Quarterly Report (10-q)

Date : 05/23/2019 @ 9:05PM
Source : Edgar (US Regulatory)
Stock : Applied Materials, Inc. (AMAT)
Quote : 47.81  -0.36 (-0.75%) @ 1:00AM

Quarterly Report (10-q)



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 April 28, 2019
or

¨
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)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange on Which Registered
Common Stock, par value $.01 per share
AMAT
The NASDAQ Stock Market LLC
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 every Interactive Data File required to be submitted 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 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  ¨
 
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 April 28, 2019 : 936,104,929



APPLIED MATERIALS, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED APRIL 28, 2019
TABLE OF CONTENTS
 
 
 
Page
 
PART I. FINANCIAL INFORMATION
 
Item 1:    
 
 
 
 
 
 
Item 2:    
Item 3:    
Item 4:    
 
 
 
 
PART II. OTHER INFORMATION
 
Item 1:    
Item 1A:
Item 2:    
Item 6:    
 
    




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
 
Six Months Ended
 
April 28,
2019
 
April 29,
2018
 
April 28,
2019
 
April 29,
2018
 
 
 
 
 
 
 
 
 
(Unaudited)
Net sales
$
3,539

 
$
4,579

 
$
7,292

 
$
8,784

Cost of products sold
2,009

 
2,523

 
4,097

 
4,788

Gross profit
1,530

 
2,056

 
3,195

 
3,996

Operating expenses:
 
 
 
 
 
 
 
Research, development and engineering
508

 
509

 
1,024

 
998

Marketing and selling
133

 
130

 
264

 
256

General and administrative
113

 
125

 
223

 
235

Total operating expenses
754

 
764

 
1,511

 
1,489

Income from operations
776

 
1,292

 
1,684

 
2,507

Interest expense
60

 
56

 
120

 
115

Interest and other income, net
43

 
25

 
83

 
52

Income before income taxes
759

 
1,261

 
1,647

 
2,444

Provision for income taxes
93

 
161

 
210

 
1,179

Net income
$
666

 
$
1,100

 
$
1,437

 
$
1,265

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.71

 
$
1.07

 
$
1.51

 
$
1.21

Diluted
$
0.70

 
$
1.06

 
$
1.50

 
$
1.20

Weighted average number of shares:
 
 
 
 
 
 
 
Basic
942

 
1,029

 
950

 
1,042

Diluted
948

 
1,040

 
957

 
1,056

See accompanying Notes to Consolidated Condensed Financial Statements.

3



APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
 
Three Months Ended
 
Six Months Ended
 
April 28,
2019
 
April 29,
2018
 
April 28,
2019
 
April 29,
2018
 
 
 
 
 
 
 
 
 
(Unaudited)
Net income
$
666

 
$
1,100

 
$
1,437

 
$
1,265

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in unrealized gain (losses) on available-for-sale investments
8

 
(7
)
 
13

 
(1
)
Change in unrealized net loss on derivative instruments
9

 
8

 
(8
)
 
(11
)
Change in defined and postretirement benefit plans

 

 

 
(2
)
Change in cumulative translation adjustments
(1
)
 

 
(1
)
 

Other comprehensive income (loss), net of tax
16

 
1

 
4

 
(14
)
Comprehensive income
$
682

 
$
1,101

 
$
1,441

 
$
1,251

See accompanying Notes to Consolidated Condensed Financial Statements.



4


APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)
 
April 28,
2019
 
October 28,
2018
 
 
 
 
 
 
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
3,116

 
$
3,440

Short-term investments
507

 
590

Accounts receivable, net
2,264

 
2,323

Inventories
3,677

 
3,721

Other current assets
498

 
530

Total current assets
10,062

 
10,604

Long-term investments
1,609

 
1,568

Property, plant and equipment, net
1,494

 
1,407

Goodwill
3,399

 
3,368

Purchased technology and other intangible assets, net
185

 
213

Deferred income taxes and other assets
2,026

 
473

Total assets
$
18,775

 
$
17,633

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
2,212

 
$
2,721

Contract liabilities
1,393

 
1,201

Total current liabilities
3,605

 
3,922

Income taxes payable
1,326

 
1,254

Long-term debt
5,311

 
5,309

Other liabilities
332

 
303

Total liabilities
10,574

 
10,788

Stockholders’ equity:
 
 
 
Common stock
9

 
10

Additional paid-in capital
7,396

 
7,274

Retained earnings
23,502

 
20,880

Treasury stock
(22,568
)
 
(21,194
)
Accumulated other comprehensive loss
(138
)
 
(125
)
Total stockholders’ equity
8,201

 
6,845

Total liabilities and stockholders’ equity
$
18,775

 
$
17,633

Amounts as of April 28, 2019 are unaudited. Amounts as of October 28, 2018 are derived from the October 28, 2018 audited consolidated financial statements.
See accompanying Notes to Consolidated Condensed Financial Statements.

