Stockholders’ Equity, Comprehensive Income and Share-Based Compensation

Accumulated Other Comprehensive Income (Loss)

Changes in the components of AOCI, net of tax, were as follows:



	Unrealized Gain on Investments, Net			Unrealized Gain on Derivative Instruments Qualifying as Cash Flow Hedges			Defined and Postretirement Benefit Plans			Cumulative Translation Adjustments			Total
	(in millions)
Balance at October 26, 2014	$	24		$	—		$	(105	)	$	5		$	(76	)
Other comprehensive income (loss) before reclassifications	(4		)	3			(45		)	(2		)	(48		)
Amounts reclassified out of AOCI	—			(3		)	2			—			(1		)
Other comprehensive income (loss), net of tax	(4		)	—			(43		)	(2		)	(49		)
Balance at April 26, 2015	$	20		$	—		$	(148	)	$	3		$	(125	)



	Unrealized Gain on Investments, Net			Unrealized Gain on Derivative Instruments Qualifying as Cash Flow Hedges			Defined and Postretirement Benefit Plans			Cumulative Translation Adjustments			Total
	(in millions)
Balance at October 27, 2013	$	25		$	2		$	(72	)	$	7		$	(38	)
Other comprehensive income (loss) before reclassifications	5			3			—			(1		)	7
Amounts reclassified out of AOCI	(5		)	(5		)	—			—			(10		)
Other comprehensive income (loss), net of tax	—			(2		)	—			(1		)	(3		)
Balance at April 27, 2014	$	25		$	—		$	(72	)	$	6		$	(41	)

The increase in accumulated other comprehensive (loss) associated with pension liability during the six months ended April 26, 2015 amounted to $43 million, net of income tax effect and was primarily due to lower discount rates used to determine the benefit obligation, taking into account prevailing interest rates.

The effects on net income of amounts reclassified from AOCI for the three and six months ended April 26, 2015 and April 27, 2014 were not material.

Stock Repurchase Program

On March 5, 2012, Applied's Board of Directors approved a stock repurchase program authorizing up to $3.0 billion in repurchases over the three years through March 2015. During the three-year period of the program ended March 2015, Applied repurchased a total of $1.4 billion of its common stock. On April 26, 2015, the Board of Directors approved a new common stock repurchase program authorizing up to $3.0 billion in repurchases over the three years ending April 2018.

Applied did not purchase any shares of its common stock during the three and six months ended April 26, 2015 and April 27, 2014. At April 26, 2015, $3.0 billion remained available for future stock repurchases under the new repurchase program.

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

Dividends

In March 2015 and December 2014, Applied's Board of Directors declared quarterly cash dividends in the amount of $0.10 per share. Dividends declared during the six months ended April 26, 2015 and April 27, 2014 totaled $246 million and $243 million, respectively. Applied currently anticipates that cash dividends will continue to be paid on a quarterly basis, although the declaration of any future cash dividend is at the discretion of the Board of Directors and will depend on Applied’s financial condition, results of operations, capital requirements, business conditions and other factors, as well as a determination by the Board of Directors that cash dividends are in the best interests of Applied’s stockholders.

Share-Based Compensation

Applied has a stockholder-approved equity plan, the Employee Stock Incentive Plan, which permits grants to employees of share-based awards, including stock options, restricted stock, restricted stock units, performance shares and performance units. In addition, the plan provides for the automatic grant of restricted stock units to non-employee directors and permits the grant of share-based awards to non-employee directors and consultants. Share-based awards made beginning in March 2012 under the plan may be subject to accelerated vesting under certain circumstances in the event of a change in control of Applied. Applied also has two Employee Stock Purchase Plans, one generally for United States employees and a second for employees of international subsidiaries (collectively, ESPP), which enable eligible employees to purchase Applied common stock.

