Lam Research Corporation
LAM RESEARCH CORP (Form: 10-Q, Received: 05/03/2012 16:13:01)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 25, 2012

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from        to

Commission file number 0-12933

 

 

LAM RESEARCH CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   94-2634797

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

4650 Cushing Parkway

Fremont, California

  94538
(Address of principal executive offices)   (Zip Code)

(510) 572-0200

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES   x     NO   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨ (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

As of April 27, 2012 there were 120,264,497 shares of registrant’s common stock outstanding.

 

 

 

 


Table of Contents

 

LAM RESEARCH CORPORATION

TABLE OF CONTENTS

 

         Page No.  
  PART I. Financial Information      3   

Item 1.

 

Financial Statements (Unaudited):

     3   
 

Consolidated Balance Sheets as of March 25, 2012 and June 26, 2011

     3   
 

Condensed Consolidated Statements of Operations for the three and nine months ended March 25, 2012 and March 27, 2011

     4   
 

Condensed Consolidated Statements of Cash Flows for the nine months ended March 25, 2012 and  March 27, 2011

     5   
 

Notes to Condensed Consolidated Financial Statements

     6   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     26   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     35   

Item 4.

 

Controls and Procedures

     36   
  PART II. Other Information      38   

Item 1.

 

Legal Proceedings

     38   

Item 1A.

 

Risk Factors

     38   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     45   

Item 3.

 

Defaults Upon Senior Securities

     46   

Item 4.

 

Mine Safety Disclosures

     46   

Item 5.

 

Other Information

     46   

Item 6.

 

Exhibits

     46   

Signatures

       47   

Exhibit Index

       48   
 

EX-31.1

  
 

EX-31.2

  
 

EX-32.1

  
 

EX-32.2

  
 

EX-101.INS

  
 

EX-101.SCH

  
 

EX-101.CAL

  
 

EX-101.DEF

  
 

EX-101.LAB

  
 

EX-101.PRE

  

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

LAM RESEARCH CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

 

     March 25,
2012
    June 26,
2011
 
     (unaudited)     (1)  
ASSETS     

Cash and cash equivalents

   $ 1,410,267      $ 1,492,132   

Short-term investments

     993,696        630,115   

Accounts receivable, less allowance for doubtful accounts of $5,258 as of March 25, 2012 and $4,720 as of June 26, 2011

     471,776        590,568   

Inventories

     376,126        396,607   

Deferred income taxes

     78,719        78,435   

Prepaid expenses and other current assets

     93,325        85,408   
  

 

 

   

 

 

 

Total current assets

     3,423,909        3,273,265   

Property and equipment, net

     279,955        270,458   

Restricted cash and investments

     165,220        165,256   

Deferred income taxes

     —          3,892   

Goodwill

     169,182        169,182   

Intangible assets, net

     34,094        47,434   

Other assets

     120,903        124,380   
  

 

 

   

 

 

 

Total assets

   $ 4,193,263      $ 4,053,867   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Trade accounts payable

   $ 179,445      $ 163,541   

Accrued expenses and other current liabilities

     330,103        358,756   

Deferred profit

     139,607        153,680   

Current portion of long-term debt, convertible notes, and capital leases

     2,500        4,782   
  

 

 

   

 

 

 

Total current liabilities

     651,655        680,759   

Long-term debt, convertible notes, and capital leases

     755,427        738,488   

Income taxes payable

     115,570        113,582   

Other long-term liabilities

     61,469        51,193   
  

 

 

   

 

 

 

Total liabilities

     1,584,121        1,584,022   

Commitments and contingencies

    

Stockholders’ equity:

    

Preferred stock, at par value of $0.001 per share; authorized - 5,000 shares; none outstanding

     —          —     

Common stock, at par value of $0.001 per share; authorized - 400,000 shares; issued and outstanding - 119,775 shares as of March 25, 2012 and 123,579 shares as of June 26, 2011

     120        124   

Additional paid-in capital

     1,747,025        1,531,465   

Treasury stock, at cost; 45,926 shares as of March 25, 2012 and 40,995 shares as of June 26, 2011

     (1,962,555     (1,761,591

Accumulated other comprehensive income (loss)

     (16,188     9,761   

Retained earnings

     2,840,740        2,690,086   
  

 

 

   

 

 

 

Total stockholders’ equity

     2,609,142        2,469,845   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,193,263      $ 4,053,867   
  

 

 

   

 

 

 

 

(1) Derived from audited financial statements

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

LAM RESEARCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

     Three Months Ended      Nine Months Ended  
     March 25,
2012
    March 27,
2011
     March 25,
2012
    March 27,
2011
 

Revenue

   $ 658,961      $ 809,087       $ 1,923,378      $ 2,485,675   

Cost of goods sold

     391,814        435,068         1,138,381        1,326,897   

Cost of goods sold - restructuring and impairments

     —          —           (859     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total costs of goods sold

     391,814        435,068         1,137,522        1,326,897   
  

 

 

   

 

 

    

 

 

   

 

 

 

Gross margin

     267,147        374,019         785,856        1,158,778   

Research and development

     113,448        96,880         320,031        273,710   

Selling, general and administrative

     95,581        80,143         259,037        228,137   

Restructuring and impairments

     —          —           1,725        (5,163
  

 

 

   

 

 

    

 

 

   

 

 

 

Total operating expenses

     209,029        177,023         580,793        496,684   
  

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

     58,118        196,996         205,063        662,094   

Other income (expense), net

     (3,568     1,663         (23,426     1,722   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income taxes

     54,550        198,659         181,637        663,816   

Income tax expense

     8,946        16,419         30,983        65,996   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 45,604      $ 182,240       $ 150,654      $ 597,820   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income per share:

         

Basic net income per share

   $ 0.38      $ 1.47       $ 1.25      $ 4.84   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted net income per share

   $ 0.38      $ 1.45       $ 1.24      $ 4.78   
  

 

 

   

 

 

    

 

 

   

 

 

 

Number of shares used in per share calculations:

         

Basic

     119,841        123,674         120,904        123,482   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted

     120,956        125,293         121,830        125,097   
  

 

 

   

 

 

    

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

LAM RESEARCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Nine Months Ended  
     March 25,
2012
    March 27,
2011
 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 150,654      $ 597,820   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     66,249        54,787   

Deferred income taxes

     3,090        (4,555

Restructuring and impairment charges

     866        (5,163

Impairment of investment

     1,724        —     

Equity-based compensation expense

     52,385        38,224   

Income tax benefit on equity-based compensation plans

     81        19,492   

Excess tax benefit on equity-based compensation plans

     (2,292     (15,106

Amortization of convertible note discount

     20,014        —     

Other, net

     3,671        (2,818

Changes in operating assets and liabilities

     105,871        239   
  

 

 

   

 

 

 

Net cash provided by operating activities

     402,313        682,920   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Capital expenditures and intangible assets

     (70,392     (92,924

Purchases of available-for-sale securities

     (638,637     (132,662

Sales and maturities of available-for-sale securities

     266,959        95,928   

Purchase of equity method investment

     (10,740     —     

Receipt of loan payments

     8,375        —     

Proceeds from sale of assets

     2,677        1,544   

Purchase of other investments

     —          (417

Transfer of restricted cash and investments

     23        (14
  

 

 

   

 

 

 

Net cash used for investing activities

     (441,735     (128,545
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Principal payments on long-term debt and capital lease obligations

     (4,164     (4,449

Excess tax benefit on equity-based compensation plans

     2,292        15,106   

Net cash received in settlement (paid in advance for) stock repurchase contracts

     55,194        (50,000

Treasury stock purchases

     (111,604     (157,563

Reissuances of treasury stock related to employee stock purchase plan

     16,760        13,676   

Proceeds from issuance of common stock

     1,776        10,222   
  

 

 

   

 

 

 

Net cash used for financing activities

     (39,746     (173,008
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (2,697     15,576   

Net increase (decrease) in cash and cash equivalents

     (81,865     396,943   

Cash and cash equivalents at beginning of period

     1,492,132        545,767   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,410,267      $ 942,710   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

LAM RESEARCH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 25, 2012

(Unaudited)

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements of Lam Research Corporation (“Lam Research” or the “Company”) for the fiscal year ended June 26, 2011, which are included in the Annual Report on Form 10-K as of and for the year ended June 26, 2011 (the “2011 Form 10-K”). The Company’s Forms 10-K, Forms 10-Q and Forms 8-K are available online at the Securities and Exchange Commission website on the Internet. The address of that site is www.sec.gov. The Company also posts its Forms 10-K, Forms 10-Q and Forms 8-K on its corporate website at http://investor.lamresearch.com .

The consolidated financial statements include the accounts of Lam Research Corporation and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. We use the equity method to account for equity investments in instances in which we own common stock or similar interests and have the ability to exercise significant influence, but not control, over the investee. The Company’s reporting period is a 52/53-week fiscal year. The Company’s current fiscal year will end June 24, 2012 and includes 52 weeks. The quarters ended March 25, 2012 (the “March 2012 quarter”) and March 27, 2011 (the “March 2011 quarter”) each included 13 weeks.

Certain amounts presented in the comparative financial statements for prior years have been reclassified to conform to the fiscal year 2012 presentation.

NOTE 2 — RECENT ACCOUNTING PRONOUNCEMENTS

In June 2011, the Financial Accounting Standards Board (“FASB”) issued new authoritative guidance that increases the prominence of items reported in other comprehensive income (“OCI”) by eliminating the option to present components of OCI as part of the statement of changes in stockholders’ equity. The amendments in this standard require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance does not affect the underlying accounting for components of OCI, but will change the presentation of the Company’s financial statements. The Company will adopt this authoritative guidance retrospectively in the first quarter of its fiscal year 2013.