5


APPLIED MATERIALS, INC
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions)
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Three Months Ended April 28, 2019
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Unaudited)
Balance as of January 27, 2019
949

 
$
9

 
$
7,265

 
$
23,032

 
1,041

 
$
(21,943
)
 
$
(154
)
 
$
8,209

Net income

 

 

 
666

 

 

 

 
666

Other comprehensive income (loss), net of tax

 

 

 

 

 

 
16

 
16

Dividends declared ($0.21 per common share)

 

 

 
(196
)
 

 

 

 
(196
)
Share-based compensation

 

 
65

 

 

 

 

 
65

Issuance under stock plans
3

 

 
66

 

 

 

 

 
66

Common stock repurchases
(16
)
 

 

 

 
16

 
(625
)
 

 
(625
)
Balance as of April 28, 2019
936

 
$
9

 
$
7,396

 
$
23,502

 
1,057

 
$
(22,568
)
 
$
(138
)
 
$
8,201

 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Six Months Ended April 28, 2019
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Unaudited)
Balance as of October 28, 2018
967

 
$
10

 
$
7,274

 
$
20,880

 
1,019

 
$
(21,194
)
 
$
(125
)
 
$
6,845

Adoption of new accounting standards (a)

 

 

 
1,570

 

 

 
(17
)
 
1,553

Net income

 

 

 
1,437

 

 

 

 
1,437

Other comprehensive income (loss), net of tax

 

 

 

 

 

 
4

 
4

Dividends declared ($0.41 per common share)

 

 

 
(385
)
 

 

 

 
(385
)
Share-based compensation

 

 
130

 

 

 

 

 
130

Issuance under stock plans
7

 

 
(8
)
 

 

 

 

 
(8
)
Common stock repurchases
(38
)
 
(1
)
 

 

 
38

 
(1,374
)
 

 
(1,375
)
Balance as of April 28, 2019
936

 
$
9

 
$
7,396

 
$
23,502

 
1,057

 
$
(22,568
)
 
$
(138
)
 
$
8,201

(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.

6


APPLIED MATERIALS, INC
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)
(In millions)
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Three Months Ended April 29, 2018
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Unaudited)
Balance as of January 28, 2018
1,050

 
$
11

 
$
6,980

 
$
18,599

 
932

 
$
(16,694
)
 
$
(79
)
 
$
8,817

Net income

 

 

 
1,100

 

 

 

 
1,100

Other comprehensive income (loss), net of tax

 

 

 

 

 

 
1

 
1

Dividends declared ($0.20 per common share)

 

 

 
(201
)
 

 

 

 
(201
)
Share-based compensation

 

 
64

 

 

 

 

 
64

Issuance under stock plans
2

 

 
43

 

 

 

 

 
43

Common stock repurchases
(44
)
 
(1
)
 

 

 
44

 
(2,499
)
 

 
(2,500
)
Balance as of April 29, 2018
1,008

 
$
10

 
$
7,087

 
$
19,498

 
976

 
$
(19,193
)
 
$
(78
)
 
$
7,324

 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings (b)
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Six Months Ended April 29, 2018
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Unaudited)
Balance as of October 29, 2017
1,060

 
$
11

 
$
7,056

 
$
18,539

 
917

 
$
(15,912
)
 
$
(64
)
 
$
9,630

Net income

 

 

 
1,265

 

 

 

 
1,265

Other comprehensive income (loss), net of tax

 

 

 

 

 

 
(14
)
 
(14
)
Dividends declared ($0.30 per common share)

 

 

 
(306
)
 

 

 

 
(306
)
Share-based compensation

 

 
129

 

 

 

 

 
129

Issuance under stock plans
7

 

 
(98
)
 

 

 

 

 
(98
)
Common stock repurchases
(59
)
 
(1
)
 

 

 
59

 
(3,281
)
 

 
(3,282
)
Balance as of April 29, 2018
1,008

 
$
10

 
$
7,087

 
$
19,498

 
976

 
$
(19,193
)
 
$
(78
)
 
$
7,324

(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.



