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 (Loss) on Derivative Instruments Qualifying as Cash Flow Hedges			Defined and Postretirement Benefit Plans			Cumulative Translation Adjustments		Total

	(in millions)
Balance as of October 29, 2017	$	53		$	(11	)	$	(120	)	$	14	$	(64	)
Adoption of new accounting standards (a)	5			(2		)	—			—		3

Other comprehensive loss before reclassifications	(7		)	(4		)	—			—		(11		)
Amounts reclassified out of AOCI	(12		)	9			(2		)	—		(5		)
Other comprehensive loss, net of tax	(19		)	5			(2		)	—		(16		)

Balance as of July 29, 2018	$	39		$	(8	)	$	(122	)	$	14	$	(77	)

(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. See Note 1.



	Unrealized Gain on Investments, Net		Unrealized Gain (Loss) on Derivative Instruments Qualifying as Cash Flow Hedges			Defined and Postretirement Benefit Plans			Cumulative Translation Adjustments		Total

	(in millions)
Balance as of October 30, 2016	$	30	$	(18	)	$	(141	)	$	14	$	(115	)
Other comprehensive income before reclassifications	23		6			—			—		29
Amounts reclassified out of AOCI	2		(5		)	(12		)	—		(15		)
Other comprehensive income (loss), net of tax	25		1			(12		)	—		14
Balance as of July 30, 2017	$	55	$	(17	)	$	(153	)	$	14	$	(101	)

The tax effects on net income of amounts reclassified from AOCI for the three and nine months ended July 29, 2018 and July 30, 2017 were not material.

Stock Repurchase Program

In September 2017, the Board of Directors approved a common stock repurchase program authorizing up to $3.0 billion in repurchases. In February 2018, the Board of Directors approved a new common stock repurchase program authorizing up to an additional $6.0 billion in repurchases. As of July 29, 2018, $5.1 billion remained available for future stock repurchases under this repurchase program.

The following table summarizes Applied’s stock repurchases for the three and nine months ended July 29, 2018 and July 30, 2017:



	Three Months Ended				Nine Months Ended
	July 29, 2018		July 30, 2017		July 29, 2018		July 30, 2017

	(in millions, except per share amount)
Shares of common stock repurchased	25		9		84		20
Cost of stock repurchased	$	1,250	$	375	$	4,532	$	787
Average price paid per share	$	49.31	$	44.34	$	53.72	$	39.48

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 June 2018, February 2018 and December 2017, Applied’s Board of Directors declared quarterly cash dividends in the amount of $0.20, $0.20 and $0.10 per share, respectively. Dividends paid during the nine months ended July 29, 2018 and July 30, 2017 totaled $410 million and $323 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 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 nine months ended July 29, 2018 and July 30, 2017, 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				Nine Months Ended
	July 29, 2018		July 30, 2017		July 29, 2018		July 30, 2017

	(In millions)
Cost of products sold	$	22	$	18	$	65	$	51
Research, development and engineering	24		20		72		61
Marketing and selling	7		7		23		21
General and administrative	11		10		33		29
Total share-based compensation	$	64	$	55	$	193	$	162

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.

As of July 29, 2018, Applied had $399 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 2.6 years. As of July 29, 2018, there were 81 million shares available for grants of share-based awards under the Employee Stock Incentive Plan, and an additional 19 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 nine months ended July 29, 2018 is presented below:



	Shares		Weighted Average Grant Date Fair Value

	(In millions, except per share amounts)
Outstanding as of October 29, 2017	22		$	23.96
Granted	6		$	51.63
Vested	(8	)	$	22.03
Canceled	(1	)	$	29.63
Outstanding as of July 29, 2018	19		$	32.45

As of July 29, 2018, 1 million additional performance-based awards could be earned based upon achievement of certain levels of specified performance goals.

During the first quarter of fiscal 2018, certain executive officers were granted awards that are subject to the achievement of specified performance goals. These 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. Certain awards require the achievement of positive adjusted operating profit and vest ratably over three years. Other awards require the achievement of targeted levels of adjusted operating margin and wafer fabrication equipment market share, and the number of shares that may vest in full after three years ranges from 0% to 200% of the target amount.

The fair value of these awards is estimated on the date of grant. If the goals are achieved, the awards will vest, provided that the grantee remains employed by Applied through each applicable 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 is based on the awards that are probable to vest and is reflected over the service period and reduced for estimated forfeitures.

Employee Stock Purchase Plans

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 1 million shares during the nine months ended July 29, 2018 and 2 million shares during the nine months ended July 30, 2017. Compensation expense is calculated using the fair value of the employees’ purchase rights under the Black-Scholes model. Underlying assumptions used in the model are outlined in the following table:




	Nine Months Ended
	July 29, 2018	July 30, 2017
ESPP:
Dividend yield	1.40%	1.09%
Expected volatility	35.5%	24.9%
Risk-free interest rate	1.83%	0.78%
Expected life (in years)	0.5	0.5
Weighted average estimated fair value	$14.26	$8.08