DEF 14A 1 d681918ddef14a.htm DEF 14A DEF 14A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934

(Amendment No.     )

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Definitive Proxy Statement

 

 

Definitive Additional Materials

 

 

Soliciting Material Pursuant to §240.14a-12

Applied Materials, Inc.

 

 

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LOGO

2019 NOTICE OF ANNUAL MEETING AND PROXY STATEMENT


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LOGO

January 24, 2019

Dear Fellow Shareholders:

We invite you to attend Applied Materials’ 2019 Annual Meeting of Shareholders, which will be held on Thursday, March 7, 2019, at 11:00 a.m. Pacific Time at our corporate offices at 3050 Bowers Avenue, Building 1, Santa Clara, California 95054.

This year’s proxy statement reflects our continued focus on our strategy, an engaged and effective Board, sound corporate governance and executive compensation practices, and regular dialogue with and responsiveness to our shareholders.

Financial Performance and Business Strategy

Fiscal 2018 marked Applied Materials’ third consecutive year of record financial performance. We delivered double-digit revenue growth across all of our segments, despite challenging market conditions in the second half of the year. We are confident that longer-term growth drivers in both semiconductor and display remain firmly in place and will continue to create great opportunities for Applied Materials.

As more industries become increasingly dependent on technology and data to define their futures, Applied’s core wafer fabrication equipment market is poised to be structurally larger and less volatile than it was in the past. We have also expanded our product portfolio to better address major technology inflections.

As we enter 2019, Applied is focused on expanding our role in the A.I.-Big Data era. Across the Company, we are taking a long-term perspective and will continue to prioritize our spending towards R&D to enable major technology inflections for our customers and drive growth and shareholder value.

Shareholder Engagement

We are committed to effective corporate governance that is informed by our shareholders, promotes the long-term interests of our shareholders, and strengthens Board and management accountability.

We have a robust shareholder outreach program that focuses on governance, compensation, environmental and sustainability issues of interest to our shareholders. The outreach is a recurring, year-round effort, led by a cross-functional team that includes members of our Investor Relations, Global Rewards, Diversity and Inclusion, Environmental Health and Safety and Legal functions, with participation of the Chairman of the Board where appropriate.

In response to shareholder feedback, in September 2018, we published our first Diversity and Inclusion (D&I) Report, which highlights our D&I strategy, practices and goals, and provides key diversity data, including the gender and ethnic composition of our workforce. The publication of this report reflects the importance of this issue to Applied and the valuable input that we received from our shareholders.

Thank you for your continued investment in and support of Applied Materials.

Sincerely,

 

LOGO

 

Thomas J. Iannotti

Chairman of the Board

 

LOGO

 

Gary E. Dickerson

President and Chief Executive Officer

  

 

3050 Bowers Avenue

Santa Clara, California 95054

Phone: (408) 727-5555

  

Mailing Address:

Applied Materials, Inc.

3050 Bowers Avenue

P.O. Box 58039

Santa Clara, California 95052-8039


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LOGO

NOTICE OF

2019 ANNUAL MEETING OF SHAREHOLDERS

Thursday, March 7, 2019

at 11:00 a.m. Pacific Time

The 2019 Annual Meeting of Shareholders of Applied Materials, Inc. will be held on Thursday, March 7, 2019, at 11:00 a.m. Pacific Time at our corporate offices at 3050 Bowers Avenue, Building 1, Santa Clara, California 95054.

Items of Business

 

 

1.  To elect ten directors to serve for a one-year term and until their successors have been duly elected and qualified.

 

 

2.  To approve, on an advisory basis, the compensation of our named executive officers for fiscal year 2018.

 

 

3.  To ratify the appointment of KPMG LLP as our independent registered public accounting firm for fiscal year 2019.

 

 

4.  To consider a shareholder proposal, if properly presented at the Annual Meeting.

 

 

5.  To transact any other business that may properly come before the Annual Meeting or any adjournment or postponement of the Annual Meeting.

 

Your vote is important. You may vote via the Internet or by telephone, or if you requested to receive printed proxy materials, by signing, dating and returning your proxy card. If you are voting via the Internet or by telephone, your vote must be received by 11:59 p.m. Eastern Time on Wednesday, March 6, 2019. For specific voting instructions, please refer to the information provided in the following Proxy Statement, together with your proxy card or the voting instructions you receive by e-mail or that are provided via the Internet.

If you received a Notice of Internet Availability of Proxy Materials on how to access the proxy materials via the Internet, a proxy card was not sent to you, and you may vote only via the Internet, unless you have requested a paper copy of the proxy materials, in which case, you may also vote by telephone or by signing, dating and returning your proxy card. Shares cannot be voted by marking, writing on and returning the Notice of Internet Availability. Any Notices of Internet Availability that are returned will not be counted as votes. Instructions for requesting a paper copy of the proxy materials are set forth on the Notice of Internet Availability.

 

By Order of the Board of Directors

 

 

LOGO

Christina Y. Lai

Corporate Secretary

Santa Clara, California

January 24, 2019

Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting to be held on March 7, 2019: The Proxy Statement and Annual Report to Shareholders are available at www.proxyvote.com.


Table of Contents

 

TABLE OF CONTENTS

 

     Page  
2019 Proxy Statement Summary      i  

Annual Meeting of Shareholders

     i  

Proposals and Board Recommendations

     i  

Director Nominees

     ii  

Board Practices and Composition

     ii  

Corporate Governance

     iii  

Executive Compensation

     iv  

Sustainability and Corporate Social Responsibility

     x  
Proposal 1—Election of Directors      1  

Nominees

     1  
Board and Corporate Governance Practices      7  

Board Composition and Nominee Considerations

     7  

Corporate Governance

     9  

Board Meetings and Committees

     14  
Director Compensation      16  

Compensation Program for Directors

     16  

Director Compensation for Fiscal 2018

     17  
Stock Ownership Information      18  

Principal Shareholders

     18  

Directors and Executive Officers

     19  
Proposal 2—Approval, on an Advisory Basis, of the Compensation of Our Named Executive Officers      20  
Compensation Discussion and Analysis      21  

Executive Summary

     21  

Compensation Governance and Decision-Making Framework

     28  

Components of Total Direct Compensation

     29  

Additional Compensation Programs and Policies

     38  

Human Resources and

Compensation Committee Report

     40  
     Page  
Executive Compensation      41  

Summary Compensation Table for Fiscal 2018, 2017 and 2016

     41  

Grants of Plan-Based Awards for Fiscal 2018

     42  

Outstanding Equity Awards at Fiscal 2018 Year-End

     43  

Option Exercises and Stock Vested for Fiscal 2018

     44  

Non-Qualified Deferred Compensation

     44  

Employment Agreement

     45  

Potential Payments Upon Termination or Change of Control

     46  

CEO Pay Ratio

     46  

Certain Relationships and Related Transactions

     47  
Proposal 3—Ratification of the Appointment of Independent Registered Public Accounting Firm      48  

Fees Paid to KPMG LLP

     48  

Policy on Audit Committee’s Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm

     49  

Audit Committee Report

     49  
Proposal 4—Shareholder Proposal to Provide for Right to Act by Written Consent      50  

Shareholder Proposal

     50  

Board of Directors Statement in Opposition

     50  
Questions and Answers about the Proxy Statement and Our 2019 Annual Meeting      53  
Other Matters      58  

Section  16(a) Beneficial Ownership Reporting Compliance

     58  

Shareholder Proposals or Nominations for 2020 Annual Meeting

     58  

No Incorporation by Reference

     58  
Appendix: Unaudited Reconciliation of Non-GAAP Adjusted Financial Measures      A-1  

Reconciliation of non-GAAP adjusted financial measures used in the Compensation Discussion and Analysis section and elsewhere in this Proxy Statement, other than as part of disclosure of target levels, can be found in the Appendix.

 

 

Cautionary Note Regarding Forward-Looking Statements

This Proxy Statement contains forward-looking statements, including those regarding anticipated growth and trends in our businesses and markets, industry outlooks, technology transitions, our business, strategies and financial performance, our development of new products, technologies and capabilities, and other statements that are not historical fact, and actual results could differ materially. Risk factors that could cause actual results to differ are set forth in the “Risk Factors” section of, and elsewhere in, our 2018 Annual Report on Form 10-K and other filings with the Securities and Exchange Commission. All forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof, and Applied Materials undertakes no obligation to update any such statements.


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2019 PROXY STATEMENT SUMMARY

 

2019 PROXY STATEMENT SUMMARY

Your proxy is being solicited on behalf of the Board of Directors of Applied Materials, Inc. We are making this Proxy Statement available to shareholders beginning on January 24, 2019. This summary highlights information contained elsewhere in this Proxy Statement. We encourage you to read the entire Proxy Statement for more information prior to voting.

Annual Meeting of Shareholders

 

 

Date and Time:    March 7, 2019, 11:00 a.m. Pacific Time
Location:    Applied Materials, Inc., 3050 Bowers Avenue, Building 1, Santa Clara, California 95054
Record Date:    January 10, 2019
Voting:    Shareholders as of the record date are entitled to vote. Each share of common stock is entitled to one vote for each director nominee and one vote for each of the proposals to be voted on.
Attendance:    Shareholders and their duly appointed proxies may attend the meeting.

Proposals and Board Recommendations

 

 

     For More Information   Board Recommendation
Proposal 1 – Election of Directors   Pages 1 to 6    FOR each Nominee

Judy Bruner

 

Stephen R. Forrest

 

Scott A. McGregor

   

Xun (Eric) Chen

 

Thomas J. Iannotti

 

Dennis D. Powell

   

Aart J. de Geus

Gary E. Dickerson

 

Alexander A. Karsner

Adrianna C. Ma

     
     
Proposal 2 – Executive Compensation   Page 20   FOR

Approval, on an advisory basis, of the compensation of our named executive officers for fiscal year 2018

   
     
Proposal 3 – Ratification of Registered Accounting Firm   Page 48   FOR

Ratification of the appointment of KPMG LLP as our independent registered public accounting firm for fiscal year 2019

   
     
Proposal 4 – Shareholder Proposal to Provide for Right to Act by Written Consent   Pages 50 to 52   AGAINST

Shareholder proposal requesting that the Board take steps to permit shareholder action by written consent without a meeting

       


 

Applied Materials, Inc.    i


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Director Nominees

 

 

Name and Occupation   Age   Director Since   Independent   Committees
Judy Bruner   60   2016    

Governance (Chair)

Executive Vice President, Administration and Chief
Financial Officer, SanDisk Corporation (retired)

       

Audit

Xun (Eric) Chen   49   2015    

Compensation

Partner, SB Investment Advisers (US), Inc.

       

Strategy

Aart J. de Geus   64   2007    

Strategy (Chair)

Chairman of the Board of Directors, Co-Chief Executive
Officer, Synopsys, Inc.

       

Investment

Gary E. Dickerson   61   2013        

President and Chief Executive Officer, Applied Materials, Inc.

       
Stephen R. Forrest   68   2008    

Audit

Professor of Electrical Engineering & Computer Science,
Physics, and Materials Science & Engineering, University of Michigan

       

Strategy

Investment

Thomas J. Iannotti   62   2005    

Compensation (Chair)

Senior Vice President and General Manager, Enterprise
Services, Hewlett-Packard Company (retired)

       
Alexander A. Karsner   51   2008    

Compensation

Managing Partner, Emerson Collective

       

Governance

Adrianna C. Ma   45   2015    

Investment (Chair)

Managing Partner, Fremont Group

       

Audit

Governance

Scott A. McGregor   62   2018    

Audit

President and Chief Executive Officer, Broadcom Corporation (retired)

       

Strategy

Dennis D. Powell   71   2007    

Audit (Chair)

Executive Vice President, Chief Financial Officer, Cisco
Systems, Inc. (retired)

             

Governance

Investment

Board Practices and Composition

 

Ensuring the Board is composed of directors who possess a wide variety of relevant skills, professional experience and backgrounds, bring diverse viewpoints and perspectives, and effectively represent the long-term interests of shareholders, is a top priority of the Board and the Corporate Governance and Nominating Committee. Our current Board composition reflects strong Board practices that support regular refreshment based on board needs and smooth succession planning.

 

Director Nominee Expertise    Key Attributes

 

LOGO

Semiconductor Industry and Technology Financial and Accounting Global Business Strategy and Innovation Operations and Infrastructure Government Policy M&A and Organizational Growth Risk Management Public Company Board Experience Executive Leadership

  

 

 

LOGO

Independent Board Chair 90% Director Independence Regular refreshment resulting in average director tenure of 7 years 4 new Independent Directors added since 2015



 

ii     2019 Proxy Statement


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2019 PROXY STATEMENT SUMMARY

 

Board Practices Support Thoughtful Board Composition

 

 

Board Composition to Support Company Strategy

The Board and the Corporate Governance and Nominating Committee regularly evaluate the size and composition of the Board to ensure appropriate alignment with the Company’s evolving business and strategic needs.

 

 

Board Diversity

The Board values diversity of background, skills and viewpoints, and gender and ethnicity in the recruitment of new directors.

 

 

Annual Board Evaluations

The Board conducts an annual self-assessment of Board, Board Committees and individual directors to evaluate effectiveness.

 

 

Board Refreshment

The Board believes the fresh perspectives brought by new directors are critical to a forward-looking and strategic Board when appropriately balanced by the deep understanding of Applied’s business provided by longer-serving directors.

 

 

Director Succession Planning

The Corporate Governance and Nominating Committee reviews the short- and long-term strategies and interests of Applied to determine what current and future skills and experience are required of the Board in exercising its oversight function.

 

Corporate Governance

 

We are committed to effective corporate governance that is informed by our shareholders, promotes the long-term interests of our shareholders, and strengthens Board and management accountability.

Governance Highlights

 

 Annual Election of Directors

 

 Shareholder Proxy Access

 Independent Chairman of the Board

 

 No Poison Pill

 Highly Independent Board (9 of 10 Directors) and Committees

 

 No Supermajority Vote Requirements

 Annual Board, Committee and Individual Evaluations

 

 Majority Voting for Directors

 Robust Board Succession Planning

 

 Regular Executive Sessions of Independent Directors

 Active Shareholder Engagement Practices

 

 Stock Ownership Guidelines for Directors and Executives

 Shareholder Right to Call a Special Meeting

 

 Clawback Policy for Annual and Long-Term Incentive Plans

Shareholder Engagement

We believe that strong corporate governance should include regular engagement with our shareholders to enable us to understand and respond to shareholder concerns. We have a robust shareholder outreach program led by a cross-functional team that includes members of our Investor Relations, Global Rewards, Diversity and Inclusion, Environmental Health and Safety and Legal functions. Independent members of our Board are also involved, as appropriate. In the fall, we solicit feedback on our executive compensation program, corporate governance and disclosure practices, and sustainability and corporate citizenship initiatives, as well as any matters voted on at our prior annual meeting. After the filing of our proxy statement, we engage again with our shareholders about important topics to be addressed at our annual meeting. Following our annual meeting, we review the results of the meeting and investor feedback, as well as evaluate emerging trends in corporate governance and other areas. We share feedback we receive from our shareholders with the Human Resources and Compensation Committee, Corporate Governance and Nominating Committee, and the full Board. Shareholder input is then factored into the Board’s decision-making. See “Shareholder Engagement” on page 12 for more information.



 

Applied Materials, Inc.    iii


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Executive Compensation

 

Company Overview

Applied Materials is the leader in materials engineering solutions used to produce virtually every new chip and advanced display in the world. Our expertise in modifying materials at atomic levels and on an industrial scale enables customers to transform possibilities into reality. At Applied Materials, our innovations make possible the technology shaping the future.

We develop, design, produce and service semiconductor and display equipment for manufacturers that sell into highly competitive and rapidly changing end markets. Our competitive positioning is driven by our ability to identify major technology inflections early, and to develop highly differentiated materials engineering solutions for our customers to enable those technology inflections. Through our broad portfolio of products and technologies, innovation leadership and focused investments in research and development, we are enabling our customers’ success, thereby generating record performance for the Company and creating significant value for our shareholders.

2018 Performance Highlights

In 2018, despite challenging market conditions in the second half of the year, we delivered another year of outstanding results across several dimensions – company-wide, across our different products and segments, and from a financial and strategic perspective. Key highlights include:

 

   

Grew revenue to $17.3 billion in fiscal 2018, up 19% from the prior year, resulting in our third consecutive year of record revenue;

 

   

Achieved record revenue across all of our segments;

 

   

Grew operating profit to a new record, resulting in record GAAP EPS of $3.23, and record non-GAAP adjusted EPS of $4.45 – an increase of 2% and 37% over fiscal 2017, respectively (see the Appendix for a reconciliation of non-GAAP adjusted measures);

 

   

Delivered operating cash flow of $3.8 billion, equal to 22% of revenue; and

 

   

Returned $5.9 billion to shareholders through dividends and share repurchases.

Highlights of five-year performance achievements across key financial measures

 

 

LOGO

Non-GAAP adjusted operating margin and non-GAAP adjusted EPS are performance targets under our bonus and long-term incentive plans. See Appendix for non-GAAP reconciliations.



 

iv     2019 Proxy Statement


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2019 PROXY STATEMENT SUMMARY

 

Strategic and Operational Highlights

In fiscal 2018, we continued to drive profitable growth by executing our strategy. Key highlights include:

 

   

Increased our investments in research and development by more than $245 million over fiscal 2017, to over $2.0 billion. We continue to prioritize our operating expenses towards R&D to solve major technology challenges for our customers and drive our long-term growth strategy.

 

   

Delivered strong growth in key areas of our semiconductor equipment business in fiscal 2018 – our process equipment businesses and our metrology and inspection businesses delivered record revenues.

 

   

Made strong gains in the memory market and positioned the Company for further growth as customers transition to new, higher performance devices.

 

   

Built upon Applied’s large installed base of manufacturing systems and grew the number of tools under comprehensive service agreements three times faster than the installed base. We are now generating about half of our services revenue from long-term agreements. These agreements enable us to generate more value by helping our customers achieve and maintain higher yields, and optimize factory output and operating costs.

 

   

Continued to deliver key tools for Gen 10.5 display factories, allowing customers to manufacture larger and more advanced TVs, and maintained the leading position in thin-film encapsulation, which enables next-generation OLED displays for mobile devices.

In summary, each of our major business segments delivered double-digit growth in fiscal 2018 despite challenging market conditions. For the calendar year, we expect most of our semiconductor businesses gained or held share. However, other segments of the wafer fabrication equipment (“WFE”) market where we do not compete, such as lithography, saw faster growth, and, as a result, we expect our overall WFE share declined in 2018. In addition, our stock price performance reflected weaker industry demand in the second half of the year, especially in the memory market.

The Human Resources and Compensation Committee (“HRCC”) set many performance targets for fiscal 2018 bonuses far above any records that Applied had achieved in the past in order to set a very high and challenging bar for the executive officers. During fiscal 2018, Applied achieved record EPS and other financial and operational objectives, but even so, our record financial results were below our aggressive targets. The HRCC also set aggressive goals for WFE share and total shareholder return (“TSR”) performance relative to our peers, and these results were below the 1.0 targets. Accordingly, bonus payouts to our executive officers were below target bonus amounts.



 

Applied Materials, Inc.    v


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Stock Price Performance

While Applied achieved strong financial results in fiscal 2018, our stock price performance reflected weaker industry demand in the second half of the year, especially in the memory market. Over the past five years, Applied has outperformed the S&P 500 Index, as shown below.

