Employee Benefit Plans
Employee Bonus Plans
Applied has various employee bonus plans. A discretionary bonus plan provides for the distribution of a percentage of pre-tax income to Applied employees who are not participants in other performance-based incentive plans, up to a maximum percentage of eligible compensation. Other plans provide for bonuses to Applied’s executives and other key contributors based on the achievement of profitability and/or other specified performance criteria. Charges under these plans were $269 million for fiscal 2013, $271 million for fiscal 2012, and $319 million charges for fiscal 2011.
Employee Savings and Retirement Plan
Applied’s Employee Savings and Retirement Plan (the 401(k) Plan) is qualified under Sections 401(a) and (k) of the Internal Revenue Code (the Code). Effective as of the close of the stock market on December 31, 2012, the Varian-sponsored 401(k) plan was merged with and into the 401(k) Plan, with the 401(k) Plan being the surviving plan. Eligible employees may make salary deferral and catch-up contributions under the 401(k) Plan on a pre-tax basis and/or (effective as of the first payroll period beginning on or after December 22, 2012) on a Roth basis, subject to an annual dollar limit established by the Code.
Applied matches 100% of participant salary and/or Roth deferral contributions up to the first 3% of eligible contribution and then 50% of every dollar between 4% and 6% of eligible contribution. Applied does not make matching contributions on any catch-up contributions made by participants. Plan participants who were employed by Applied or any of its affiliates on or after January 1, 2010 became 100% vested in their Applied matching contribution account balances. Applied’s matching contributions under the 401(k) Plan were approximately $29 million, net of $1 million in forfeitures for fiscal 2013, $37 million for fiscal 2012 and $27 million for fiscal 2011.
Defined Benefit Pension Plans of Foreign Subsidiaries and Other Post-Retirement Benefits
Several of Applied’s foreign subsidiaries have defined benefit pension plans covering substantially all of their eligible employees. Benefits under these plans are typically based on years of service and final average compensation levels. The plans are managed in accordance with applicable local statutes and practices. Applied deposits funds for certain of these plans with insurance companies, pension trustees, government-managed accounts, and/or accrues the expense for the unfunded portion of the benefit obligation on its Consolidated Financial Statements. Applied’s practice is to fund the various pension plans in amounts sufficient to meet the minimum requirements as established by applicable local governmental oversight and taxing authorities. Depending on the design of the plan, local custom and market circumstances, the liabilities of a plan may exceed qualified plan assets. The differences between the aggregate projected benefit obligations and aggregate plan assets of these plans have been recorded as liabilities by Applied and are included in other liabilities and accrued expenses in the Consolidated Balance Sheets.
Applied also has a U.S. post-retirement plan that provides certain medical and vision benefits to eligible retirees who are at least age 55 and whose years of service plus their age equals at least 65 at their date of retirement. An eligible retiree also may elect coverage for an eligible spouse or domestic partner who is not eligible for Medicare. Coverage under the plan generally ends for both the retiree and spouse or domestic partner upon becoming eligible for Medicare. In addition, Applied also has a post-retirement benefit plan as a result of the acquisition of Varian. Applied’s liability under these post-retirement plans, which was included in other liabilities in the Consolidated Balance Sheets, was $34 million at October 27, 2013 and $33 million at October 28, 2012.
A summary of the changes in benefit obligations and plan assets, which includes post-retirement benefits, for fiscal 2013 and 2012 is presented below.
