Contract assets & liabilities: disclosure examples

November 2, 2025	November 3, 2024
(In millions)
Contract Assets	8,922	4,402
Contract Liabilities	13,016	14,495

We fulfill our obligations under a contract with a customer by transferring products and services in exchange for consideration from the customer. We recognize a contract asset when revenue recognized on a contract exceeds the amount invoiced. A contract asset is a right to consideration that is conditional on something other than the passage of time. A contract asset becomes a receivable when invoiced upon the right to consideration becoming unconditional.

We recognize a contract liability when billings on a contract exceed the revenue recognized and there is a future obligation to transfer products or services to a customer. Changes in our contract assets and contract liabilities primarily result from the timing difference between our performance and the customer’s payment.

As of November 2, 2025 , approximately 67 % of contract liabilities related to contracts subject to termination for convenience provisions . The amount of revenue recognized during fiscal year 2025 that was included in the contract liabilities balance as of November 3, 2024 was $ 9,205 million. The amount of revenue recognized during fiscal year 2024 that was included in the contract liabilities balance as of October 29, 2023 was $ 2,440 million.

Remaining Performance Obligations

Revenue allocated to remaining performance obligations represents the transaction price allocated to unsatisfied or partially unsatisfied performance obligations. Remaining performance obligations include unearned revenue and amounts that will be invoiced and recognized as revenue in future periods, but do not include contracts for software, subscriptions or services where the customer is not committed. The customer is not considered committed when the customer contract permits termination for convenience. Additionally, as a practical expedient, we have not included contracts that have an original duration of one year or less, nor have we included contracts with sales-based or usage-based royalties promised in exchange for a license of IP.

Financing Activities: For 2026, net cash provided by financing activities consisted primarily of $12.75 billion of proceeds from customer contract liability deposits on strategic customer agreements; partially offset by $10.04 billion of repayments of debt; $1.13 billion for the repurchases of common stock for withholdings on employee equity awards; $650 million for the acquisition of 2.5 million shares of our common stock under our share repurchase authorization; and $610 million for the payments of dividends to shareholders. See Item 8. Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 16. Revenue and Customer Contract Liabilities and Note 9. Debt.

For 2025, net cash used for financing activities consisted primarily of $4.62 billion of repayments of debt; $522 million for the payments of dividends to shareholders; and $340 million for the repurchases of common stock for withholdings on employee equity awards; partially offset by approximately $4.43 billion of proceeds from the issuance of debt.

For 2024, net cash used for financing activi ties consisted primarily of $1.90 billion of repayments of debt; $513 million for the paym ents of dividends to shareholders; $300 million for the acquisition of 3.2 million shares of our common stock under our share repurchase authorization; and $233 million for the repurchases of common stock for withholdings on employee equity awards; partially offset by approximately $1.00 billion of proceeds from the issuance of debt.

Critical Accounting Estimates

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. Estimates and judgments are based on historical experience, forecasted events, and various other assumptions that we believe to be reasonable under the circumstances. Estimates and judgments may vary under different assumptions or conditions and involve a significant level of uncertainty. We evaluate our estimates and judgments on an ongoing basis. Our management believes the accounting policies below are critical in the portrayal of our financial condition and results of operations and require management’s most difficult, subjective, or complex judgments.

October 26, 2025	October 27, 2024
ASSETS
Current assets:
Cash and cash equivalents	7,241	8,022
Short-term investments	1,332	1,449
Accounts receivable, net	5,185	5,234
Inventories	5,915	5,421
Other current assets	1,208	1,094
Total current assets	20,881	21,220
Long-term investments	4,327	2,787
Property, plant and equipment, net	4,610	3,339
Goodwill	3,707	3,732
Purchased technology and other intangible assets, net	226	249
Deferred income taxes and other assets	2,548	3,082
Total assets	36,299	34,409
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term debt	100	799
Accounts payable and accrued expenses	5,333	4,820
Contract liabilities	2,566	2,849
Total current liabilities	7,999	8,468
Long-term debt	6,455	5,460
Income taxes payable	356	670
Other liabilities	1,074	810
Total liabilities	15,884	15,408

See accompanying Notes to Consolidated Financial Statements.