FY2014 – FY2018 Total Shareholder Return vs. Key Peers

 

 

LOGO



 

vi     2019 Proxy Statement


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2019 PROXY STATEMENT SUMMARY

 

Primary Compensation Elements and Executive Compensation Highlights for Fiscal 2018

The primary elements of our compensation program consist of base salary, annual incentive bonuses and annual long-term incentive awards. Other elements of compensation include a 401(k) savings plan, deferred compensation benefits and other benefits programs that are generally available to all employees. Primary elements and highlights of our fiscal 2018 compensation program were as follows:

 

    Element of Pay     Structure     Highlights
                         

Base Salary

(see page 29)

 

   

 

 

 

Fixed cash compensation for expected day-to-day responsibilities

 

   

 

 

 

Fiscal 2018 salaries for each named executive officer (“NEO”) remained unchanged from 2017 levels, except to reflect promotions

   
     

Reviewed annually and adjusted when appropriate, based on scope of responsibility, performance, time in role, experience, and competitive market for executive talent

 

         
                         

Annual

Incentive

Bonuses

(see page 29)

   

 

 

 

 

 

 

 

Variable compensation paid in cash

 

Based on performance against pre-established financial, operational, strategic and individual performance measures

 

Financial and non-financial metrics provide a comprehensive assessment of executive performance

 

Performance metrics evaluated annually for alignment with strategy and market trends

 

NEO annual incentives determined through three-step performance measurement process:

 

 

 

LOGO

   

 

 

 

 

 

 

Fiscal 2018 target bonuses as a percentage of base salary were the same as fiscal 2017 levels for all the NEOs, except to reflect promotions

 

The threshold non-GAAP adjusted EPS goal for fiscal 2018 was $3.50. The Company achieved an actual result of $4.45

 

As the threshold performance goal was achieved, the annual bonuses were based on the performance of the Company’s objective and quantifiable business and strategic goals in the corporate scorecard for each NEO

 

Based on achievement compared to goals, fiscal 2018 actual annual bonuses ranged from 0.58x to 0.73x target for our NEOs

 

— Achievement against the corporate scorecard ranged from 0.53x to 0.66x target (see corporate scorecard information on page 32)

 

— Individual performance factor was 1.1x target for all our NEOs, which was determined based on an assessment of individual performance results and impact against both quantitative and strategic objectives (see individual performance highlights on page 33)

 

   
                                                 
                         

Long-Term

Incentives

(see page 35)

 

   

 

 

 

 

 

 

Performance share units (“PSUs”) to establish rigorous long-term performance alignment

 

Restricted stock units (“RSUs”) to provide link to shareholder value creation and retention value

 

Performance share units vest based on achievement of 3-year non-GAAP adjusted operating margin and 3-year WFE market share goals

 

Restricted stock units vest ratably over 3 years

   

 

 

 

 

 

 

The target vehicle mix of the equity awards consists of 75% PSUs and 25% RSUs for the CEO and 50% PSUs and 50% RSUs for the other NEOs

 

Non-GAAP adjusted operating margin is a key measure of our Company’s long-term success

 

WFE market share is a relative performance measure benchmarked against key industry peers

 

— For fiscal 2019, the WFE market share metric was replaced with relative TSR, which better reflects our growing Display and services businesses, in addition to our semiconductor segment, and incentivizes management to outperform the market through each business environment

 

   
   
                                   


 

Applied Materials, Inc.    vii


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Pay Mix

In fiscal 2018, a significant portion of our executive compensation consisted of variable compensation and long-term incentives. As illustrated below, 93% of CEO compensation for fiscal 2018 comprised variable compensation elements, and 83% of Mr. Dickerson’s overall compensation was delivered in equity with multi-year vesting.

 

FY2018 Compensation Mix1

CEO

  

All Other NEOs

 

LOGO

  

 

LOGO

1 Represents total direct compensation for fiscal 2018.

Summary of 2018 Total Direct Compensation

The following table summarizes elements of annual total direct compensation for our NEOs for fiscal 2018, consisting of (1) base salary, (2) annual incentive bonus and (3) annual long-term incentive awards (the grant date fair value of stock awards). This table excludes amounts not considered by the Human Resources and Compensation Committee (“HRCC”) to be annual total direct compensation, such as (a) the amount of a special bonus paid to Mr. Durn in connection with his hire in August 2017 and the grant date fair value of restricted stock units awarded to him for retention and performance purposes, (b) the grant date fair value of restricted stock units awarded to each of Mr. Ghanayem and Dr. Raja in connection with each officer’s promotion and (c) certain other amounts required by the SEC to be reported in the Summary Compensation Table (see page 41 of this Proxy Statement).

 

Name and Principal Position   

Salary

($)

    

Annual

Incentive

Bonus

($)

    

Annual

Long-Term

Incentive

Award

($)

    

Total

($)

 

Gary E. Dickerson

     1,000,000        1,430,000        11,261,311        13,691,311  

President and Chief Executive Officer

                                   

Daniel J. Durn

     600,000        471,900        2,943,380        4,015,280  

Senior Vice President, Chief Financial Officer

                                   

Ali Salehpour

     600,000        588,060        3,610,485        4,798,545  

Senior Vice President, Services, Display and Flexible Technology

                                   

Prabu G. Raja

     549,039        522,720        2,820,650        3,892,409  

Senior Vice President, Semiconductor Products Group

                                   

Steve G. Ghanayem

     549,039        432,878        2,820,650        3,802,567  

Senior Vice President, New Markets and Alliances Group

                                   


 

viii     2019 Proxy Statement


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2019 PROXY STATEMENT SUMMARY

 

Pay and Performance

We align compensation with our business objectives, performance and shareholder interests. The following chart shows the connection between TSR and the total direct compensation of our CEO for the last five fiscal years. While TSR has grown significantly over the previous four years, our CEO’s total direct compensation has remained relatively flat during that period.

 

 

LOGO

 

(1) 

Total direct compensation consists of annual base salary, annual incentive bonus and annual long-term incentive award (grant date fair value of annual equity awards for all fiscal years, except for fiscal 2014, which consists of the total amount of cash-settled performance units). Total direct compensation shown above excludes other amounts required by the SEC to be reported in the Summary Compensation Table.

(2) 

TSR line illustrates the total shareholder return on our common stock during the period from October 24, 2014 through October 26, 2018 (the last business day of fiscal 2018), assuming $100 was invested on October 24, 2014 and assuming reinvestment of dividends.



 

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Sustainability and Corporate Social Responsibility

 

Applied is committed to growing its business in a sustainable and socially responsible manner, and we demonstrate our commitment through our corporate social responsibility programs and initiatives. We publish an annual Corporate Social Responsibility Report, and recently released our first Diversity and Inclusion Report, to highlight accomplishments and provide key data to stakeholders. We believe diverse and inclusive teams foster better decision making, create a richer culture for our team members, heighten performance to enable world-class results, and attract the best talent.

Our Board and management oversee sustainability matters to establish accountability. Sustainability is integrated into our operations, and we have an Environmental, Health and Safety (“EHS”) organization that is focused on maintaining a safe and healthful working environment, demonstrating environmental leadership, and meeting or exceeding regulatory compliance. The Head of EHS reports to the Board of Directors on a quarterly basis and provides a more in-depth environmental and sustainability update to the Audit Committee on an annual basis. Our Human Resources and Compensation Committee oversees our corporate culture and human capital management programs, including our diversity and inclusion practices and initiatives.

We believe that investing in operating our business sustainably, in our people and in our communities benefits Applied and its shareholders.

 

 

Sustainability

 

    Conduct business in environmentally, socially responsible and ethical manner while protecting health and safety of our workers and community  

 

    Guiding principles include designing efficient and sustainable products, pollution prevention, worker protection and ethical business practices  

 

 

People

 

    Value global diversity and inclusion within the workforce and ongoing career development for employees to encourage innovation and engagement  

 

    Attract, develop and retain world-class global workforce  

 

 

 

 

Community

 

    Invest financial and human resources in communities where we work and live  

 

    Invest in education, arts and culture, civic engagement, and environment  

 

    Employee involvement through charitable donations and volunteer programs

 

 

 

 

Key Initiatives

 

Diversity and Inclusion    Supply Chain

We believe diverse and inclusive teams create a richer culture, enhance performance, and attract the best talent.

 

   Transparency . Recently published a Diversity and Inclusion Report to highlight accomplishments and provide key diversity data

 

   Commitment. Committed to increasing women’s representation globally and underrepresented minorities in our U.S. workforce through recruiting and mentoring programs and sponsoring employee resource groups. Promote next generation of diverse technology leaders by supporting STEM education programs

 

   Engagement. Integrate emphasis on diversity and inclusion in new hire orientation and employee development programs and measure inclusion in our annual employee survey

  

Sustainable supply chains are core to our success, and we actively seek to manage and promote global best practices.

 

   Industry Coalition. Member of Responsible Business Alliance (formerly EICC) and have adopted its Code of Conduct, to promote safe working conditions in supply chains and environmentally-responsible, sustainable and ethical business operations

 

   Commitment to High Standards. Require all companies in our global supply chain to implement Responsible Business Alliance Code of Conduct

  
Environment    Ethics

We seek to operate and develop products in a way that minimizes environmental impact.

 

   GHG Emissions. Committed to reducing GHG emissions through policies and programs, product manufacturing processes and customer solutions

 

   Water and Waste Reduction. Our Austin, TX water reclamation project has recycled 3.8 million gallons of water. Our continued focus on recycling kept our 2017 waste diversion rate at 75% even as overall recycling volumes increased ~2 tons. Packaging materials now account for roughly 70% of our total recyclables

 

   Energy consumption. Maintained flat direct energy consumption year-over-year despite our rapid growth. Our onsite green-power generation initiatives in 2017 produced 3.5 Gigawatt hours (the equivalent of powering 2.4 million homes per year)

  

We maintain highest ethical standards in interactions with employees, customers, suppliers, competitors and public.

 

   Human Rights. Our Standards of Business Conduct include several important provisions on human rights, including prohibitions on the use of child labor or forced, bonded or indentured labor in our operations

 

   Conflict Minerals. Committed to responsible sourcing of materials for our products. Do not directly purchase conflict minerals or have any direct relationship with mines or smelters that process these minerals. Are involved in the Conflict-Free Sourcing Initiative (CFSI)

 

   Training and Business Ethics Helplines. Conduct numerous global training reinforcement programs and offer 24/7 Business Ethics Helplines



 

x     2019 Proxy Statement


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PROPOSAL 1—ELECTION OF DIRECTORS

 

LOGO

PROXY STATEMENT

PROPOSAL 1—ELECTION OF DIRECTORS

Nominees

 

 

Applied’s Board of Directors is elected each year at the Annual Meeting of Shareholders. Applied currently has ten directors. Upon the recommendation of the Corporate Governance and Nominating Committee, the Board has nominated the ten individuals listed below for election at the Annual Meeting, each of whom currently serves as a director of Applied. These nominees bring a wide variety of relevant skills, professional experience and backgrounds, as well as diverse viewpoints and perspectives to represent the long-term interests of shareholders, and to fulfill the leadership and oversight responsibilities of the Board.

If any nominee listed below becomes unable to stand for election at the Annual Meeting, the persons named as

proxies may vote for any person designated by the Board to replace the nominee. Alternatively, the proxies may vote for the remaining nominees and leave a vacancy that the Board may fill later, or the Board may reduce the authorized number of directors. As of the date of this Proxy Statement, the Board is not aware of any nominee who is unable or will decline to serve as a director.

Each director elected at the Annual Meeting will serve until Applied’s 2020 Annual Meeting of Shareholders and until he or she is succeeded by another qualified director who has been elected, or, if earlier, until his or her death, resignation or removal.

 

 

 

 

THE BOARD RECOMMENDS THAT YOU VOTE FOR EACH OF THE FOLLOWING DIRECTOR NOMINEES

 

 

 

 

LOGO  

Judy Bruner

 

Executive Vice President, Administration and Chief Financial Officer, SanDisk Corporation (retired)

  

Independent Director

 

Director since 2016

 

Age 60

 

Board Committees:

 

  Corporate Governance and Nominating (Chair)

 

  Audit

 

Other Current Public Boards:

 

  Rapid7, Inc.

  Seagate Technology plc

  Varian Medical Systems, Inc.

 

Key Qualifications and Expertise:

 

  Executive leadership and management experience

 

  Accounting principles, financial controls, financial reporting rules and regulations, and audit procedures

 

  Global business, industry and operational experience

 

  Risk management and controls

 

  Public company board experience

 
 

 

Judy Bruner served as Executive Vice President, Administration and Chief Financial Officer of SanDisk

Corporation, a supplier of flash storage products, from June 2004 until its acquisition by Western Digital in May 2016. Previously, she was Senior Vice President and Chief Financial Officer of Palm, Inc., a provider of handheld computing and communications solutions, from September 1999 until June 2004. Prior to Palm, Inc., Ms. Bruner held financial management positions at 3Com Corporation, Ridge Computers and Hewlett-Packard Company. She currently serves as a member of the boards of directors of Rapid7, Inc., Seagate Technology plc and Varian Medical Systems, Inc. Ms. Bruner is a member of the board of trustees of the Computer History Museum, and previously served as a member of the board of directors of Brocade Communications Systems, Inc., from 2009 until its acquisition in November 2017.
 
 
 
 
 
 
 
 

 

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LOGO  

Xun (Eric) Chen

 

Partner,

SB Investments Advisers (US), Inc.

  

Independent Director

 

Director since 2015

 

Age 49

 

Board Committees:

 

  Human Resources and Compensation

 

  Strategy

 

Other Current Public Boards:

 

  None

 

Key Qualifications and Expertise:

 

   Executive leadership and management experience

 

  Semiconductor industry leadership

 

  Global business, industry and operational experience in the technology and information sector

 

  Mergers and acquisitions, capital markets

 

  Public company board experience

 
 

 

Eric Chen has been a Partner of SB Investment Advisers (US), Inc. (“SBIA”), an investment adviser

focused on investments in the technology sector, since March 2018. Prior to joining SBIA, Dr. Chen was the Chief Executive Officer and Co-Founder of BaseBit Technologies, Inc., a technology company in Silicon Valley. He served as CEO of BaseBit Technologies since it was founded in October 2015, except from March 2016 until December 2017, when BaseBit was a portfolio company of Team Curis Group, a group of integrated biotechnology and data technology companies and laboratories, during which time Dr. Chen served as CEO of Team Curis Group. From 2008 to 2015, Dr. Chen served as a managing director of Silver Lake, a leading private investment firm focused on technology-enabled and related growth industries. Prior to Silver Lake, Dr. Chen was a senior vice president and served on the executive committee of ASML Holding N.V. He joined ASML following its 2007 acquisition of Brion Technologies, Inc., a company he co-founded in 2002 and served as Chief Executive Officer. Prior to Brion Technologies, Dr. Chen was a senior vice president at J.P. Morgan. He served as a member of the boards of directors of Qihoo 360 Technology Co. Ltd. from 2014 to July 2016 and of Varian Semiconductor Equipment Associates, Inc. (“Varian”) from 2004 until its acquisition by Applied in 2011.

 

 

 

LOGO  

Aart J. de Geus

 

Chairman and Co-Chief Executive Officer,

Synopsys, Inc.

  

Independent Director

 

Director since 2007

 

Age 64

 

Board Committees:

 

  Strategy (Chair)

  Investment

 

Other Current Public Boards:

 

  Synopsys, Inc.

 

Key Qualifications and Expertise:

 

  Executive leadership and management experience

 

  Semiconductor industry leadership

 

  Innovation, management development and understanding of global challenges and opportunities

 

  Navigating a company from start-up through various stages of growth

 

  Mergers and acquisitions

 

  Public company board leadership

 
 

Aart J. de Geus is a co-founder of Synopsys, Inc., a provider of electronic design automation software and

related services for semiconductor design companies, and currently serves as its Chairman of the Board of Directors and Co-Chief Executive Officer. Since 1986, Dr. de Geus has held various positions at Synopsys, including President, Senior Vice President of Engineering and Senior Vice President of Marketing, and has served as a member of its board of directors. From 1982 to 1986, Dr. de Geus was employed by the General Electric Company, a global infrastructure, finance and media company, where he was the Manager of the Advanced Computer-Aided Engineering Group.
 
 
 
 
 
 
 
 
 

 

2    2019 Proxy Statement


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PROPOSAL 1—ELECTION OF DIRECTORS

 

 

 

LOGO  

Gary E. Dickerson

 

President and Chief Executive Officer,

Applied Materials, Inc.

  

Director since 2013

 

Age 61

 

Other Current Public Boards:

 

  None

 

Key Qualifications and Expertise:

 

  Executive leadership and management experience

 

  Semiconductor industry leadership

 

  Global business, industry and operational experience

 

  Extensive engineering and technological leadership

 

  Understanding of complex industry and global challenges

 

  Expertise in driving innovation and product development

 
 

 

Gary E.  Dickerson  was  named  President  of  Applied in  June  2012  and  was  appointed  Chief  Executive

Officer and a member of the Board of Directors in September 2013. Before joining Applied, he served as Chief Executive Officer and a director of Varian, a supplier of semiconductor manufacturing equipment, from 2004 until its acquisition by Applied in November 2011. Prior to Varian, Mr. Dickerson served 18 years with KLA-Tencor Corporation, a supplier of process control and yield management solutions for the semiconductor and related industries, where he held a variety of operations and product development roles, including President and Chief Operating Officer. Mr. Dickerson started his semiconductor career in manufacturing and engineering management at General Motors’ Delco Electronics Division and AT&T Technologies.
 
 

 

 

 

LOGO  

Stephen R. Forrest

 

Professor of Electrical Engineering & Computer

Science, Physics, and Materials Science &

Engineering, University of Michigan

  

Independent Director

 

Director since 2008

 

Age 68

 

Board Committees:

  Audit

  Strategy

  Investment

 

Other Current Public Boards:

 

  None

 

Key Qualifications and Expertise:

 

  Semiconductor, display and alternative energy technologies

 

  Research and development portfolio management

 

  Government policy

 

  Innovation, technology licensing and product commercialization

 

  Establishing partnerships to develop businesses in new markets focused on alternative energy and other technologies

 
 

 

Stephen R. Forrest holds faculty appointments as

Professor of Electrical Engineering and Computer Science, as Professor of Physics, and as Professor of Materials Science and Engineering at the University of Michigan, and leads the University’s Optoelectronics Components and Materials Group. From January 2006 to December 2013, Dr. Forrest also served as Vice President for Research at the University of Michigan. From 1992 to 2005, Dr. Forrest served in a number of positions at Princeton University, including Chair of the Electrical Engineering Department, Director of the Center for Photonics and Optoelectronic Materials, and director of the National Center for Integrated Photonic Technology. Prior to Princeton, Dr. Forrest was a faculty member of the Electrical Engineering and Materials Science Departments at the University of Southern California.
 
 
 
 
 
 

 

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LOGO  

Thomas J. Iannotti

 

Senior Vice President and General Manager,

Enterprise Services, Hewlett-Packard Company

(retired)

  

Chairman of the Board

 

Independent Director

 

Director since 2005

 

Age 62

 

Board Committees:

 

  Human Resources and Compensation (Chair)

 

Other Current Public Boards:

 

  Atento S.A.

 

Key Qualifications and Expertise:

 

  Service management for technology companies on a global, regional and country level

 

  Senior leadership and management experience

 

  Global business, industry and operational experience

 

  International strategic and business development

 

  Public company board experience

 
 

 

Thomas J. Iannotti served as Senior Vice President

and General Manager, Enterprise Services, for Hewlett-Packard Company, a technology solutions provider to consumers, businesses and institutions globally, from February 2009 until his retirement in October 2011. From 2002 to January 2009, Mr. Iannotti held various executive positions at Hewlett-Packard, including Senior Vice President and Managing Director, Enterprise Business Group, Americas. From 1978 to 2002, Mr. Iannotti worked at Digital Equipment Corporation, a vendor of computer systems and software, and at Compaq Computer Corporation, a supplier of personal computing systems, after its acquisition of Digital Equipment Corporation. Mr. Iannotti currently serves as a member of the board of directors of Atento S.A.

 

 
 
 
 

 

 

 

LOGO  

Alexander A. Karsner

 

Managing Partner, Emerson Collective

  

Independent Director

 

Director since 2008

 

Age 51

 

Board Committees:

 

  Human Resources and Compensation

  Corporate Governance and Nominating

 

Other Current Public Boards:

 

  None

 

Key Qualifications and Expertise:

 

  Expertise in public policy and government relations

 

  Domestic and international trade, development and investment markets

 

  Entrepreneurial leadership

 

  Renewable energy policy, technologies and commercialization

 

  Public company board experience

 
 

 

Alexander A. Karsner has served as Managing Partner of Emerson Collective, an investment platform funding non-profit,  philanthropic  and  for-profit  portfolios

advancing education, immigration, the environment and other social justice initiatives, since January 2016. Mr. Karsner has been Founder and CEO of Manifest Energy Inc., an energy technology development and investment firm, since July 2009, and has served as its Executive Chairman since January 2013. From March 2006 to August 2008, he served as Assistant Secretary for Energy Efficiency and Renewable Energy at the U.S. Department of Energy. From August 2002 to March 2006, Mr. Karsner was Founder and Managing Director of Enercorp, a private company involved in international project development, management and financing of energy infrastructure. Mr. Karsner has also worked with Tondu Energy Systems of Texas, Wartsila Power Development of Finland and other multi-national energy firms and developers. He is also Senior Strategist at X, part of Alphabet Inc., and a Precourt Energy Scholar at Stanford University’s School of Civil and Environmental Engineering, and serves on Advisory Boards of MIT Medialab, Sandia National Laboratory and The Polsky Center for Entrepreneurship at the University of Chicago’s Booth School of Business. Mr. Karsner served as a member of the board of directors of Codexis, Inc. from 2009 to 2014.

