Company Quick10K Filing
Quick10K
Applied Materials
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$45.51 936 $42,602
10-Q 2019-07-28 Quarter: 2019-07-28
10-Q 2019-04-28 Quarter: 2019-04-28
10-Q 2019-01-27 Quarter: 2019-01-27
10-K 2018-10-28 Annual: 2018-10-28
10-Q 2018-07-29 Quarter: 2018-07-29
10-Q 2018-04-29 Quarter: 2018-04-29
10-Q 2018-01-28 Quarter: 2018-01-28
10-K 2017-10-29 Annual: 2017-10-29
10-Q 2017-07-30 Quarter: 2017-07-30
10-Q 2017-04-30 Quarter: 2017-04-30
10-Q 2017-01-29 Quarter: 2017-01-29
10-K 2016-10-30 Annual: 2016-10-30
10-Q 2016-07-31 Quarter: 2016-07-31
10-Q 2016-05-01 Quarter: 2016-05-01
10-Q 2016-01-31 Quarter: 2016-01-31
10-K 2015-10-25 Annual: 2015-10-25
10-Q 2015-07-26 Quarter: 2015-07-26
10-Q 2015-04-26 Quarter: 2015-04-26
10-Q 2015-01-25 Quarter: 2015-01-25
10-K 2014-10-26 Annual: 2014-10-26
10-Q 2014-07-27 Quarter: 2014-07-27
10-Q 2014-04-27 Quarter: 2014-04-27
10-Q 2014-01-26 Quarter: 2014-01-26
8-K 2019-08-19 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-08-15 Earnings, Exhibits
8-K 2019-07-22 Officers
8-K 2019-06-30 Enter Agreement, Regulation FD, Exhibits
8-K 2019-05-16 Earnings, Exhibits
8-K 2019-03-07 Shareholder Vote
8-K 2019-02-14 Earnings, Exhibits
8-K 2018-11-15 Earnings, Exhibits
8-K 2018-08-16 Earnings, Exhibits
8-K 2018-05-17 Earnings, Exhibits
8-K 2018-03-08 Shareholder Vote
8-K 2018-02-14 Earnings, Exhibits
8-K 2018-01-22 Officers
DQ Daqo New Energy 17,109
STM Stmicroelectronics Nv 15,736
MXIM Maxim Integrated Products 14,316
CY Cypress Semiconductor 8,347
SMTC Semtech 2,864
DIOD Diodes 1,821
RMBS Rambus 1,250
QTNA Quantenna Communications 635
NVEC NVE 324
MOSY Mosys 109
AMAT 2019-07-28
Part I. Financial Information
Item 1. Financial Statements
Note 1 Basis of Presentation
Note 2 Earnings per Share
Note 3 Cash, Cash Equivalents and Investments
Note 4 Fair Value Measurements
Note 5 Derivative Instruments and Hedging Activities
Note 6 Accounts Receivable, Net
Note 7 Contract Balances
Note 8 Balance Sheet Detail
Note 9 Business Combination
Note 10Goodwill, Purchased Technology and Other Intangible Assets
Note 11Borrowing Facilities and Debt
Note 12 Stockholders' Equity, Comprehensive Income and Share-Based Compensation
Note 13 Income Taxes
Note 14Warranty, Guarantees and Contingencies
Note 15Industry Segment Operations
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A: Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 ex311amatq32019.htm
EX-31.2 ex312amatq32019.htm
EX-32.1 amat-ex321for10xqq32019.htm
EX-32.2 amat-ex322for10xqq32019.htm

Applied Materials Earnings 2019-07-28

AMAT 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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Table of Contents


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)

    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 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
P.O. Box 58039
Santa Clara, California 95052-8039
(Address of principal executive offices)

(408727-5555
(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          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          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
 
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  
Number of shares outstanding of the issuer’s common stock as of July 28, 2019: 923,753,756


Table of Contents

APPLIED MATERIALS, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JULY 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:    
 