In September 2011, the FASB issued revised guidance intended to simplify how an entity tests goodwill for impairment. The amendment will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more-likely-than-not that its fair value is less than its carrying amount. This accounting standard update will be effective for the Company beginning in the first quarter of fiscal 2013 and early adoption is permitted. The Company is currently evaluating this accounting standard update and does not expect it to have an impact on its Consolidated Financial Statements.

NOTE 3 — EQUITY-BASED COMPENSATION PLANS

The Company has stock plans that provide for grants of equity-based awards to eligible participants, including stock options and restricted stock units (“RSUs”), of Lam Research common stock (“Common Stock”). An option is a right to purchase the Company’s stock at a set price. An RSU award is an agreement to issue shares of the Company’s stock at the time of vesting. The Company’s options and RSU awards typically vest over a period of two years or less. The Company also has an employee stock purchase plan that allows employees to purchase its Common Stock at a discount through payroll deductions.

The Company recognized the following equity-based compensation expense and related income tax benefit in the Condensed Consolidated Statements of Operations:

 

     Three Months Ended      Nine Months Ended  
     March 25,
2012
     March 27,
2011
     March 25,
2012
     March 27,
2011
 
     (in millions)  

Equity-based compensation expense

   $ 16.4       $ 12.5       $ 52.4       $ 38.2   

Income tax benefit related to equity-based compensation expense

   $ 2.2       $ 2.1       $ 7.1       $ 6.4   

The estimated fair value of the Company’s stock-based awards, less expected forfeitures, is amortized over the awards’ vesting term on a straight-line basis.

 

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Table of Contents

Stock Options and RSUs

The 2007 Stock Incentive Plan provides for grants of equity-based awards to eligible participants. Additional shares are reserved for issuance under the Company’s 1997 Stock Incentive Plan and its 1999 Stock Option Plan pursuant to awards previously granted under those plans (together with the 2007 Stock Incentive Plan, the “Plans”). As of March 25, 2012, there were a total of 2,593,779 shares reserved to cover options and RSUs issued and outstanding under the Plans. As of March 25, 2012, there were an additional 7,670,108 shares reserved and available for future equity-based awards under the 2007 Stock Incentive Plan.

A summary of stock option activity under the Plans as of March 25, 2012 and changes during the nine months then ended is presented below:

 

Options

   Shares
(in  thousands)
    Weighted-Average
Exercise Price
     Weighted-Average
Remaining
Contractual Term
(years)
     Aggregate Intrinsic
Value as of
March 25, 2012

(in thousands)
 

Outstanding at June 26, 2011

     310      $ 21.50         2.26      

Exercised

     (75   $ 23.70         

Forfeited or expired

     (4   $ 21.60         
  

 

 

         

Outstanding at March 25, 2012

     231      $ 20.78         1.98       $ 5,320   
  

 

 

         

Exercisable at March 25, 2012

     231      $ 20.78         1.98       $ 5,320   
  

 

 

         

The total intrinsic value of options exercised during the three months ended March 25, 2012 and March 27, 2011 was $0.1 million and $9.2 million, respectively. The total intrinsic value of options exercised during the nine months ended March 25, 2012 and March 27, 2011 was $1.3 million and $14.0 million, respectively.

As of March 25, 2012, all stock options outstanding were fully vested and all related compensation expense has been recognized.

A summary of the Company’s RSUs as of March 25, 2012 and changes during the nine months then ended is presented below:

 

Unvested Restricted Stock Units

   Shares
(in  thousands)
    Average Grant-
Date Fair
Value
 

Unvested at June 26, 2011

     2,331      $ 39.90   

Granted

     1,136      $ 40.46   

Vested

     (1,052   $ 34.78   

Forfeited

     (52   $ 39.78   
  

 

 

   

Unvested at March 25, 2012

     2,363      $ 42.55   
  

 

 

   

The fair value of the Company’s RSUs was calculated based upon the fair market value of the Company’s stock at the date of grant. As of March 25, 2012, there was $55.9 million of total unrecognized compensation expense related to unvested RSUs granted; that expense is expected to be recognized over a weighted average remaining period of 1.2 years.

ESPP

The 1999 Employee Stock Purchase Plan (as amended and restated, the “1999 ESPP”) allows employees to designate a portion of their base compensation to be withheld through payroll deductions and used to purchase the Company’s Common Stock at a purchase price per share equal to the lower of 85% of the fair market value of the Company’s Common Stock on the first or last day of the applicable purchase period. Each offering period generally lasts up to 12 months and includes up to three interim purchase dates. As of March 25, 2012, there were a total of 10,928,473 shares available for issuance under the 1999 ESPP.

 

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Table of Contents

Purchase rights under the 1999 ESPP were valued using the Black-Scholes model assuming no expected dividends and the following weighted-average assumptions for the three and nine months ended March 25, 2012:

 

     Three Months Ended
March 25,

2012
    Nine Months Ended
March  25,

2012
 

Expected term (years)

     0.68        0.73   

Expected stock price volatility

     44.39     44.33

Risk-free interest rate

     0.10     0.11

As of March 25, 2012, there was $4.1 million of unrecognized compensation expense related to the 1999 ESPP, which is expected to be recognized over the next 0.4 years.

NOTE 4 — FINANCIAL INSTRUMENTS

The Company maintains an investment portfolio of various holdings, types, and maturities. The Company’s mutual funds, which are related to the Company’s obligations under the deferred compensation plan, are classified as trading securities. Investments classified as trading securities are recorded at fair value based upon quoted market prices. Differences between the cost and fair value of trading securities are recognized as “Other income (expense)” in the Consolidated Statements of Operations. All of the Company’s other short-term investments are classified as available-for-sale and consequently are recorded in the Consolidated Balance Sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of tax.

Fair Value

The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact, and it considers assumptions that market participants would use when pricing the asset or liability.

A fair value hierarchy has been established that prioritizes the inputs to valuation techniques used to measure fair value. The level of an asset or liability in the hierarchy is based on the lowest level of input that is significant to the fair value measurement. Assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

Level 1: Valuations based on quoted prices in active markets for identical assets or liabilities with sufficient volume and frequency of transactions.

Level 2: Valuations based on observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or model-derived valuations techniques for which all significant inputs are observable in the market or can be corroborated by, observable market data for substantially the full term of the assets or liabilities.

Level 3: Valuations based on unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities and based on non-binding, broker-provided price quotes and may not have been corroborated by observable market data.

 

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Table of Contents

The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis:

 

            Fair Value Measurement at March 25, 2012  
     Total      Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 
     (In thousands)  

Assets

           

Short-Term Investments

           

Money Market Funds

   $ 1,285,652       $ 1,285,652       $ —         $ —     

Municipal Notes and Bonds

     360,464         —           360,464         —     

US Treasury and Agencies

     77,523         77,523         —           —     

Government-Sponsored Enterprises

     48,935         —           48,935         —     

Foreign Government Bonds

     2,544         —           2,544         —     

Corporate Notes and Bonds

     597,183         164,885         432,298         —     

Mortgage Backed Securities - Residential

     11,562         —           11,562         —     

Mortgage Backed Securities - Commercial

     60,371         —           60,371         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Short-Term Investments

   $ 2,444,234       $ 1,528,060       $ 916,174       $ —     

Equities

     7,301         7,301         —           —     

Mutual Funds

     24,639         24,639         —           —     

Derivative Assets

     8,850         —           8,850         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,485,024       $ 1,560,000       $ 925,024       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Derivative Liabilities

   $ 2,914       $ —         $ 2,914       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The amounts in the table above are reported in the Consolidated Balance Sheet as of March 25, 2012 as follows:

 

Reported As:    Total      (Level 1)      (Level 2)      (Level 3)  
     (In thousands)  

Cash Equivalents

   $ 1,285,653       $ 1,285,653       $ —         $ —     

Short-Term Investments

     993,696         77,522         916,174         —     

Restricted Cash and Investments

     164,885         164,885         —           —     

Prepaid Expenses and Other Current Assets

     31,940         31,940         —           —     

Other Assets

     8,850         —           8,850         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,485,024       $ 1,560,000       $ 925,024       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Accrued Expenses and Other Current Liabilities

   $ 2,914       $ —         $ 2,914       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

9


Table of Contents

The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis:

 

            Fair Value Measurement at June 26, 2011  
     Total      Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 
     (In thousands)  

Assets

           

Short-Term Investments

           

Money Market Funds

   $ 1,300,098       $ 1,300,098       $ —         $ —     

Municipal Notes and Bonds

     321,339         —           321,339         —     

US Treasury and Agencies

     8,496         8,496         —           —     

Government-Sponsored Enterprises

     19,868         —           19,868         —     

Foreign Government Bond

     1,005         —           1,005         —     

Corporate Notes and Bonds

     382,432         164,885         217,547         —     

Mortgage Backed Securities - Residential

     2,633         —           2,633         —     

Mortgage Backed Securities - Commercial

     60,729         —           60,729         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Short-Term Investments

   $ 2,096,600       $ 1,473,479       $ 623,121       $ —     

Equities

     7,443         7,443         —           —     

Mutual Funds

     19,467         19,467         —           —     

Derivative Assets

     1,994         —           1,994         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,125,504       $ 1,500,389       $ 625,115       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Derivative Liabilities

   $ 1,924       $ —         $ 1,924       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The amounts in the table above are reported in the Consolidated Balance Sheet as of June 26, 2011 as follows:

 

Reported As:    Total      (Level 1)      (Level 2)      (Level 3)  
     (In thousands)  

Cash Equivalents

   $ 1,301,600       $ 1,300,098       $ 1,502       $ —     

Short-Term Investments

     630,115         8,496         621,619         —     

Restricted Cash and Investments

     164,885         164,885         —           —     

Prepaid Expenses and Other Current Assets

     26,910         26,910         —           —     

Other Assets

     1,994         —           1,994         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,125,504       $ 1,500,389       $ 625,115       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Accrued Expenses and Other Current Liabilities

   $ 1,924       $ —         $ 1,924       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company’s primary financial instruments include its cash, cash equivalents, short-term investments, restricted cash and investments, long-term investments, accounts receivable, accounts payable, long-term debt and capital leases, and foreign currency related derivatives. The estimated fair value of cash, accounts receivable and accounts payable approximates their carrying value due to the short period of time to their maturities. The estimated fair values of long-term debt, excluding convertible notes, and capital lease obligations approximate their carrying value as the substantial majority of these obligations have interest rates that adjust to market rates on a periodic basis. Refer to Note 13 of the Notes to the Condensed Consolidated Financial Statements for additional information regarding the fair value of the Company’s convertible notes.