 

4    2019 Proxy Statement


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PROPOSAL 1—ELECTION OF DIRECTORS

 

 

 

LOGO  

Adrianna C. Ma

 

Managing Partner, Fremont Group

  

Independent Director

 

Director since 2015

 

Age 45

 

Board Committees:

 

  Investment (Chair)

  Audit

  Corporate Governance and Nominating

 

Other Current Public Boards:

 

  None

 

Key Qualifications and Expertise:

 

 Broad experience with technology companies

 

 Expertise in global growth investment

 

 Financial and accounting expertise

 

 Mergers and acquisitions, capital markets

 

 Board experience with technology-enabled growth companies

 
 

 

Adrianna  C.  Ma   has  been  a  Managing  Partner at the  Fremont  Group,  a  private  investment  company, since May 2015.  At  the  Fremont  Group,  she  oversees

BF Global, the flagship portfolio of funds, including its investment strategy, asset allocation, manager selection and risk management. From 2005 to April 2015, Ms. Ma served as a Managing Director at General Atlantic LLC, a global growth equity firm, where she invested in and served on the boards of directors of technology-enabled growth companies around the world. Prior to joining General Atlantic, Ms. Ma worked at Morgan Stanley & Co. Incorporated as an investment banker in the Mergers, Acquisitions and Restructuring Department. Ms. Ma served as a member of the board of directors of C&J Energy Services, Inc. from 2013 to 2015.
 
 
 
 
 

 

 

 

LOGO  

Scott A. McGregor

 

President and Chief Executive Officer,

Broadcom Corporation (retired)

  

Independent Director

 

Director since 2018

 

Age 62

 

Board Committees:

 

  Audit

  Strategy

 

Other Current Public Boards:

 

  Equifax Inc. (since October 2017)

 

Key Qualifications and Expertise:

 

 Executive leadership and management experience

 

 Semiconductor industry leadership

 

 Global business, industry and operational experience

 

 Innovation, management development and understanding of global challenges and opportunities

 

 Public company Board leadership

 
 

 

Scott A. McGregor served as President and Chief Executive Officer and as a member of the board of

directors of Broadcom Corporation, a world leader in wireless connectivity, broadband, automotive and networking infrastructure, from 2005 until the company was acquired by Avago Technologies Limited in 2016. Mr. McGregor joined Broadcom from Philips Semiconductors (now NXP Semiconductors), where he was President and Chief Executive Officer. He previously served in a range of senior management positions at Santa Cruz Operation Inc., Digital Equipment Corporation (now part of HP), Xerox PARC and Microsoft, where he was the architect and development team leader for Windows 1.0. Mr. McGregor currently serves as a member of the board of directors of Equifax Inc. He previously served as a member of the boards of directors of Ingram Micro Inc. and Xactly Corporation.
 
 
 
 
 

 

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LOGO  

Dennis D. Powell

 

Executive Vice President, Chief Financial Officer,

Cisco Systems, Inc. (retired)

  

Independent Director

 

Director since 2007

 

Age 71

 

Board Committees:

 

  Audit (Chair)

 

  Corporate Governance and Nominating

 

  Investment

 

Other Current Public Boards:

 

  Intuit, Inc.

 

Key Qualifications and Expertise:

 

 Global financial and executive leadership

 

 Accounting principles, financial controls, financial reporting rules and regulations, and audit procedures

 

 Mergers and acquisitions

 

 Risk management and controls

 

 Public company board experience

 
 

 

Dennis D. Powell served as an Executive Advisor at Cisco Systems, Inc., a  provider of  networking

products and services, from February 2008 to September 2010. He served as Cisco’s Chief Financial Officer from May 2003 to February 2008 and, in addition, served as an Executive Vice President from 2007 to 2008 and a Senior Vice President from 2003 to 2007. After joining Cisco in 1997, Mr. Powell also served as Senior Vice President, Corporate Finance and Vice President, Corporate Controller. Before joining Cisco, Mr. Powell worked for 26 years at Coopers & Lybrand LLP, an accounting firm, where he was last a senior partner. Mr. Powell served as a member of the board of directors of VMware, Inc. from 2007 to 2015 and currently serves as a member of the board of directors of Intuit, Inc.
 
 
 
 
 

Chairman Emeritus

 

 

James C. Morgan became Chairman Emeritus in March 2009, following his retirement as our director and Chairman of the Board. Mr. Morgan spent more than 31 years as a director and employee of Applied, including over 20 years as Chairman of the Board. Mr. Morgan first joined Applied in

1976 and served as Chief Executive Officer from 1977 to 2003. As Chairman Emeritus, Mr. Morgan does not attend any Board or Committee meetings, has no voting rights and receives no retainer or meeting fees.

 

 

6    2019 Proxy Statement


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BOARD AND CORPORATE GOVERNANCE PRACTICES

 

BOARD AND CORPORATE GOVERNANCE PRACTICES

Board Composition and Nominee Considerations

 

 

Nominee Skills and Experience

Our director nominees have a wide variety of relevant skills, professional experience and backgrounds, and collectively bring to our Board diverse viewpoints and perspectives that

strengthen its ability to represent the long-term interests of shareholders. The chart below illustrates broad categories of skills and expertise that our director nominees offer that we believe contribute to the effective leadership and exercise of oversight responsibilities by the Board.

 

 

 

LOGO
Semiconductor Industry and Technology Financial and ccounting Global Business Strategy and Innovation Operations and Infrastructure Government Policy M&A and Organizational Growth Risk Management Public Company Board Experience Executive Leadership

 

Diversity. Because diverse backgrounds, experiences and perspectives foster thoughtful and robust discussion and decision-making, our Corporate Governance and Nominating Committee (the “Governance Committee”) and the Board place great value on a diversity of backgrounds, skills and viewpoints, gender and ethnicity among the directors when considering potential director candidates and nominees. Among the factors the Governance Committee considers in identifying and evaluating a potential director is the extent to which the candidate would add to the diversity of the Board.

Independence. The Governance Committee also expects each non-employee director to be free of relationships, interests or affiliations that could give rise to conflicts of interest or interfere with the director’s exercise of independent judgment. Applied’s Corporate Governance Guidelines require that a majority of our directors must be independent, and that our Audit, Human Resources and Compensation, and Governance Committees must consist solely of independent directors.

Director independence is determined under Nasdaq listing standards and SEC rules. The Board has affirmatively determined that all members of the Board who served during

2018 and all director nominees, other than Mr. Dickerson, our Chief Executive Officer, are independent under applicable Nasdaq listing standards and SEC rules.

Tenure. The Board believes that new ideas and perspectives are critical to a forward-looking and strategic Board, as are the valuable experiences and deep understanding of Applied’s business and industries that longer-serving directors offer. Our Governance Guidelines do not impose a tenure limit on Board service, and ongoing Board refreshment has resulted in a balanced range of tenures which ensures both continuity and fresh perspectives among our director nominees.

Our directors are not typically nominated for re-election after they reach the age of 70. However, after due consideration, the Board has waived this policy with respect to Mr. Powell for 2019, as the Board continues to assess Board composition and the needs of the Board as part of its refreshment and succession planning process. The Board determined that it would be beneficial to have Mr. Powell continue to serve as director due to his financial and accounting expertise, his deep knowledge of the Company, and his leadership role as Chair of the Audit Committee.

 

 

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Our nominees have an average tenure of 7 years, which is lower than the average tenure of other S&P 500 companies, and four of our nominees have been members of the Board for four years or less.

 

 

 

Regular

refreshment

resulting in

average director

tenure of 7 years

 

 

LOGO

 

 

Board Composition and Refreshment

Identification of New Director Candidates. Identifying and recommending individuals for nomination and election to our Board is a principal responsibility of our Governance Committee, which performs this function through an ongoing, year-round process.

The Governance Committee regularly considers the size and composition of the Board and assesses whether the composition appropriately aligns with the Company’s evolving business and strategic needs. The focus is on ensuring that the Board is composed of directors who possess a wide variety of relevant skills, professional experience and backgrounds, bring diverse viewpoints and perspectives, and effectively represent the long-term interests of shareholders.

In its consideration of potential director candidates, the Governance Committee reviews the short- and long-term strategies and interests of the Company to determine what current and future skills and experiences are required of the Board in exercising its oversight function. Specific search criteria evolve over time to reflect the Company’s dynamic business and strategic needs and the changing composition of the Board, and may include such factors as:

 

    Operating experience or thought leadership in key markets, industries, technologies or business models that are aligned with the Company’s strategic growth plans;

 

    Business or cultural background in regions where the Company does significant business;

 

    Senior executive leadership and management experience; and

 

    Subject matter expertise in such areas as corporate finance and financial reporting, governance, compensation, risk management and marketing.

 

The Governance Committee also considers succession planning in light of anticipated retirements, and for Board and Committee Chair roles, to maintain relevant expertise and depth of experience.

In addition, all director candidates are also expected to possess or demonstrate:

 

    Sound judgment, analytical and inquisitive perspective, and practical wisdom;

 

    Strategic mindset and engaged and collaborative approach;

 

    Independence, personal and professional ethics, integrity and values; and

 

    Commitment to representing the long-term interests of Applied’s shareholders.

The Governance Committee may retain a search firm to assist in identifying and evaluating new candidates for director nominees and may also consider referrals from directors, shareholders or other sources. The Governance Committee evaluates and interviews potential Board candidates and makes appointment recommendations to the full Board. All members of the Board may interview candidates.

Recent Board Refreshment. As a result of the foregoing process, the Board has added four new directors over the last four years, each of whom have brought valuable and diverse backgrounds and perspectives to the overall composition of the Board. The most recent appointment was Mr. McGregor in January 2018. Mr. McGregor is a former CEO who brings to our Board deep experience in the global semiconductor industry, as well as experience in innovation, management development, and understanding global challenges and opportunities.

 

 

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BOARD AND CORPORATE GOVERNANCE PRACTICES

 

Regular Review of Board Composition

Drives Refreshment

 

 

Identification of Potential Candidates "Independent Directors " Shareholders " Independent Search Firms " Our People In-Depth Review " Screen Qualifications " Consider Skills and Diversity " Review Independence and Potential Conflicts " Meet with Directors Recommend to the Board " The Governance Committee recommends selected candidates to the Board Results " Four new independent directors appointed by the Board since 2015 LOGO

Re-nomination of Directors for Election at Annual Meeting. In considering whether to recommend re-nomination of a director for election at our Annual Meeting, the Governance Committee considers factors such as:

 

    The extent to which the director’s skills, qualifications and experience continue to contribute to the success of our Board;

 

    Feedback from the annual Board evaluations and individual discussions between each non-employee director and our Chairman;

 

    Attendance and participation at, and preparation for, Board and Committee meetings;

 

    Shareholder feedback, including the support received by director nominees elected at our 2018 Annual Meeting;

 

    Outside board and other affiliations, including any actual or perceived conflicts of interest; and

 

    The extent to which the director continues to contribute to the diversity of our Board.

Based on the Governance Committee’s recommendation, the Board selects director nominees and recommends them for election by Applied’s shareholders.

Shareholder Recommendations or Nominations. The evaluation procedures described above apply to all candidates for director nomination, including candidates submitted by shareholders. Shareholders wishing to recommend a candidate for consideration by the Governance Committee should submit the candidate’s name, biographical data and a description of his or her qualifications in light of the criteria listed above to Christina Y. Lai, Corporate Secretary, Applied Materials, Inc., 3225 Oakmead Village Drive, M/S 1268, P.O. Box 58039, Santa Clara, CA 95052, or by e-mail at corporatesecretary@amat.com.

Shareholders wishing to nominate a director should follow the specific procedures set forth in our Bylaws.

 

 

Corporate Governance

 

Corporate Governance Guidelines

Applied’s Corporate Governance Guidelines establish the governance framework within which the Board conducts its business and fulfills its responsibilities. These guidelines and other important governance materials are available on our website at: http://www.appliedmaterials.com/company/investor-relations/governance-documents. The Board regularly reviews our Corporate Governance Guidelines in light of legal and regulatory requirements, evolving best practices and other developments.

Board Leadership

Our corporate governance framework provides the Board flexibility to determine the appropriate leadership structure for the Company, and whether the roles of Chairman and CEO should be separated or combined. In making this determination, the Board considers many factors, including the needs of the business, the Board’s assessment of its leadership needs from time to time and the best interests of shareholders. If the role of Chairman is filled by a director who does not qualify as an independent director, the Board will designate a Lead Independent Director.

 

 

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The Board believes that it is currently appropriate to separate the roles of Chairman and CEO. The CEO is responsible for setting our strategic direction and the day-to-day leadership of our business, while the Chairman, along with the rest of our independent directors, ensures that the Board’s time and attention are focused on effective oversight of the matters most critical to Applied. Mr. Iannotti, an independent director, currently serves as the Chairman of the Board. Mr. Iannotti has significant experience and knowledge of Applied, working with two CEOs and different management teams at Applied, and the Board believes that his deep knowledge of the Company and industry, as well as his strong leadership and governance experience, enable him to lead the Board effectively and independently.

Director Onboarding and Education

When new directors join the Board, they participate in a comprehensive onboarding program to learn about our industry, business, strategies and policies. The multi-day onboarding program includes meetings with senior executives to discuss our businesses, strategy, operations and our corporate functions such as finance, technology, information systems and legal, and a tour of the Maydan Technology Center, our state-of-the-art R&D facilities. New directors also meet with the executives and staff supporting the Committees on which they sit, as well as the Committees’ external consultants and advisors. Each new director is also partnered with an experienced fellow director “mentor” to facilitate the integration of the new director to the Board.

For continued education regarding our business and industry, we provide presentations by internal and external experts during Board meetings on topics such as technology inflections, industry trends and changes in the geopolitical and macroeconomic landscape, with particular focus on the

implications and impact to the Company. Our Board and Committees also regularly review developments in corporate governance to continue enhancing the Board’s effectiveness. We encourage directors to participate in external continuing director education programs and provide reimbursement for expenses associated with this participation. Throughout the year, Board members also attend Company events, including Analyst Day, our Engineering and Technology (ET) Conference, and Diversity Day, as well as meetings with leaders below the CEO Executive Staff level, which provides directors additional visibility into the Company’s culture, strategies and operations.

Board and Committee Evaluations

Our Board recognizes that a thorough, constructive evaluation process enhances our Board’s effectiveness and is an essential element of good corporate governance. Every year, the Governance Committee oversees the design and execution of the evaluation process, which involves assessments of the Board, each standing committee of the Board, and individual directors. Written questionnaires solicit feedback on a range of issues, including Board and Committee structure and composition; meeting process and dynamics; execution of key responsibilities; interaction with management; and information and resources.

Following completion of the written questionnaires, the Chairman meets with each director individually to discuss additional input on these topics and to provide individual feedback. Committee chairs lead a discussion of evaluation results for their respective Committees, and a summary of Board and Committee evaluation results is discussed with the full Board, including suggestions for updating policies and practices per evaluation results. Director suggestions for improvements to evaluation questionnaires and process are considered for incorporation for the following year.

 

 

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BOARD AND CORPORATE GOVERNANCE PRACTICES

 

2018 Board Evaluation Process

 

 

LOGO
Questionnaire Evaluation questionnaire provides director feedback on an unattributed basisOne-on-One Discussions Candid, one-on-one discussions between the Chairman and each director to solicit additional feedback and provide individual feedbackClosed Session Closed session discussion of Board and Committee evaluations led by our Chairman and independent Committee chairsBoard Summary Summary of Board and Committee evaluation results provided to the full BoardPolicies and practices are updated as appropriate per evaluation feedback and suggestions

Board’s Role in Risk Oversight

One of the Board’s most important functions is overseeing risk management for the Company. Applied’s risk oversight framework illustrated below shows the close interaction between the full Board, individual committees and senior management.

 

LOGO
The Board The Board has the ultimate responsibility for, and is actively engaged in, oversight of the Companys risk management, in some cases directly by the full Board, and in some cases through delegation of certain types of risks to the oversight of the appropriate Board Committee. C O M M I T T E E S Audit Oversees the enterprise risk management program, as well as risks related to financial, regulatory, compliance, cybersecurity and environmental, health and safety matters, and regularly reviews with management, the head of internal audit and the independent accountants the steps taken to monitor and mitigate risk exposures Governance Oversees the management of risks related to corporate governance matters, including director independence, Board composition and succession, and overall Board effectiveness HR and Compensation Oversees risks associated with Applieds compensation policies, plans and practices, organizational talent and culture, management succession, and human capital management, including the corporate culture, and diversity and inclusion programs and initiatives Management Applieds management has day-to-day responsibility for: The BoardThe Board has the ultimate responsibility for, and is actively engaged in, oversight of the Companys risk management, in some cases directly by the full Board, and in some cases through delegation of certain types of risks to the oversight of the appropriate Board Committee. C O M M I T T E E SAuditOversees the enterprise risk management program, as well as risks related to financial, regulatory, compliance, cybersecurity and environmental, health and safety matters, and regularly reviews with management, the head of internal audit and the independent accountants the steps taken to monitor and mitigate risk exposuresGovernanceOversees the management of risks related to corporate governance matters, including director independence, Board composition and succession, and overall Board effectivenessHR and CompensationOversees risks associated with Applieds compensation policies, plans and practices, organizational talent and culture, management succession, and human capital management, including the corporate culture, and diversity and inclusion programs and initiativesManagementApplieds management has day-to-day responsibility for:

 

 

Applied has implemented an enterprise risk management (“ERM”) program, overseen by the Audit Committee, which provides an enterprise-wide perspective on Applied’s risks. The risks identified are reported to the Board, with a focus on the most significant risks facing the Company, including strategic,

operational, financial, and legal and compliance risks. Oversight responsibility for a particular risk may fall within an area of responsibility and expertise of one of the Board Committees. Management reviews the ERM program activities regularly with the Audit Committee and annually with the Board.

 

 

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Risk Assessment of Compensation Programs. We have assessed our compensation policies, plans and practices, and determined that they do not create risks that are reasonably likely to have a material adverse effect on Applied. To make this determination, our management reviewed our compensation policies, plans and practices, and assessed the following aspects: design, payment methodology, potential payment volatility, relationship to our financial results, length of performance period, risk-mitigating features, performance measures and goals, oversight and controls, and plan features and values compared to market practices. Management reviewed its analysis with the Human Resources and Compensation Committee, which agreed with this determination. Applied also has in place various controls to mitigate risks relating to compensation policies, plans and practices, such as executive stock ownership guidelines and a clawback policy that enables the recovery of certain incentive compensation payments in certain circumstances.

Management Succession Planning

The Board has delegated to the Human Resources and Compensation Committee (“HRCC”) primary responsibility for overseeing management succession planning and executive organizational development, as well as human capital management programs.

The HRCC reviews and advises on management’s succession and development programs for the CEO and other senior executives, with an eye toward ensuring development of the talent needed to lead Applied today and in the future and readiness of succession candidates who can assume top management positions without undue interruption. Board members have opportunities throughout the year to engage with members of senior management and other high-potential leaders in a variety of formal and informal settings, including Board meetings and events, preparatory meetings, analyst meetings and internal and external business and technology conferences.

The HRCC and Board also regularly discuss matters related to organizational health and discuss individual executive transitions as the need arises over the course of the year. The Board’s goal is to have a long-term and continuing process for effective senior leadership development and succession and to ensure that there are ready choices available when the time is right. The HRCC also receives quarterly reports from the Group Vice President of Human Resources, covering a range of topics relating to corporate culture and human capital management, including the Company’s diversity and inclusion practices and initiatives and its sexual harassment policies.