APPLIED MATERIALS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In millions, except per share amounts)

Page
Forward-Looking Statements	3
About GE Aerospace	4
Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)	7
Consolidated Results	8
Segment Operations	9
Corporate & Other	10
Other Consolidated Information	11
Capital Resources and Liquidity	12
Critical Accounting Estimates	14
Other Items	16
Non-GAAP Financial Measures	19
Other Financial Data	22
Cybersecurity	23
Risk Factors	24
Legal Proceedings	31
Management and Auditor's Reports	32
Audited Financial Statements and Notes	36
Statement of Operations	36
Statement of Financial Position	37
Statement of Cash Flow s	38
Statement of Comprehensive Income (Loss)	39
Statement of Changes in Shareholders' Equity	39
Note 1 Basis of Presentation and Summary of Significant Accounting Policies	40
Note 2 Discontinued Operations	46

Additionally, a favorable impact from accounts receivable collections, including the related impact of factoring as discussed below, and a favorable change in accounts payable and other accrued liabilities driven by timing of payments and an increase in material purchases, partially offset by the net change in contract assets and contract liabilities, primarily at Pratt & Whitney, due to sales in excess of billings, contributed to an increase in net cash flows provided by operating activities in 2024 compared to 2023. Excluding the charges discussed above, higher net income after adjustments for depreciation and amortization, deferred income tax benefit, stock compensation cost, net periodic pension and other postretirement income, and gain on sale of CIS business, net of transaction costs also contributed to an increase in net cash flows provided by operating activities in 2024 compared to 2023, primarily driven by the operating performance of our segments.

The Company enters into various factoring agreements with third-party financial institutions to sell certain of its receivables, primarily related to customer facilitated programs. The activity pursuant to these agreements is generally dependent on underlying delivery volumes within our commercial OEM programs. Factoring activity resulted in a $0.9 billion increase in cash provided by operating activities in 2024, compared to 2023.

Operating Activities

We make both required and discretionary contributions to our pension plans. Required contributions are primarily determined by Employee Retirement Income Security Act of 1974 (ERISA) funding rules, which require us to fully fund our U.S. qualified pension plans over a rolling fifteen-year period as determined annually based on the calculated funded status at the beginning of each year per the Pension Protection Act of 2006 and subsequent amendments. The funding requirements are primarily based on the year’s expected service cost and amortization of other previously unfunded liabilities, which are dependent upon many factors, including returns on invested assets, the level of market interest rates, and actuarial assumptions.

Global pension and PRB cash funding requirements are expected to be approximately $0.3 billion in 2026, which includes benefit payments to be paid directly by the Company. We can contribute cash or RTX shares to our plans at our discretion, subject to applicable regulations. As of December 31, 2025, the total investment by the U.S. qualified pension plans in RTX shares was less than 1% of total plan assets.

Page
Forward-Looking Statements	3
Part I	4
Item 1. Business	4
Item 1A. Risk Factors	10
Item 1B. Unresolved Staff Comments	20
Item 1C. Cybersecurity	20
Item 2. Properties	21
Item 3. Legal Proceedings	21
Item 4. Mine Safety Disclosures	21
Part II	22
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities	22
Item 6. [Reserved]	22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations	23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	35
Item 8. Financial Statements and Supplementary Data	36
Auditor's Report	36
Consolidated and Combined Statement of Income (Loss)	38
Consolidated and Combined Statement of Financial Position	39
Consolidated and Combined Statement of Cash Flows	40
Consolidated and Combined Statement of Comprehensive Income (Loss)	41
Consolidated and Combined Statement of Changes in Equity	42
Note	1	Organization and Basis of Presentation	43
Note	2	Summary of Significant Accounting Policies	44
Note	3	Assets and Liabilities Held for Sale	48

Payments for commercial aircraft sales are received in accordance with the customer agreement, which generally includes a deposit upon order and additional payments in accordance with a payment schedule, with the balance being due immediately prior to or at aircraft delivery. Advances and progress billings (contract liabilities) are normal and customary for commercial aircraft contracts and not considered a significant financing component as they are intended to protect us from the other party failing to adequately complete some or all of its obligations under the contract.