|
| | | | | | | |
| 2013 | | 2012 |
| | | |
| (In millions, except percentages) |
Change in projected benefit obligation | | | |
Beginning projected benefit obligation | $ | 434 |
| | $ | 303 |
|
Service cost | 20 |
| | 16 |
|
Interest cost | 15 |
| | 14 |
|
Plan participants’ contributions | 1 |
| | 1 |
|
Actuarial (gain) loss | (16 | ) | | 96 |
|
Curtailments, settlements and special termination benefits | (8 | ) | | (3 | ) |
Foreign currency exchange rate changes | 10 |
| | (4 | ) |
Benefits paid | (10 | ) | | (7 | ) |
Plan amendments and business combinations | (1 | ) | | 18 |
|
Ending projected benefit obligation | $ | 445 |
| | $ | 434 |
|
Ending accumulated benefit obligation | $ | 409 |
| | $ | 395 |
|
Range of assumptions to determine benefit obligations | | | |
Discount rate | 1.1% - 4.5% |
| | 1.3% - 4.7% |
|
Rate of compensation increase | 2.0% - 4.7% |
| | 2.0% - 8.0% |
|
Change in plan assets | | | |
Beginning fair value of plan assets | $ | 214 |
| | $ | 183 |
|
Return on plan assets | 18 |
| | 14 |
|
Employer contributions | 24 |
| | 31 |
|
Plan participants’ contributions | 1 |
| | 1 |
|
Foreign currency exchange rate changes | 8 |
| | (4 | ) |
Divestitures, settlements and business combinations | (7 | ) | | (4 | ) |
Benefits paid | (10 | ) | | (7 | ) |
Ending fair value of plan assets | $ | 248 |
| | $ | 214 |
|
Funded status | $ | (197 | ) | | $ | (220 | ) |
Amounts recognized in the consolidated balance sheets | | | |
Noncurrent asset | $ | 9 |
| | $ | 5 |
|
Current liability | (4 | ) | | (4 | ) |
Noncurrent liability | (202 | ) | | (221 | ) |
Total | $ | (197 | ) | | $ | (220 | ) |
Estimated amortization from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year | | | |
Actuarial loss | $ | 4 |
| | $ | 6 |
|
Prior service cost (credit) | — |
| | (1 | ) |
Total | $ | 4 |
| | $ | 5 |
|
Amounts recognized in accumulated other comprehensive loss | | | |
Net actuarial loss | $ | 91 |
| | $ | 117 |
|
Prior service cost (credit) | 2 |
| | (3 | ) |
Total | $ | 93 |
| | $ | 114 |
|
Plans with projected benefit obligations in excess of plan assets | | | |
Projected benefit obligation | $ | 438 |
| | $ | 428 |
|
Fair value of plan assets | $ | 233 |
| | $ | 202 |
|
Plans with accumulated benefit obligations in excess of plan assets | | | |
Accumulated benefit obligation | $ | 269 |
| | $ | 389 |
|
Fair value of plan assets | $ | 99 |
| | $ | 202 |
|
|
| | | | | |
| 2013 | | 2012 |
Plan assets — allocation | | | |
Equity securities | 37 | % | | 37 | % |
Debt securities | 36 | % | | 33 | % |
Insurance contracts | 19 | % | | 23 | % |
Commingled funds | 5 | % | | 5 | % |
Cash | 3 | % | | 2 | % |
The following table presents a summary of the ending fair value of the plan assets:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| October 27, 2013 | | October 28, 2012 |
| Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| | | | | | | | | | | | | | | |
| (In millions) |
Equity securities | $ | 92 |
| | $ | — |
| | $ | — |
| | $ | 92 |
| | $ | 79 |
| | $ | — |
| | $ | — |
| | $ | 79 |
|
Debt securities | 90 |
| | — |
| | — |
| | 90 |
| | 70 |
| | — |
| | — |
| | 70 |
|
Insurance contracts | — |
| | — |
| | 47 |
| | 47 |
| | — |
| | — |
| | 49 |
| | 49 |
|
Commingled funds | — |
| | 12 |
| | — |
| | 12 |
| | — |
| | 12 |
| | — |
| | 12 |
|
Cash | 7 |
| | — |
| | — |
| | 7 |
| | 4 |
| | — |
| | — |
| | 4 |
|
Total | $ | 189 |
| | $ | 12 |
| | $ | 47 |
| | $ | 248 |
| | $ | 153 |
| | $ | 12 |
| | $ | 49 |
| | $ | 214 |
|
The following table presents the activity in Level 3 instruments during fiscal 2013 and 2012:
|
| | | | | | | |
| 2013 | | 2012 |
| | | |
| (In millions) |
Balance, beginning of year | $ | 49 |
| | $ | 48 |
|
Actual return on plan assets: | | | |
Relating to assets still held at reporting date | (1 | ) | | 1 |
|
Purchases, sales, settlements, net | (4 | ) | | 3 |
|
Currency impact | 3 |
| | (3 | ) |
Balance, end of year | $ | 47 |
| | $ | 49 |
|
Applied’s investment strategy for its defined benefit plans is to invest plan assets in a prudent manner, maintaining well-diversified portfolios with the long-term objective of meeting the obligations of the plans as they come due. Asset allocation decisions are typically made by plan fiduciaries with input from Applied’s international pension committee. Applied’s asset allocation strategy incorporates a sufficient equity exposure in order for the plans to benefit from the expected better long-term performance of equities relative to the plans’ liabilities. Applied retains investment managers, where appropriate, to manage the assets of the plans. Performance of investment managers is monitored by plan fiduciaries with the assistance of local investment consultants. The investment managers make investment decisions within the guidelines set forth by plan fiduciaries. Risk management practices include diversification across asset classes and investment styles, and periodic rebalancing toward target asset allocation ranges. Investment managers may use derivative instruments for efficient portfolio management purposes. Plan assets do not include any of Applied’s own equity or debt securities.