    



Table of Contents

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
 
Nine Months Ended
 
July 28,
2019
 
July 29,
2018
 
July 28,
2019
 
July 29,
2018
 
 
 
 
 
 
 
 
 
(Unaudited)
Net sales
$
3,562

 
$
4,162

 
$
10,854

 
$
12,946

Cost of products sold
2,005

 
2,298

 
6,102

 
7,086

Gross profit
1,557

 
1,864

 
4,752

 
5,860

Operating expenses:
 
 
 
 
 
 
 
Research, development and engineering
515

 
505

 
1,539

 
1,503

Marketing and selling
128

 
138

 
392

 
394

General and administrative
112

 
128

 
335

 
363

Total operating expenses
755

 
771

 
2,266

 
2,260

Income from operations
802

 
1,093

 
2,486

 
3,600

Interest expense
58

 
59

 
178

 
174

Interest and other income, net
38

 
43

 
121

 
95

Income before income taxes
782

 
1,077

 
2,429

 
3,521

Provision for income taxes
211

 
61

 
421

 
1,240

Net income
$
571

 
$
1,016

 
$
2,008

 
$
2,281

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.61

 
$
1.02

 
$
2.13

 
$
2.22

Diluted
$
0.61

 
$
1.01

 
$
2.11

 
$
2.20

Weighted average number of shares:
 
 
 
 
 
 
 
Basic
929

 
994

 
943

 
1,026

Diluted
937

 
1,005

 
950

 
1,039

See accompanying Notes to Consolidated Condensed Financial Statements.

3

Table of Contents


APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
 
Three Months Ended
 
Nine Months Ended
 
July 28,
2019
 
July 29,
2018
 
July 28,
2019
 
July 29,
2018
 
 
 
 
 
 
 
 
 
(Unaudited)
Net income
$
571

 
$
1,016

 
$
2,008

 
$
2,281

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Change in unrealized gain (loss) on available-for-sale investments
6

 
(18
)
 
19

 
(19
)
Change in unrealized net loss on derivative instruments
(5
)
 
16

 
(13
)
 
5

Change in defined and postretirement benefit plans

 

 

 
(2
)
Change in cumulative translation adjustments

 

 
(1
)
 

Other comprehensive income (loss), net of tax
1

 
(2
)
 
5

 
(16
)
Comprehensive income
$
572

 
$
1,014

 
$
2,013

 
$
2,265

See accompanying Notes to Consolidated Condensed Financial Statements.



4

Table of Contents

APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In millions)
 
July 28,
2019
 
October 28,
2018
 
 
 
 
 
 
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
3,014

 
$
3,440

Short-term investments
547

 
590

Accounts receivable, net
2,373

 
2,323

Inventories
3,539

 
3,721

Other current assets
569

 
530

Total current assets
10,042

 
10,604

Long-term investments
1,650

 
1,568

Property, plant and equipment, net
1,513

 
1,407

Goodwill
3,399

 
3,368

Purchased technology and other intangible assets, net
170

 
213

Deferred income taxes and other assets
2,031

 
473

Total assets
$
18,805

 
$
17,633

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
2,355

 
$
2,721

Contract liabilities
1,430

 
1,201

Total current liabilities
3,785

 
3,922

Income taxes payable
1,253

 
1,254

Long-term debt
5,312

 
5,309

Other liabilities
339

 
303

Total liabilities
10,689

 
10,788

Stockholders’ equity:
 
 
 
Common stock
9

 
10

Additional paid-in capital
7,460

 
7,274

Retained earnings
23,880

 
20,880

Treasury stock
(23,096
)
 
(21,194
)
Accumulated other comprehensive loss
(137
)
 
(125
)
Total stockholders’ equity
8,116

 
6,845

Total liabilities and stockholders’ equity
$
18,805

 
$
17,633

Amounts as of July 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

Table of Contents

APPLIED MATERIALS, INC
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions)
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Three Months Ended July 28, 2019
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Unaudited)
Balance as of April 28, 2019
936

