Fair Value Measurements

6 Months Ended

Apr. 26, 2020

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 26, 2020, 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. These investments are measured at fair value using quoted prices for identical assets in an active market and the changes in fair value of these equity investments are recognized in the consolidated statements of operations.

Investments with remaining effective maturities of 12 months or less from the balance sheet date are classified as short-term investments. Investments with remaining effective maturities of more than 12 months from the balance sheet date are classified as long-term investments.

Applied’s interest rate derivatives are measured at fair value using valuation models based on observable market data, including interest rates, credit spreads and credit default swap rates. The changes in fair value of these derivatives are recognized in the consolidated statements of comprehensive income.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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


	April 26, 2020										October 27, 2019
	Level 1		Level 2		Total		Level 1		Level 2			Total

	(In millions)
Assets:
Available-for-sale debt security investments
Money market funds*	$	4,346	$	—	$	4,346	$	1,677	$	—		$	1,677
U.S. Treasury and agency securities	369		17		386		323		18			341
Non-U.S. government securities	—		4		4		—		10			10
Municipal securities	—		401		401		—		406			406
Commercial paper, corporate bonds and medium-term notes	—		579		579		—		1,024			1,024
Asset-backed and mortgage-backed securities	—		597		597		—		635			635
Total available-for-sale debt security investments	$	4,715	$	1,598	$	6,313	$	2,000	$	2,093		$	4,093
Equity investments with readily determinable values

Publicly traded equity securities	$	38	$	—	$	38	$	45	$	—		$	45
Total equity investments with readily determinable values	$	38	$	—	$	38	$	45	$	—		$	45

Total assets	$	4,753	$	1,598	$	6,351	$	2,045	$	2,093		$	4,138

Liabilities:
Interest rate derivatives	$	—	$	180	$	180	$	—	$	—		$	—
Total liabilities	$	—	$	180	$	180	$	—	$	—		$	—

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* Amount as of April 26, 2020 includes $115 million invested in money market funds related to deferred compensation plans. Due to restrictions on the distribution of these funds, they are classified as restricted cash equivalents and are included in deferred income taxes and other assets in the Consolidated Condensed Balance Sheets.

Applied did not have any financial assets or liabilities measured at fair value on a recurring basis within Level 3 fair value measurements as of April 26, 2020 or October 27, 2019.

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. 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. 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 26, 2020 and April 28, 2019 were not material.

Other

The carrying amounts of Applied’s financial instruments, including cash and cash equivalents, restricted cash equivalents, accounts receivable, notes payable - short term, and accounts payable and accrued expenses, approximate fair value due to their short maturities. The carrying value of the Company’s revolving credit facility approximates its fair value given the revolving nature of the balance and the variable market interest rate. As of April 26, 2020, the aggregate principal amount of long-term senior notes was $4.8 billion, and the estimated fair value was $5.8 billion. As of October 27, 2019, the aggregate principal amount of long-term senior notes was $4.8 billion, and the estimated fair value was $5.5 billion. The estimated fair value of long-term senior notes is determined by Level 2 inputs and is based primarily on quoted market prices for the same or similar issues. See Note 11 of the Notes to the Consolidated Condensed Financial Statements for further detail of existing debt.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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