Long-term contracts Substantially all contracts at BDS and certain contracts at BGS are long-term contracts with the U.S. government and other customers that generally extend over several years. Products sales under long-term contracts primarily include fighter jets, rotorcraft, cybersecurity products, surveillance suites, advanced weapons, missile defense, military derivative aircraft, satellite systems and modification of commercial passenger aircraft to cargo freighters. Sales of services under long-term contracts primarily include support and maintenance agreements associated with our commercial and defense products and space travel on Commercial Crew.

Net cash provided by operating activities increased $1.6 billion in 2025 compared to 2024. The increase was primarily due to various changes in working capital (primarily timing of cash payments for accounts payable and contract liabilities at RMS) and lower tax payments, reflecting the impact of the One Big Beautiful Bill Act (the Tax Act).

Non-GAAP Financial Measure - Free Cash Flow

Free cash flow is a non-GAAP financial measure that we define as cash from operations less capital expenditures. Our capital expenditures are comprised of equipment and facilities infrastructure and information technology (inclusive of costs for the development or purchase of internal-use software that are capitalized). We use free cash flow to evaluate our business performance and overall liquidity, and is a performance goal in our annual and long-term incentive plans. We believe free cash flow is a useful measure for investors because it represents the amount of cash generated from operations after reinvesting in the business and that may be available to return to stockholders and creditors (through dividends, stock repurchases and debt repayments) or available to fund acquisitions and other investments. The entire amount of free cash flow is not necessarily available for discretionary expenditures, however, because it does not account for certain mandatory expenditures, such as the repayment of maturing debt and future pension contributions. While management believes that free cash flow as a non-GAAP financial measure may be useful in evaluating our financial performance, it should be considered supplemental to, and not a substitute for, financial information prepared in accordance with GAAP and may not be comparable to similarly titled measures used by other companies.

The following table reconciles net cash provided by operating activities to free cash flow (in millions):

Payment terms vary but are generally short-term in nature. The Company's long-term contracts, where revenue is generally recognized over time, are typically billed as work progresses in accordance with the contract terms and conditions, either at periodic intervals or upon achievement of certain milestones. The timing of revenue recognition and billings under these contracts results in either unbilled receivables (contract assets) when revenue recognized exceeds billings, or customer advances (contract liabilities) when billings exceed revenue recognized. Unbilled receivables are reclassified to accounts receivable when an unconditional right to consideration exists, typically when a milestone in the contract is achieved. The Company does not evaluate whether the transaction price includes a significant financing component for contracts where the time between cash collection and performance is less than one year.

Certain arrangements with customers include variable consideration, typically in the form of rebates, cash discounts or penalties. In limited circumstances, the Company sells products with a general right of return. In most instances, returns are limited to product quality issues. The Company records a reduction to revenue at the time of sale to reflect the ultimate amount of consideration it expects to receive. The Company's estimates are updated quarterly based on historical experience, trend analysis, and expected market conditions. Variable consideration is typically not constrained at the time revenue is recognized. See Notes 2 and 20 for additional information about the Company's revenues.

Derivatives and Hedging

Contract liabilities consist of advance payments and billings in excess of revenue recognized. Advance payments from customers related to work not yet started are classified as deferred revenue. Contract liabilities are not considered to have a significant financing component, as they are used to meet working capital requirements that are generally higher in the early stages of a contract and are intended to protect us from the other party failing to meet its obligations under the contract. Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period.

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Contract assets and liabilities in the Consolidated Balance Sheet consisted of the following amounts as of December 31, 2025 and December 31, 2024 (in thousands):

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​	​	​	​	​	​
​	December 31, 2025	​	December 31, 2024
Contract assets:	​	​	​	​	​
Costs and estimated earnings in excess of billings, less allowance for credit losses	88,817	​	91,681
Contract liabilities:	​	​	​	​	​
Billings in excess of costs and estimated earnings and deferred revenue	2,120,262	​	1,149,257

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Contract assets and liabilities fluctuate year to year based on various factors, including, but not limited to, the variability in billing and payment terms of customers and changes in the number and size of projects in progress at period end. Contract assets decreased from December 31, 2024 to December 31, 2025 by approximately $ 2.9 million. Contract liabilities increased from December 31, 2024 to December 31, 2025 by approximately $ 971.0 million. The decrease in contract assets included a decrease of $ 7.5 million attributable to the timing of billings, partially offset by an increase of $ 4.6 million related to our 2025 acquisitions. The increase in contract liabilities is primarily due to an increase of $ 910.1 million related to an increase in billings in excess of costs recognized on our performance obligations, primarily from the timing of billings on projects within the technology sector. Additionally, there was an increase of $ 60.9 million as a result of our 2025 acquisitions.