 

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Table of Contents

Investments

The following tables summarize the Company’s investments (in thousands):

 

    March 25, 2012     June 26, 2011  
    Cost     Unrealized
Gain
    Unrealized
(Loss)
    Fair Value     Cost     Unrealized
Gain
    Unrealized
(Loss)
    Fair Value  

Cash

  $ 124,949      $ —        $ —        $ 124,949      $ 190,903      $ —        $ —        $ 190,903   

Fixed Income Money Market Funds

    1,285,652        —          —          1,285,652        1,300,098        —          —          1,300,098   

Municipal Notes and Bonds

    358,776        1,710        (22     360,464        319,913        1,510        (84     321,339   

US Treasury and Agencies

    77,609        20        (106     77,523        8,462        34        —          8,496   

Government-Sponsored Enterprises

    48,916        68        (49     48,935        19,864        6        (2     19,868   

Foreign Government Bonds

    2,549        —          (5     2,544        1,004        1        —          1,005   

Corporate Notes and Bonds

    596,456        1,220        (493     597,183        380,992        1,498        (58     382,432   

Mortgage Backed Securities - Residential

    11,515        74        (27     11,562        2,521        144        (32     2,633   

Mortgage Backed Securities - Commercial

    59,857        694        (180     60,371        60,639        277        (187     60,729   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Cash and Short -Term Investments

  $ 2,566,279      $ 3,786      $ (882   $ 2,569,183      $ 2,284,396      $ 3,470      $ (363   $ 2,287,503   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Publicly Traded Equity Securities

  $ 9,320      $ —        $ (2,019   $ 7,301      $ 9,320      $ —        $ (1,877   $ 7,443   

Mutual Funds

    23,541        1,138        (40     24,639        17,975        1,492        —          19,467   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Financial Instruments

  $ 2,599,140      $ 4,924      $ (2,941   $ 2,601,123      $ 2,311,691      $ 4,962      $ (2,240   $ 2,314,413   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As Reported

               

Cash and Cash Equivalents

  $ 1,410,267      $ —        $ —        $ 1,410,267      $ 1,492,132      $ —        $ —        $ 1,492,132   

Short-Term Investments

    990,792        3,786        (882     993,696        627,008        3,470        (363     630,115   

Restricted Cash and Investments

    165,220        —          —          165,220        165,256        —          —          165,256   

Other assets

    32,861        1,138        (2,059     31,940        27,295        1,492        (1,877     26,910   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2,599,140      $ 4,924      $ (2,941   $ 2,601,123      $ 2,311,691      $ 4,962      $ (2,240   $ 2,314,413   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Company accounts for its investment portfolio at fair value. Realized gains (losses) for investment sales and pay-downs are specifically identified. Management assesses the fair value of investments in debt securities that are not actively traded through consideration of interest rates and their impact on the present value of the cash flows to be received from the investments. The Company also considers whether changes in the credit ratings of the issuer could impact the assessment of fair value. The Company recognized a $1.7 million other-than-temporary impairment of a strategic private equity investment during the nine months ended March 25, 2012. The Company did not recognize any losses on investments due to other-than-temporary impairments during the three months ended March 25, 2012 or the three or nine months ended March 27, 2011. Additionally, gross realized gains and losses from sales of investments were both less than $0.6 million during the three and nine months ended March 25, 2012 and March 27, 2011.

The following is an analysis of the Company’s fixed income securities in unrealized loss positions (in thousands):

 

     March 25, 2012  
     Unrealized Losses
Less Than 12 Months
    Unrealized Losses
12 Months or Greater
    Total  
     Fair Value      Gross
Unrealized
Loss
    Fair Value      Gross
Unrealized
Loss
    Fair Value      Gross
Unrealized
Loss
 

Short-Term Investments

               

Municipal Notes and Bonds

   $ 19,896       $ (22   $ —         $ —        $ 19,896       $ (22

US Treasury and Agencies

     75,046         (106     —           —          75,046         (106

Government-Sponsored Enterprises

     26,178         (49     —           —          26,178         (49

Foreign Government Bonds

     1,543         (5     —           —          1,543         (5

Corporate Notes and Bonds

     205,786         (493     56         —          205,842         (493

Mortgage Backed Securities - Residential

     10,422         (27     —           —          10,422         (27

Mortgage Backed Securities - Commercial

     19,131         (144     896         (36     20,027         (180
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Short-Term Investments

   $ 358,002       $ (846   $ 952       $ (36   $ 358,954       $ (882
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

11


Table of Contents

The amortized cost and fair value of cash equivalents, short-term investments, and restricted cash and investments with contractual maturities are as follows:

 

     March 25, 2012      June 26, 2011  
     Cost      Estimated
Fair

Value
     Cost      Estimated
Fair

Value
 
     (in thousands)  

Due in less than one year

   $ 1,686,799       $ 1,687,159       $ 1,606,390       $ 1,606,925   

Due in more than one year

     754,531         757,075         487,103         489,675   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,441,330       $ 2,444,234       $ 2,093,493       $ 2,096,600   
  

 

 

    

 

 

    

 

 

    

 

 

 

Management has the ability, if necessary, to liquidate any of its cash equivalents and short-term investments in order to meet the Company’s liquidity needs in the next 12 months. Accordingly, those investments with contractual maturities greater than one year from the date of purchase nonetheless are classified as short-term on the accompanying Consolidated Balance Sheets.

Derivative Instruments and Hedging

The Company carries derivative financial instruments (“derivatives”) on its Consolidated Balance Sheets at their fair values. The Company enters into foreign currency forward contracts with financial institutions with the primary objective of reducing volatility of earnings and cash flows related to foreign currency exchange rate fluctuations. The counterparties to these foreign currency forward contracts are large international financial institutions that the Company believes are creditworthy, and therefore, we do not consider the risk of counterparty nonperformance to be material.

Cash Flow Hedges

In the normal course of business, the Company’s financial position is routinely subjected to market risk associated with foreign currency exchange rate fluctuations on non-US dollar transactions or cash flows, primarily from Japanese yen-denominated revenues and Euro-denominated expenses. The Company’s policy is to mitigate the foreign exchange risk arising from the fluctuations in the value of these non-US dollar denominated transactions or cash flows through a foreign currency cash flow hedging program, using foreign currency forward contracts that generally expire within 12 months and no later than 24 months. These foreign currency forward contracts are designated as cash flow hedges and are carried on the Company’s balance sheet at fair value with the effective portion of the contracts’ gains or losses included in accumulated other comprehensive income (loss) and subsequently recognized in revenue in the same period the hedged revenue is recognized.

At inception and at each quarter end, hedges are tested prospectively and retrospectively for effectiveness using regression analysis. Changes in the fair value of foreign currency forward contracts due to changes in time value are excluded from the assessment of effectiveness and are recognized in revenue in the current period. The change in time value related to these contracts was not material for all reported periods. To qualify for hedge accounting, the hedge relationship must meet criteria relating both to the derivative instrument and the hedged item. These criteria include identification of the hedging instrument, the hedged item, the nature of the risk being hedged and how the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value or cash flows will be measured. There were no gains or losses during the three or nine months ended March 25, 2012 or March 27, 2011 associated with ineffectiveness or forecasted transactions that failed to occur.

To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge and the hedges must be tested to demonstrate an expectation of providing highly effective offsetting changes to future cash flows on hedged transactions. When derivative instruments are designated and qualify as effective cash flow hedges, the Company recognizes effective changes in the fair value of the hedging instrument within accumulated other comprehensive income (loss) until the hedged exposure is realized. Consequently, with the exception of excluded time value and hedge ineffectiveness recognized, the Company’s results of operations are not subject to fluctuation as a result of changes in the fair value of the derivative instruments. If hedges are not highly effective or if the Company does not believe that the underlying hedged forecasted transactions will occur, the Company may not be able to account for its derivative instruments as cash flow hedges. If this were to occur, future changes in the fair values of the Company’s derivative instruments would be recognized in earnings. Additionally, related amounts previously recorded in “Other comprehensive income” would be reclassified to income immediately. At March 25, 2012, the Company had gains of $3.8 million accumulated in Other Comprehensive Income, which it expects to reclassify from Other Comprehensive Income into earnings over the next 12 months.

Balance Sheet Hedges

The Company also enters into foreign currency forward contracts to hedge fluctuations associated with foreign currency denominated monetary assets and liabilities, primarily intercompany receivables and payables. These foreign currency forward contracts are not designated for hedge accounting treatment. Therefore, the change in fair value of these derivatives is recorded as a component of other income (expense) and offsets the change in fair value of the foreign currency denominated assets and liabilities, recorded in other income (expense).

