, competitiveness and ability to execute on its global strategies and maintain a culture of innovation depend in large part on its ability to attract, retain and motivate employees with key skills and experience. Achieving this objective may be difficult due to many factors, including fluctuations in global economic and industry conditions, management changes, Applied’s organizational structure, increasing global competition for talent, the availability of qualified employees, cost reduction activities (including workforce reductions and unpaid shutdowns), availability of career development opportunities, the ability to obtain necessary authorizations for workers to provide services outside their home countries, and the attractiveness of Applied’s compensation and benefit programs, including its share-based programs. The loss or retirement of employees ~~present~~presents particular challenges to the extent they involve the departure of knowledgeable and experienced employees and the resulting need to identify and train existing or new workers to perform necessary functions, which may result in unexpected costs, reduced productivity, and/or difficulties with respect to internal processes and controls.

Applied is exposed to various risks related to protection and enforcement of intellectual property rights.

Applied’s success depends in significant part on the protection of its patents, trade secrets, copyrights and other intellectual property rights. Infringement of Applied’s rights by a third party, such as the unauthorized manufacture or sale of equipment or spare parts, could result in uncompensated lost market and revenue opportunities for Applied. Policing any unauthorized use of intellectual property is difficult and costly and Applied cannot be certain that the measures it has implemented will prevent misuse. Applied’s ability to enforce its intellectual property rights is subject to litigation risks, as well as uncertainty as to the protection and enforceability of those rights in some countries. If Applied seeks to enforce its intellectual property rights, it may be subject to claims that those rights are invalid or unenforceable, and others may seek counterclaims against Applied, which could have a negative impact on its business. If Applied is unable to enforce and protect intellectual property rights, or if they are circumvented, invalidated, rendered obsolete by the rapid pace of technological change, it could have an adverse impact on its competitive position and business. In addition, changes in intellectual property laws or their interpretation, such as recent changes in U.S. patent laws, may impact Applied’s ability to protect and assert its intellectual property rights, increase costs and uncertainties in the prosecution of patent applications and enforcement or defense of issued patents, and diminish the value of Applied’s intellectual property.

Third parties may also assert claims against Applied and its products. Claims that Applied’s products infringe the rights of others, whether or not meritorious, can be expensive and time-consuming to defend and resolve, and may divert the efforts and attention of management and personnel. The inability to obtain rights to use third party intellectual property on commercially reasonable terms could have an adverse impact on Applied’s business. In addition, Applied may face claims based on the theft or unauthorized use or disclosure of third-party trade secrets and other confidential business information. Any such incidents and claims could severely harm Applied’s business and reputation, result in significant expenses, harm its competitive position, and prevent Applied from selling certain products, all of which could have a significant adverse impact on Applied’s business and results of operations.

Applied is exposed to risks related to cybersecurity threats and incidents.

In the conduct of its business, Applied collects, uses, transmits and stores data on information technology ~~systems. This~~systems, including systems owned and maintained by Applied or third party providers. These data ~~includes~~include confidential information and intellectual property belonging to Applied or its customers or other business partners, as well as personally-identifiable information of individuals. All information systems are subject to disruption, breach or failure. Applied has experienced, and expects to continue to be subject to, cybersecurity threats and incidents ranging from employee error or misuse to individual attempts to gain unauthorized access to these information systems, to sophisticated and targeted measures known as advanced persistent threats, none of which have been material to the Company to date. Applied devotes significant resources to network security, data encryption and other measures to protect its systems and data from unauthorized access or misuse. However, depending on their nature and scope, cybersecurity incidents could result in business disruption; the misappropriation of intellectual property, and corruption or loss of confidential information and critical data (Applied’s and that of third parties); reputational damage; litigation with third parties; diminution in the value of Applied’s investment in research, development and engineering; data privacy issues; and increased cybersecurity protection and remediation costs. Compliance with, and changes to, laws and regulations concerning privacy and information security could result in significant expense, and any failure to comply could result in proceedings against Applied by regulatory authorities or other third parties.