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During the years ended December 31, 2025 and 2024, we recognized revenue of $ 1.00 billion and $ 816.8 million, respectively, related to our contract liabilities at January 1, 2025 and January 1, 2024, respectively.

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We offer various incentive programs that provide distributors and direct sale customers with cash rebates, account credits, or additional hardware and software products, solutions, and services based on meeting specified program criteria. Customer incentives are recognized as a reduction of sales if distributed in cash or customer account credits. We record accruals at the time of revenue recognition as a current liability within Customer returns, rebates, and incentives in our Consolidated Balance Sheet or, where a right of setoff exists, as a reduction of Receivables. Customer incentives for additional hardware and software products, solutions, and services to be provided are considered distinct performance obligations. As such, we allocate revenue to them based on relative standalone selling price. Until the incentive is redeemed, the revenue is recorded as a contract liability.

Our primary incentive program provides distributors with cash rebates or account credits based on agreed amounts that vary depending on the customer to whom our distributor ultimately sells the product. A critical assumption used in estimating the accrual for this program is the time period from when revenue is recognized to when the rebate is processed. Our estimate is based primarily on historical experience. If the time period were to change by 10 percent, the effect would be an adjustment to the accrual of approximately $24 million.

More information regarding our revenue recognition and returns, rebates, and incentives policies are contained in Note 1 and Note 2 in the Consolidated Financial Statements.

Legacy Asbestos-related Matters

We (including our subsidiaries) have been named as a defendant in lawsuits alleging personal injury as a result of exposure to asbestos that was used in certain components of our products many years ago, including products from divested businesses for which we have agreed to defend and indemnify claims. Additionally, we have maintained insurance coverage that includes indemnity and defense costs, over and above self-insured retentions, for many of these claims. See Notes 1 and 17 in the Consolidated Financial Statements for more information.

Operating Activities. The $547 million increase in net cash provided by operating activities in fiscal 2025 compared with fiscal 2024 was primarily due to favorable impacts of tax planning strategies and tax reform and less cash used for merger, acquisition and severance related payments and CP program interest as a result of lower average outstanding CP notes in fiscal 2025. Such amounts were partially offset by $73 million more cash used to fund working capital (i.e., receivables, contract assets, inventories, accounts payable and contract liabilities), largely due to timing of billing and collection activity and cash used for settlement of a longstanding legal matter.

Cash flow from operations was positive in all of our business segments in fiscal 2025.

Investing Activities. Our primary investing activities include capital expenditures and cash proceeds from sales of businesses.

The $670 million change in net cash provided by investing activities in fiscal 2025 compared with net cash used in investing activities in fiscal 2024 was primarily due to a $547 million increase in proceeds from the sale of businesses in fiscal 2025 (see “Divestitures” section below), net of cash divested, and the absence of a $100 million contribution to our rabbi trust assets made in fiscal 2024.

Divestitures. During fiscal 2025, we completed the divestiture of our CAS disposal group for net cash proceeds of $820 million. During fiscal 2024, we completed the divestitures of our Antenna disposal group and Aerojet Ordnance Tennessee, Inc. (“AOT disposal group”) for net cash proceeds of $170 million and $103 million, respectively. See Note 13: Acquisitions and Divestitures in the Notes for further information .

Financing Activities. Our primary financing activities include issuing and repaying long-term debt and commercial paper, exercising employee stock options, paying dividends and repurchasing common stock.

The $858 million increase in net cash used in financing activities in fiscal 2025 compared with fiscal 2024 was primarily due to increases in repayments of long-term debt, net of issuances of $825 million, cash used to repurchase common stock of $600 million and a decrease in net repayments of commercial paper of $569 million in fiscal 2025. Our primary financing activities are further discussed below.