 

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Table of Contents

As of March 25, 2012, the Company had the following outstanding foreign currency forward contracts that were entered into under its cash flow and balance sheet hedge program:

 

     Derivatives Designated as
Hedging Instruments:
     Derivatives Not Designated
as Hedging Instruments:
 
    

(in thousands)

 

Foreign Currency Forward Contracts

     

Sell JPY

   $ 52,223       $ 4,183   

Buy CHF

     —           162,552   

Buy TWD

     —           84,855   

Buy EUR

     94,236         40,012   
  

 

 

    

 

 

 
   $  146,459       $  291,602   
  

 

 

    

 

 

 

The fair value of derivatives instruments in the Company’s Condensed Consolidated Balance Sheets as of March 25, 2012 was as follows:

 

     Fair Value of Derivative Instruments  
     Asset Derivatives      Liability Derivatives  
     Balance Sheet
Location
     Fair Value      Balance Sheet
Location
     Fair Value  
    

(in thousands)

 

Derivatives designated as hedging instruments:

           

Foreign exchange forward contracts

    
 
Prepaid expense
and other assets
  
  
   $ 4,863         Accrued liabilities      $ (1,615

Derivatives not designated as hedging instruments:

           

Foreign exchange forward contracts

    
 
Prepaid expense
and other assets
  
  
   $ 3,987         Accrued liabilities       $ (1,299
     

 

 

       

 

 

 

Total derivatives

      $ 8,850          $ (2,914
     

 

 

       

 

 

 

The fair value of derivatives instruments in the Company’s Condensed Consolidated Balance Sheets as of June 26, 2011 was as follows:

 

     Fair Value of Derivative Instruments  
     Asset Derivatives      Liability Derivatives  
     Balance Sheet
Location
     Fair Value      Balance Sheet
Location
     Fair Value  
    

(in thousands)

 

Derivatives designated as hedging instruments:

           

Foreign exchange forward contracts

    
 
Prepaid expense
and other assets
  
  
   $ 1,881         Accrued liabilities       $ (1,142

Derivatives not designated as hedging instruments:

           

Foreign exchange forward contracts

    
 
Prepaid expense
and other assets
  
  
   $ 113         Accrued liabilities       $ (782
     

 

 

       

 

 

 

Total derivatives

      $ 1,994          $ (1,924
     

 

 

       

 

 

 

 

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Table of Contents

The effect of derivative instruments designated as cash flow hedges on the Company’s Condensed Consolidated Statements of Operations was as follows:

 

     Three Months Ended March 25, 2012      Nine Months Ended March 25, 2012  
Derivatives Designated as Hedging
Instruments:
  

Gain (Loss)
Recognized

(Effective
Portion) (1)

     Gain (Loss)
Recognized
(Effective
Portion) (2)
    Gain (Loss)
Recognized
(Ineffective
Portion) (3)
     Gain (Loss)
Recognized
(Excluded
from
Effectiveness
Testing) (4)
     Gain (Loss)
Recognized
(Effective
Portion) (1)
     Gain (Loss)
Recognized
(Effective
Portion) (2)
    Gain (Loss)
Recognized
(Inefective
Portion) (3)
     Gain (Loss)
Recognized
(Excluded
from
Effectiveness
Testing) (4)
 
    

(in thousands)

 

Foreign exchange forward contracts

   $  6,432       $ (3,140   $ 3       $ —           $ (5,361)       $ (8,652   $ 1       $ 754   

 

     Three Months Ended March 27, 2011      Nine Months Ended March 27, 2011  
  

 

 

           

 

 

         
Derivatives Designated as Hedging
Instruments:
   Gain (Loss)
Recognized
(Effective
Portion) (1)
    Gain (Loss)
Recognized
(Effective
Portion) (2)
    Gain (Loss)
Recognized
(Ineffective
Portion) (3)
     Gain (Loss)
Recognized
(Excluded
from
Effectiveness
Testing) (4)
     Gain (Loss)
Recognized
(Effective
Portion) (1)
     Gain (Loss)
Recognized
(Effective
Portion) (2)
    Gain (Loss)
Recognized
(Ineffective
Portion) (3)
     Gain (Loss)
Recognized
(Excluded
from
Effectiveness
Testing) (4)
 
     (in thousands)  

Foreign exchange forward contracts

   $    (3,570)    $ (279   $ —         $ 59         $ (8,347)       $ (6,081   $ —         $ 246   

 

(1) Amount recognized in other comprehensive income (effective portion).
(2) Amount of gain (loss) reclassified from accumulated other comprehensive income into income (effective portion) located in revenue and operating expenses.
(3) Amount of gain (loss) recognized in income on derivative (ineffective portion) located in other income (expense), net.
(4) Amount of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing) located in other income (expense), net.

The effect of derivative instruments not designated as cash flow hedges on the Company’s Condensed Consolidated Statement of Operations was as follows:

 

     Three Months Ended      Nine Months Ended  
     March 25,
2012
    March 27,
2011
     March 25 ,
2012
    March 27,
2011
 
Derivatives Not Designated as Hedging Instruments:    Gain (Loss)
Recognized (5)
    Gain (Loss)
Recognized (5)
     Gain (Loss)
Recognized (5)
    Gain (Loss)
Recognized (5)
 
     (in thousands)  

Foreign exchange forward contracts

   $ (4,476   $ 21,617       $ (47,299   $ 35,795   

 

(5) Amount of gain (loss) recognized in income located in other income (expense), net.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short term investments, restricted cash and investments, trade accounts receivable, and derivative financial instruments used in hedging activities. Cash is placed on deposit in large international financial institutions. Such deposits may be in excess of insured limits. Management believes that the financial institutions that hold the Company’s cash are credit worthy and, accordingly, minimal credit risk exists with respect to these balances.

The Company’s available-for-sale securities must have a minimum rating of A2 / A at the time of purchase, as rated by two of the following three rating agencies: Moody’s, Standard & Poor’s (S&P), or Fitch. To ensure diversification and minimize concentration, the Company’s policy limits the amount of credit exposure with any one financial institution or commercial issuer.

The Company is exposed to credit losses in the event of nonperformance by counterparties on the foreign currency forward contracts that are used to mitigate the effect of exchange rate fluctuations and on contracts related to structured share repurchase agreements. These counterparties are large international financial institutions and to date, no such counterparty has failed to meet its financial obligations to the Company.

Credit risk evaluations, including trade references, bank references and Dun & Bradstreet ratings, are performed on all new customers and the Company monitors its customers’ financial statements and payment performance. In general, the Company does not require collateral on sales.

 

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Table of Contents

NOTE 5 — INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out method) or market. Shipments to Japanese customers, to whom title does not transfer until customer acceptance, are classified as inventory and carried at cost until title transfers. Inventories consist of the following:

 

     March 25,      June 26,  
     2012      2011  
     (in thousands)  

Raw materials

   $ 217,205       $ 212,979   

Work-in-process

     78,471         69,013   

Finished goods

     80,450         114,615   
  

 

 

    

 

 

 
   $ 376,126       $ 396,607   
  

 

 

    

 

 

 

NOTE 6 — PROPERTY AND EQUIPMENT, NET

Property and equipment, net, consists of the following:

 

     March 25,     June 26,  
     2012     2011  
     (in thousands)  

Manufacturing, engineering and office equipment

   $ 383,816      $ 345,684   

Computer equipment and software

     104,111        95,770   

Land

     14,209        14,758   

Buildings

     69,453        65,429   

Leasehold improvements

     58,858        55,833   

Furniture and fixtures

     15,698        15,258   
  

 

 

   

 

 

 
     646,145        592,732   

Less: accumulated depreciation and amortization

     (366,190     (322,274
  

 

 

   

 

 

 
   $ 279,955      $ 270,458   
  

 

 

   

 

 

 

The Company’s long lived assets held for use, including property, plant, and equipment and intangible assets, are measured at fair value when an impairment exists. Long lived assets held for use are assessed for impairment when events occur that indicate a potential impairment. The Company did not record impairments of long lived assets held for use during the nine months ended March 25, 2012 or March 27, 2011.

NOTE 7 — GOODWILL AND INTANGIBLE ASSETS

Goodwill

The balance of goodwill was $169.2 million as of March 25, 2012 and June 26, 2011. Of this balance, $104.2 million is not tax deductible due to applicable foreign law. The remaining goodwill balance of $65.0 million is tax deductible.

The Company’s goodwill is measured at fair value when an impairment exits. Goodwill is assessed at least annually for impairment. The Company did not record impairments of goodwill during the nine months ended March 25, 2012 or March 27, 2011.

Intangible Assets

The following table provides details of the Company’s intangible assets subject to amortization as of March 25, 2012 (in thousands, except years):

 

     Gross      Accumulated
Amortization
    Net      Weighted-Average
Useful Life

(years)
 

Customer relationships

   $ 35,226       $ (27,185   $ 8,041         6.90   

Existing technology

     61,941         (41,715     20,226         6.68   

Patents

     20,870         (16,658     4,212         6.08   

Other intangible assets

     35,216         (33,601     1,615         4.10   
  

 

 

    

 

 

   

 

 

    
   $ 153,253       $ (119,159   $ 34,094         6.06   
  

 

 

    

 

 

   

 

 

    

 

15


Table of Contents

The following table provides details of the Company’s intangible assets subject to amortization as of June 26, 2011 (in thousands, except years):

 

     Gross      Accumulated
Amortization
    Net      Weighted-Average
Useful Life (years)
 

Customer relationships

   $ 35,226       $ (23,468   $ 11,758         6.90   

Existing technology

     61,941         (35,409     26,532         6.68   

Patents

     20,670         (14,323     6,347         6.11   

Other intangible assets

     35,216         (32,419     2,797         4.10   
  

 

 

    

 

 

   

 

 

    
   $ 153,053       $ (105,619   $ 47,434         6.06   
  

 

 

    

 

 

   

 

 

    

The Company recognized $4.5 million and $4.5 million in intangible asset amortization expense during the three months ended March 25, 2012 and March 27, 2011, respectively. The Company recognized $13.5 million and $16.5 million in intangible asset amortization expense during the nine months ended March 25, 2012 and March 27, 2011, respectively.