A summary of the components of net periodic benefit costs and the weighted average assumptions used for net periodic benefit cost and benefit obligation calculations for fiscal 2013, 2012 and 2011 is presented below.
|
| | | | | | | | | | | |
| 2013 | | 2012 | | 2011 |
| | | | | |
| (In millions, except percentages) |
Components of net periodic benefit cost | | | | | |
Service cost | $ | 20 |
| | $ | 16 |
| | $ | 15 |
|
Interest cost | 15 |
| | 14 |
| | 14 |
|
Expected return on plan assets | (12 | ) | | (11 | ) | | (11 | ) |
Amortization of actuarial loss and prior service credit | 6 |
| | — |
| | 2 |
|
Settlement and curtailment loss (gain) | — |
| | 6 |
| | (2 | ) |
Net periodic benefit cost | $ | 29 |
| | $ | 25 |
| | $ | 18 |
|
Weighted average assumptions | | | | | |
Discount rate | 3.46 | % | | 4.53 | % | | 4.33 | % |
Expected long-term return on assets | 5.38 | % | | 5.91 | % | | 6.39 | % |
Rate of compensation increase | 3.07 | % | | 3.09 | % | | 3.42 | % |
Asset return assumptions are derived based on actuarial and statistical methodologies, from analysis of long-term historical data relevant to the country in which each plan is in effect and the investments applicable to the corresponding plan. The discount rate for each plan was derived by reference to appropriate benchmark yields on high quality corporate bonds, allowing for the approximate duration of both plan obligations and the relevant benchmark yields.
Future expected benefit payments for the pension plans and the post-retirement plan over the next ten fiscal years are as follows:
|
| | | |
| Benefit Payments |
| (In millions) |
2014 | $ | 14 |
|
2015 | 14 |
|
2016 | 15 |
|
2017 | 15 |
|
2018 | 17 |
|
2019-2023 | 98 |
|
| $ | 173 |
|
Company contributions to these plans for fiscal 2014 are expected to be approximately $18 million.
Executive Deferred Compensation Plans
Applied sponsors two unfunded deferred compensation plans, the Executive Deferred Compensation Plan (Predecessor EDCP) and the 2005 Executive Deferred Compensation Plan (2005 EDCP), under which certain employees may elect to defer a portion of their following year’s eligible earnings. The Predecessor EDCP was frozen as of December 31, 2004 such that no new deferrals could be made under the plan after that date and the plan would qualify for “grandfather” relief under Section 409A of the Code. The Predecessor EDCP participant accounts continue to be maintained under the plan and credited with deemed interest. The 2005 EDCP was implemented by Applied effective as of January 1, 2005 and is intended to comply with the requirements of Section 409A of the Code. In addition, Applied also sponsors a non-qualified deferred compensation plan as a result of the acquisition of Varian. Amounts payable, including accrued deemed interest, totaled $49 million at October 27, 2013 and $57 million at October 28, 2012, which were included in other liabilities in the Consolidated Balance Sheets. Under the Predecessor EDCP and 2005 EDCP, in the event of change of control (as defined under these plans), the distribution of all deferred balances would be required.