Shareholder Rights

In addition to direct engagement through our recurring shareholder engagement program discussed below, Applied

has instituted a number of mechanisms that allow shareholders to advance their points of view, including:

Right to Call a Special Meeting. Our Bylaws permit shareholders holding at least 20% of our outstanding shares of common stock to call a special meeting.

Proxy Access. Our Bylaws permit proxy access. Any shareholder (or group of up to 20 shareholders) owning 3% or more of Applied’s common stock continuously for at least three years may nominate up to two individuals or 20% of our Board, whichever is greater, as director candidates for election to the Board, and require us to include such nominees in our annual meeting proxy statement if the shareholders and nominees satisfy the requirements contained in our Bylaws.

Majority Voting. Under our Bylaws, in any uncontested election of directors (an election in which the number of nominees does not exceed the number of directors to be elected), any nominee who receives a greater number of votes cast “for” his or her election than votes cast “against” his or her election will be elected.

Our Bylaws provide that in the event an incumbent director receives more “against” than “for” votes, he or she shall tender his or her resignation after certification of the shareholder vote. Our Governance Committee, composed entirely of independent directors, will consider the offer of resignation, taking into consideration all factors it deems relevant, and recommend to the Board the action to be taken. The Board must take action on the recommendation within 90 days following certification of the shareholder vote. No director who tenders an offer of resignation may participate in the vote on the Governance Committee’s recommendation or the Board’s determination of whether to accept the resignation offer. Applied will publicly disclose the Board’s decision, including, if applicable, the reasons for rejecting an offer to resign.

Shareholder Engagement

We believe that strong corporate governance should include regular engagement with our shareholders to enable us to understand and respond to shareholder concerns.

Investor Relations. Our senior management team, including our CEO, CFO and members of our Investor Relations team, maintain regular contact with a broad base of investors, including through quarterly earnings calls, individual meetings and other channels for communication, to understand their concerns. In 2018, senior management participated in over 400 meetings with investors, including more than 160 meetings with the CFO and more than 20 with our CEO.

Shareholder Outreach Program. In addition, we have a robust shareholder outreach program, which is a recurring, year-round effort, led by a cross-functional team that includes members of our Investor Relations, Global Rewards, Diversity and Inclusion, Environmental, Health & Safety and Legal functions, with participation of our Chairman of the Board where appropriate. The outreach enables us to build meaningful relationships and trust over time with our shareholders.

 

 

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BOARD AND CORPORATE GOVERNANCE PRACTICES

 

 

LOGO

Spring/Summer" Review results from our most recent Annual Meeting" Share investor feedback with our HRCC, Governance Committee, and Board" Evaluate proxy season trends, corporate governance practices,and other developmentsAnnual Meeting(March)Our ShareholderOutreach ProgramFall Engagement"Active outreach with investors to understand priorities for corporate governance and executive compensation"Share investor feedback with our HRCC, Governance Committee, and BoardWinter Engagement" Active outreach with investors to discuss important items to be considered at Annual Meeting" Share investor feedback with our HRCC, Governance Committee, and BoardPublish Annual Report and Proxy Statement for Annual Meeting of Shareholders (January)

 

 

Key Themes Discussed with Shareholders in 2018

 

 
  Corporate Governance      

Solicited extensive feedback regarding the right to act by written consent and how that fits with the meaningful shareholder rights that Applied already has in place

 

 

  Board Refreshment and

  Composition

     

Shareholders recognized Applied’s commitment to diversity, including gender, race/ethnicity and age, as well as our recent refreshment and attention to balanced skill-sets across our Board

 

 
  Risk Oversight      

Shareholders appreciated our framework for the Board’s oversight of risk, particularly around cybersecurity and sustainability

 

 
  Executive Compensation        

Shareholders expressed support for our compensation program, metrics, and link between pay and performance

 

 
  Diversity and Inclusion      

Received strong support for our Diversity and Inclusion Report and constructive feedback for ways to improve disclosure around additional diversity-related topics

 

 

We engage with a significant cross-section of our shareholder base, including large institutional investors, pension funds, and other investors. Topics of discussion include key business, Board, governance, executive compensation, environmental, sustainability and diversity and inclusion matters, as well as other subjects of interest to our shareholders. Based on feedback from shareholders, we have over the last few years adopted proxy access and a special meeting right and implemented changes to our executive compensation programs. During the fall of 2018, we contacted the holders of approximately 45% of our outstanding shares, and engaged in active discussions on these topics with investors who requested meetings, representing approximately 29% of our shares outstanding.

Board Responsiveness. In 2018, as part of our regular shareholder engagement program and at the request of our Governance Committee, we conducted extensive shareholder outreach efforts to solicit feedback regarding two topics – the

right to act by written consent and disclosure of EEO-1 diversity data. These topics were the subject of shareholder proposals that had both received significant, although not majority, shareholder support at our 2018 Annual Meeting.

Action by Written Consent. Consistent with the lower-than-majority level of support for the written consent proposal at the 2018 Annual Meeting, investors who engaged with us did not express strong pressure on the Company to implement action by written consent. Shareholders expressed various views regarding action by written consent. While some shareholders indicated general support for action by written consent as a matter of principle in favor of greater shareholder rights, most shareholders with whom we engaged expressed disinterest or active opposition to adoption of the right based on several factors:

 

    Concerns that action by written consent could be disruptive and jeopardize their ability to participate in, or even be notified of, a vote;
 

 

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    Belief that Applied’s corporate governance practices and the shareholder rights already provided by Applied, such as proxy access and the ability to call special meetings at a 20% ownership threshold (recognized to be below the market standard of 25% and more favorable to shareholders), provide sufficient transparency and accountability of the Board to shareholders; and

 

    View that action by written consent does not provide investors with any additional material benefits beyond other rights they are already afforded.

Based on the input provided by shareholders, reflecting the lack of a clear consensus to adopt action by written consent, concerns about potential disruption and disenfranchisement that could result from exercise of the right, and the meaningful shareholder rights that Applied already has in place, including proxy access and a special meeting right implemented following extensive shareholder outreach, the Governance Committee determined that providing for a right to act by written consent is not warranted.

Disclosure of Diversity Data. In September 2018, we published our first Diversity and Inclusion (“D&I”) Report, which highlights our D&I strategy, practices and goals, and provides key diversity data, including the gender and ethnic composition of our workforce. The publication of this report not only reflects the importance of this issue to Applied, but also the input that we received from our shareholders. Shareholder feedback to the report was universally positive, with the view that the report demonstrated our commitment to diversity and inclusion, transparency in disclosing data and accountability in working towards our goals. Shareholders also expressed appreciation of our continuing efforts to explore the disclosure of additional data regarding the diversity of our workforce. Based on our 2017 workforce demographics, we set new goals for increasing our global diversity and ensuring we have an inclusive work environment, which include increasing women and underrepresented minorities in our workforce.

Shareholder Communications

Any shareholder wishing to communicate with any of our directors regarding Applied may write to the director, c/o Christina Y. Lai, Corporate Secretary, Applied Materials, Inc., 3225 Oakmead Village Drive, M/S 1268, P.O. Box 58039, Santa Clara, CA 95052, or by e-mail at corporatesecretary@amat.com. The Corporate Secretary reviews correspondence directed to the Board and, at the Corporate Secretary’s discretion, forwards items that she deems appropriate for the Board’s consideration. The independent directors of the Board review and approve the shareholder communication process periodically in order to enable an effective method by which shareholders can communicate with the Board.

Stock Ownership Guidelines

The Board has adopted stock ownership guidelines to align the interests of our directors and executive officers with those of our shareholders. The guidelines provide that non-employee directors should each own Applied stock with a value of at least five times the annual base retainer for non-employee directors. Applied’s Chief Executive Officer should own Applied stock with a value of at least six times his annual base salary. Each Section 16 officer on the CEO Executive Staff should own Applied stock with a value of at least three times his or her annual base salary. As of December 31, 2018, all of our directors and executive officers were in compliance with the stock ownership guidelines.

Standards of Business Conduct

Applied’s Standards of Business Conduct embody our commitment to ethical and legal business practices. The Board expects Applied’s directors, officers and all other members of its workforce to act ethically at all times and to acknowledge their commitment to Applied’s Standards of Business Conduct. The Standards of Business Conduct are available on our website at: http://www.appliedmaterials.com/company/investor-relations/governance-documents.

 

 

Board Meetings and Committees

 

 

The Board met six times in fiscal 2018. Each director attended over 75% of all Board and applicable committee meetings held during fiscal 2018. Directors are strongly encouraged to attend the Annual Meeting of Shareholders, and all of the directors serving on our Board at the time attended our 2018 Annual Meeting of Shareholders.

The Board has three principal committees performing the functions required by applicable SEC rules and Nasdaq listing standards to be performed by independent directors: the Audit Committee, the Human Resources and Compensation Committee, and the Corporate Governance and Nominating

Committee. Each of these committees meets regularly and has a written charter approved by the Board that is reviewed annually by the respective committee and by the Board.

In addition, at each regularly-scheduled Board meeting, the Chair of each committee reports on any significant matters addressed by the committee since the last Board meeting. Each director who serves on the Audit Committee, Human Resources and Compensation Committee, or Corporate Governance and Nominating Committee is an independent director under applicable Nasdaq listing standards and SEC rules.

 

 

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BOARD AND CORPORATE GOVERNANCE PRACTICES

 

Copies of the current charters for the Audit, Human Resources and Compensation, and Corporate Governance and Nominating Committees can be found on our website at: http://www.appliedmaterials.com/company/investor-relations/governance-documents. The Board also has a Strategy

Committee and an Investment Committee, whose roles and responsibilities are described in Applied’s Corporate Governance Guidelines.

 

 

 Audit Committee

 

Members:

 

Dennis D. Powell, Chair*

Judy Bruner*

Stephen R. Forrest

Adrianna C. Ma*

Scott A. McGregor*

 

Primary responsibilities:

 

  Oversee financial statements, internal control over financial reporting and auditing, accounting and financial reporting processes

  Oversee the qualifications, independence, performance and engagement of our independent registered public accounting firm

  Oversee disclosure controls and procedures, and internal audit function

  Review and pre-approve audit and permissible non-audit services and fees

  Oversee tax, legal, regulatory and ethical compliance

  Review and approve related-person transactions

  Oversee financial-related risks, enterprise risk management program and cybersecurity

  Oversee matters related to Environmental Health and Safety

   Meetings in
Fiscal 2018:
 13

*   Audit Committee Financial Expert

    

 

 Human Resources and Compensation Committee

 

Members:

 

Thomas J. Iannotti, Chair

Xun (Eric) Chen

Alexander A. Karsner

 

Primary responsibilities:

 

  Oversee human resources programs, compensation and employee benefits programs, policies and plans

  Review and advise on management succession planning and executive organizational development

  Determine compensation policies for executive officers and employees

  Review the performance and determine the compensation of executive officers

  Approve and oversee equity-related incentive plans and executive bonus plans

  Review compensation policies and practices as they relate to risk management practices

  Approve the compensation program for Board members

  Oversee human capital management, including the Company’s culture, and diversity and inclusion programs and initiatives

   Meetings in
Fiscal 2018:
 4

 

 Corporate Governance and Nominating Committee

 

Members:

 

Judy Bruner, Chair

Alexander A. Karsner

Adrianna C. Ma

Dennis D. Powell

 

Primary responsibilities:

 

  Oversee the composition, structure and evaluation of the Board and its committees

  Identify and recommend qualified candidates for election to the Board

  Establish procedures for director candidate nomination and evaluation

  Oversee corporate governance policies and practices, including Corporate Governance Guidelines

  Review and approval of director service on the board of directors of other companies and oversight of director education

  Review shareholder proposals and recommend to the Board actions to be taken in response to each proposal

  Review conflict of interest matters for the board of directors

   Meetings in
Fiscal 2018: 5

 

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DIRECTOR COMPENSATION

Compensation Program for Directors

 

 

We compensate our non-employee directors for their service on the Board with a combination of cash and equity awards. Directors who are employees of Applied do not receive any compensation for their service as directors.

Retainer and Meeting Fees

Each non-employee director receives an annual cash retainer for his or her service on the Board, as well as additional cash retainers if he or she serves as the Chairman of the Board, on a committee or as the chair of a committee. Annual retainers are paid quarterly and are prorated based on the director’s service during the fiscal year. The following table sets forth cash compensation for non-employee directors in effect during fiscal 2018.

 

Annual Base Retainer (prorated and paid quarterly)    $ 70,000  
Additional Annual Retainers for Committee Service (prorated and paid quarterly):         

Audit Committee

   $ 25,000  

Human Resources and Compensation

Committee

   $ 12,500  

Corporate Governance and Nominating

Committee

   $ 10,000  

Strategy Committee

   $ 10,000  

Additional Annual Retainers for Chairman and

Committee Chairs (prorated and paid quarterly):

        

Chairman of the Board

   $ 150,000  

Audit Committee Chair

   $ 25,000  

Human Resources and Compensation

Committee Chair

   $ 20,000  

Corporate Governance and Nominating

Committee Chair

   $ 12,500  

Strategy Committee Chair

   $ 12,500  

In addition, non-employee directors receive $2,000 per meeting for service on the Investment Committee or other ad-hoc committee of which they are a member, or $3,000 per meeting if they are the chair of such a committee. Non-employee directors are reimbursed for travel and other reasonable out-of-pocket expenses related to attendance at Board and committee meetings, business events on behalf of Applied, and seminars and programs on subjects related to their Board responsibilities.

Equity Compensation

Initial Grant. Upon initial appointment or election to the Board, a non-employee director receives a grant of restricted stock units with respect to a number of shares of Applied common stock with a fair market value on the date of grant equal to $225,000 (rounded down to the nearest whole share), pro-rated based on the period starting on the day of initial appointment or election and ending on the day of the next scheduled annual meeting of shareholders.

Annual Grant. Each non-employee director elected at an annual meeting receives on that date a non-discretionary grant of restricted stock units with respect to a number of shares of Applied common stock with a fair market value on the date of grant equal to $225,000 (rounded down to the nearest whole share). A non-employee director who is initially appointed or elected to the Board on the day of an annual meeting of shareholders receives only an annual grant. Each of our non-employee directors re-elected at the 2018 Annual Meeting received a grant of 3,789 restricted stock units on that date.

Vesting. Grants made to our non-employee directors vest in full on the earlier of March 1 of the year following the date of grant or the next annual meeting, provided the non-employee director remains on the Board through the scheduled vesting date. Vesting of these grants will be accelerated in full upon a non-employee director’s earlier termination of service on the Board due to disability or death, or upon a change of control of Applied if the director ceases to be a non-employee director (and does not become a member of the board of directors of any successor corporation or its parent). Non-employee directors may elect in advance to defer receipt of vested shares until their termination of service on the Board.

Limit on Awards. Under our amended and restated Employee Stock Incentive Plan, grants of equity awards to any individual non-employee director may not exceed a fair market value totaling more than $400,000 in any fiscal year.

Charitable Matching Contributions

Non-employee directors are eligible to participate in The Applied Materials Foundation Matching Gift Program, under which the Foundation annually will match up to $3,000 of a non-employee director’s donations to eligible non-profit and educational organizations, as well as match an unlimited amount of donations to our annual North America Food Drive. In addition, non-employee directors are eligible to participate in a matching program under the Applied Materials, Inc.

 

 

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DIRECTOR COMPENSATION

 

Political Action Committee, under which the Company annually will match up to $2,500 of a non-employee director’s contributions for the benefit of eligible non-profit organizations and kindergarten to 12th grade public and non-profit private

schools in the U.S. Non-employee directors are subject to the same maximum matching amounts and other terms as those for Applied’s employees.

 

 

Director Compensation for Fiscal 2018

 

 

Name      Fees Earned
or Paid in
Cash
($)
       Stock
Awards
($)(1)(2)
       All Other
Compensation
($)(3)
       Total
($)
 

Judy Bruner

       117,500          222,035          3,000          342,535  

Xun (Eric) Chen

       92,500          222,035          —            314,535  

Aart J. de Geus

       94,500          222,035          —            316,535  

Stephen R. Forrest

       107,000          222,035          522          329,557  

Thomas J. Iannotti

       252,500          222,035          5,750          480,285  

Alexander A. Karsner

       92,500          222,035          —            314,535  

Adrianna C. Ma

       108,000          222,035          4,000          334,035  

Scott A. McGregor(4)

       76,442          249,137          —            325,579  

Dennis D. Powell

       132,000          222,035          —            354,035  
(1)

Amounts shown do not reflect compensation actually received by the directors. Instead, these amounts represent the grant date fair value of stock awards granted in fiscal 2018 (consisting of 3,789 restricted stock units granted to each director on March 8, 2018 and 472 restricted stock units granted to Mr. McGregor upon his initial appointment to the Board during fiscal 2018), as determined pursuant to FASB Accounting Standards Codification 718 (“ASC 718”). The assumptions used to calculate the value of stock awards are set forth in Note 11 of the Notes to Consolidated Financial Statements included in Applied’s Annual Report on Form 10-K for fiscal 2018 filed with the SEC on December 13, 2018.

(2)

Each director had 3,789 restricted stock units outstanding at the end of fiscal 2018. In addition, certain directors had restricted stock units that had vested in previous years and for which settlement was deferred until the date of his or her termination of service from the Board, as follows: Dr. Chen, 10,278 units; Ms. Ma, 16,297 units; and Mr. Powell, 57,638 units.

(3)

Amount shown represents The Applied Materials Foundation’s and/or the Company’s matching contribution of the director’s donations/contributions to eligible non-profit organizations.

(4) 

Mr. McGregor was appointed to the Board in January 2018.

 

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STOCK OWNERSHIP INFORMATION

Principal Shareholders

 

The following table shows the number of shares of our common stock beneficially owned as of December 31, 2018 by each person known by Applied to own 5% or more of our common stock. In general, “beneficial ownership” refers to shares that an entity or individual had the power to vote or the power to dispose of, and shares that such entity or individual had the right to acquire within 60 days after December 31, 2018.

 

    Shares Beneficially Owned  
Name       Number         Percent(1)  

The Vanguard Group
100 Vanguard Blvd.
Malvern, PA 19355

    76,883,094 (2)       8.07

BlackRock, Inc.
55 East 52nd Street
New York, NY 10055

    68,889,949 (3)       7.23

State Street Corporation
One Lincoln Street
Boston, MA 02111

    55,652,309 (4)       5.84
(1)

Percentage ownership is calculated by dividing the number of shares beneficially owned by such person or group by 952,895,973 shares of common stock outstanding as of December 31, 2018.

(2)

The amended Schedule 13G filed with the SEC by The Vanguard Group (“Vanguard”) on February 12, 2018 indicates that as of December 31, 2017, Vanguard had sole dispositive power over 75,164,270 shares, shared dispositive power over 1,718,824 shares, sole voting power over 1,531,416 shares, and shared voting power over 226,174 shares.

(3)

The amended Schedule 13G filed with the SEC by BlackRock, Inc. (“BlackRock”) on January 29, 2018 indicates that as of December 31, 2017, BlackRock had sole dispositive power over 68,889,949 shares and sole voting power over 58,292,395 shares.

(4)

The amended Schedule 13G filed with the SEC by State Street Corporation (“State Street”) on February 13, 2018 indicates that as of December 31, 2017, State Street had shared dispositive power over 55,652,309 shares and shared voting power over 49,249,823 shares.

 

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STOCK OWNERSHIP INFORMATION

 

Directors and Executive Officers

 

The following table shows the number of shares of our common stock beneficially owned as of December 31, 2018 by: (1) each director nominee, (2) each NEO and (3) the current directors and executive officers as a group. In general, “beneficial ownership” refers to shares that a director or executive officer had the power to vote or the power to dispose of, and shares that such individual had the right to acquire within 60 days after December 31, 2018.