The estimated future amortization expense of purchased intangible assets as of March 25, 2012 is as follows (in thousands):

 

Fiscal Year

   Amount  

2012 (3 months)

   $ 4,497   

2013

     16,417   

2014

     10,444   

2015

     2,204   

2016

     381   

Thereafter

     151   
  

 

 

 
   $ 34,094   
  

 

 

 

NOTE 8 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following:

 

     March 25,
2012
     June 26,
2011
 
     (in thousands)  

Accrued compensation

   $ 172,495       $ 206,313   

Warranty reserves

     32,266         40,951   

Income and other taxes payable

     47,138         51,183   

Other

     78,204         60,309   
  

 

 

    

 

 

 
   $ 330,103       $ 358,756   
  

 

 

    

 

 

 

 

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Table of Contents

NOTE 9 — OTHER INCOME (EXPENSE), NET

The significant components of other income (expense), net, are as follows:

 

     Three Months Ended     Nine Months Ended  
     March 25,
2012
    March 27,
2011
    March 25,
2012
    March 27,
2011
 
     (in thousands)  

Interest income

   $ 2,959      $ 2,237      $ 8,020      $ 7,283   

Interest expense

     (9,422     (107     (28,028     (318

Gains on deferred compensation plan related assets

     2,717        2,220        504        4,798   

Foreign exchange losses

     (126     (1,982     (1,358     (8,269

Other, net

     304        (705     (2,564     (1,772
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (3,568   $ 1,663      $ (23,426   $ 1,722   
  

 

 

   

 

 

   

 

 

   

 

 

 

NOTE 10 — INCOME TAX EXPENSE

The Company’s effective tax rate for the three and nine months ended March 25, 2012 was approximately 16.4% and 17.1%, respectively.

The differences between the U.S. federal statutory tax rate of 35% and the Company’s effective tax rate for the three and nine months ended March 25, 2012 were primarily due to the geographic mix of income and research and development tax credits partially offset by the tax effect of non-deductible stock-based compensation. The effective tax rates recorded during the three and nine months ended March 25, 2012 included the tax impact of discrete items, which were recorded during the quarter in which they occurred. During the three and nine months ended March 25, 2012, discrete items primarily consisted of: (1) a tax benefit of $1.0 million and a tax expense of $2.8 million, respectively, related to the filing of prior year U.S. federal and foreign tax returns and the associated provision to return adjustments, (2) a tax benefit of $0.2 million and $7.4 million respectively due to the recognition of previously unrecognized tax benefits and the reversal of the related interest accruals due to resolution of certain foreign uncertain tax positions, (3) a tax benefit of $4.2 million and $7.9 million, respectively, related to acquisition, integration, restructuring and asset impairment related expenses, and (4) a tax expense of $0.9 million and $2.6 million, respectively, of interest related to uncertain tax positions.

The total gross unrecognized tax benefits as of each date noted below were as follows:

 

     March 25,
2012
     June 26,
2011
 
     (in millions)  

Total gross unrecognized tax benefits

   $ 186.4       $ 181.5   

If the gross unrecognized tax benefits were recognized in a future period, it would result in a net tax benefit of $124.6 million and a reduction of the effective tax rate.

The Company recognizes interest expense and penalties related to the above unrecognized tax benefits within income tax expense. As of March 25, 2012, the Company had accrued approximately $17.2 million for the payment of gross interest and penalties, relating to unrecognized tax benefits, compared to $16.9 million as of June 26, 2011.

The Internal Revenue Service (“IRS”) is examining the Company’s U.S. income tax return for fiscal years 2008 and 2009. The Company is also under audit by the California Franchise Tax Board (“FTB”) for fiscal years 2005 and 2006. As of March 25, 2012, no significant adjustments have been proposed by the IRS or FTB. The Company is unable to make a reasonable estimate as to when cash settlements, if any, with the relevant taxing authorities will occur. In addition, the Company is also subject to audits by foreign tax authorities.

The Company files U.S. federal, U.S. state, and foreign income tax returns. As of March 25, 2012, tax years 2003-2011 remain subject to examination in the jurisdictions where the Company operates.

The Company is in various stages of the examinations in connection with all of its tax audits worldwide, and it is difficult to determine when these examinations will be settled. It is reasonably possible that over the next twelve-month period the Company may experience an increase or decrease in its unrecognized tax benefits. It is not possible to determine either the magnitude or the range of any increase or decrease at this time.

Realization of the Company’s net deferred tax assets is based upon the weight of available evidence, including such factors as the recent earnings history and expected future taxable income. The Company believes it is more likely than not that such assets will be realized with the exception of $46.2 million related to certain California and foreign deferred tax assets. However, ultimate realization could be negatively impacted by market conditions and other variables not known or anticipated at this time. If the valuation allowance related to deferred tax assets were released as of March 25, 2012, approximately $46.2 million would be credited to the statement of operations.

 

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Table of Contents

NOTE 11 — NET INCOME PER SHARE

Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the treasury stock method, for dilutive stock options and RSUs. The following table reconciles the numerators and denominators of the basic and diluted computations for net income per share.

 

     Three Months Ended      Nine Months Ended  
     March 25,
2012
     March 27,
2011
     March 25,
2012
     March 27,
2011
 
     (in thousands, except per share data)  

Numerator:

           

Net income

   $ 45,604       $ 182,240       $ 150,654       $ 597,820   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Basic average shares outstanding

     119,841         123,674         120,904         123,482   

Effect of potential dilutive securities:

           

Employee stock plans

     1,115         1,619         926         1,615   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted average shares outstanding

     120,956         125,293         121,830         125,097   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share—basic

   $ 0.38       $ 1.47       $ 1.25       $ 4.84   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share—diluted

   $ 0.38       $ 1.45       $ 1.24       $ 4.78   
  

 

 

    

 

 

    

 

 

    

 

 

 

For purposes of computing diluted net income per share, weighted-average common shares do not include potentially dilutive securities that are anti-dilutive under the treasury stock method. The following potentially dilutive securities were excluded:

 

     Three Months Ended      Nine Months Ended  
     March 25,
2012
     March 27,
2011
     March 25,
2012
     March 27,
2011
 
     (in thousands)  

Number of potential dilutive securities excluded

     148         107         264         96   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted shares outstanding do not include any effect resulting from warrants, assumed conversion of the Notes, or note hedges (as described in Note 13) as their impact would have been anti-dilutive.

NOTE 12 — COMPREHENSIVE INCOME

The components of comprehensive income, on an after-tax basis where applicable, are as follows:

 

     Three Months Ended     Nine Months Ended  
     March 25,
2012
    March 27,
2011
    March 25,
2012
    March 27,
2011
 
     (in thousands)  

Net income

   $ 45,604      $ 182,240      $ 150,654      $ 597,820   

Foreign currency translation adjustment

     7,118        26,629        (24,771     70,724   

Unrealized gain (loss) on fair value of derivative financial instruments, net

     12,593        (3,012     11,130        3,849   

Unrealized gain on financial instruments, net

     552        1,441        591        879   

Reclassification adjustment for gain included in earnings

     (3,479     (558     (8,688     (6,924

Postretirement benefit plan adjustment

     158        (29     (4,211     1,123   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 62,546      $ 206,711      $ 124,705      $ 667,471   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

The balance of accumulated other comprehensive loss, on an after-tax basis where applicable, is as follows:

 

     March 25,
2012
    June 26,
2011
 
     (in thousands)  

Accumulated foreign currency translation adjustment

   $ (9,919   $ 14,852   

Accumulated unrealized gain on derivative financial instruments

     3,813        581   

Accumulated unrealized gain on financial instruments

     545        744   

Postretirement benefit plan adjustment

     (10,627     (6,416
  

 

 

   

 

 

 

Accumulated other comprehensive income (loss)

   $ (16,188   $ 9,761   
  

 

 

   

 

 

 

NOTE 13 — LONG TERM DEBT

The following table reflects the carrying value of the Company’s convertible notes and other long-term debt as of March 25, 2012 and June 26, 2011:

 

     March 25,
2012
    June 26,
2011
 
     (in millions)  

0.50% Notes due 2016

   $ 450.0      $ 450.0   

Less: Unamortized interest discount

     (63.9     (74.4
  

 

 

   

 

 

 

Net carrying amount of 0.50% Notes 2016

     386.1        375.6   
  

 

 

   

 

 

 

1.25% Notes due 2018

     450.0        450.0   

Less: Unamortized interest discount

     (93.7     (103.2
  

 

 

   

 

 

 

Net carrying amount of 1.25% Notes 2018

     356.3        346.8   
  

 

 

   

 

 

 

Other long-term debt

     1.0        3.9   
  

 

 

   

 

 

 

Total long-term debt

   $ 743.4      $ 726.3   
  

 

 

   

 

 

 

Convertible Senior Notes

In May 2011, the Company issued and sold $450 million in aggregate principal amount of 0.5% Convertible Senior Notes due May 2016 (the “2016 Notes”) at par. At the same time, the Company issued and sold $450 million in aggregate principal amount of 1.25% Convertible Senior Notes due May 2018 (the “2018 Notes”, and collectively with the 2016 Notes the “Notes”) at par. The Notes may be converted, under certain circumstances, based on an initial conversion rate of 15.8687 shares of common stock per $1,000 principal amount of notes (which represents an initial conversion price of approximately $63.02 per share of common stock).

The net proceeds to the Company from the sale of the Notes were $835.5 million. The Company pays cash interest at an annual rate of 0.5% and 1.25%, respectively, on the 2016 and 2018 Notes, payable semi-annually on May 15 and November 15 of each year, beginning November 15, 2011.

