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Stockholders' Equity, Comprehensive Income and Share-Based Compensation | 6 Months Ended
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Apr. 26, 2020
Equity [Abstract] |
Stockholders' Equity, Comprehensive Income and Share-Based Compensation | Stockholders’ Equity, Comprehensive Income and Share-Based Compensation Accumulated Other Comprehensive Income (Loss) Changes in the components of AOCI, net of tax, were as follows:
| Unrealized Gain (Loss) on Investments, Net |  | Unrealized Gain (Loss) on Derivative Instruments Qualifying as Cash Flow Hedges |  | Defined and Postretirement Benefit Plans |  | Cumulative Translation Adjustments |  | Total
| (in millions) |  |  |  |  |  |  |  |
Balance as of October 27, 2019 | $ | 11 |  |  | $ | (16) |  |  | $ | (188) |  |  | $ | 13 |  |  | $ | (180) |
Other comprehensive income (loss) before reclassifications | 5 |  |  | (137) |  |  | — |  |  | — |  |  | (132) |
Amounts reclassified out of AOCI | (4) |  |  | 1 |  |  | — |  |  | — |  |  | (3) |
Other comprehensive income (loss), net of tax | 1 |  |  | (136) |  |  | — |  |  | — |  |  | (135) |
Balance as of April 26, 2020 | $ | 12 |  |  | $ | (152) |  |  | $ | (188) |  |  | $ | 13 |  |  | $ | (315) |
| Unrealized Gain (Loss) on Investments, Net |  | Unrealized Gain (Loss) on Derivative Instruments Qualifying as Cash Flow Hedges |  | Defined and Postretirement Benefit Plans |  | Cumulative Translation Adjustments |  | Total
| (in millions) |  |  |  |  |  |  |  |
Balance as of October 28, 2018 | $ | 7 |  |  | $ | (9) |  |  | $ | (137) |  |  | $ | 14 |  |  | $ | (125) |
Adoption of new accounting standards (a) | (17) |  |  | — |  |  | — |  |  | — |  |  | (17) |
Other comprehensive income (loss) before reclassifications | 13 |  |  | (4) |  |  | — |  |  | (1) |  |  | 8 |
Amounts reclassified out of AOCI | — |  |  | (4) |  |  | — |  |  | — |  |  | (4) |
Other comprehensive income (loss), net of tax | 13 |  |  | (8) |  |  | — |  |  | (1) |  |  | 4 |
Balance as of April 28, 2019 | $ | 3 |  |  | $ | (17) |  |  | $ | (137) |  |  | $ | 13 |  |  | $ | (138) |
(a) - Represents the reclassification adjustment related to the adoption of Accounting Standard Update (ASU) 2016-01 Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities in the first quarter of fiscal 2019. The tax effects on the unrealized loss on derivative instruments qualifying as cash flow hedges for the six months ended April 26, 2020 was $39 million. The tax effects on net income of amounts reclassified from AOCI for the three and six months ended April 26, 2020 and April 28, 2019 were not material. Stock Repurchase Program In February 2018, the Board of Directors approved a common stock repurchase program authorizing up to an aggregate of $6.0 billion in repurchases. As of April 26, 2020, approximately $1.5 billion remained available for future stock repurchases under this repurchase program. The following table summarizes Applied’s stock repurchases for the six months ended April 26, 2020 and April 28, 2019:
| Three Months Ended |  |  |  | Six Months Ended |  |
| April 26, 2020 |  | April 28, 2019 |  | April 26, 2020 |  | April 28, 2019
| (in millions, except per share amount) |  |  |  |  |  |
Shares of common stock repurchased | 4 |  |  | 16 |  |  | 7 |  |  | 38 |
Cost of stock repurchased | $ | 199 |  |  | $ | 625 |  |  | $ | 399 |  |  | $ | 1,375 |
Average price paid per share | $ | 50.14 |  |  | $ | 39.91 |  |  | $ | 54.06 |  |  | $ | 36.48 |
Applied records treasury stock purchases under the cost method using the first-in, first-out (FIFO) method. Upon reissuance of treasury stock, amounts in excess of the acquisition cost are credited to additional paid in capital. If Applied reissues treasury stock at an amount below its acquisition cost and additional paid in capital associated with prior treasury stock transactions is insufficient to cover the difference between the acquisition cost and the reissue price, this difference is recorded against retained earnings. Dividends In March 2020 and December 2019, Applied’s Board of Directors declared quarterly cash dividends, in the amount of $0.22 and $0.21 per share, respectively. The dividend declared in March 2020 is payable in June 2020. Dividends paid during the six months ended April 26, 2020 and April 28, 2019 totaled $385 million and $381 million, respectively. Applied currently anticipates that cash dividends will continue to be paid on a quarterly basis, although the declaration of any future cash dividend is at the discretion of the Board of Directors and will depend on Applied’s financial condition, results of operations, capital requirements, business conditions and other factors, as well as a determination by the Board of Directors that cash dividends are in the best interests of Applied’s stockholders. Share-Based Compensation Applied has a stockholder-approved equity plan, the Employee Stock Incentive Plan, which permits grants to employees of share-based awards, including stock options, restricted stock, restricted stock units, performance shares and performance units. In addition, the plan provides for the automatic grant of restricted stock units to non-employee directors and permits the grant of share-based awards to non-employee directors and consultants. Share-based awards made under the plan may be subject to accelerated vesting under certain circumstances in the event of a change in control of Applied. Applied also has two Employee Stock Purchase Plans, one generally for United States employees and a second for employees of international subsidiaries (collectively, ESPP), which enable eligible employees to purchase Applied common stock. During the three and six months ended April 26, 2020 and April 28, 2019, Applied recognized share-based compensation expense related equity awards and ESPP shares. The effect of share-based compensation on the results of operations was as follows:
| Three Months Ended |  |  |  | Six Months Ended |  |
| April 26, 2020 |  | April 28, 2019 |  | April 26, 2020 |  | April 28, 2019
| (In millions) |  |  |  |  |  |
Cost of products sold | $ | 24 |  |  | $ | 22 |  |  | $ | 55 |  |  | $ | 44 |