 

     Shares Beneficially Owned  
Name        Number(1)     Percent(2)  

Directors, not including the CEO:

    

Judy Bruner

     14,566 (3)       *  

Xun (Eric) Chen

     24,397 (4)       *  

Aart J. de Geus

     141,467 (3)       *  

Stephen R. Forrest

     74,967 (3)       *  

Thomas J. Iannotti

     61,967 (3)       *  

Alexander A. Karsner

     20,027 (3)       *  

Adrianna C. Ma

     22,934 (5)       *  

Scott A. McGregor

     4,261 (3)       *  

Dennis D. Powell

     88,677 (6)       *  

Named Executive Officers:

    

Gary E. Dickerson

     2,236,206 (7)       *  

Daniel J. Durn

     46,129 (8)       *  

Ali Salehpour

     216,137       *  

Prabu G. Raja

     205,504       *  

Steve G. Ghanayem

     248,471       *  

Current Directors and Executive Officers, as a Group (18 persons)

     4,157,277 (9)       *  
*

Less than 1%

(1)

Except as subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all of their shares of common stock.

(2)

Percentage ownership is calculated by dividing the number of shares beneficially owned by such person or group by the sum of 952,895,973 shares of common stock outstanding as of December 31, 2018, plus the number of shares of common stock that such person or group had the right to acquire within 60 days after December 31, 2018.

(3)

Includes 3,789 restricted stock units that are scheduled to vest within 60 days after December 31, 2018.

(4)

Includes (a) 10,497 restricted stock units that have vested and which, pursuant to Dr. Chen’s election to defer, will be converted to shares of Applied common stock and paid to him on the date of his termination of service from the Applied Board and (b) 3,789 restricted stock units that are scheduled to vest within 60 days after December 31, 2018 and which, pursuant to Dr. Chen’s election to defer, will be converted to shares of Applied common stock and paid to him on the date of his termination of service from the Applied Board.

(5) 

Includes (a) 16,627 restricted stock units that have vested and which, pursuant to Ms. Ma’s election to defer, will be converted to shares of Applied common stock and paid to her on the date of her termination of service from the Applied Board and (b) 3,789 restricted stock units that are scheduled to vest within 60 days after December 31, 2018 and which, pursuant to Ms. Ma’s election to defer, will be converted to shares of Applied common stock and paid to her on the date of her termination of service from the Applied Board.

(6)

Includes (a) 58,870 restricted stock units that have vested and which, pursuant to Mr. Powell’s election to defer, will be converted to shares of Applied common stock and paid to him on the date of his termination of service from the Applied Board and (b) 3,789 restricted stock units that are scheduled to vest within 60 days after December 31, 2018.

(7)

Includes an option to purchase 1,000,000 shares that is exercisable within 60 days after December 31, 2018.

(8)

Includes 18,630 restricted stock units that are scheduled to vest within 60 days after December 31, 2018.

(9)

Includes (a) an option to purchase 1,000,000 shares that is exercisable within 60 days after December 31, 2018, (b) 68,053 restricted stock units that are scheduled to vest within 60 days after December 31, 2018 and (c) 85,994 restricted stock units that have vested and which, pursuant to each director’s election to defer, will be converted to shares of Applied common stock and paid to the director on the date of the director’s termination of service from the Applied Board.

 

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PROPOSAL 2—APPROVAL, ON AN ADVISORY BASIS, OF THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS

 

Pursuant to Section 14A of the Securities Exchange Act of 1934 (the “Exchange Act”), we are asking shareholders to approve, on a non-binding, advisory basis, the compensation of our NEOs, as described in this Proxy Statement. We seek this approval each year. Our annual “say-on-pay” proposals have been supported by our shareholders each year since we began providing this vote in 2011, and received the support of 96% of votes cast in 2018.

Our Board of Directors believes that our compensation policies and practices promote a performance-based culture and align our executives’ interests with those of our shareholders through a strong emphasis on at-risk compensation tied to the achievement of performance objectives and shareholder value. Our executive compensation program is also designed to attract and retain highly-talented executives who are critical to the successful implementation of Applied’s strategic plan.

Pay and Performance. We align compensation with our business objectives, performance and shareholder interests. See pages 26 and 35 for charts illustrating the connection between key financial and Company performance metrics and the compensation paid to our CEO during the last five fiscal years.

Significant Portion of CEO Pay Consists of Variable Compensation and Long-Term Incentives. In fiscal 2018, 93% of our CEO’s compensation comprised variable

compensation elements, and 83% of his overall compensation was delivered in equity with multi-year vesting. Performance objectives include financial and market objectives relating to adjusted operating margin, gross margin, WFE market share and relative TSR, as well as strategic and operational objectives, as described on page 32.

Please see the “Compensation Discussion and Analysis” section for further discussion of our executive compensation program and the fiscal 2018 compensation of our NEOs.

We are asking our shareholders to approve the compensation of our NEOs as described in this Proxy Statement by voting in favor of the following resolution:

“RESOLVED, that the shareholders approve, on a non-binding, advisory basis, the compensation paid to the Company’s named executive officers as disclosed in the Company’s Proxy Statement for the 2019 Annual Meeting of Shareholders pursuant to Item 402 of Regulation S-K, including the Compensation Discussion and Analysis section, the Summary Compensation Table, other compensation tables, narrative discussion and related disclosure.”

Even though this say-on-pay vote is advisory and therefore will not be binding on the Company, the HRCC and the Board value the opinions of our shareholders, and will consider the results of the vote when making future compensation decisions for our NEOs.

 

 

   

THE BOARD RECOMMENDS THAT YOU VOTE FOR THE APPROVAL, ON AN ADVISORY BASIS, OF THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS FOR FISCAL YEAR 2018, AS DISCLOSED IN THIS PROXY STATEMENT

 

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

COMPENSATION DISCUSSION AND ANALYSIS

Executive Summary

 

Our Business and Strategy

Applied Materials is the leader in materials engineering solutions used to produce virtually every new chip and advanced display in the world. Our expertise in modifying materials at atomic levels and on an industrial scale enables customers to transform possibilities into reality. At Applied Materials, our innovations make possible the technology shaping the future.

We develop, design, produce and service semiconductor and display equipment for manufacturers that sell into highly competitive and rapidly changing end markets. Our competitive positioning is driven by our ability to identify major technology inflections early, and to develop highly differentiated materials engineering solutions for our customers to enable those technology inflections. Through our broad portfolio of products and technologies, innovation leadership and focused investments in research and development, we are enabling our customers’ success, thereby generating record performance for the Company and creating significant value for our shareholders.

Our Performance Highlights

In 2018, despite challenging market conditions in the second half of the year, we delivered another year of outstanding results across several dimensions – company-wide, across our different products and segments, and from a financial and strategic perspective. Key highlights include:

 

   

Grew revenue to $17.3 billion in fiscal 2018, up 19% from the prior year, resulting in our third consecutive year of record revenue;

 

   

Achieved record revenue across all of our segments;

 

   

Grew operating profit to a new record, resulting in record GAAP EPS of $3.23, and record non-GAAP adjusted EPS of $4.45 – an increase of 2% and 37% over fiscal 2017, respectively (see the Appendix for a reconciliation of non-GAAP adjusted measures);

 

   

Delivered operating cash flow of $3.8 billion, equal to 22% of revenue; and

 

   

Returned $5.9 billion to shareholders through dividends and share repurchases.

Highlights of five-year performance achievements across key financial measures

 

 

LOGO

Non-GAAP adjusted operating margin and non-GAAP adjusted EPS are performance targets under our bonus and long-term incentive plans. See Appendix for non-GAAP reconciliations.



 

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Key financial highlights for our reporting segments in fiscal 2018 include the following:

 

   

Semiconductor Systems segment: we delivered record annual revenue of $10.9 billion, up 15% from the prior year.

 

   

Applied Global Services segment: we grew revenue to a record $3.8 billion, up 24% from fiscal 2017. We accelerated our momentum by introducing new ways to help our customers manage increasing complexity.

 

   

Display and Adjacent Markets segment: we delivered manufacturing equipment for increasingly larger and more advanced TVs, as well as high-resolution mobile displays, growing revenue to a record $2.5 billion, up 31% from fiscal 2017.

Strategic and Operational Highlights

Applied’s strategy is to deliver highly differentiated materials engineering products and services that enable major technology inflections and drive our customers’ success.

 

See inflections Identify customers Develop Differentiated Valuable Ensure customer success early High Value Problems Sustainable products + Generate residual value LOGO

In fiscal 2018, we continued to drive profitable growth by executing our strategy. Key highlights include:

 

   

Increased our investments in research and development by more than $245 million over fiscal 2017, to over $2.0 billion. We continue to prioritize our operating expenses towards R&D to solve major technology challenges for our customers and drive our long-term growth strategy.

 

   

Delivered strong growth in key areas of our semiconductor equipment business in fiscal 2018 – our process equipment businesses and our metrology and inspection businesses delivered record revenues.

 

   

Made strong gains in the memory market and positioned the Company for further growth as customers transition to new, higher performance devices.

 

   

Built upon Applied’s large installed base of manufacturing systems and grew the number of tools under comprehensive service agreements three times faster than the installed base. We are now generating about half of our services revenue from long-term agreements. These agreements enable us to generate more value by helping our customers achieve and maintain higher yields, and optimize factory output and operating costs.

 

   

Continued to deliver key tools for Gen 10.5 display factories, allowing customers to manufacture larger and more advanced TVs, and maintained the leading position in thin-film encapsulation, which enables next-generation OLED displays for mobile devices.

In summary, each of our major business segments delivered double-digit growth in fiscal 2018 despite challenging market conditions. For the calendar year, we expect most of our semiconductor businesses gained or held share. However, other segments of the wafer fabrication equipment (“WFE”) market where we do not compete, such as lithography, saw faster growth, and, as a result, we expect our overall WFE share declined in 2018. In addition, our stock price performance reflected weaker industry demand in the second half of the year, especially in the memory market.

The HRCC set many performance targets for fiscal 2018 bonuses far above any records that Applied had achieved in the past in order to set a very high and challenging bar for the executive officers. During fiscal 2018, Applied achieved record EPS and other financial and operational objectives, but even so, our record financial results were below our aggressive targets. The HRCC also set aggressive goals for WFE share and total shareholder return (“TSR”) performance relative to our peers, and these results were below the 1.0 targets. Accordingly, bonus payouts to our executive officers were below target bonus amounts.



 

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COMPENSATION DISCUSSION AND ANALYSIS

 

Stock Price Performance

While Applied achieved strong financial results in fiscal 2018, our stock price performance reflected weaker industry demand in the second half of the year, especially in the memory market. Over the past five years, Applied has outperformed the S&P 500 Index, as shown below.    

FY2014 – FY2018 Total Shareholder Return vs. Key Peers

 

LOGO



 

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Primary Compensation Elements and Executive Compensation Highlights for Fiscal 2018

The primary elements of our compensation program consist of base salary, annual incentive bonuses and annual long-term incentive awards. Other elements of compensation include a 401(k) savings plan, deferred compensation benefits and other benefits programs that are generally available to all employees. Primary elements and highlights of our fiscal 2018 compensation program were as follows:

 

    Element of Pay     Structure     Highlights
                         

Base Salary

(see page 29)

 

   

 

 

 

Fixed cash compensation for expected day-to-day responsibilities

 

   

 

 

 

Fiscal 2018 salaries for each named executive officer (“NEO”) remained unchanged from 2017 levels, except to reflect promotions

   
     

Reviewed annually and adjusted when appropriate, based on scope of responsibility, performance, time in role, experience, and competitive market for executive talent

 

         
                         

Annual

Incentive

Bonuses

(see page 29)

   

 

 

 

 

 

 

 

Variable compensation paid in cash

 

Based on performance against pre-established financial, operational, strategic and individual performance measures

 

Financial and non-financial metrics provide a comprehensive assessment of executive performance

 

Performance metrics evaluated annually for alignment with strategy and market trends

 

NEO annual incentives determined through three-step performance measurement process:

 

 

 

LOGO

   

 

 

 

 

 

 

Fiscal 2018 target bonuses as a percentage of base salary were the same as fiscal 2017 levels for all the NEOs, except to reflect promotions

 

The threshold non-GAAP adjusted EPS goal for fiscal 2018 was $3.50. The Company achieved an actual result of $4.45

 

As the threshold performance goal was achieved, the annual bonuses were based on the performance of the Company’s objective and quantifiable business and strategic goals in the corporate scorecard for each NEO

 

Based on achievement compared to goals, fiscal 2018 actual annual bonuses ranged from 0.58x to 0.73x target for our NEOs

 

— Achievement against the corporate scorecard ranged from 0.53x to 0.66x target (see corporate scorecard information on page 32)

 

— Individual performance factor was 1.1x target for all our NEOs, which was determined based on an assessment of individual performance results and impact against both quantitative and strategic objectives (see individual performance highlights on page 33)

 

   
                                                 
                         

Long-Term

Incentives

(see page 35)

 

   

 

 

 

 

 

 

Performance share units (“PSUs”) to establish rigorous long-term performance alignment

 

Restricted stock units (“RSUs”) to provide link to shareholder value creation and retention value

 

Performance share units vest based on achievement of 3-year non-GAAP adjusted operating margin and 3-year WFE market share goals

 

Restricted stock units vest ratably over 3 years

   

 

 

 

 

 

 

The target vehicle mix of the equity awards consists of 75% PSUs and 25% RSUs for the CEO and 50% PSUs and 50% RSUs for the other NEOs

 

Non-GAAP adjusted operating margin is a key measure of our Company’s long-term success

 

WFE market share is a relative performance measure benchmarked against key industry peers

 

— For fiscal 2019, the WFE market share metric was replaced with relative TSR, which better reflects our growing Display and services businesses, in addition to our semiconductor segment, and incentivizes management to outperform the market through each business environment

 

   
   
                         


 

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COMPENSATION DISCUSSION AND ANALYSIS

 

Pay Mix

In fiscal 2018, a significant portion of our executive compensation consisted of variable compensation and long-term incentives. As illustrated below, 93% of CEO compensation for fiscal 2018 comprised variable compensation elements, and 83% of Mr. Dickerson’s overall compensation was delivered in equity with multi-year vesting.

 

FY2018 Compensation Mix1

CEO

  

All Other NEOs

 

LOGO

  

 

LOGO

1 Represents total direct compensation for fiscal 2018.

Summary of 2018 Total Direct Compensation

The following table summarizes elements of annual total direct compensation for our NEOs for fiscal 2018, consisting of (1) base salary, (2) annual incentive bonus and (3) annual long-term incentive awards (the grant date fair value of stock awards). This table excludes amounts not considered by the Human Resources and Compensation Committee (“HRCC”) to be annual total direct compensation, such as (a) the amount of a special bonus paid to Mr. Durn in connection with his hire in August 2017 and the grant date fair value of restricted stock units awarded to him for retention and performance purposes, (b) the grant date fair value of restricted stock units awarded to each of Mr. Ghanayem and Dr. Raja in connection with each officer’s promotion and (c) certain other amounts required by the SEC to be reported in the Summary Compensation Table (see page 41 of this Proxy Statement).

 

Name and Principal Position    Salary
($)
    

Annual
Incentive
Bonus

($)

    

Annual
Long-Term
Incentive
Award

($)

    

Total

($)

 

Gary E. Dickerson
President and Chief Executive Officer

     1,000,000        1,430,000        11,261,311        13,691,311  

Daniel J. Durn
Senior Vice President, Chief Financial Officer

     600,000        471,900        2,943,380        4,015,280  

Ali Salehpour
Senior Vice President, Services, Display and Flexible Technology

     600,000        588,060        3,610,485        4,798,545  

Prabu G. Raja
Senior Vice President, Semiconductor Products Group

     549,039        522,720        2,820,650        3,892,409  

Steve G. Ghanayem
Senior Vice President, New Markets and Alliances Group

     549,039        432,878        2,820,650        3,802,567  


 

Applied Materials, Inc.    25


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Pay and Performance

We align compensation with our business objectives, performance and shareholder interests. The following chart shows the connection between TSR and the total direct compensation of our CEO for the last five fiscal years. While TSR has grown significantly over the previous four years, our CEO’s total direct compensation has remained relatively flat during that period.

 

LOGO

 

(1) 

Total direct compensation consists of annual base salary, annual incentive bonus and annual long-term incentive award (grant date fair value of annual equity awards for all fiscal years, except for fiscal 2014, which consists of the total amount of cash-settled performance units). Total direct compensation shown above excludes other amounts required by the SEC to be reported in the Summary Compensation Table.

(2) 

TSR line illustrates the total shareholder return on our common stock during the period from October 24, 2014 through October 26, 2018 (the last business day of fiscal 2018), assuming $100 was invested on October 24, 2014 and assuming reinvestment of dividends.



 

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COMPENSATION DISCUSSION AND ANALYSIS

 

Other Key Compensation Practices

We are committed to executive compensation practices that drive performance, mitigate risk and align the interests of our leadership team with the interests of our shareholders. Below is a summary of best practices that we have implemented and practices that we avoid because we believe they are not in the best interests of Applied or our shareholders.

 

WHAT WE DO        WHAT WE DO NOT DO

  Pay for Performance – Significant majority of NEO target compensation is performance-based and tied to pre-established performance goals aligned with our short- and long-term objectives.     Ò   No Guaranteed Bonuses – Our annual bonus plans are performance-based and do not include any minimum payment levels.

 

   

 

  Mitigation of Risk – Use of varied performance measures in incentive programs mitigates risk that executives will be motivated to pursue results with respect to any one performance measure to the detriment of Applied as a whole.     Ò   No Hedging or Pledging – Our insider trading policy prohibits all directors, NEOs and other employees from engaging in hedging or other speculative trading, and prohibits directors and NEOs from pledging their shares.

 

   

 

  Compensation Recoupment Policy – Both our annual cash bonus plan and our stock incentive plan contain “clawback” provisions providing for reimbursement of incentive compensation from NEOs in certain circumstances.     Ò   No Perquisites – We do not provide material perquisites or other personal benefits to our NEOs or directors, except in connection with business-related relocation.

 

   

 

  Stock Ownership Guidelines – All senior officers and directors are subject to stock ownership guidelines to align their interests with shareholders’ interests.     Ò   No Dividends on Unvested Equity Awards – We do not pay dividends or dividend equivalents on unvested equity awards.

 

   

 

  Double-Trigger Change-in-Control Provisions – Equity awards for all NEOs require a “double-trigger” of both a change-in-control and termination of employment for vesting acceleration benefits to apply.     Ò   No Executive Pensions – We do not offer any executive pension plans.

 

   

 

  Annual Say-On-Pay Vote – We seek annual shareholder feedback on our executive compensation program.       Ò   No Tax Gross-Ups – We do not pay tax gross-ups, except in connection with business-related relocation or expatriate assignments.


 

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Compensation Governance and Decision-Making Framework

 

 

Overview of Compensation Program Philosophy and Governance Framework

Our executive compensation program has three principal objectives:

 

  To attract, reward and retain highly-talented executive officers and other key employees;

 

  To motivate these individuals to achieve short-term and long-term goals that enhance shareholder value; and

 

  To support our core values and culture.

We seek to achieve these objectives by:

 

  Providing compensation that is competitive with the practices of other leading, high-technology companies; and

 

  Linking rewards to Company and individual performance by:

 

    Setting challenging performance goals for executive officers and other key employees;

 

    Balancing retention needs with performance objectives; and

 

    Providing a high proportion of total target compensation in the form of equity incentives to motivate executive officers and key employees to increase long-term value in alignment with shareholders’ interests.

The HRCC uses these principles to determine base salaries, annual incentive bonuses and long-term incentive awards. The HRCC also considers Applied’s business objectives, external factors such as geopolitical and economic environment, competitive practices and trends, and corporate considerations, including the affordability of the compensation program.

The HRCC further considers the results of the annual advisory “say-on-pay” vote and shareholder feedback. At our Annual Meeting in 2018, our “say-on-pay” proposal received

a substantial majority (96%) of votes cast. In consideration of this vote and feedback from our shareholders through our extensive outreach effort, the HRCC approved an executive compensation program for fiscal 2018 that is unchanged from the fiscal 2017 program.

Fiscal 2018 Peer Group Companies

The HRCC regularly reviews compensation paid by our peer group, which consists of a broad range of high-technology companies whose businesses are similar to ours and with which we typically compete for executive talent, as a reference point for evaluating our compensation program.