The Company separately accounts for the liability and equity components of the Notes. The initial debt components of the 2016 and 2018 Notes were valued at $373.8 million and $345.1 million, respectively, based on the present value of the future cash flows using discount rates of 4.29% and 5.27%, respectively, the Company’s borrowing rate at the date of the issuance for similar debt instruments without the conversion feature. The carrying values of the equity components of the 2016 and 2018 Notes were $76.2 million and $104.9 million, respectively, as of March 25, 2012. The effective interest rates on the liability components of the 2016 Notes and 2018 Notes for the three months ended March 25, 2012 were 4.29% and 5.27%, respectively. The following table presents the amount of interest cost recognized relating to both the contractual interest coupon and amortization of the discount on the liability component of the Notes during the three and nine months ended March 25, 2012.

 

     Three Months Ended
March 25,

2012
     Nine Months Ended
March  25,

2012
 
     (in millions)  

Contractual interest coupon

   $ 2.0       $ 5.9   

Amortization of interest discount

     6.7         20.0   
  

 

 

    

 

 

 

Total interest cost recognized

   $ 8.7       $ 25.9   
  

 

 

    

 

 

 

 

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Table of Contents

The remaining bond discount of the 2016 Notes of $63.9 million as of March 25, 2012 will be amortized over their remaining life, which is approximately 4.1 years. The remaining bond discount of the 2018 Notes of $93.7 million as of March 25, 2012 will be amortized over their remaining life, which is approximately 6.1 years.

The 2016 Notes may be converted at any time prior to the close of business on the business day immediately preceding February 15, 2016, at the option of the holder, only under the following circumstances: 1) during the five business-day period after any ten consecutive trading-day period (the “measurement period”) in which the trading price per $1,000 principal amount of 2016 notes for each day of such measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on each such trading day; 2) during any fiscal quarter commencing after the fiscal quarter ending September 25, 2011, if the last reported sale price of the Company’s common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price in effect on the last trading day of the immediately preceding fiscal quarter; or 3) upon the occurrence of specified corporate events. On and after February 15, 2016 until the close of business on the second scheduled trading day immediately preceding the maturity date of May 15, 2016, holders may convert their notes at any time, regardless of the foregoing circumstances.

Upon conversion, a holder will receive the conversion value of the 2016 Notes to be converted equal to the conversion rate multiplied by the volume weighted average price of the Company’s common stock during a specified period following the conversion date. The conversion value of each 2016 Note will be paid in: 1) cash equal to the principal amount of the note and 2) to the extent the conversion value exceeds the principal amount of the note, common stock (plus cash in lieu of any fractional shares of common stock). The conversion price will be subject to adjustment in some events but will not be adjusted for accrued interest. Upon a “fundamental change” at any time, as defined, the Company will in some cases increase the conversion rate for a holder who elects to convert its 2016 Notes in connection with such fundamental change. In addition, the holders may require the Company to repurchase for cash all or a portion of their notes upon a “designated event” at a price equal to 100% of the principal amount of the notes being repurchased plus accrued and unpaid interest, if any.

Concurrently with the issuance of the 2016 Notes, the Company purchased a convertible note hedge and sold warrants. The separate convertible note hedge and warrant transactions are collectively structured to reduce the potential future economic dilution associated with the conversion of the 2016 Notes and to increase the effective initial conversion price to $71.34 per share. Each of these components is discussed separately below:

Convertible Note Hedge. Counterparties agreed to sell to the Company up to approximately 7.1 million shares of the Company’s common stock, which is the number of shares initially issuable upon conversion of the 2016 Notes in full, at a price of $63.02 per share. The convertible note hedge transaction will be settled in net shares and will terminate upon the earlier of the maturity date of the 2016 Notes or the first day none of the 2016 Notes remains outstanding due to conversion or otherwise. Settlement of the convertible note hedge in net shares, based on the number of shares issued upon conversion of the 2016 Notes, on the expiration date would result in the Company receiving net shares equivalent to the number of shares issuable by the Company upon conversion of the 2016 Notes. Should there be an early unwind of the convertible note hedge transaction, the number of net shares potentially received by the Company will depend upon 1) the then existing overall market conditions, 2) the Company’s stock price, 3) the volatility of the Company’s stock, and 4) the amount of time remaining before expiration of the convertible note hedge. The convertible note hedge transaction cost of $76.2 million has been accounted for as an equity transaction. The Company initially recorded approximately $28.2 million in stockholders’ equity from the net deferred tax liability related to the convertible note hedge at inception of the transaction.

Sold Warrants. The Company received $57.6 million from the same counterparties from the sale of warrants to purchase up to approximately 7.1 million shares of the Company’s common stock at an exercise price of $71.34 per share. The warrants expire on a series of dates between August 15, 2016 and October 21, 2016. At expiration, the Company may, at its option, elect to settle the warrants on a net share basis. As of March 25, 2012, the warrants had not been exercised and remained outstanding. The value of the warrants was initially recorded in equity and continues to be classified as equity.

The 2018 Notes may be converted at any time prior to the close of business on the business day immediately preceding February 15, 2018, at the option of the holder only under the following circumstances: 1) during the five business-day period after any ten consecutive trading-day period (the “measurement period”) in which the trading price per $1,000 principal amount of 2018 notes for each day of such measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the applicable conversion rate on each such trading day; 2) during any fiscal quarter commencing after the fiscal quarter ending September 25, 2011, if the last reported sale price of the Company’s common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price in effect on the last trading day of the immediately preceding fiscal quarter; or 3) upon the occurrence of specified corporate events. On and after February 15, 2018 until the close of business on the second scheduled trading day immediately preceding the maturity date of May 15, 2018, holders may convert their notes at any time, regardless of the foregoing circumstances.

Upon conversion, a holder will receive the conversion value of the 2018 Notes to be converted equal to the conversion rate multiplied by the volume weighted average price of the Company’s common stock during a specified period following the conversion date. The conversion value of each 2018 Notes will be paid in: 1) cash equal to the principal amount of the note and 2) to the extent the conversion value exceeds the principal amount of the note, common stock (plus cash in lieu of any fractional shares of common stock). The conversion price will be subject to adjustment in some events but will not be adjusted for accrued interest. Upon a “fundamental change” at any time, as defined, the Company will in some cases increase the conversion rate for a holder who elects to convert its 2018 Notes in connection with such fundamental change. In addition, the holders may require the Company to repurchase for cash all or a portion of their notes upon a “designated event” at a price equal to 100% of the principal amount of the notes being repurchased plus accrued and unpaid interest, if any.

 

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Table of Contents

Concurrently with the issuance of the 2018 Notes, the Company purchased a convertible note hedge and sold warrants. The separate convertible note hedge and warrant transactions are collectively structured to reduce the potential future economic dilution associated with the conversion of the 2018 Notes and to increase the effective initial conversion price to $76.10 per share. Each of these components is discussed separately below:

Convertible Note Hedge. Counterparties agreed to sell to the Company up to approximately 7.1 million shares of the Company’s common stock, which is the number of shares initially issuable upon conversion of the 2018 Notes in full, at a price of $63.02 per share. The convertible note hedge transaction will be settled in net shares and will terminate upon the earlier of the maturity date of the 2018 Notes or the first day none of the 2018 Notes remains outstanding due to conversion or otherwise. Settlement of the convertible note hedge in net shares, based on the number of shares issued upon conversion of the 2018 Notes, on the expiration date would result in the Company receiving net shares equivalent to the number of shares issuable by the Company upon conversion of the 2018 Notes. Should there be an early unwind of the convertible note hedge transaction, the number of net shares potentially received by the Company will depend upon 1) the then existing overall market conditions, 2) the Company’s stock price, 3) the volatility of the Company’s stock, and 4) the amount of time remaining before expiration of the convertible note hedge. The convertible note hedge transaction cost of $104.9 million has been accounted for as an equity transaction. The Company initially recorded approximately $38.8 million in stockholders’ equity from the net deferred tax liability related to the convertible note hedge at inception of the transaction.

Sold Warrants . The Company received $76.3 million from the same counterparties from the sale of warrants to purchase up to approximately 7.1 million shares of the Company’s common stock at an exercise price of $76.10 per share. The warrants expire on a series of dates between August 15, 2018 and October 23, 2018. At expiration, the Company may, at its option, elect to settle the warrants on a net share basis. As of March 25, 2012, the warrants had not been exercised and remained outstanding. The value of the warrants was initially recorded in equity and continues to be classified as equity.

Fair Value of Notes

As of March 25, 2012, the face values of the 2016 Notes and 2018 Notes were $450.0 million and $450.0 million, respectively. As of March 25, 2012, the fair values of the 2016 Notes and 2018 Notes, which includes the debt and equity components, were approximately $461.4 million and $472.1 million, respectively, based on quoted market prices (level 1 inputs within the fair value hierarchy).

Other Long-term Debt

The Company’s remaining total long-term debt, excluding convertible notes, of $1.0 million as of March 25, 2012 consists of various bank loans and government subsidized technology loans supporting operating needs.

Contractual Obligations

The Company’s contractual cash obligations relating to its convertible notes and other long-term debt as of March 25, 2012 were as follows:

 

     Long-term
Debt
 
     (in thousands)  

Payments due by period:

  

One year

   $ 983   

Two years

     —     

Three years

     —     

Four years

     —     

Five years

     450,000   

Over 5 years

     450,000   
  

 

 

 

Total

     900,983   

Current portion of long-term debt

     983   
  

 

 

 

Long-term debt

   $ 900,000   
  

 

 

 

NOTE 14 — COMMITMENTS

Capital Leases

Capital leases reflect building and office equipment leases. The amounts in the table below include the interest portion of payment obligations.