Applied is exposed to various risks related to legal proceedings.

Applied from time to time is, and in the future may be involved in legal proceedings or claims regarding patent infringement, intellectual property rights, antitrust, environmental regulations, securities, contracts, product performance, product liability, unfair competition, misappropriation of trade secrets, employment, workplace safety, and other matters. Applied also on occasion receives notification from customers who believe that Applied owes them indemnification or has other obligations related to claims made against such customers by third parties.

Legal proceedings and claims, whether with or without merit, and associated internal investigations, may be time-consuming and expensive to prosecute, defend or conduct; divert management’s attention and other Applied resources; inhibit Applied’s ability to sell its products; result in adverse judgments for damages, injunctive relief, penalties and fines; and negatively affect Applied’s business. There can be no assurance regarding the outcome of current or future legal proceedings, claims or investigations.

The failure to successfully implement enterprise resource planning and other information systems changes could adversely impact Applied’s business and results of operations.

Applied ~~is in the process of implementing~~periodically implements new or enhanced enterprise resource planning and related information systems in order to better manage its business operations, align its global organizations and enable future growth. ~~This implementation~~Implementation of new business processes and information systems requires the commitment of significant personnel, training and financial resources, and entails risks to Applied’s business operations. If Applied does not successfully implement ~~new~~ enterprise resource planning and related information systems improvements, or if there are delays or difficulties in implementing these systems, Applied may not realize anticipated productivity improvements or cost efficiencies, and may experience interruptions in service and operational difficulties, such as its ability to track orders, timely manufacture and ship products, project inventory requirements, effectively manage its supply chain and allocate human resources, aggregate financial data and report operating results, and otherwise effectively manage its business, all of which could result in quality issues,

reputational harm, lost market and revenue opportunities, and otherwise adversely affect Applied’s business, financial condition and results of operations.

Applied may incur impairment charges related to goodwill or long-lived assets.

Applied has a significant amount of goodwill and other acquired intangible assets related to acquisitions. 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 more frequently when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The review compares the fair value for each of Applied’s reporting units to its associated carrying value, including goodwill. Factors that could lead to impairment of goodwill and intangible assets include adverse industry or economic trends, reduced estimates of future cash flows, declines in the market price of Applied common stock, changes in Applied’s strategies or product portfolio, and restructuring activities. Applied’s valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and projections of future operating performance. Applied may be required to record future charges to earnings during the period in which an impairment of goodwill or intangible assets is determined to exist.

~~Applied is exposed to risks associated with operating in jurisdictions with complex and changing tax laws.~~

On December 22, 2017, the U.S. government enacted tax legislation referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The U.S. Securities and Exchange Commission staff issued Staff Accounting Bulletin (“SAB”) No. 118, which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that will not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under Accounting Standards Codification (“ASC”) 740. Pursuant to this guidance, provisional adjustments were recorded when reasonable estimates could be determined. No adjustments were recorded when reasonable estimates could not be determined. These provisional estimates will be revised as information becomes available and guidance is issued by the Internal Revenue Service, and changes in Applied’s provision for income taxes and effective tax rates could have a material impact on Applied’s results of operations and financial condition.

Applied is subject to risks associated with environmental and safety regulations.

Applied is subject to environmental and safety regulations in connection with its global business operations, including but not limited to: regulations related to the development, manufacture and use of its products; handling, discharge, recycling and disposal of hazardous materials used in its products or in producing its products; the operation of its facilities; and the use of its real property. The failure or inability to comply with existing or future environmental and safety regulations could result in: significant remediation or other legal liabilities; the imposition of penalties and fines; restrictions on the development, manufacture, sale or use of certain of its products; limitations on the operation of its facilities or ability to use its real property; and a decrease in the value of its real property. Applied could be required to alter its manufacturing and operations and incur substantial expense in order to comply with environmental and safety regulations. Any failure to comply with environmental and safety regulations could subject Applied to significant costs and liabilities that could adversely affect Applied’s business, financial condition and results of operations.

Applied is exposed to various risks related to the global regulatory environment.