 
$
9

 
$
7,396

 
$
23,502

 
1,057

 
$
(22,568
)
 
$
(138
)
 
$
8,201

Net income

 

 

 
571

 

 

 

 
571

Other comprehensive income (loss), net of tax

 

 

 

 

 

 
1

 
1

Dividends declared ($0.21 per common share)

 

 

 
(193
)
 

 

 

 
(193
)
Share-based compensation

 

 
67

 

 

 

 

 
67

Issuance under stock plans

 

 
(3
)
 

 

 

 

 
(3
)
Common stock repurchases
(12
)
 

 

 

 
12

 
(528
)
 

 
(528
)
Balance as of July 28, 2019
924

 
$
9

 
$
7,460

 
$
23,880

 
1,069

 
$
(23,096
)
 
$
(137
)
 
$
8,116

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

 

 

 
2,008

 

 

 

 
2,008

Other comprehensive income (loss), net of tax

 

 

 

 

 

 
5

 
5

Dividends declared ($0.62 per common share)

 

 

 
(578
)
 

 

 

 
(578
)
Share-based compensation

 

 
197

 

 

 

 

 
197

Issuance under stock plans
7

 

 
(11
)
 

 

 

 

 
(11
)
Common stock repurchases
(50
)
 
(1
)
 

 

 
50

 
(1,902
)
 

 
(1,903
)
Balance as of July 28, 2019
924

 
$
9

 
$
7,460

 
$
23,880

 
1,069

 
$
(23,096
)
 
$
(137
)
 
$
8,116

(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

Table of Contents

APPLIED MATERIALS, INC
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY (Continued)
(In millions)
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Three Months Ended July 29, 2018
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Unaudited)
Balance as of April 29, 2018
1,008

 
$
10

 
$
7,087

 
$
19,498

 
976

 
$
(19,193
)
 
$
(78
)
 
$
7,324

Adoption of new accounting standards (a)

 

 

 
(3
)
 

 

 
3

 

Net income

 

 

 
1,016

 

 

 

 
1,016

Other comprehensive income (loss), net of tax

 

 

 

 

 

 
(2
)
 
(2
)
Dividends declared ($0.20 per common share)

 

 

 
(195
)
 

 

 

 
(195
)
Share-based compensation

 

 
64

 

 

 

 

 
64

Issuance under stock plans

 

 
(6
)
 

 

 

 

 
(6
)
Common stock repurchases
(25
)
 

 

 

 
25

 
(1,251
)
 

 
(1,251
)
Balance as of July 29, 2018
983

 
$
10

 
$
7,145

 
$
20,316

 
1,001

 
$
(20,444
)
 
$
(77
)
 
$
6,950

 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings (b)
 
Treasury Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Nine Months Ended July 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

Adoption of new accounting standard (a)

 

 

 
(3
)
 

 

 
3

 

Net income

 

 

 
2,281

 

 

 

 
2,281

Other comprehensive income (loss), net of tax

 

 

 

 

 

 
(16
)
 
(16
)
Dividends declared ($0.50 per common share)

 

 

 
(501
)
 

 

 

 
(501
)
Share-based compensation

 

 
193

 

 

 

 

 
193

Issuance under stock plans
7

 

 
(104
)
 

 

 

 

 
(104
)
Common stock repurchases
(84
)
 
(1
)
 

 

 
84

 
(4,532
)
 

 
(4,533
)
Balance as of July 29, 2018
983

 
$
10

 
$
7,145

 
$
20,316

 
1,001

 
$
(20,444
)
 
$
(77
)
 
$
6,950

(a) - Represents the reclassification adjustment related to the early adoption of Accounting Standards Update (ASU) 2018-02 Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
(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

Table of Contents

APPLIED MATERIALS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In millions)
 