 

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Table of Contents

The Company’s contractual cash obligations relating to its existing capital leases, including interest, as of March 25, 2012 were as follows:

 

     Capital Leases  
     (in thousands)  

Payments due by period:

  

One year

   $ 1,852   

Two years

     1,597   

Three years

     1,545   

Four years

     1,553   

Five years

     9,131   

Over 5 years

     —     
  

 

 

 

Total

     15,678   

Less: Interest on capital leases

     1,176   
  

 

 

 

Less: Current portion of capital leases

     1,517   
  

 

 

 

Capital leases

   $ 12,985   
  

 

 

 

Operating Leases and Related Guarantees

The Company leases most of its administrative, R&D and manufacturing facilities, regional sales/service offices and certain equipment under non-cancelable operating leases. Certain of the Company’s facility leases for buildings located at its Fremont, California headquarters and certain other facility leases provide the Company with options to extend the leases for additional periods or to purchase the facilities. Certain of the Company’s facility leases provide for periodic rent increases based on the general rate of inflation.

On December 18, 2007, the Company entered into two operating leases regarding certain improved properties in Livermore, California. These leases were amended on April 3, 2008 and July 9, 2008 (as so amended, the “Livermore Leases”). On December 21, 2007, the Company entered into a series of four amended and restated operating leases (the “New Fremont Leases,” and collectively with the Livermore Leases, the “Operating Leases”) with regard to certain improved properties at the Company’s headquarters in Fremont, California.

The Operating Leases have a term of approximately seven years ending on the first business day in January 2015. The Company may, at its discretion and with 30 days’ notice, elect to purchase the property that is the subject of the Operating Lease for an amount approximating the sum required to pay the amount of the lessor’s investment in the property and any accrued but unpaid rent.

The Company is required, pursuant to the terms of the Operating Leases, to maintain collateral in an aggregate of approximately $164.9 million in separate interest-bearing accounts as security for the Company’s obligations under the Operating Leases. This amount is recorded as restricted cash in the Company’s Consolidated Balance Sheet as of as of March 25, 2012.

When the terms of the Operating Leases expire, the property subject to that Operating Lease may be remarketed. The Company has guaranteed to the lessor that each property will have a certain minimum residual value. The aggregate guarantee made by the Company under the Operating Leases is generally no more than approximately $141.7 million; however, under certain default circumstances, the guarantee with regard to an Operating Lease may be 100% of the lessor’s aggregate investment in the applicable property, which in no case will exceed $164.9 million, in the aggregate.

The Company recognized at lease inception $0.6 million in estimated liabilities related to the Operating Leases, which represents the fair value guarantee premium that would be required had the guarantee been issued in a standalone transaction. These liabilities are recorded in other long-term liabilities with the offsetting entry recorded as prepaid rent in other assets. The balances in prepaid rent and the guarantee liability are amortized to the statement of operations on a straight line basis over the life of the leases. If it becomes probable that the Company will be required to make a payment under the residual guarantee, the Company will increase its liability with a corresponding increase to prepaid rent and amortize the increased prepaid rent over the remaining lease term with no corresponding reduction in the liability. As of March 25, 2012, the unamortized portion of the fair value of the residual value guarantees remaining in other long-term liabilities and prepaid rent was $0.2 million.

Other Guarantees

The Company has issued certain indemnifications to its lessors for taxes and general liability under some of its agreements. The Company has entered into certain insurance contracts that may limit its exposure to such indemnifications. As of March 25, 2012, the Company had not recorded any liability on its Consolidated Financial Statements in connection with these indemnifications, as it does not believe, based on information available, that it is probable that any amounts will be paid under these guarantees.

Generally, the Company indemnifies, under pre-determined conditions and limitations, its customers for infringement of third-party intellectual property rights by the Company’s products or services. The Company seeks to limit its liability for such indemnity to an amount not to exceed the sales price of the products or services subject to its indemnification obligations. The Company does not believe, based on information available, that it is probable that any material amounts will be paid under these guarantees.

 

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Table of Contents

Warranties

The Company provides standard warranties on its systems. The liability amount is based on actual historical warranty spending activity by type of system, customer, and geographic region, modified for any known differences such as the impact of system reliability improvements.

Changes in the Company’s product warranty reserves were as follows:

 

     Three Months Ended     Nine Months Ended  
     March 25,
2012
    March 27,
2011
    March 25,
2012
    March 27,
2011
 
     (in thousands)  

Balance at beginning of period

   $ 32,734      $ 42,520      $ 40,951      $ 31,756   

Warranties issued during the period

     11,555        13,027        27,908        39,357   

Settlements made during the period

     (14,692     (12,063     (37,838     (28,083

Expirations and change in liability for pre-existing warranties during the period

     2,669        (1,564     1,245        (1,798

Changes in foreign currency exchange rates

     —          —          —          688   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 32,266      $ 41,920      $ 32,266      $ 41,920   
  

 

 

   

 

 

   

 

 

   

 

 

 

NOTE 15 — RESTRUCTURING AND ASSET IMPAIRMENTS

Prior to incurring charges under the restructuring plans discussed below, management approved and announced the specific actions to be taken under each plan. Severance packages were communicated to affected employees in sufficient detail that the employees could determine their type and amount of benefit. The termination of the affected employees occurred as soon as practical after the restructuring plans were announced. The amount of remaining future lease payments for facilities the Company ceased to use and included in the restructuring charges is based on management’s estimates using known prevailing real estate market conditions at that time based, in part, on the opinions of independent real estate experts. Leasehold improvements relating to the vacated buildings were written off, as these items will have no future economic benefit to the Company and have been abandoned.

Accounting for restructuring activities, as compared to regular operating cost management activities, requires an evaluation of formally committed and approved plans. Restructuring activities have comparatively greater strategic significance and materiality and may involve exit activities, whereas regular cost containment activities are more tactical in nature and are rarely characterized by formal and integrated action plans or exiting a particular product, facility, or service.

There were no restructuring and asset impairment charges and reversals during the three months ended March 25, 2012 or March 27, 2011. The following table summarizes restructuring and asset impairment charges and reversals during the nine months ended March 25, 2012 and March 27, 2011. In addition to charges incurred under specific restructuring plans, the Company incurred asset impairment charges of $1.7 million related to a decline in the market value of certain facilities.

 

     Nine Months Ended  
     March 25,
2012
    March 27,
2011
 
     (in thousands)  

June 2008 Plan

   $ (859   $ —     

March 2009 Plan

     —          (5,163

Asset impairments outside of specific restructuring plans

     1,725        —     
  

 

 

   

 

 

 

Total restructuring and assset impairment charges (recoveries)

   $ 866      $ (5,163
  

 

 

   

 

 

 

The amounts in the table above were recorded in the Consolidated Statements of Operations for the respective periods as follows:

 

     Nine Months Ended  
     March 25,
2012
    March 27,
2011
 
     (in thousands)  

Cost of goods sold

   $ (859   $ —     

Operating expense

     1,725        (5,163
  

 

 

   

 

 

 

Total restructuring and assset impairment charges (recoveries)

   $ 866      $ (5,163
  

 

 

   

 

 

 

 

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June 2008 Plan

During the June 2008 quarter, the Company incurred restructuring expenses and asset impairment charges related to the integration of SEZ and overall streamlining of the Company’s combined Clean Product Group (“June 2008 Plan”). During the three months ended December 25, 2011 the Company released $0.9 million related to a recorded obligation not realized for a previously restructured product line. There were no restructuring and asset impairment charges (recoveries) under the June 2008 Plan during three months ended March 25, 2012 or the three or nine months ended March 27, 2011. There are no remaining liabilities related to the June 2008 Plan as of March 25, 2012.

March 2009 Plan

During the March 2009 quarter the Company incurred restructuring expenses and asset impairment charges designed to align the Company’s cost structure with its outlook for the current economic environment and future business opportunities (“March 2009 Plan”). There were no charges incurred under the March 2009 Plan during the three or nine months ended March 25, 2012 or the three months March 27, 2011. During the nine months ended March 27, 2011 the Company reversed $5.2 million in restructuring and asset impairment charges as a result of a decision to occupy previously restructured facilities.

Below is a table summarizing activity relating to the March 2009 Plan during the nine months ended March 25, 2012:

 

     Facilities  
     (in thousands)  

Balance at June 26, 2011

   $ 28,106   

Cash payments

     (151
  

 

 

 

Balance at March 25, 2012

   $ 27,955   
  

 

 

 

Total charges incurred through March 25, 2012 under the March 2009 Plan were $61.3 million. The facilities balance consists primarily of lease payments, net of sublease income, on vacated buildings and is expected to be paid by the end of fiscal year 2015.

NOTE 16 – BUSINESS COMBINATIONS

On December 14, 2011, Lam Research entered into an Agreement and Plan of Merger with Novellus Systems, Inc. (“Novellus”), under which Novellus will become a wholly-owned subsidiary of Lam Research. The transaction is structured as an all stock deal that was estimated at the date of announcement to be valued at approximately $3.3 billion, based on Lam’s closing stock price on the date of the agreement. The ultimate transaction value will be based on Lam’s stock price at the close of market on the date of the transaction close. Completion of the transaction is subject to certain closing conditions, including but not limited to approval of the transaction by the stockholders of Lam Research and Novellus, required regulatory approvals, and other customary conditions.

In addition, on the date of announcement, the Board of Directors authorized, in conjunction with the transaction, the repurchase of up to $1.6 billion of Company common stock, which replaces the previous repurchase authorizations under the program.