7


APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
 
Six Months Ended
 
April 28,
2019
 
April 29,
2018
 
 
 
 
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
1,437

 
$
1,265

Adjustments required to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
182

 
227

Share-based compensation
130

 
129

Deferred income taxes
49

 
72

Other
(9
)
 
11

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
60

 
(326
)
Inventories
44

 
(540
)
Other current and non-current assets
(9
)
 
(34
)
Accounts payable and accrued expenses
(409
)
 
103

Contract liabilities
192

 
282

Income taxes payable
(53
)
 
860

Other liabilities
20

 
28

Cash provided by operating activities
1,634

 
2,077

Cash flows from investing activities:
 
 
 
Capital expenditures
(251
)
 
(324
)
Cash paid for acquisitions, net of cash acquired
(23
)
 
(5
)
Proceeds from sales and maturities of investments
906

 
2,432

Purchases of investments
(827
)
 
(729
)
Cash provided by (used in) investing activities
(195
)
 
1,374

Cash flows from financing activities:
 
 
 
Proceeds from common stock issuances
73

 
56

Common stock repurchases
(1,375
)
 
(3,282
)
Tax withholding payments for vested equity awards
(80
)
 
(154
)
Payments of dividends to stockholders
(381
)
 
(211
)
Cash used in financing activities
(1,763
)
 
(3,591
)
Decrease in cash and cash equivalents
(324
)
 
(140
)
Cash and cash equivalents — beginning of period
3,440

 
5,010

Cash and cash equivalents — end of period
$
3,116

 
$
4,870

Supplemental cash flow information:
 
 
 
Cash payments for income taxes
$
232

 
$
217

Cash refunds from income taxes
$
18

 
$
41

Cash payments for interest
$
110

 
$
110


See accompanying Notes to Consolidated Condensed Financial Statements.

8


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 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 28, 2018 ( 2018 Form 10-K). Applied’s results of operations for the three and six months ended April 28, 2019 are not necessarily indicative of future operating results. Applied’s fiscal year ends on the last Sunday in October of each year. Fiscal 2019 and 2018 each contain 52 weeks, and the first half of fiscal 2019 and 2018 each contained 26 weeks.
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 recast to 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.
Changes to Significant Accounting Policies
Applied adopted various amended guidance during the first quarter of fiscal 2019. The following accounting policies have been updated as part of the adoption of the new standards.
A llowance 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. Bad debt expense and any reversals are recorded in marketing and selling expenses in the Consolidated Condensed Statement of 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. Accordingly, amounts billed for shipping and handling costs are recorded as a component of net sales and costs as a component of cost of products sold.
Warranty
Applied provides for the estimated cost of warranty when revenue is recognized. Estimated warranty costs are determined by analyzing specific product, current and historical configuration statistics and regional warranty support costs. Applied’s warranty obligation is affected by product and component failure rates, material usage and labor costs incurred in correcting product failures during the warranty period. If actual warranty costs differ substantially from Applied’s estimates, revisions to the estimated warranty liability would be required.

9


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)



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

10


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)



Recent Accounting Pronouncements
Accounting Standards Adopted
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 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 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, 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 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 goods or services and requires certain additional disclosures. Applied adopted this authoritative guidance in the first quarter of fiscal 2019 using the full retrospective method, which required restating each prior reporting period presented. Refer to the Impacts to Previously Reported Results section below for the impact of the adoption of the standard to Applied’s consolidated financial statements.
For all periods prior to the date of initial adoption of this 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.
    


11


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 three and six months ended April 29, 2018 as follows:
 
April 29, 2018
 
Three Months Ended
 
Six Months Ended
 
As Previously Reported
Revenue Recognition Adjustment
Retirement Benefit Adjustment
As Adjusted
 
As Previously Reported
Revenue Recognition Adjustment
Retirement Benefit Adjustment
As Restated
 
(In millions, except per share amounts)
 
 
 
 
 
 
 
 
 
