Employee Benefit Plans

Employee Bonus Plans

Applied has various employee bonus plans. A discretionary bonus plan provides for the distribution of a percentage of pre-tax income to Applied employees who are not participants in other performance-based incentive plans, up to a maximum percentage of eligible compensation. Other plans provide for bonuses to Applied’s executives and other key contributors based on the achievement of profitability and/or other specified performance criteria. Charges under these plans for fiscal 2018, 2017 and 2016 were $382 million, $449 million and $312 million, respectively.

Employee Savings and Retirement Plan

Applied’s Employee Savings and Retirement Plan (the 401(k) Plan) is qualified under Sections 401(a) and (k) of the Internal Revenue Code (the Code). Eligible employees may make salary deferral and catch-up contributions under the 401(k) Plan on a pre-tax basis and on a Roth basis, subject to an annual dollar limit established by the Code. Applied matches 100% of participant salary and/or Roth deferral contributions up to the first 3% of eligible contribution and then 50% of every dollar between 4% and 6% of eligible contribution. Applied does not make matching contributions on any catch-up contributions made by participants. Plan participants who were employed by Applied or any of its affiliates became 100% vested in their Applied matching contribution account balances. Applied’s matching contributions under the 401(k) Plan were approximately $45 million for fiscal 2018 and $38 million for each of fiscal 2017 and 2016.

Defined Benefit Pension Plans of Foreign Subsidiaries and Other Post-Retirement Benefits

Several of Applied’s foreign subsidiaries have defined benefit pension plans covering substantially all of their eligible employees. Benefits under these plans are typically based on years of service and final average compensation levels. The plans are managed in accordance with applicable local statutes and practices. Applied deposits funds for certain of these plans with insurance companies, pension trustees, government-managed accounts, and/or accrues the expense for the unfunded portion of the benefit obligation on its Consolidated Financial Statements. Applied’s practice is to fund the various pension plans in amounts sufficient to meet the minimum requirements as established by applicable local governmental oversight and taxing authorities. Depending on the design of the plan, local custom and market circumstances, the liabilities of a plan may exceed the qualified plan assets. The differences between the aggregate projected benefit obligations and aggregate plan assets of these plans have been recorded as liabilities by Applied and are included in other liabilities and accrued expenses in the Consolidated Balance Sheets.

Through December 31, 2017, Applied also sponsored a U.S. post-retirement plan that provided covered medical and vision benefits to certain eligible retirees. An eligible retiree also could elect coverage for an eligible spouse or domestic partner who was not eligible for Medicare. Coverage ended entirely for all participants when the plan terminated on December 31, 2017. In addition, Applied also has a post-retirement benefit plan as a result of the acquisition of Varian. Applied’s liability under these post-retirement plans, which was included in other liabilities in the Consolidated Balance Sheets, were immaterial at each of October 28, 2018 and October 29, 2017.

A summary of the changes in benefit obligations and plan assets, which includes post-retirement benefits, for each fiscal year is presented below:



	2018			2017			2016

	(In millions, except percentages)
Change in projected benefit obligation
Beginning projected benefit obligation	$	506		$	495		$	471
Service cost	12			13			13
Interest cost	11			10			13
Plan participants’ contributions	1			2			1
Actuarial (gain) loss	24			(35		)	77
Curtailments, settlements and special termination benefits	(1		)	(1		)	(6		)
Foreign currency exchange rate changes	(16		)	34			(42		)
Benefits paid	(12		)	(12		)	(10		)
Plan amendments and business combinations	(1		)	—			(22		)
Ending projected benefit obligation	$	524		$	506		$	495
Ending accumulated benefit obligation	$	490		$	472		$	460
Range of assumptions to determine benefit obligations
Discount rate	0.6% - 3.1%			0.5% - 3.4%			0.5% - 3.1%
Rate of compensation increase	2.4% - 3.5%			2.2% - 3.5%			1.6% - 3.6%
Change in plan assets
Beginning fair value of plan assets	$	361		$	310		$	281
Return on plan assets	17			18			37
Employer contributions	11			16			50
Plan participants’ contributions	1			2			1
Foreign currency exchange rate changes	(12		)	28			(45		)
Divestitures, settlements and business combinations	(1		)	(1		)	(4		)
Benefits paid	(12		)	(12		)	(10		)
Ending fair value of plan assets	$	365		$	361		$	310
Funded status	$	(159	)	$	(145	)	$	(185	)
Amounts recognized in the consolidated balance sheets
Noncurrent asset	$	19		$	17		$	11
Current liability	(1		)	(1		)	(2		)
Noncurrent liability	(177		)	(161		)	(194		)
Total	$	(159	)	$	(145	)	$	(185	)
Estimated amortization from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal period
Actuarial loss	$	8		$	6		$	6
Prior service credit	(1		)	(4		)	(16		)
Total	$	7		$	2		$	(10	)
Amounts recognized in accumulated other comprehensive loss
Net actuarial loss	$	161		$	141		$	186
Prior service credit	(2		)	(4		)	(21		)
Total	$	159		$	137		$	165
Plans with projected benefit obligations in excess of plan assets
Projected benefit obligation	$	365		$	326		$	341
Fair value of plan assets	$	186		$	142		$	145
Plans with accumulated benefit obligations in excess of plan assets
Accumulated benefit obligation	$	331		$	293		$	307
Fair value of plan assets	$	186		$	142		$	145