Research, development and engineering | 27 |  |  | 25 |  |  | 62 |  |  | 49 |
Marketing and selling | 8 |  |  | 7 |  |  | 19 |  |  | 15 |
General and administrative | 12 |  |  | 11 |  |  | 28 |  |  | 22 |
Total share-based compensation | $ | 71 |  |  | $ | 65 |  |  | $ | 164 |  |  | $ | 130 |
Share-based expense in the first six months of fiscal 2020 increased compared to the same period in the prior year primarily due to expense related to awards with provisions that became effective in the first quarter of fiscal 2020 that allow partial accelerated vesting in the event of a qualifying retirement. The cost associated with share-based awards that are subject solely to time-based vesting requirements, less expected forfeitures, is recognized over the awards’ service period for the entire award on a straight-line basis. Share-based awards granted to certain executive officers allow partial accelerated vesting in the event of a qualifying retirement based on age and years of service. The cost associated with performance-based equity awards, which include both performance and market goals, is recognized for each tranche over the service period. The cost of equity awards related to performance goals is based on an assessment of the likelihood that the applicable performance goals will be achieved. For the equity awards based on market goals, the cost is recognized based upon the assumption of 100% achievement of the goal. As of April 26, 2020, Applied had $505 million in total unrecognized compensation expense, net of estimated forfeitures, related to grants of share-based awards and shares issued under Applied’s ESPP, which will be recognized over a weighted average period of 2.7 years. As of April 26, 2020, there were 57 million shares available for grants of share-based awards under the Employee Stock Incentive Plan, and an additional 11 million shares available for issuance under the ESPP. Restricted Stock Units, Restricted Stock, Performance Shares and Performance Units A summary of the changes in any restricted stock units, restricted stock, performance shares and performance units outstanding under Applied’s equity compensation plans during the six months ended April 26, 2020 is presented below:
| Shares |  | Weighted Average Grant Date Fair Value |  |  |  |
| (In millions, except per share amounts) |  |  |  |  |  |
Outstanding as of October 27, 2019 | 18 |  |  | $ | 35.78 |  |  |  |  |
Granted | 5 |  |  | $ | 53.30 |  |  |  |  |
Vested | (8) |  |  | $ | 30.79 |  |  |  |  |
Canceled | — |  |  | $ | 41.31 |  |  |  |  |
Outstanding as of April 26, 2020 | 15 |  |  | $ | 44.53 |  |  |  |  |
As of April 26, 2020, 1.3 million additional performance-based awards could be earned based upon achievement of certain levels of specified performance goals. During the first quarter of fiscal 2020, certain executive officers were granted awards that are subject to the achievement of targeted levels of adjusted operating margin and targeted levels of total shareholder return (TSR) relative to a peer group, comprised of companies in the Standard & Poor's 500 Index. Each metric will be weighted 50% and will be measured over a three-year period. The awards become eligible to vest only if performance goals are achieved and will vest only if the grantee remains employed by Applied through each applicable vesting date, subject to a qualifying retirement described below. The number of shares that may vest in full after three years ranges from 0% to 200% of the target amount. The awards provide for a partial payout based on actual performance at the conclusion of the three-year performance period in the event of a qualifying retirement based on age and years of service. The fair value of the portion of the awards subject to targeted levels of adjusted operating margin is estimated on the date of grant. If the performance goals are not met as of the end of the performance period, no compensation expense is recognized, and any previously recognized compensation expense is reversed. The expected cost is based on the portion of the awards that is probable to vest and is reflected over the service period and reduced for estimated forfeitures. The fair value of the portion of the awards subject to targeted levels of relative total shareholder return is estimated on the date of grant using a Monte Carlo simulation model. Compensation expense is recognized based upon the assumption of 100% achievement of the TSR goal and will not be reversed even if the threshold level of TSR is never achieved, and is reflected over the service period and reduced for estimated forfeitures. Employee Stock Purchase Plans Under the ESPP, substantially all employees may purchase Applied common stock through payroll deductions at a price equal to 85 percent of the lower of the fair market value of Applied common stock at the beginning or end of each 6-month purchase period, subject to certain limits. Applied issued a total of 2 million shares during each of the three and six months ended April 26, 2020 and April 28, 2019. Compensation expense is calculated using the fair value of the employees’ purchase rights under the Black-Scholes model. Underlying assumptions used in the model are outlined in the following table:
| Three and Six Months Ended |  |
| April 26, 2020 |  | April 28, 2019
Dividend yield | 1.40% |  | 2.18%
Expected volatility | 37.2% |  | 37.1%
Risk-free interest rate | 1.05% |  | 2.51%
Expected life (in years) | 0.5 |  | 0.5
Weighted average estimated fair value | $15.24 |  | $9.78

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- Definition The entire disclosure for shareholders' equity and share-based payment arrangement. Includes, but is not limited to, disclosure of policy and terms of share-based payment arrangement, deferred compensation arrangement, and employee stock purchase plan (ESPP). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 505 -URI http://asc.fasb.org/topic&trid=2208762 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 718 -URI http://asc.fasb.org/topic&trid=2228938 + Details
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