 
Net sales
$
4,567

$
12

$

$
4,579

 
$
8,771

$
13

$

$
8,784

Cost of products sold
$
2,477

$
46

$

$
2,523

 
$
4,761

$
26

$
1

$
4,788

Gross profit
$
2,090

$
(34
)
$

$
2,056

 
$
4,010

$
(13
)
$
(1
)
$
3,996

Research, development and engineering
$
509

$

$

$
509

 
$
997

$

$
1

$
998

General and administrative
$
124

$

$
1

$
125

 
$
234

$

$
1

235

Interest and other income, net
$
24

$

$
1

$
25

 
$
49

$

$
3

52

Income before income taxes
$
1,295

$
(34
)
$

$
1,261

 
$
2,457

$
(13
)
$

$
2,444

Provision for income taxes
$
166

$
(5
)
$

$
161

 
$
1,193

$
(14
)
$

$
1,179

Net income
$
1,129

$
(29
)
$

$
1,100

 
$
1,264

$
1

$

$
1,265

Earnings per share: basic
$
1.10

$
(0.03
)
$

$
1.07

 
$
1.21

$

$

$
1.21

Earnings per share: diluted
$
1.09

$
(0.03
)
$

$
1.06

 
$
1.20

$

$

$
1.20

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


12


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 half 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 six months ended April 29, 2018 as follows:
 
April 29, 2018
 
Six Months Ended
 
As Previously Reported
Adjustment
As Adjusted
 
(In millions)
 
 
 
 
Cash flows from operating activities:
 
 
 
Net income
$
1,264

$
1

$
1,265

Adjustments required to reconcile net income to cash provided by operating activities:
 
 
 
Deferred income taxes
$
86

$
(14
)
$
72

Changes in operating assets and liabilities:
 
 
 
Inventories
$
(564
)
$
24

$
(540
)
Accounts payable and accrued expenses
$
100

$
3

$
103

Contract liabilities
$
296

$
(14
)
$
282

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 retrospective basis, with early adoption permitted. Applied is currently evaluating the effect of this new guidance on Applied’s consolidated financial statements.
Fair Value Measurement: Changes to the Disclosure Requirements for Fair Value Measurement. In August 2018, the FASB issued authoritative guidance that 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 valuation processes for Level 3 fair value measurements. The authoritative guidance will be effective for Applied in the first quarter of fiscal 2020. Early adoption is permitted only for the removal and amendment of certain disclosures, while the new disclosures requirements are to be applied prospectively. Applied is currently evaluating the effect of this new guidance on Applied’s consolidated financial statements.
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.
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.
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.

13


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)



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.


14


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
 
Six Months Ended
 
April 28,
2019
 
April 29,
2018
 
April 28,
2019
 
April 29,
2018
 
 
 
 
 
 
 
 
 
(In millions, except per share amounts)
Numerator:
 
 
 
 
 
 
 
Net income
$
666

 
$
1,100

 
$
1,437

 
$
1,265

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding
942

 
1,029

 
950

 
1,042

Effect of weighted dilutive stock options, restricted stock units and employee stock purchase plan shares
6

 
11

 
7

 
14

Denominator for diluted earnings per share
948

 
1,040

 
957

 
1,056

Basic earnings per share
$
0.71

 
$
1.07

 
$
1.51

 
$
1.21

Diluted earnings per share
$
0.70

 
$
1.06

 
$
1.50

 
$
1.20

Potentially weighted dilutive securities
3

 

 
3

 

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.

15


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:
 
April 28, 2019
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
 
 
 
 
 
 
 
 
(In millions)
Cash
$
1,185

 
$

 
$

 
$
1,185

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
1,671

 

 

 
1,671

Municipal securities
1

 

 

 
1

Commercial paper, corporate bonds and medium-term notes
253

 

 

 
253

Asset-backed and mortgage-backed securities
6

 

 

 
6

Total Cash equivalents
1,931

 

 

 
1,931

Total Cash and Cash equivalents
$
3,116

 
$

 
$

 
$
3,116

Short-term and long-term investments:
 
 
 
 
 
 
 
U.S. Treasury and agency securities
$
367

 
$
1

 
$

 
$
368

Non-U.S. government securities*
9

 

 

 
9

Municipal securities
410

 
2

 
1

 
411

Commercial paper, corporate bonds and medium-term notes
588

 
3

 
1

 
590

Asset-backed and mortgage-backed securities
601

 
1

 
1

 
601

Total fixed income securities
1,975

 
7

 
3

 
1,979

Publicly traded equity securities
10

 
27

 
3

 
34

Equity investments in privately-held companies
97

 
9

 
3

 
103

Total equity investments
107

 
36

 
6

 
137

Total short-term and long-term investments
$
2,082

 
$
43

 
$
9

 
$
2,116

 
 