For the composition of the fiscal 2018 peer group, we considered companies that met the following criteria: (1) technology companies with manufacturing operations, (2) companies whose revenues were approximately one-third to five times that of Applied, (3) companies with global operations that disclose executive compensation pursuant to SEC rules, (4) companies that compete with us for key talent, and (5) companies that devote significant resources to research and development as a percentage of revenue. Based on this assessment, the HRCC determined to remove EMC Corp. and SanDisk Corp., which were part of the 2017 peer group, from the fiscal 2018 peer group due to their acquisition by other companies, one of which is in our peer group. Each of the other companies in the peer group listed below met most, if not all, of the five screening criteria listed above and continued to be included in the peer group; in addition, several of the companies were among our principal U.S. competitors or top U.S. customers.

Data gathered on the peer group include base salary, bonus, targeted cash compensation, long-term incentive awards and total direct compensation. The HRCC uses this information as a reference point rather than to target a specific percentile for our NEOs. The peer group data is gathered from the sources described in “Role of Compensation Consultant” below.

 

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

The tables below set forth our fiscal 2018 peer group and related information.

 

Fiscal 2018 Peer Group
   
Advanced Micro Devices, Inc.    Micron Technology, Inc.
Broadcom, Inc.    Motorola Solutions, Inc.
Cisco Systems, Inc.    NetApp, Inc.
Corning Inc.    NVIDIA Corp.
Intel Corp.    QUALCOMM, Inc.
Juniper Networks, Inc.    Seagate Technology plc
KLA-Tencor Corp.    Texas Instruments, Inc.
Lam Research Corp.    Western Digital Corp.

Applied Materials Positioning Relative to Peers

 

RevenueMarket Capitalization 50th percentilePercentile Rank 100th percentile100thpercentile LOGO

 

 

Components of Total Direct Compensation

 

 

Determining Annual Total Direct Compensation

At the beginning of fiscal 2018, the HRCC evaluated each NEO’s annual total direct compensation – consisting of annual base salary, annual incentive bonus and annual long-term incentive award. As part of this annual evaluation, the HRCC considers the NEO’s scope of responsibility, performance, skill set, prior experience and achievements, advancement potential, impact on results and expected future contributions to our business. The HRCC also considers the compensation levels of an executive officer relative to other Applied officers, the need to attract and retain talent, business conditions, and compensation levels at our peer companies for comparable positions; however, no individual element of compensation is targeted to a peer percentile range. The HRCC uses peer group data as a tool to assess how our executives’ compensation compares to the market rather than as a means to establish specific target compensation levels. Actual pay results vary based on the overall performance of the Company and individual NEO performance, as the largest portion of NEO compensation is performance-based.

Base Salaries

Base salaries and bonus opportunities are designed to attract, motivate, reward and retain executive talent, as well as to align pay with performance. At the beginning of each fiscal year, the HRCC determines each NEO’s targeted total cash compensation (salary and target bonus).

Base salaries are an annual fixed level of cash compensation. At the beginning of fiscal 2018, the HRCC increased each of Dr. Raja’s and Mr. Ghanayem’s base salary from $500,000 to $550,000 to reflect his additional responsibilities and promotion from Group Vice President to Senior Vice President. These promotions were made in connection with a new organizational structure implemented

in November 2017 designed to accelerate our strategy and growth. The HRCC did not change base salaries for the other NEOs in fiscal 2018. The HRCC determined that continuing base salary amounts from fiscal 2017 for those other NEOs was sufficiently competitive to provide adequate retention value and allowed Applied to continue its focus on weighting cash compensation toward performance-based incentives.

Annual Incentive Bonus Opportunities

Bonus Plan Overview. In fiscal 2018, all of our NEOs participated in the Senior Executive Bonus Plan (the “Bonus Plan”). The Bonus Plan is a shareholder-approved bonus program designed to motivate and reward achievement of Applied’s business goals and to attract and retain highly-talented individuals. The annual incentive bonus opportunity for each NEO under the Bonus Plan is directly linked to Applied’s achievement of financial and market performance, operational performance and strategic objectives, in addition to individual performance. Company and individual goals are designed to incentivize management to drive strong operating performance, invest in innovation to drive future growth and create shareholder value. Our Bonus Plan is performance-based and does not include any minimum payment levels.

Determining Target Bonus Amounts. Target bonus amounts for the NEOs are expressed as a percentage of base salary. The HRCC sets the annual target bonus amount for each NEO, taking into consideration Mr. Dickerson’s recommendations regarding the annual target bonus amounts for each of the NEOs other than himself. In early fiscal 2018, Mr. Dickerson recommended that, for each NEO other than Dr. Raja and Mr. Ghanayem, the target bonus amounts remain unchanged from fiscal 2017. Mr. Dickerson recommended, and the HRCC approved, increasing each of Dr. Raja’s and Mr. Ghanayem’s target bonus from 120% to 135% of his salary in connection with each officer’s promotion. In making his recommendations, Mr. Dickerson

 

 

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relied on a variety of factors, including publicly-available data and market survey data, as described above, as well as his assessment of overall economic and business conditions.

The HRCC considered these same factors in deciding not to increase Mr. Dickerson’s target bonus.

 

 

Assessing Performance and Payout. The determination of fiscal 2018 performance and annual incentive bonuses for our NEOs consisted of three key steps, as illustrated in the diagram below and the following discussion.

 

Initial Performance NEO Bonus Determination Initial Performance Hurdle Corporate Scorecard Individual Performance Factor Threshold performance requirement that must be achieved for maximum bonuses to become available Assessment of performance against pre-defined financial, operational and strategic corporate goals Assessment of individual NEO performance against personal objectives and contributions to the businessInitial performance goal for fiscal 2018 was non-GAAP adjusted EPS of $3.50 For fiscal 2018, 50% based on financial and market performance; 50% based on objective and measurable operational and strategic goals LOGO

 

The HRCC believes that this multi-step performance framework appropriately emphasizes financial performance, while also providing a mechanism to assess achievement of key business imperatives by individual NEOs.

 

Initial Performance Goal. For fiscal 2018, the HRCC chose non-GAAP adjusted EPS as the initial performance hurdle. EPS, an indicator of overall Company financial performance, is a measure of profits generated on a per share basis that are available either to reinvest in the business or distribute to shareholders, and has a strong link to share price valuation.

If Applied does not achieve a threshold non-GAAP adjusted EPS of $3.50 for the fiscal year, no bonus is payable. If this threshold is achieved, the maximum bonus that becomes payable for each NEO is the lowest of: (a) $5 million, (b) 3x a corporate bonus pool funding modifier, multiplied by the target bonus, and (c) 3x the target bonus, as a percentage of base salary.

In fiscal 2018, Applied’s non-GAAP adjusted EPS was $4.45, resulting in achievement of the initial performance goal under the Bonus Plan. Adjusted EPS is a non-GAAP measure that excludes certain items from EPS determined in accordance with GAAP (see Appendix for a reconciliation of non-GAAP adjusted EPS).

 

Non-GAAP adjusted EPS does not exclude share-based compensation expenses.

Balanced Corporate Scorecard. If the initial performance goal is achieved, the HRCC then uses the corporate scorecard to evaluate achievement of pre-defined corporate objectives and goals for each NEO and as a primary mechanism to exercise negative discretion from the maximum bonus amount. The scorecard is designed to measure financial and non-financial objectives that are considered by the HRCC to be key drivers of the Company’s near-term financial and operational success that will create shareholder value over the longer-term. As in previous years, the fiscal 2018 scorecard measured corporate performance in five broad categories: (1) Financial and Market Performance, (2) Products and Growth, (3) Execution, (4) Customers, Field and Service and (5) People and Organization. These categories align with and support the Company’s strategy of strengthening our materials engineering capabilities to enable major technology inflections for our customers and positioning Applied for sustainable growth to support long-term value creation for its shareholders.

 

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

Scorecard Category

 

 

Link to Company Strategy and Performance

 

Financial and Market Performance   Financial, market share and TSR goals align with a focus on delivering sustainable performance that increases shareholder value
Products and Growth   Reinforces strategy of developing new and differentiated products and services, and positioning Applied and its products for future revenue and market share growth
Execution   Incentivizes increased efficiency in operational process, product development success and quality and safety performance
Customers, Field and Service   Promotes focus on customer service by improving growth and efficiency at key accounts and applications
People and Organization   Drives focus on greater employee engagement to promote hiring, retention and development of key talent

 

NEO Objectives and Weightings. Each NEO was assigned individualized weightings for all measures to reflect the relative impact and contributions of that NEO and his business or organizational unit to Applied’s overall performance with respect to a particular measure. The Financial and Market Performance measures were weighted at approximately 50% for all NEOs. The corporate scorecard objectives and weightings were the same for Mr. Dickerson and Mr. Durn. All other NEOs had objectives and weightings as set forth in the table below.

Goal Setting and Measurement. At the beginning of the fiscal year, the HRCC reviewed objectives, goals and weightings initially proposed by management, provided input and made adjustments, and approved the final corporate scorecard and individual weightings for each NEO. Scorecard objectives are intended to be very challenging to incentivize our NEOs to

achieve performance levels that are higher than our externally communicated financial targets. Consequently, delivering results below the 100% target level can still represent meaningful progress towards our long-term strategic goals. Progress towards achieving the corporate scorecard objectives was evaluated and tracked quarterly during the fiscal year. Scores were awarded for each metric under the scorecard based on the degree to which the pre-determined goals for that metric were achieved. Performance hurdles were set to measure achievement at 0, 0.5, 1.0, 1.5 and 2.0 levels, with a score of 1.0 indicating performance that met very high expectations and scores over 1.0 indicating extraordinary achievement. At the end of the fiscal year, scores were calculated based on actual performance against objectives and were presented to the HRCC to review, adjust and approve.

 

 

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The following table details fiscal 2018 corporate scorecard objectives, their relative weightings for each NEO, the achievements based on performance against rigorous objectives and the resulting scores, as approved by the HRCC (see Appendix for non-GAAP reconciliations).

 

    Weightings    

Achievements

 

 

Score

 

 
Objectives   Dickerson
and Durn
    Salehpour     Raja     Ghanayem  

Financial and Market Performance

    50.0%       50.0%       47.5%       50.0%              

Grow wafer fabrication equipment (measured by Gartner) market share

                                 

Estimating wafer fabrication equipment market share below target in calendar 2018

    0.0  

Grow Display revenue per target

                                 

Delivered $2.5 billion in Display revenue

    1.0  

Achieve gross margin targets (gross margin reported externally)

                                 

Achieved 46.3% non-GAAP adjusted gross margin

    0.5  

Achieve adjusted operating margin goal (operating margin reported externally)

                                 

Achieved 29.0% non-GAAP adjusted operating margin

    0.5  

Achieve TSR target relative to peers

                                 

Delivered TSR performance below target relative to semiconductor equipment peer group

    0.0  

Products and Growth

    20.0%       24.0%       20.0%       40.0%              

Win development tool of record and production tool of record positions at key customers

                                 

Exceeded target number of development tool of record and production tool of record positions

    1.5  

Grow service revenue per target

                                 

Achieved targeted service revenue

    1.0  

Develop growth pipeline to deliver targeted fiscal 2021 revenue and create opportunities in core and new businesses

                                 

Developed strong pipeline of opportunities to drive significant future growth, but fell slightly short of aggressive targets

    0.5  

Execution

    10.0%       10.0%       12.5%       0.0%              

Update enterprise resource planning system for Semiconductor Products Group while maintaining order-to-cash and on-time-delivery targets

                                 

Updated enterprise resource planning system while maintaining order-to-cash and on-time-delivery targets

    1.0  

Improve product success rate and commercialization of winning products

                                 

Made significant progress with new products that will deliver future growth and improved product development processes and methods, as measured by Capability Maturity Model. Some results were below aggressive goals that were set

    0.5  

Improve operational, quality and safety performance

                                 

Delivered overall improvements in key metrics for delivery times, materials costs, quality and safety but fell short of some targets for the year

    0.5  

Customers, Field and Service

    10.0%       10.0%       10.0%       0.0%              

Achieve growth and efficiency metrics at key accounts

                                 

Achieved field management goals at a majority of key accounts

    0.5  

Grow target applications for systems and service

                                 

Delivered targeted application growth for systems and service

    1.0  

People and Organization

    10.0%       6.0%       10.0%       10.0%              

Improve overall health score and employee engagement score relative to 2017 organizational health index survey results and improve priority practices score relative to 2016 survey, measured by survey administered by McKinsey

                                 

Increased overall health score by 4 points and overall employee engagement score by 2.9 points; increase priority practices scores on average of 5 points

    2.0  

Implement next phase of organizational development strategy

         

>90% of targeted population had development plan by Q2 and >85% of targeted population trained by fiscal year end

    1.5  

Goals tied to objective and quantifiable metrics aligned with Company strategy

 

 

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

Individual Performance Factor. The HRCC also considered the individual performance of each NEO as indicated by that NEO’s individual performance factor (“IPF”). The IPF applied only if the initial performance goal and at least some of the corporate scorecard objectives were achieved. The IPF modified the initial bonus amount as determined based on achievement against the corporate scorecard objectives. The IPF modifier ranges from 0 to 1.5.

The HRCC determined the IPFs for all NEOs. Mr. Dickerson’s IPF was based on the HRCC’s year-end assessment of his leadership and the Company’s overall performance during the year. The HRCC determined the IPF for each other NEO taking into consideration Mr. Dickerson’s recommendation,

which included his assessment of the achievement of strategic, financial, operational and organizational performance goals specific to the business or organizational unit for which the NEO was responsible, as well as the NEO’s leadership skills and current and expected contributions to the business. For fiscal 2018, in light of the significant efforts by each NEO in leading his respective organization, and in Mr. Dickerson’s case, Applied, and in recognition of the significant teamwork required of the leadership team to deliver outstanding financial results despite challenging market conditions, the HRCC assigned each NEO an IPF of 1.1.

 

 

The following table shows the highlights of each NEO’s performance in fiscal 2018 that the HRCC considered in determining their respective IPFs.

 

NEO   

 

Fiscal 2018 Individual Performance Highlights

Gary E. Dickerson

  

  Delivered record annual revenue of $17.3 billion and non-GAAP adjusted EPS of $4.45, up 19% and 37% from fiscal 2017, respectively
  

  Positioned Applied for future growth, to win at key industry inflections and to execute well in a range of market conditions

Daniel J. Durn

  

  Delivered record annual revenue of $17.3 billion and non-GAAP adjusted EPS of $4.45, up 19% and 37% from fiscal 2017, respectively
  

  Executed tax strategy to optimize tax rate and cash management in light of new U.S. tax legislation
  

  Drove successful implementation of new enterprise resource planning system to enhance Company infrastructure and delivered significant process efficiency improvements

Ali Salehpour

  

  Delivered record Applied Global Services (“AGS”) revenues of $3.8 billion
  

  Developed new service products and positioned AGS for double-digit annual growth
  

  Delivered record revenues in Display of $2.5 billion

Prabu G. Raja

  

  Delivered record Semiconductor Systems revenues of $10.9 billion
  

  Increased revenues for high-growth semiconductor businesses by approximately 20% from fiscal 2017
  

  Developed pipeline of new products to address future technology inflections and expand served market

Steve G. Ghanayem

  

  Created New Markets and Alliances group to drive growth through new industry engagements
  

  Built new capabilities for the Company, including the Materials Engineering Technology Accelerator research and development center in the State of New York opening in 2019

 

 

Applied Materials, Inc.    33


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Actual Bonus Payouts. The diagram below shows the results for each of the three key steps in determining the NEOs’ fiscal 2018 annual incentive bonuses. Despite achieving record EPS and many of our fiscal 2018 corporate scorecard objectives, in addition to each NEO achieving a strong IPF against his personal objectives and contributions to the business, there were certain important scorecard areas where we did not reach the targets set at the beginning of the year, which together reduced bonus payouts for our NEOs by, on average, 31% from target bonus amounts.

Fiscal 2018 Annual Incentive Calculation

 

 

       

Performance Measures

     

Fiscal 2018 Achievement

       
LOGO Initial Performance Goal    

  Fiscal 2018 non-GAAP adjusted EPS of $3.50

 

   

  Achieved non-GAAP adjusted EPS of $4.45

 

       
LOGO Corporate Scorecard    

  Strong performance on core objectives:

– Financial and Market Performance

– Products and Growth

– Execution

– Customers, Field and Service

– People and Organization

 

   

  NEO scorecard results achieved in a range from 0.53 to 0.66 based on individual weightings

 

       
LOGO Individual Performance Modifier    

  Strong NEO performance against personal objectives and individual contribution to business performance

 

   

  IPF achieved at 1.1 for all NEOs

 

        LOGO
       

 

Average NEO bonus, as
multiple of target: 0.69

 

 

The following table shows for each NEO: (1) the maximum amount payable under the Bonus Plan, (2) the target bonus amounts expressed as a percentage of base salary, (3) the target bonus expressed as a dollar amount and (4) the actual fiscal 2018 bonus amount approved by the HRCC and paid to the NEO.

 

NEO     

(1)

Maximum

Bonus

Payable

($)

    

(2)

Target
Bonus as a
Percentage
of Base

Salary

(%)

    

(3)

Target

Bonus

($)

      

(4)

Actual

Bonus

($)

 

Gary E. Dickerson

     $5,000,000      200%      $ 2,000,000        $ 1,430,000  

Daniel J. Durn

     $1,980,000      110%      $ 660,000        $ 471,900  

Ali Salehpour

     $2,430,000      135%      $ 810,000        $ 588,060  

Prabu G. Raja

     $2,227,500      135%      $ 742,500        $ 522,720  

Steve G. Ghanayem

     $2,227,500      135%      $ 742,500        $ 432,878  

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

Pay Driven by Operating Performance. Our process for determining annual bonus awards has resulted in strong pay and performance alignment. Despite achieving record EPS and many of the fiscal 2018 corporate scorecard objectives, in addition to achieving a strong IPF against his personal objectives and contributions to the Company, there were certain important scorecard areas where we did not reach the aggressive targets set at the beginning of the year, which together reduced bonus payout for our CEO from fiscal 2017. The chart below shows the actual annual bonus awards for our CEO and our non-GAAP adjusted EPS achievements over the last five fiscal years.

CEO Actual Annual Bonus vs. Earnings Per Share

 

 

LOGO

Non-GAAP adjusted EPS is a performance target under our bonus plan. See Appendix for non-GAAP reconciliations.

 

Long-Term Incentives

Overview. Applied’s long-term incentive compensation program is intended to help (1) achieve our business objectives, (2) attract, motivate and retain key talent, and (3) align our executives’ interests with shareholders’ interests to maximize long-term shareholder value.

Timing of Awards. The HRCC grants equity and other long-term incentive awards to NEOs under our shareholder-approved Employee Stock Incentive Plan (the “Stock Plan”). The HRCC has not granted, nor does it intend to grant, equity awards in anticipation of the release of material, nonpublic information that is likely to result in changes to the price of our common stock, such as a significant positive or negative earnings announcement. Similarly, Applied has not timed, nor does it intend to time, the release of material, nonpublic information based on equity award grant dates.

Fiscal 2018 Equity Awards

The HRCC believes that a meaningful portion of NEOs’ target compensation should be in the form of long-term incentives.

These awards are intended to reward performance over a multi-year period, align the interests of executives with those of shareholders, instill an ownership culture, enhance the personal stake of executive officers in the growth and success of the Company, and provide an incentive for continued service at the Company.

Given the comprehensive review of Applied’s compensation program in fiscal 2017 performed by the HRCC and the strong support received from our shareholders on our incentive programs last year, we continued our approach to make performance-based equity awards a substantial portion of the overall value of equity awards granted to our NEOs. The long-term incentive program, which is designed to align performance metrics with our strategic goals over a three-year performance period, has remained unchanged for fiscal 2018.

The long-term incentive awards for NEOs consist of two forms of equity vehicles: performance share units (“PSUs”) and restricted stock units (“RSUs”). The target vehicle mix of the awards consists of 75% PSUs and 25% RSUs for the CEO and 50% PSUs and 50% RSUs for the other NEOs.

 

 

Applied Materials, Inc.    35


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CEO LTI Vehicle Mix   All Other NEO LTI
Vehicle Mix

 

LOGO

 

 

LOGO

For fiscal 2018, in December 2017, the HRCC granted the number of PSUs and RSUs listed in the below table to our NEOs.