Nine Months Ended
 
July 28,
2019
 
July 29,
2018
 
 
 
 
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
2,008

 
$
2,281

Adjustments required to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
271

 
337

Share-based compensation
197

 
193

Deferred income taxes
57

 
94

Other
(19
)
 
4

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(47
)
 
(543
)
Inventories
182

 
(859
)
Other current and non-current assets
(93
)
 
2

Accounts payable and accrued expenses
(337
)
 
211

Contract liabilities
229

 
201

Income taxes payable
(52
)
 
764

Other liabilities
25

 
25

Cash provided by operating activities
2,421

 
2,710

Cash flows from investing activities:
 
 
 
Capital expenditures
(344
)
 
(457
)
Cash paid for acquisitions, net of cash acquired
(28
)
 
(5
)
Proceeds from sales and maturities of investments
1,385

 
2,823

Purchases of investments
(1,370
)
 
(1,661
)
Cash provided by (used in) investing activities
(357
)
 
700

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

 
56

Common stock repurchases
(1,903
)
 
(4,532
)
Tax withholding payments for vested equity awards
(83
)
 
(160
)
Payments of dividends to stockholders
(577
)
 
(410
)
Cash used in financing activities
(2,490
)
 
(5,046
)
Decrease in cash and cash equivalents
(426
)
 
(1,636
)
Cash and cash equivalents — beginning of period
3,440

 
5,010

Cash and cash equivalents — end of period
$
3,014

 
$
3,374

Supplemental cash flow information:
 
 
 
Cash payments for income taxes
$
453

 
$
281

Cash refunds from income taxes
$
20

 
$
51

Cash payments for interest
$
143

 
$
143


See accompanying Notes to Consolidated Condensed Financial Statements.

8

Table of Contents

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 nine months ended July 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 contain 52 weeks each, and the first nine months of fiscal 2019 and 2018 each contained 39 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.
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. 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 Applied provides to the customer to deliver against a performance metric. Judgment is used to determine whether multiple promised goods or services in a contract should be accounted for separately or as a group.
Determine the transaction price. The transaction price for Applied’s contracts with customers may include fixed and variable consideration. Applied includes variable consideration in the transaction price to the extent that it is probable that a significant reversal of revenue will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
Allocate the transaction price to the performance obligations. A contract’s transaction price is allocated to each distinct performance obligation identified within the contract. Applied generally estimates the standalone selling price of a distinct performance obligation based on historical cost plus an appropriate margin. For contracts with multiple performance obligations, Applied allocates the contract’s transaction price to each performance obligation using the relative standalone selling price of each distinct good or service in the contract.
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 nine months ended July 29, 2018 as follows:
 
July 29, 2018
 
Three Months Ended
 
Nine 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
$
4,468

$
(306
)
$

$
4,162

 
$
13,239

$
(293
)
$

$
12,946

Cost of products sold
$
2,441

$
(144
)
$
1

$
2,298

 
$
7,202

$
(118
)
$
2

$
7,086

Gross profit
$
2,027

$
(162
)
$
(1
)
$
1,864

 
$
6,037

$
(175
)
$
(2
)
$
5,860

Research, development and engineering
$
504

$

$
1

$
505

 
$
1,501

$

$
2

$
1,503

General and administrative
$
128

$

$

$
128

 
$
362

$

$
1

$
363

Interest and other income, net
$
41

$

$
2

$
43

 
$
90

$

$
5

$
95

Income before income taxes
$
1,239

$
(162
)
$

$
1,077

 
$
3,696

$
(175
)
$

$
3,521

Provision for income taxes
$
66

$
(5
)
$

$
61

 
$
1,259

$
(19
)
$

$
1,240

Net income
$
1,173

$
(157
)
$

$
1,016

 
$
2,437

$
(156
)
$

$
2,281

Earnings per share: basic
$
1.18

$
(0.16
)
$

$
1.02

 
$
2.37

$
(0.15