During the three and six months ended April 26, 2015 and April 27, 2014, Applied recognized share-based compensation expense related to stock options, ESPP shares, restricted stock, restricted stock units, performance shares and performance units. The effect of share-based compensation on the results of operations was as follows:



	Three Months Ended				Six Months Ended
	April 26, 2015		April 27, 2014		April 26, 2015		April 27, 2014

	(In millions)
Cost of products sold	$	14	$	13	$	29	$	27
Research, development, and engineering	17		16		35		33
Marketing and selling	7		5		13		11
General and administrative	9		8		18		17
Total share-based compensation	$	47	$	42	$	95	$	88

The cost associated with share-based awards that are subject solely to time-based vesting requirements, less expected forfeitures, is recognized over the awards’ service period for the entire award on a straight-line basis. The cost associated with performance-based equity awards is recognized for each tranche over the service period, based on an assessment of the likelihood that the applicable performance goals will be achieved.

At April 26, 2015, Applied had $326 million in total unrecognized compensation expense, net of estimated forfeitures, related to grants of share-based awards and shares issued under Applied’s ESPP, which will be recognized over a weighted average period of 2.7 years. At April 26, 2015, there were 168 million shares available for grants of share-based awards under the Employee Stock Incentive Plan, and an additional 32 million shares available for issuance under the ESPP.

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

A summary of the changes in restricted stock units, restricted stock, performance shares and performance units outstanding under Applied’s equity compensation plans during the six months ended April 26, 2015 is presented below:



	Shares		Weighted Average Grant Date Fair Value

	(In millions, except per share amounts)
Non-vested restricted stock units, restricted stock, performance shares and performance units at October 26, 2014	33		$	12.59
Granted	10		$	23.54
Vested	(13	)	$	11.85
Canceled	(1	)	$	14.43
Non-vested restricted stock units, restricted stock, performance shares and performance units at April 26, 2015	29		$	16.51

With respect to the performance-based awards granted in fiscal 2013 and 2012, as of October 26, 2014, all performance goals had been fully achieved, but such awards remained subject to time-based vesting.

During the first quarter of fiscal 2015, certain executive officers were granted awards that are subject to the achievement of specified performance goals (performance-based awards). These performance-based awards become eligible to vest only if performance goals are achieved and will vest only if the grantee remains employed by Applied through each applicable vesting date. These performance-based awards require the achievement of targeted levels of adjusted annual operating profit margin. Additional shares become eligible for time-based vesting if Applied achieves certain levels of total shareholder return (TSR) relative to a peer group, comprised of companies in the Standard & Poor's 500 Information Technology Index, measured at the end of a two-year period.

The fair value of these performance-based awards is estimated on the date of grant and assumes that the specified performance goals will be achieved. If the goals are achieved, these awards vest over a specified remaining service period of generally three or four years, provided that the grantee remains employed by Applied through each scheduled vesting date. If the performance goals are not met as of the end of the performance period, no compensation expense is recognized and any previously recognized compensation expense is reversed. The expected cost of each award is reflected over the service period and is reduced for estimated forfeitures.

Employee Stock Purchase Plan

Under the ESPP, substantially all employees may purchase Applied common stock through payroll deductions at a price equal to 85 percent of the lower of the fair market value of Applied common stock at the beginning or end of each 6-month purchase period, subject to certain limits. Applied issued 2 million shares during the three and six months ended April 26, 2015 and 3 million shares during the three and six months ended April 27, 2014. Compensation expense is calculated using the fair value of the employees’ purchase rights under the Black-Scholes model. Underlying assumptions used in the model and the weighted average estimated fair value of purchase rights under the ESPP are outlined in the following table:



	Three and Six Months Ended
	April 26, 2015	April 27, 2014
ESPP:
Dividend yield	1.56%	2.14%
Expected volatility	31.4%	25.3%
Risk-free interest rate	0.07%	0.08%
Expected life (in years)	0.5	0.5
Weighted average estimated fair value	$6.04	$4.07