 

NEO     

Target Value
of Awards
(1)

($)

 
 

 

    


Equivalent
Target
Number of
PSUs
(2)
 
 
 
 
      

Equivalent
Number of
Shares
(2)


 

Dickerson

   $ 11,500,00        168,096          56,032  

Durn

   $ 3,000,000        29,235          29,235  

Salehpour

   $ 3,680,000        35,861          35,861  

Raja

   $ 2,875,000        28,016          28,016  

Ghanayem

   $ 2,875,000        28,016          28,016  
  (1)

Value of awards is based on Applied’s stock price on the grant date. Amounts shown in the “Stock Awards” column of the Summary Compensation Table represent grant date fair value determined pursuant to Accounting Standards Codification 718.

  (2) 

Number of shares calculated by dividing value of awards by $51.31, the closing price of Applied stock on December 14, 2017, the grant date.

Size of Performance-Based Equity Awards. In determining the size of the awards, the HRCC considered each NEO’s award as a component of his total direct compensation. Target fiscal 2018 long-term equity awards were determined in light of each NEO’s scope of responsibility, performance, impact on results and expected future contributions to our business, compensation levels relative to other Applied officers, the wholesale changes made to the long-term incentive program in fiscal 2017 and establishment of three-year performance goals, the need to attract and retain talent, and business conditions. In addition, the fiscal 2018 target grant sizes provided sufficient performance-based equity incentives to align compensation with the long-term interests of our shareholders, were in line with market norms for the NEOs’ respective roles and were sufficient to provide incentive for them.

Performance Share Units. The fiscal 2018 PSUs, granted in December 2017, will vest three years from the grant date based on achievement of average non-GAAP adjusted operating margin for fiscal 2018 through fiscal 2020 and average WFE market share goals for calendar years 2017 through 2019, with equal weighting given to each metric.

 

 

LOGO

FY18 Long-Term Incentive Plan Metrics 50% WFE Market Share - 3-year Average Relativemeasure versus our industry peer group that reflects the strategic importance and adoption of our products in the marketplace, our brand interactions across our segments, and our ability to grow our business oer time and across business cycles. 50% Non-GAAP adjusted Operating Profit Margin-3-year Average Reflects an important measure of profitability, value creation, and the ability of management to improve operational efficiency over time. It is also a key metric for our shareholders.

The number of PSUs that may vest is based on the achievement of threshold (minimum required for a payout), target or maximum levels of each metric and may range from 50% to 200% of the target number of shares, as set forth below.

 

Achievement Level     


Percentage  
of Shares  
That May  
Vest  
 
 
 
 

Threshold

     50%  

Target

     100%  

Maximum

     200%  

If the threshold level is not achieved, then no shares will vest. If achievement falls between threshold, target or maximum levels, the portion of the award that may vest will be determined based on straight-line interpolation.

In setting goals for the PSUs, the HRCC considered Applied’s historical results and relative performance, and established goals that are aligned with Applied’s financial and strategic objectives and will require significant effort to achieve the maximum level.

Restricted Stock Units. The RSU awards are scheduled to vest ratably over three years, providing a link to shareholder value creation and maintaining retention value.

 

 

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COMPENSATION DISCUSSION AND ANALYSIS

 

Changes for Fiscal 2019. In 2018, the HRCC approved certain changes to the long-term incentive program. For fiscal 2019, the PSU awards will continue to be subject to the achievement of two performance metrics over a three-year performance period: (1) three-year average non-GAAP adjusted operating margin and (2) three-year average relative TSR, rather than WFE market share as has been used for PSUs granted in previous years.

 

 

LOGO

FY19 Long-Term Incentive Plan Metrics 50% Relative TSR-3-year Average Captures the full scale of our business and greater incentivizes management to outperform the market through each business environment. 50% Non-GAAP Adjusted Operating Profit Margin-3-year Average Reflects and important measure of profitability, value creation, and the ability of management to improve operational efficiency over time. It is also a key metric for our shareholders.

WFE market share relative to our key industry peers remains a strong measure of our operating performance, but given the evolution of Applied’s business to encompass diversified revenue streams beyond semiconductors, including the Display and services businesses as long-term drivers of growth, the HRCC approved a shift toward relative TSR to ensure that the go-forward metric captures the full scale of our business and greater incentivizes management to outperform the market through each business environment.

Relative TSR will be measured over a three-year period relative to the S&P 500 Index. A TSR payout factor will be determined by calculating the Company’s TSR percentile rank within the S&P 500 based on the approved payout scale detailed below. The TSR calculation uses a 60-day average stock price at the beginning and end of the performance period for measurement purposes. This approach minimizes the impact of a single beginning and ending point stock price for each performance cycle.

 

Achievement Level    Percentage  
of Shares  
That May  
Vest  
 

Above 25th Percentile

     50%  

50th Percentile

     100%  

75th Percentile

     200%  

The HRCC also approved retirement provisions applicable to long-term incentive awards, beginning with fiscal 2019 awards. The provisions, which will become effective in January 2020, provide for a partial payout of PSU awards

based on actual performance at the conclusion of the three-year performance period and partial accelerated vesting of RSU awards in the event of a qualifying retirement based on age and years of service. The provisions establish a consistent retirement policy and are designed to maintain engagement and focus, as well as provide retention incentive, for our executive officers as some approach potential retirement decisions.

Promotion Awards. In November 2017, in connection with the promotions of Dr. Raja and Mr. Ghanayem, the HRCC granted each of them 35,506 RSUs with a value of $2,000,000. The RSU awards are scheduled to vest ratably over three years, subject to each officer’s continued employment through each applicable vesting date.

CFO Equity Award. In October 2018, the HRCC approved a one-time equity retention award for Mr. Durn. In light of Mr. Durn’s strong performance and smooth transition from the previous CFO, the value of equity awards from his former employer that he forfeited, and the value of outstanding Applied equity awards held by him, the HRCC granted Mr. Durn a retention award. Mr. Durn’s award consists of 72,908 RSUs with a value of $2,500,000, which are scheduled to vest ratably over three years, subject to his continued employment through each applicable vesting date.

Role and Authority of the Human Resources and Compensation Committee

The HRCC has a written charter approved by the Board that specifies the HRCC’s duties and responsibilities, which is available on our website at: http://www.appliedmaterials.com/files/hrcc_charter.pdf. In accordance with its charter, the HRCC oversees our programs that foster executive and employee development and retention, with emphasis on leadership development, management capabilities, succession plans and human capital management. The HRCC also determines executive and director compensation, and oversees significant employee benefits programs, policies and plans.

Each member of the HRCC has been determined to be independent under Nasdaq, SEC and Internal Revenue Code rules. The HRCC may delegate any of its responsibilities to subcommittees. See “Board Meetings and Committees” for more information about the HRCC.

Role of Compensation Consultant

The HRCC has the authority to engage independent advisors to assist it in carrying out its responsibilities. For fiscal 2018, the HRCC engaged Semler Brossy Consulting Group (“Semler Brossy”) as its independent executive compensation consultant.

 

 

Applied Materials, Inc.    37


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Semler Brossy, who reports directly to the HRCC and not to management, is independent from Applied, has not provided any services to Applied other than to the HRCC and receives compensation from Applied only for services provided to the HRCC. The HRCC assessed the independence of Semler Brossy pursuant to SEC rules and concluded that the work of Semler Brossy for the HRCC has not raised any conflict of interest.

Semler Brossy reviews and advises on all principal aspects of the executive compensation program. Its main responsibilities are as follows:

 

    Advise on alignment of pay and performance;

 

    Review and advise on executive total compensation, including base salaries, short- and long-term incentives, associated performance goals, and retention and severance arrangements;

 

    Advise on trends in executive compensation;

 

    Provide recommendations regarding the composition of our peer group;

 

    Analyze peer group proxy statements, compensation survey data and other publicly available data; and

 

    Perform any special projects requested by the HRCC.

The HRCC typically asks Semler Brossy to attend the HRCC’s meetings, including executive sessions at which management is not present. Semler Brossy communicates regularly with the HRCC Chair outside of committee meetings and also meets with management to gather information and review proposals.

Role of Executive Officers and Management in Compensation Decisions

For fiscal 2018, the HRCC invited Mr. Dickerson (as CEO) and other executives, including the heads of Global Human Resources and Global Rewards, to attend its meetings. The HRCC also regularly held executive sessions without management present. The CEO, together with the HRCC, assesses the performance of our NEOs and other executive officers. The CEO presents to the HRCC his evaluation of each executive officer’s performance over the past year and makes recommendations to the HRCC regarding base salaries, bonus targets and actual payments, performance goals and weightings, and long-term incentive awards for executive officers. The HRCC considers these recommendations in making its final determinations, in addition to considering input from Semler Brossy. The HRCC discusses the CEO’s proposed compensation and makes final decisions regarding the CEO’s compensation when he is not present.

 

 

Additional Compensation Programs and Policies

 

 

Non-Qualified Deferred Compensation Plan

Our 2016 Deferred Compensation Plan (the “DCP”) allows our NEOs and other eligible employees to voluntarily defer on a pre-tax basis a portion of their eligible earnings. We do not provide matching or other employer contributions to our executive officers under this plan. Deferrals made prior to October 2015 under the DCP are credited with deemed interest and are subject to the distribution rules in place prior to the plan amendment in October 2015. Beginning in fiscal 2016, participants are permitted to notionally invest new deferrals in certain investment options newly available under the plan. Additionally, for new deferrals, the DCP provides new distribution rules for in-service distributions and upon a qualifying separation from service, disability and change in control. See “Nonqualified Deferred Compensation” below for more information about the DCP.

Retirement Benefits under the 401(k) Plan and Generally Available Benefits Programs

During fiscal 2018, all full-time and part-time (working 20 or more hours a week) U.S. employees, including the NEOs, were eligible to participate in Applied’s 401(k) plan, a tax-qualified retirement plan. Eligible Applied 401(k) plan

participants receive matching contributions from Applied. Other than the 401(k) plan, we do not provide defined benefit pension plans or defined contribution retirement plans to the NEOs or other employees, except as required in certain countries outside the U.S. for legal or competitive reasons. Applied offers a number of other benefits programs to a broad base of eligible employees, including a tax-qualified employee stock purchase plan, medical, dental and vision insurance, long-term and short-term disability plans, life and accidental death and dismemberment plans, health and dependent care flexible spending accounts, business travel insurance, wellness programs, educational assistance, employee assistance program and certain other country- specific benefits.

Applied annually benchmarks its overall benefits programs, including the 401(k) plan, against those of our peers. Applied’s overall broad-based benefits programs are at approximately the market median, which the HRCC believes allows us to remain competitive in attracting and retaining talent.

The benefits provided under the programs discussed above are not considered by the HRCC in determining an individual NEO’s total compensation.

 

 

38    2019 Proxy Statement


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COMPENSATION DISCUSSION AND ANALYSIS

 

Relocation Program

Applied maintains a relocation program available to all eligible employees that is consistent with current practices among global companies. Applied provides competitive relocation benefits to ensure it can fill positions critical to its business needs and provide career development opportunities for high-potential employees. Benefits for employees on international assignment include reimbursement on an after-tax basis for housing and transportation allowances and living and travel expense reimbursements. Benefits also include tax equalization that is intended to put employees who relocate in service to Applied in the same position, from a tax-liability perspective, that they would be in if they were still located in the U.S.

In 2014, at the Board’s request, Mr. Dickerson relocated with his family to Japan to continue leading critical efforts toward the then-anticipated completion of a proposed business combination with Tokyo Electron.

Board Rationale for Relocation. Recognizing the complexity of a U.S.-Japanese merger, including both geographic and cultural differences, the Board felt it was critical to have senior leadership presence from Applied on the ground in Japan to work closely with Tokyo Electron during the regulatory review period and to effect a smooth business combination and increase the likelihood of achieving forecasted business benefits of the merger. The Board considered and determined that the anticipated cost savings that would be generated from the merger would significantly outweigh the expenses to relocate Mr. Dickerson and his family to Japan.

Relocation Benefits. In accordance with our relocation program that is available to all employees on global assignment, the HRCC approved relocation benefits for Mr. Dickerson, which included amounts for taxes incurred in connection with the relocation, as well as tax equalization for the incremental tax-liability resulting from his relocation to Japan in service of Applied.

Tax equalization ensures that the tax costs incurred by Mr. Dickerson on the international assignment be equivalent to what the tax costs would have been had he remained in the U.S. Tax payments were not paid to Mr. Dickerson but were paid directly to the appropriate tax authorities. While the amounts of the relocation benefits are attributed to Mr. Dickerson in the Summary Compensation Table, they did not provide any additional compensation to him and are not part of his ongoing pay.

Disclosure and Payment Timing. Although Mr. Dickerson relocated to Japan for part of 2014 and 2015, the timing and disclosure of relocation payments extend beyond this period. Mr. Dickerson is subject to income taxes in Japan on income earned for the period of time of his international assignment, including continuing Japanese tax liabilities related to his equity awards. Japan assesses income tax on compensation

earned while an individual is resident in Japan. Performance shares are deemed earned over the period during which they vest and stock options are deemed earned from grant to exercise. Mr. Dickerson has an outstanding stock option award, which is scheduled to expire in fiscal 2020, as well as performance shares, that he earned during the period of his international assignment in Japan. Applied, in connection with providing tax equalization benefits to Mr. Dickerson under the relocation program, will be responsible for incremental taxes in connection with the vesting of the performance shares and the stock option award when it is exercised by Mr. Dickerson.

Stock Ownership Guidelines

We have stock ownership guidelines to help align the interests of our Section 16 officers on the CEO Executive Staff with those of our shareholders. The guidelines provide that officers should meet the following ownership levels in Applied common stock:

 

Position    Ownership Level  

CEO

     6x base salary  

Other Officers

     3x base salary  

As of December 31, 2018, each officer was in compliance with the stock ownership guidelines.

Hedging and Pledging Prohibitions

Applied has an insider trading policy that, among other things, prohibits all of our employees and directors from engaging in hedging or other speculative transactions relating to Applied shares, and prohibits directors and NEOs from pledging their Applied shares.

Clawback Policy

We have a “clawback” policy that allows the Board to require reimbursement of incentive compensation from an executive officer in the event intentional misconduct by the officer is determined to be the primary cause of a material negative restatement of Applied’s financial results. The compensation that may be recovered is the after-tax portion of any bonus paid to, and any performance-based equity awards earned by, the NEO within the 12 months after filing of the financial statements, if the compensation would not have been paid to the NEO had Applied’s financial results been reported properly. The policy applies to financial statements filed in a rolling three-year, look-back period. This clawback policy is in addition to any policies or recovery rights that are required under applicable laws, including the Sarbanes-Oxley Act and the Dodd-Frank Act.

Tax Deductibility

Section 162(m) of the Internal Revenue Code, as amended by the recently-exacted Tax Cuts and Jobs Act, restricts

 

 

Applied Materials, Inc.    39


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deductibility for federal income tax purposes of annual individual compensation in excess of $1 million to each NEO, effective for tax years beginning after 2017, subject to a transition rule for certain written binding contracts which were in effect on November 2, 2017, and which were not modified in any material respect on or after such date. In the past, Section 162(m)’s deductibility limitation was subject to an exception for compensation that qualified as ‘performance-based’. Our compensation programs were designed to permit Applied to qualify for the performance-based exception,

although the Company reserved the right to pay compensation that did not qualify as ‘performance-based’. While the HRCC will continue to consider the deductibility of compensation as a factor in making compensation decisions, it retains the flexibility to provide compensation that is consistent with the Company’s goals for its executive compensation program, even if such compensation would not be fully tax-deductible.

 

 

HUMAN RESOURCES AND

COMPENSATION COMMITTEE REPORT

 

 

The information contained in this report shall not be deemed to be “soliciting material” or “filed” with the SEC or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that Applied specifically incorporates it by reference into a document filed under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act.

The Human Resources and Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis for fiscal 2018. Based on the review and discussions, the Human Resources and Compensation

Committee recommended to the Board that the Compensation Discussion and Analysis be included in Applied’s Proxy Statement for its 2019 Annual Meeting of Shareholders.

This report is submitted by the Human Resources and Compensation Committee.

Thomas J. Iannotti (Chair)

Xun (Eric) Chen

Alexander A. Karsner

 

 

40    2019 Proxy Statement


Table of Contents

EXECUTIVE COMPENSATION

 

EXECUTIVE COMPENSATION

Summary Compensation Table for Fiscal 2018, 2017 and 2016

 

The following table shows compensation information for fiscal 2018, 2017 and 2016 for our NEOs.

 

Name and Principal Position   Year     Salary
($)
    Bonus
($)(1)
    Stock
Awards
($)(2)
    Non-Equity
Incentive Plan
Compensation
($)(3)
    All Other
Compensation
($)
   

Total

($)

 

Gary E. Dickerson
President and Chief Executive Officer

   

2018

2017

2016

 

 

 

   

1,000,000

1,000,000

1,019,231

 

 

 

   

—  

—  

—  

 

 

 

   

11,261,311

10,844,501

11,111,985

 

 

 

   

1,430,000

2,640,000

2,449,440

 

 

 

   

373,229

838,204

5,099,766

(4) 

 

 

 
   

14,064,540

15,322,705

19,680,422

 

 

 

Daniel J. Durn(5)
Senior Vice President, Chief Financial Officer

   

2018

2017

2016

 

 

 

   

600,000

138,462

—  

 

 

 

   

250,000

500,000

—  

 

 

 

   

5,329,659

5,421,909

—  

 

 

 

   

471,900

—  

—  

 

 

 

   

23,252

411,239

—  

(6) 

 

 

 
   

6,674,811

6,471,610

—  

 

 

 

Ali Salehpour
Senior Vice President, Services, Display and Flexible Technology

   

2018

2017

2016

 

 

 

   

600,000

591,346

560,577

 

 

 

   

—  

—  

1,732,500

 

 

 

   

3,610,485

3,868,486

3,086,656

 

 

 

   

588,060

1,060,290

882,651

 

 

 

   

15,824

12,058

9,230

(7) 

 

 

 
   

4,814,369

5,532,180

6,271,614

 

 

 

Prabu G. Raja(8)
Senior Vice President, Semiconductor Products Group

   

2018

2017

2016

 

 

 

   

549,039

—  

—  

 

 

 

   

—  

—  

—  

 

 

 

   

4,784,842

—  

—  

 

 

 

   

522,720

—  

—  

 

 

 

   

13,923

—  

—  

(9) 

 

 

 
   

5,870,524

—  

—  

 

 

 

Steve G. Ghanayem(8)
Senior Vice President, New Markets and Alliances Group

   

2018

2017

2016

 

 

 

   

549,039

—  

—  

 

 

 

   

—  

—  

—  

 

 

 

   

4,784,842

—  

—  

 

 

 

   

432,878

—  

—  

 

 

 

   

14,869

—  

—  

(10) 

 

 

 
   

5,781,628

—  

—  

 

 

 

 

(1)

Amount shown for Mr. Durn (a) for fiscal 2018 is a special bonus of $250,000, awarded to Mr. Durn in lieu of a fiscal 2017 bonus as his employment occurred after the eligibility date for a 2017 bonus award under the Senior Executive Bonus Plan, which bonus was paid six months following Mr. Durn’s start date and (b) for fiscal 2017 is a new-hire bonus of $500,000, which is subject to repayment by Mr. Durn if he resigns or his employment is terminated by Applied for cause within two years of his hire. Amount shown for Mr. Salehpour for fiscal 2016 is a retention bonus paid to him in the beginning of fiscal 2016, six months after the termination of a proposed business combination with Tokyo Electron.

(2)

Amounts shown do not reflect compensation actually received by the executive officer. Instead, the amounts reported represent the aggregate grant date fair value of target stock awards granted in the respective fiscal years, as determined pursuant to ASC 718 (but excluding the effect of estimated forfeitures for performance-based awards). For fiscal 2018, the grant date fair value of maximum number of stock awards that may be earned by each NEO is as follows: Mr. Dickerson: $19,691,326; Mr. Durn: $6,795,794; Mr. Salehpour: $5,408,915; Dr. Raja: $6,189,845; and Mr. Ghanayem: $6,189,845. See “Fiscal 2018 Equity Awards” on page 35 for more information regarding the stock awards. The assumptions used to calculate the value of awards are set forth in Note 11 of the Notes to Consolidated Financial Statements included in Applied’s Annual Report on Form 10-K for fiscal 2018 filed with the SEC on December 13, 2018.