	2018		2017
Plan assets — allocation
Equity securities	47	%	47	%
Debt securities	32	%	39	%
Insurance contracts	10	%	11	%
Other investments	10	%	3	%
Cash	1	%	—	%

The following table presents a summary of the ending fair value of the plan assets:



	October 28, 2018								October 29, 2017
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total

	(In millions)
Equity securities	$	86	$	—	$	—	$	86	$	83	$	—	$	—	$	83
Debt securities	19		—		—		19		16		—		—		16
Insurance contracts	—		—		36		36		—		—		38		38
Other investments	—		14		—		14		—		13		—		13
Cash	2		—		—		2		2		—		—		2
Total assets at fair value	$	107	$	14	$	36	157		$	101	$	13	$	38	152
Assets measured at net asset value							208								209
Total							$	365							$	361

The following table presents the activity in Level 3 instruments for each fiscal year:



	2018			2017

	(In millions)
Balance, beginning of year	$	38		$	38
Actual return on plan assets:
Relating to assets still held at reporting date	(1		)	(3		)
Purchases, sales, settlements, net	—			1
Currency impact	(1		)	2
Balance, end of year	$	36		$	38

Applied’s investment strategy for its defined benefit plans is to invest plan assets in a prudent manner, maintaining well-diversified portfolios with the long-term objective of meeting the obligations of the plans as they come due. Asset allocation decisions are typically made by plan fiduciaries with input from Applied’s international pension committee. Applied’s asset allocation strategy incorporates a sufficient equity exposure in order for the plans to benefit from the expected better long-term performance of equities relative to the plans’ liabilities. Applied retains investment managers, where appropriate, to manage the assets of the plans. Performance of investment managers is monitored by plan fiduciaries with the assistance of local investment consultants. The investment managers make investment decisions within the guidelines set forth by plan fiduciaries. Risk management practices include diversification across asset classes and investment styles, and periodic rebalancing toward target asset allocation ranges. Investment managers may use derivative instruments for efficient portfolio management purposes. Plan assets do not include any of Applied’s own equity or debt securities.

A summary of the components of net periodic benefit costs and the weighted average assumptions used for net periodic benefit cost calculations for each fiscal year is presented below:



	2018			2017			2016

	(In millions, except percentages)
Components of net periodic benefit cost
Service cost	$	12		$	13		$	13
Interest cost	11			10			13
Expected return on plan assets	(20		)	(18		)	(14		)
Amortization of actuarial loss and prior service credit	3			(10		)	3
Settlement and curtailment loss	—			—			(5		)
Net periodic benefit cost (income)	$	6		$	(5	)	$	10
Weighted average assumptions
Discount rate	2.16		%	1.88		%	2.82		%
Expected long-term return on assets	5.41		%	5.38		%	5.38		%
Rate of compensation increase	2.66		%	2.69		%	2.71		%

Asset return assumptions are derived based on actuarial and statistical methodologies, from analysis of long-term historical data relevant to the country in which each plan is in effect and the investments applicable to the corresponding plan. The discount rate for each plan was derived by reference to appropriate benchmark yields on high quality corporate bonds, allowing for the approximate duration of both plan obligations and the relevant benchmark yields.

Future expected benefit payments for the pension plans and the post-retirement plan over the next ten fiscal years are as follows:



	Benefit Payments
	(In millions)
2019	$	12
2020	12
2021	13
2022	13
2023	12
2024-2028	77
	$	139

Company contributions to these plans for fiscal 2019 are expected to be approximately $15 million.

Executive Deferred Compensation Plans

Applied sponsors two unfunded deferred compensation plans, the Executive Deferred Compensation Plan (Predecessor EDCP) and the 2016 Deferred Compensation Plan (2016 DCP) (formerly known as the 2005 Executive Deferred Compensation Plan), under which certain employees may elect to defer a portion of their following year’s eligible earnings. The Predecessor EDCP was frozen as of December 31, 2004 such that no new deferrals could be made under the plan after that date and the plan would qualify for “grandfather” relief under Section 409A of the Code. The Predecessor EDCP participant accounts continue to be maintained under the plan and credited with deemed interest. The 2016 DCP was originally implemented by Applied effective as of January 1, 2005, and amended and restated as of October 12, 2015, and is intended to comply with the requirements of Section 409A of the Code. In addition, Applied also sponsors a non-qualified deferred compensation plan as a result of the acquisition of Varian. Amounts payable, including accrued deemed interest, totaled $92 million and $63 million at October 28, 2018 and October 29, 2017, respectively, which were included in other liabilities in the Consolidated Balance Sheets.