As a public company with global operations, Applied is subject to the laws of the United States and multiple foreign jurisdictions and the rules and regulations of various governing bodies, which may differ among jurisdictions, including those related to financial and other disclosures, accounting standards, corporate governance, intellectual property, tax, trade, antitrust, employment, immigration and travel regulations, privacy, and anti-corruption. Changing, inconsistent or conflicting laws, rules and regulations, and ambiguities in their interpretation and application create uncertainty and challenges, and compliance with laws, rules and regulations may be onerous and expensive, divert management time and attention from revenue-generating activities, and otherwise adversely impact Applied’s business operations. Violations of law, rules and regulations could result in fines, criminal sanctions, restrictions on Applied’s business, and damage to its reputation, and could have an adverse impact on its business operations, financial condition and results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

The following table provides information as of January ~~28, 2018~~27, 2019 with respect to the shares of common stock repurchased by Applied during the first quarter of fiscal ~~2018.~~2019 pursuant to a publicly announced stock repurchase program approved by the Board of Directors in February 2018, which authorized up to an aggregate of $6.0 billion in repurchases.


Period	Total Number of Shares Purchased	Average Price Paid per Share		Aggregate Price Paid		Total Number of Shares Purchased as Part of Publicly Announced Program*	Maximum Dollar Value of Shares That May Yet be Purchased Under the Program*		Total Number of Shares Purchased	Average Price Paid per Share		Aggregate Price Paid		Total Number of Shares Purchased as Part of Publicly Announced Program	Maximum Dollar Value of Shares That May Yet be Purchased Under the Program

	(In millions, except per share amounts)								(In millions, except per share amounts)
Month #1
(October 30, 2017 to November 26, 2017)	1.4	$	57.44	$	81	1.4	$	3,529
(October 29, 2018 to November 25, 2018)									5.9	$	34.28	$	204	5.9	$	4,123
Month #2
(November 27, 2017 to December 24, 2017)	7.2	$	52.28	375		7.2	$	3,154
(November 26, 2018 to December 23, 2018)									7.6	$	34.37	260		7.6	$	3,863
Month #3
(December 25, 2017 to January 28, 2018)	6.0	$	53.80	326		6.0	$	2,828
(December 24, 2018 to January 27, 2019)									8.5	$	33.58	286		8.5	$	3,577
Total	14.6	$	53.41	$	782	14.6			22.0	$	34.04	$	750	22.0


*	In September 2017, the Board of Directors approved a common stock repurchase program authorizing up to $3.0 billion in repurchases, which was in addition to a $2.0 billion common stock repurchase program approved in June 2016.

Item 6. Exhibits

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



		Incorporated by Reference
Exhibit No.	Description	Form	File No.	Exhibit No.	Filing Date
10.1	Amendment No. 1 to the Applied Materials, Inc. 2016 Deferred Compensation Plan†
10.2	Second Amendment to the Applied Materials, Inc. 2016 Deferred Compensation Plan†
10.3	Form of Performance Shares Agreement for members of the Executive Staff for use under the Applied Materials, Inc. Employee Stock Incentive Plan†
10.4	Form of Restricted Stock Unit Agreement for members of the Executive Staff for use under the Applied Materials, Inc. Employee Stock Incentive Plan†
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002†
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002†
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002‡
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002‡
101.INS	XBRL Instance Document‡
101.SCH	XBRL Taxonomy Extension Schema Document‡
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document‡
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document‡
101.LAB	XBRL Taxonomy Extension Label Linkbase Document‡
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document‡


†	Filed herewith.


‡	Furnished herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



APPLIED MATERIALS, INC.

By:	/s/ DANIEL J. DURN
	Daniel J. Durn Senior Vice President, Chief Financial Officer (Principal Financial Officer)

February ~~22, 2018~~21, 2019



By:	/s/ CHARLES W. READ
	Charles W. Read Corporate Vice President, Corporate Controller and Chief Accounting Officer (Principal Accounting Officer)

February ~~22, 2018~~21, 2019

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