 
 
 
 
 
 
Total Cash, Cash equivalents and Investments
$
5,198

 
$
43

 
$
9

 
$
5,232

 _________________________
* Includes agency debt securities guaranteed by Canada.


16


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)



October 28, 2018
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
 
 
 
 
 
 
 
 
(In millions)
Cash
$
1,489

 
$

 
$

 
$
1,489

Cash equivalents:
 
 
 
 
 
 
 
Money market funds
1,599

 

 

 
1,599

Commercial paper, corporate bonds and medium-term notes
352

 

 

 
352

Total Cash equivalents
1,951

 

 

 
1,951

Total Cash and Cash equivalents
$
3,440

 
$

 
$

 
$
3,440

Short-term and long-term investments:
 
 
 
 
 
 
 
U.S. Treasury and agency securities
$
335

 
$

 
$
2

 
$
333

Non-U.S. government securities*
10

 

 

 
10

Municipal securities
399

 

 
4

 
395

Commercial paper, corporate bonds and medium-term notes
705

 

 
3

 
702

Asset-backed and mortgage-backed securities
595

 

 
4

 
591

Total fixed income securities
2,044

 

 
13

 
2,031

Publicly traded equity securities
17

 
25

 
4

 
38

Equity investments in privately-held companies
89

 

 

 
89

Total equity investments
106

 
25

 
4

 
127

Total short-term and long-term investments
$
2,150

 
$
25

 
$
17

 
$
2,158

 
 
 
 
 
 
 
 
Total Cash, Cash equivalents and Investments
$
5,590

 
$
25

 
$
17

 
$
5,598

 _________________________
* Includes agency debt securities guaranteed by Canada.
 
Maturities of Investments
The following table summarizes the contractual maturities of Applied’s investments as of April 28, 2019 :
 
 
Cost
 
Estimated
Fair Value
 
 
 
 
 
(In millions)
Due in one year or less
$
414

 
$
414

Due after one through five years
960

 
964

No single maturity date**
708

 
738

Total
$
2,082

 
$
2,116

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

Gains and Losses on Investments
During the three and six months ended April 28, 2019 and April 29, 2018 , gross realized gains and losses on investments for these periods were not material.
As of April 28, 2019 , and October 28, 2018 , 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.

17


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)



Applied determined that the gross unrealized losses on its marketable fixed-income securities as of April 28, 2019 and April 29, 2018 were temporary in nature and therefore it did not recognize any impairment of its marketable fixed-income securities during the three and six months ended April 28, 2019 or April 29, 2018 . Impairment charges on equity investments in privately-held companies during the three and six months ended April 28, 2019 and April 29, 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 losses on investments classified as 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.
The components of gain (losses) on equity investments for the three and six months ended April 28, 2019 were as follows:
 
April 28, 2019
 
Three Months Ended
 
Six Months Ended
 
 
 
 
 
(In millions)
Publicly traded equity securities
 
 
 
Unrealized gain
$
7

 
$
13

Unrealized loss
(1
)
 
$
(3
)
Gain on sales
1

 
$
2

Equity investments in privately-held companies
 
 
 
Unrealized gain
2

 
9

Unrealized loss
(2
)
 
(3
)
Gain on sales
3

 
4

Total gain on equity investments, net
$
10

 
$
22



18


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)




Note 4
Fair Value Measurements
Applied’s financial assets are measured and recorded at fair value on a recurring basis, except for equity investments in privately-held companies. These equity investments are generally accounted for under the measurement alternative, defined as cost, less impairments, adjusted for subsequent observable price changes and are periodically assessed for impairment when events or circumstances indicate that a decline in value may have occurred. Applied’s nonfinancial assets, such as goodwill, intangible assets, and property, plant and equipment, are recorded at cost and are assessed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.
Fair Value Hierarchy
Applied uses the following fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
 
Level 1 — Quoted prices in active markets for identical assets or liabilities;
Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Applied’s investments consist primarily of debt securities that are classified as available-for-sale and recorded at their fair values. In determining the fair value of investments, Applied uses pricing information from pricing services that value securities based on quoted market prices and models that utilize observable market inputs. In the event a fair value estimate is unavailable from a pricing service, Applied generally obtains non-binding price quotes from brokers. Applied then reviews the information provided by the pricing services or brokers to determine the fair value of its short-term and long-term investments. In addition, to validate pricing information obtained from pricing services, Applied periodically performs supplemental analysis on a sample of securities. Applied reviews any significant unanticipated differences identified through this analysis to determine the appropriate fair value. As of April 28, 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.