(3)

Amounts consist of bonuses earned under the Senior Executive Bonus Plan for services rendered in the respective fiscal years.

(4)

Amount includes Applied’s matching contribution of $12,375 under the tax-qualified 401(k) Plan, Applied’s payment on behalf of Mr. Dickerson of $780 in term life insurance premiums and Applied’s matching contribution of $2,500 pursuant to a program under the Applied Materials, Inc. Political Action Committee to an eligible non-profit organization. Amount also includes $110,070 paid by Applied on behalf of Mr. Dickerson for tax consultation, $88,103 for taxes incurred and $159,401 of tax equalization payments for Japanese tax liabilities and taxes incurred as a result of these payments made under Applied’s relocation program in connection with Mr. Dickerson’s international assignment in Japan in contemplation of the closing of a proposed business combination with Tokyo Electron. Tax equalization ensures that the tax costs incurred by Mr. Dickerson on the international assignment are equivalent to what the tax costs would have been had he remained in the U.S. The tax equalization amounts were not paid to Mr. Dickerson but were paid directly to the appropriate tax authorities. See “Relocation Program” on page 39 for more information regarding Mr. Dickerson’s international assignment.

(5)

Mr. Durn was appointed CFO effective August 24, 2017.

(6)

Amount consists of (a) Applied’s matching contribution of $18,089 under the tax-qualified 401(k) Plan, (b) Applied’s payment on behalf of Mr. Durn of $780 in term life insurance premiums, and (c) the reimbursement to Mr. Durn of $4,383 for taxes incurred in connection with his relocation.

(7)

Amount consists of (a) Applied’s matching contribution of $12,544 under the tax-qualified 401(k) Plan, (b) Applied’s payment on behalf of Mr. Salehpour of $780 in term life insurance premiums and (c) Applied’s matching contribution of $2,500 pursuant to a program under the Applied Materials, Inc. Political Action Committee to an eligible non-profit organization.

(8)

Dr. Raja and Mr. Ghanayem were each designated an executive officer effective November 2017.

(9)

Amount consists of (a) Applied’s matching contribution of $12,406 under the tax-qualified 401(k) Plan, (b) Applied’s payment on behalf of Dr. Raja of $767 in term life insurance premiums and (c) a payment of $750 under Applied’s Patent Incentive Award Program.

(10)

Amount consists of (a) Applied’s matching contribution of $13,727 under the tax-qualified 401(k) Plan, (b) Applied’s payment on behalf of Mr. Ghanayem of $767 in term life insurance premiums and (c) a payment of $375 under Applied’s Patent Incentive Award Program.

 

Applied Materials, Inc.    41


Table of Contents

Grants of Plan-Based Awards for Fiscal 2018

 

The following table shows all plan-based awards granted to the NEOs during fiscal 2018.

 

         

 

Estimated Possible Payouts
Under Non-Equity
Incentive Plan Awards(1)

   

 

Estimated Future Payouts
Under Equity
Incentive Plan Awards

   

All Other
Stock
Awards:
Number of
Shares of
Stock or
Units

(#)

    All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#)
    Exercise
or Base
Price of
Option
Awards
($/share)
   

Grant
Date Fair
Value of
Stock and
Option
Awards

($)(2)

 
Name  

Grant

Date

    Threshold
($)
   

Target

($)

    Maximum
($)
    Threshold
(#)
   

Target

(#)

    Maximum
(#)
 

Gary E. Dickerson

   

12/14/2017

12/14/2017

—  

 

 

 

   

—  

—  

0

 

 

 

   

—  

—  

2,000,000

 

 

 

   

—  

—  

5,000,000

 

 

 

   

84,048

—  

—  

 

 

 

   

168,096

—  

—  

 

 

 

   

336,192

—  

—  

 

 

 

   

—  

56,032

—  

 

 

 

   

—  

—  

—  

 

 

 

   

—  

—  

—  

 

 

 

   

8,430,014

2,831,297

—  

 

 

 

Daniel J. Durn

   

12/14/2017

12/14/2017

10/19/2018

—  

 

 

 

 

   

—  

—  

—  

0

 

 

 

 

   

—  

—  

—  

660,000

 

 

 

 

   

—  

—  

—  

1,980,000

 

 

 

 

   

14,618

—  

—  

—  


 

 

 

   

29,235

—  

—  

—  

 

 

 

 

   

58,470

—  

—  

—  

 

 

 

 

   

—  

29,235

72,908

—  

 

 

 

 

   

—  

—  

—  

—  

 

 

 

 

   

—  

—  

—  

—  

 

 

 

 

   


1,466,135

1,477,245

2,386,279
—  

 

 

 
 

Ali Salehpour

   

12/14/2017

12/14/2017

—  

 

 

 

   

—  

—  

0

 

 

 

   

—  

—  

810,000

 

 

 

   

—  

—  

2,430,000

 

 

 

   

17,931

—  

—  

 

 

 

   

35,861

—  

—  

 

 

 

   

71,722

—  

—  

 

 

 

   

—  

35,861

—  

 

 

 

   

—  

—  

—  

 

 

 

   

—  

—  

—  

 

 

 

   

1,798,429

1,812,056

—  

 

 

 

Prabu G. Raja

   

11/6/2017

12/14/2017

12/14/2017

—  

 

 

 

 

   

—  

—  

—  

0

 

 

 

 

   

—  

—  

—  

742,500

 

 

 

 

   

—  

—  

—  

2,227,500

 

 

 

 

   

—  

14,008

—  

—  

 

 

 

   

—  

28,016

—  

—  

 

 

 

   

—  

56,032

—  

—  

 

 

 

   

35,506

—  

28,016

—  


 

 

 

   

—  

—  

—  

—  

 

 

 

 

   

—  

—  

—  

—  

 

 

 

 

   


1,964,192

1,405,002

1,415,648
—  

 

 

 
 

Steve G. Ghanayem

   

11/6/2017

12/14/2017

12/14/2017

—  

 

 

 

 

   

—  

—  

—  

0

 

 

 

 

   

—  

—  

—  

742,500

 

 

 

 

   

—  

—  

—  

2,227,500

 

 

 

 

   

—  

14,008

—  

—  

 

 

 

   

—  

28,016

—  

—  

 

 

 

   

—  

56,032

—  

—  

 

 

 

   

35,506

—  

28,016

—  


 

 

 

   

—  

—  

—  

—  

 

 

 

 

   

—  

—  

—  

—  

 

 

 

 

   


1,964,192

1,405,002

1,415,648
—  

 

 

 
 

 

(1)

Amounts shown were estimated possible payouts for fiscal 2018 under the Senior Executive Bonus Plan. These amounts were based on the individual NEO’s fiscal 2018 base salary and position. The maximum amount shown is three times the target amount for the NEO, except the amount for Mr. Dickerson, which is the maximum amount payable per participant in any performance period under the Senior Executive Bonus Plan. Actual bonuses received by the NEOs for fiscal 2018 under the Senior Executive Bonus Plan are reported in the Summary Compensation Table under the column titled “Non-Equity Incentive Plan Compensation.

(2)

Amounts shown do not reflect compensation actually received by the NEOs. Instead, the amounts represent the aggregate grant date fair value of the awards as determined pursuant to ASC 718 (but excluding the effect of estimated forfeitures for performance-based awards). The assumptions used to calculate the awards’ value are set forth in Note 11 of the Notes to Consolidated Financial Statements included in Applied’s Annual Report on Form 10-K for fiscal 2018 filed with the SEC on December 13, 2018.

 

42    2019 Proxy Statement


Table of Contents

EXECUTIVE COMPENSATION

 

Outstanding Equity Awards at Fiscal 2018 Year-End

 

The following table shows all outstanding equity awards held by the NEOs at the end of fiscal 2018.

 

    Option Awards     Stock Awards(1)  
Name   Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
    Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
    Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
    Option
Exercise
Price
($)
    Option
Expiration
Date
    Number
of Shares
or Units
of Stock
That
Have Not
Vested
(#)
    Market
Value of
Shares or
Units of
Stock That
Have Not
Vested
($)(2)
    Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights
That Have
Not Vested
(#)
    Equity
Incentive
Plan Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other Rights
That Have
Not Vested
($)(2)
 

Gary E. Dickerson

   

1,000,000

—  

—  

—  

—  

—  

 

 

 

 

 

 

   

—  

—  

—  

—  

—  

—  

 

 

 

 

 

 

   

—  

—  

—  

—  

—  

—  

 

 

 

 

 

 

   

15.06

—  

—  

—  

—  

—  

 

 

 

 

 

 

   

9/1/2020

—  

—  

—  

—  

—  

 

 

 

 

 

 

   

—  

139,232

356,955

62,293

56,032

—  

 

(3) 

(4) 

(5) 

(6) 

 

 
   

—  

4,505,548

11,551,064

2,015,801

1,813,196

—  

 

 

 

 

 

 

   

—  

—  

—  

—  

—  

280,316

168,096

 

 

 

 

 

(7) 

(8) 

 
   

—  

—  

—  

—  

—  

9,071,026

5,439,587

 

 

 

 

 

 

 

Daniel J. Durn

   

—  

—  

—  

—  

—  

 

 

 

 

 

   

—  

—  

—  

—  

—  

 

 

 

 

 

   

—  

—  

—  

—  

—  

 

 

 

 

 

   

—  

—  

—  

—  

—  

 

 

 

 

 

   

—  

—  

—  

—  

—  

 

 

 

 

 

   

59,616

29,235

72,908

—  

—  

(9) 

(10) 

(11) 

 

 

 
   

1,929,174

946,045

2,359,303

—  

—  

 

 

 

 

 

   

—  

—  

—  

33,535

29,235

 

 

 

(12) 

(8) 

 
   

—  

—  

—  

1,085,193

946,045

 

 

 

 

 

Ali Salehpour

   

—  

—  

—  

—  

—  

—  

 

 

 

 

 

 

   

—  

—  

—  

—  

—  

—  

 

 

 

 

 

 

   

—  

—  

—  

—  

—  

—  

 

 

 

 

 

 

   

—  

—  

—  

—  

—  

—  

 

 

 

 

 

 

   

—  

—  

—  

—  

—  

—  

 

 

 

 

 

 

   

38,675

99,155

44,298

35,861

—  

—  

(3) 

(13) 

(14) 

(15) 

 

 

 
   

1,251,523

3,208,656

1,433,483

1,160,462

—  

—  

 

 

 

 

 

 

   

—  

—  

—  

—  

66,446

35,861

 

 

 

 

(7) 

(8) 

 
   

—  

—  

—  

—  

2,150,193

1,160,462

 

 

 

 

 

 

Prabu G. Raja

   

—  

—  

—  

—  

—  

—  

—  

 

 

 

 

 

 

 

   

—  

—  

—  

—  

—  

—  

—  

 

 

 

 

 

 

 

   

—  

—  

—  

—  

—  

—  

—  

 

 

 

 

 

 

 

   

—  

—  

—  

—  

—  

—  

—  

 

 

 

 

 

 

 

   

—  

—  

—  

—  

—  

—  

—  

 

 

 

 

 

 

 

   

19,338

69,408

34,608

35,506

28,016

—  

—  

(3) 

(16) 

(17) 

(18) 

(19) 

 

 

 
   

625,778

2,246,043

1,119,915

1,148,974

906,598

—  

—  

 

 

 

 

 

 

 

   

—  

—  

—  

—  

—  

51,911

28,016

 

 

 

 

 

(7) 

(8) 

 
   

—  

—  

—  

—  

—  

1,679,840

906,598

 

 

 

 

 

 

 

Steve G. Ghanayem

   

—  

—  

—  

—  

—  

—  

—  

 

 

 

 

 

 

 

   

—  

—  

—  

—  

—  

—  

—  

 

 

 

 

 

 

 

   

—  

—  

—  

—  

—  

—  

—  

 

 

 

 

 

 

 

   

—  

—  

—  

—  

—  

—  

—  

 

 

 

 

 

 

 

   

—  

—  

—  

—  

—  

—  

—  

 

 

 

 

 

 

 

   

19,338

69,408

34,608

35,506

28,016

—  

—  

(3) 

(16) 

(17) 

(18) 

(19) 

 

 

 
   

625,778

2,246,043

1,119,915

1,148,974

906,598

—  

—  

 

 

 

 

 

 

 

   

—  

—  

—  

—  

—  

51,911

28,016

 

 

 

 

 

(7) 

(8) 

 
   

—  

—  

—  

—  

—  

1,679,840

906,598

 

 

 

 

 

 

 

 

(1)

Stock awards consist of restricted stock units, performance shares and PSUs, all of which will be converted into Applied common stock on a one-to-one basis upon vesting. All future vesting of shares is subject to the NEO’s continued employment with Applied through each applicable vest date. See “Long-Term Incentives” on page 35 for more information regarding these awards.

(2)

Market value was determined by multiplying the number of such shares by the closing price of Applied common stock of $32.36 on October 26, 2018, the last trading day of fiscal 2018, as reported on the Nasdaq Global Select Market.

(3)

Performance shares were granted on December 8, 2014. These shares vested on December 19, 2018.

(4)

Performance shares were granted on December 7, 2015. Of these, 178,477 shares vested on December 19, 2018 and 178,478 shares are scheduled to vest on December 19, 2019.

(5)

Restricted stock units were granted on December 1, 2016. Of these, 31,146 shares vested on December 19, 2018 and 31,147 shares are scheduled to vest on December 19, 2019.

(6)

Restricted stock units were granted on December 14, 2017. Of these, 18,677 shares vested on December 19, 2018, 18,677 shares are scheduled to vest on December 19, 2019 and 18,678 shares are scheduled to vest on December 19, 2020.

(7)

PSUs were granted on December 1, 2016. The shares are scheduled to vest on December 19, 2019, depending on the achievement of specified performance goals. The number of shares shown is the target amount, and the actual number of shares that may vest ranges from 0% to 200% of the target amount, depending on the achievement of specified performance goals.

(8)

PSUs were granted on December 14, 2017. The shares are scheduled to vest on December 19, 2020, depending on the achievement of specified performance goals. The number of shares shown is the target amount, and the actual number of shares that may vest ranges from 0% to 200% of the target amount, depending on the achievement of specified performance goals.

 

Applied Materials, Inc.    43


Table of Contents
(9)

Restricted stock units were granted on September 6, 2017. Of these, 11,178 shares vested on December 19, 2018, 18,630 shares are scheduled to vest February 1 of each of 2019 and 2020, and 11,178 shares are scheduled to vest on December 19, 2019.

(10)

Restricted stock units were granted on December 14, 2017. Of these, 9,745 shares vested on December 19, 2018, and 9,745 shares are scheduled to vest on December 19 of each of 2019 and 2020.

(11)

Restricted stock units were granted on October 19, 2018. Of these, 24,302 shares are scheduled to vest on November 1, 2019, and 24,303 shares are scheduled to vest on November 1 of each of 2020 and 2021.

(12)

PSUs were granted on September 6, 2017. The shares are scheduled to vest on December 19, 2019, depending on the achievement of specified performance goals. The number of shares shown is the target amount, and the actual number of shares that may vest ranges from 0% to 200% of the target amount, depending on the achievement of specified performance goals.

(13)

Performance shares were granted on December 7, 2015. Of these, 49,577 shares vested on December 19, 2018 and 49,578 shares are scheduled to vest on December 19, 2019.

(14)

Restricted stock units were granted on December 1, 2016. Of these, 22,149 shares vested on December 19, 2018 and 22,149 shares are scheduled to vest on December 19, 2019.

(15)

Restricted stock units were granted on December 14, 2017. Of these, 11,953 shares vested on December 19, 2018 and 11,954 shares are scheduled to vest on December 19 of each of 2019 and 2020.

(16)

Performance shares were granted on December 7, 2015. Of these, 34,704 shares vested on December 19, 2018 and 34,704 shares are scheduled to vest on December 19, 2019.

(17)

Restricted stock units were granted on December 1, 2016. Of these, 17,304 shares vested on December 19, 2018 and 17,304 shares are scheduled to vest on December 19, 2019.

(18)

Restricted stock units were granted on November 6, 2017. Of these, 8,876 shares vested on December 19, 2018, 8,877 shares are scheduled to vest on December 19 of each of 2019 and 2021, and 8,876 shares are scheduled to vest on December 19, 2020.

(19)

Restricted stock units were granted on December 14, 2017. Of these, 9,338 shares vested on December 19, 2018 and 9,339 shares are scheduled to vest on December  19 of each of 2019 and 2020.

Option Exercises and Stock Vested for Fiscal 2018

 

The following table shows all stock awards that vested and the value realized upon vesting for each NEO during fiscal 2018.

 

     Option Awards      Stock Awards  
Name    Number of Shares
Acquired on
Exercise
(#)
     Value Realized
on Exercise
($)
     Number of Shares
Acquired on
Vesting
(#)(1)
     Value Realized
on Vesting
($)(2)
 

Gary E. Dickerson

     —          —          408,349        21,626,163  

Daniel J. Durn

     —          —          29,810        1,590,177  

Ali Salehpour

     —          —          156,926        7,872,201  

Prabu G. Raja

     —          —          102,913        5,285,672  

Steve G. Ghanayem

     —          —          113,263        5,686,964  
(1)

Of the amounts shown in this column, Applied withheld the following number of shares to cover tax withholding obligations: 225,617 shares for Mr. Dickerson; 12,077 shares for Mr. Durn; 77,211 shares for Mr. Salehpour; 50,623 shares for Dr. Raja; and 55,380 shares for Mr. Ghanayem.

(2)

Value realized equals the fair market value of Applied common stock on the vesting date, multiplied by the number of shares that vested.

Non-Qualified Deferred Compensation

 

 

Applied’s 2016 Deferred Compensation Plan (the “DCP”), restated effective October 12, 2015 (the “Restatement Date”) and formerly known as the 2005 Executive Deferred Compensation Plan, is a non-qualified deferred compensation plan that allows eligible employees, including executive officers, to voluntarily defer receipt of all or a portion of their: (1) eligible sign-on bonus payments, if any, (2) up to 40% of their base salaries, (3) eligible annual bonus payments, if any, and (4) eligible severance payments, if any.

Deferrals made prior to the Restatement Date are retained as separate “rollover” accounts under the DCP. These deferrals continue to be credited with deemed interest in the sum of

(a) the yield-to-maturity of five-year U.S. Treasury notes, plus (b) 1.50%. The deemed interest rate under the DCP for fiscal 2018 was 3.40% from October 30, 2017 to December 31, 2017 and 3.61% from January 1, 2018 to October 28, 2018. Deferred amounts in the rollover accounts, plus deemed interest thereon, are generally payable on the same date selected by the participants or specified prior to the Restatement Date under the terms of the DCP. Beginning in fiscal 2016, new deferrals under the DCP are credited with deemed investment returns, gains or losses based upon investment crediting options newly available under the DCP. Applied does not make any matching or other employer contributions to the plan for our executive officers.

 

 

44    2019 Proxy Statement


Table of Contents

EXECUTIVE COMPENSATION

 

Under the DCP, a change in control (as defined prior to the Restatement Date), would trigger the distribution of all deferred balances in the rollover accounts. For new account balances after the Restatement Date, the DCP provides new distribution rules for in-service distribution options and upon a qualifying separation from service, disability and change in

control, including the option to change the time and form of payment within three (3) months following a change in control, as such term is defined in the DCP. Distributions are payable from the general assets of Applied or from the assets of a grantor trust (known as a rabbi trust) established by Applied.

 

 

Non-Qualified Deferred Compensation for Fiscal 2018

 

Name  

Executive
Contributions in
Last Fiscal Year

($)

   

Registrant
Contributions in
Last Fiscal Year

($)

    Aggregate
Earnings in
Last Fiscal Year
($)(1)
    Aggregate
Withdrawals/
Distributions
($)
    Aggregate
Balance at Last
Fiscal Year End
($)
 

Gary E. Dickerson

    —         —         —         —         —    

Daniel J. Durn

    —         —         —         —         —    

Ali Salehpour

    1,250,626       —         22,403       —         3,032,493  

Prabu G. Raja

    919,325       —         34,481