19


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)



Assets Measured at Fair Value on a Recurring Basis
Financial assets (excluding cash balances) measured at fair value on a recurring basis are summarized below:
 
 
April 28, 2019
 
October 28, 2018
 
Level 1
 
Level 2
 
Total
 
Level 1
 
Level 2
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Assets:
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale debt security investments
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
1,671

 
$

 
$
1,671

 
$
1,599

 
$

 
$
1,599

U.S. Treasury and agency securities
336

 
32

 
368

 
297

 
36

 
333

Non-U.S. government securities

 
9

 
9

 

 
10

 
10

Municipal securities

 
412

 
412

 

 
395

 
395

Commercial paper, corporate bonds and medium-term notes

 
843

 
843

 

 
1,054

 
1,054

Asset-backed and mortgage-backed securities

 
607

 
607

 

 
591

 
591

Total available-for-sale debt security investments
$
2,007

 
$
1,903

 
$
3,910

 
$
1,896

 
$
2,086

 
$
3,982

Equity investments with readily determinable values
 
 
 
 
 
 
 
 
 
 
 
Publicly traded equity securities
$
34

 
$

 
$
34

 
$
38

 
$

 
$
38

Total equity investments with readily determinable values
$
34

 
$

 
$
34

 
$
38

 
$

 
$
38

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
2,041

 
$
1,903

 
$
3,944

 
$
1,934

 
$
2,086

 
$
4,020

There were no transfers between Level 1 and Level 2 fair value measurements during the three and six months ended April 28, 2019 or April 29, 2018 . Applied did not have any financial assets measured at fair value on a recurring basis within Level 3 fair value measurements as of April 28, 2019 or October 28, 2018 .
Assets and Liabilities without Readily Determinable Values Measured on a Non-recurring Basis
Applied’s equity investments without readily determinable values consist of equity investments in privately-held companies. 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. These investments are periodically assessed for impairment when an event or circumstance indicates that a decline in value may have occurred. Impairment charges on equity investments in privately-held companies during the three and six months ended April 28, 2019 and April 29, 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. As of April 28, 2019 , the aggregate principal amount of long-term debt was $5.4 billion , and the estimated fair value was $ 5.7 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 10 of the Notes to the Consolidated Condensed Financial Statements for further detail of existing debt.

20


APPLIED MATERIALS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)



Note 5
Derivative Instruments and Hedging Activities
Derivative Financial Instruments
Applied conducts business in a number of foreign countries, with certain transactions denominated in local currencies, such as the Japanese yen, euro, Israeli shekel and Taiwanese dollar. Applied uses derivative financial instruments, such as forward exchange contracts and currency option contracts, to hedge certain forecasted foreign currency denominated transactions expected to occur typically within the next 24 months . The purpose of Applied’s foreign currency management is to mitigate the effect of exchange rate fluctuations on certain foreign currency denominated revenues, costs and eventual cash flows. The terms of currency instruments used for hedging purposes are generally consistent with the timing of the transactions being hedged.
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 as of April 28, 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 and six months ended April 28, 2019 and April 29, 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 as of April 28, 2019 and October 28, 2018 were not material.



21


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
 
 
 
April 28, 2019
 
April 29, 2018
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)
 
Gain or (Loss)
Reclassified
from AOCI into
Income
 
Gain or (Loss)
Recognized in
Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Derivatives in Cash Flow Hedging Relationships
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
AOCI
 
$
11

 
$

 
$

 
$
2

 
$

 
$

Foreign exchange contracts
Cost of products sold
 

 
(2
)
 
4

 

 
(12
)
 
4

Foreign exchange contracts
General and administrative
 

 
2

 
(2
)
 

 
5

 
(1
)
Interest rate contracts
Interest expense
 

 
(2
)
 

 

 
(1
)
 

Total
 
 
$
11

 
$
(2
)
 
$
2

 
$
2

 
$
(8
)
 
$
3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
April 28, 2019
 
April 29, 2018
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)
 
Gain or (Loss)
Reclassified
from AOCI into
Income
 
Gain or (Loss)
Recognized in
Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In millions)
Derivatives in Cash Flow Hedging Relationships
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
AOCI
 
$
(5
)
 
$