NOTE 17 — STOCK REPURCHASE PROGRAM

On September 10, 2010, the Board of Directors authorized the repurchase of up to $250 million of Company common stock and on September 1, 2011 the Board of Directors authorized the repurchase of up to an additional $500 million of Company common stock. On December 14, 2011, the Board of Directors authorized the repurchase of up to $1.6 billion of Company common stock, which replaces the previous repurchase authorizations under the program. These repurchases can be conducted on the open market or as private purchases and may include the use of derivative contracts with large financial institutions, in all cases subject to compliance with applicable law. Repurchases will be funded using the Company’s available cash. This repurchase program has no termination date and may be suspended or discontinued at any time.

Repurchases under the repurchase program were as follows during the periods indicated:

 

Period

   Total Number of
Shares
Repurchased
     Total Cost of
Repurchase
     Average Price Paid
Per Share
     Amount Available
Under Repurchase
Program
 
     (in thousands, except per share data)  

Available balance as of June 26, 2011

            $ 249,244   

Authorization of additional $500 million - September 2011

            $ 749,244   

Quarter ended September 25, 2011

     1,977       $ 74,287       $ 37.57       $ 674,957   

Quarter ended December 25, 2011

     2,860       $ 110,637       $ 38.69       $ 564,320   

Authorization of new $1.6 billion plan - December 2011

            $ 1,600,000   

Quarter ended March 25, 2012

     300       $ 12,513       $ 41.71       $ 1,587,487   

In addition to shares repurchased under Board authorized repurchase program shown above, the Company acquired 152,000 shares at a total cost of $6.4 million which the Company withheld through net share settlements to cover minimum tax withholding obligations upon the vesting

 

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of restricted stock unit awards granted under the Company’s equity compensation plans. The shares retained by the Company through these net share settlements are not a part of the Board-authorized repurchase program but instead are authorized under the Company’s equity compensation plans.

As part of its share repurchase program, the Company may from time-to-time enter into structured share repurchase arrangements with financial institutions using general corporate funds. Historically, these arrangements have required the Company to make an up-front cash payment in exchange for the right to receive shares of its common stock or cash at the expiration of the agreement, dependent upon the closing price of the Corporation’s common stock at the settlement date. During the quarter ended March 25, 2012 one of these arrangements settled, resulting in the receipt of $79.2 million. As of March 25, 2012 there are no outstanding prepayments under such arrangement. Under these arrangements, any prepayments or cash payments at settlement are recorded as a component of additional paid in capital in the Company’s Consolidated Balance Sheet.

NOTE 18 — LEGAL PROCEEDINGS

From time to time, the Company has received notices from third parties alleging infringement of such parties’ patent or other intellectual property rights by the Company’s products. In such cases, it is the Company’s policy to defend the claims, or if considered appropriate, negotiate licenses on commercially reasonable terms. The Company does not believe any of these matters will have a material adverse effect on its consolidated financial condition or results of operations. However, no assurance can be given that the Company will be able in the future to negotiate necessary licenses on commercially reasonable terms, or at all, or that any litigation resulting from such claims would not have a material adverse effect on the Company’s consolidated financial position or operating results.

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

With the exception of historical facts, the statements contained in this discussion are forward-looking statements, which are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Certain, but not all, of the forward-looking statements in this report are specifically identified as forward-looking, by use of phrases and words such as “we believe,” “we anticipate,” “we expect,” “may,” “should,” “could” and other future-oriented terms. The identification of certain statements as “forward-looking” is not intended to mean that other statements not specifically identified are not forward-looking. Forward-looking statements include, but are not limited to, statements that relate to: trends in the global economic environment and the semiconductor industry; the anticipated levels of, and rates of change in, future shipments, margins, market share, capital expenditures, revenue and operating expenses generally; volatility in our quarterly results; customer requirements and our ability to satisfy those requirements; customer capital spending and their demand for our products; our ability to defend our market share and to gain new market share; anticipated growth in the industry and the total market for wafer-fabrication equipment and our growth relative to such growth; levels of research and development (“R&D”) expenditures; the estimates we make, and the accruals we record, in order to implement our critical accounting policies (including but not limited to the adequacy of prior tax payments, future tax liabilities and the adequacy of our accruals relating to them); our access to capital markets; our ability to manage and grow our cash position; and the sufficiency of our financial resources to support future business activities (including but not limited to operations, investments, debt service requirements and capital expenditures). Such statements are based on current expectations and are subject to risks, uncertainties, and changes in condition, significance, value, and effect, including without limitation those discussed below under the heading “Risk Factors” within Part II Item 1A and elsewhere in this report and other documents we file from time to time with the Securities and Exchange Commission (“SEC”), such as our annual report on Form 10-K for the year ended June 26, 2011, our quarterly reports on Form 10-Q for the quarter ended September 25, 2011 and December 25, 2011, and our current reports on Form 8-K. Such risks, uncertainties and changes in condition, significance, value, and effect could cause our actual results to differ materially from those expressed in this report and in ways not readily foreseeable. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof and are based on information currently and reasonably known to us. We undertake no obligation to release the results of any revisions to these forward-looking statements, which may be made to reflect events or circumstances that occur after the date hereof or to reflect the occurrence or effect of anticipated or unanticipated events.

Documents To Review In Connection With Management’s Discussion and Analysis Of Financial Condition and Results Of Operations

For a full understanding of our financial position and results of operations for the three and nine months ended March 25, 2012, and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations below, you should also read the Condensed Consolidated Financial Statements and notes presented in this Form 10-Q and the financial statements and notes in our 2011 Form 10-K.

Overview

Management’s Discussion and Analysis of Financial Condition and Results of Operations consists of the following sections:

Executive Summary provides an overview of the Company’s operations and a summary of certain highlights of our results of operations

Results of Operations provides an analysis of operating results

Critical Accounting Policies and Estimates discusses accounting policies that reflect the more significant judgments and estimates we use to prepare our Condensed Consolidated Financial Statements

Liquidity and Capital Resources provides an analysis of cash flows, contractual obligations and financial position

EXECUTIVE SUMMARY

We design, manufacture, market, refurbish, and service semiconductor processing equipment used in the fabrication of integrated circuits and are recognized as a major provider of such equipment to the worldwide semiconductor industry. Our customers include semiconductor manufacturers that make DRAM, flash memory, and logic integrated circuits for a wide range of consumer and industrial electronics. Semiconductor wafers are subjected to a complex series of process and preparation steps that result in the simultaneous creation of many individual integrated circuits. We leverage our expertise in the areas of etch and single-wafer clean processing to develop technology and productivity solutions that typically benefit our customers through lower defect rates, enhanced yields, faster processing time, and/or reduced cost as well as by facilitating their ability to meet more stringent performance and design standards.

The semiconductor capital equipment industry is cyclical in nature and has historically experienced periodic and pronounced changes in customer demand resulting in industry downturns and upturns. Today’s leading indicators of change in customer investment patterns, such as electronics demand, memory pricing, and foundry utilization rates, may not be any more reliable than in prior years. Demand for our equipment can vary significantly from period to period as a result of various factors, including, but not limited to, economic conditions (both general and in the semiconductor and electronics industries), supply, demand, prices for semiconductors, customer capacity requirements, and our ability to develop, acquire, and market competitive products. For these and other reasons, our results of operations during any particular fiscal period are not necessarily indicative of future operating results, and we could experience significant volatility from quarter to quarter.

We saw sequential growth from the December 2011 quarter in both shipments and revenues for the March 2012 quarter as foundry integrated circuit manufacturers increased their leading-edge production capacity. The leading-edge devices produced by foundry integrated circuit manufacturers offer low power, high performance capabilities

 

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required by the growing mobile markets and as a result, demand for our products continued to strengthen. Also, as announced in December 2011, we plan to extend our product and services portfolio and leadership in wafer fabrication equipment via the acquisition of Novellus Systems, Inc. Integration planning is in process and progressing as planned.

The following table summarizes certain key financial information for the periods indicated below (in thousands, except percentage and per share data):

 

     Three Months Ended  
     March 25,
2012
    December 25,
2011
    March 27,
2011
 

Revenue

   $ 658,961      $ 583,981      $ 809,087   

Gross margin

   $ 267,147      $ 234,826      $ 374,019   

Gross margin as a percent of revenue

     40.5     40.2     46.2

Total operating expenses

   $ 209,029      $ 187,280      $ 177,023   

Net income

   $ 45,604      $ 33,212      $ 182,240   

Diluted net income per share

   $ 0.38      $ 0.27      $ 1.45   

In the quarter ended March 25, 2012, revenue increased as compared to the quarter ended December 25, 2011 primarily due to increased capacity investments by leading-edge foundry customers. Gross margin as a percent of revenues increased in the March 2012 quarter as compared to the December 2011 quarter due to improved factory utilization as a result of greater business volumes offset by less favorable customer mix. Operating expenses in the March 2012 quarter increased as compared to the quarter ended December 2011. This change in operating expenses is related to continued investments in next-generation research and development and the customer facing activities that surround and support it, higher variable compensation expenses associated with higher profit levels, costs associated with the anticipated Novellus acquisition and integration, as well as expenses related to market appreciation of deferred compensation plan obligations. The increased operating expenses related to deferred compensation plan obligations were substantively offset by income from the market appreciation of assets related to this plan, which were recorded in other income (expense).

Our cash and cash equivalents, short-term investments, and restricted cash and investments balances totaled approximately $2.6 billion as of March 25, 2012 compared to $2.4 billion as of December 25, 2011. Cash generated by operations was approximately $146 million during the March 2012 quarter. We used cash during the March 2012 quarter to purchase $28 million of property and equipment and repurchase $19 million of our shares. We received cash of $79 million as the result of a cash settlement under a structured stock repurchase program. Employee headcount increased to approximately 3,900 as of March 25, 2012, from approximately 3,850 as of December 25, 2011.

RESULTS OF OPERATIONS

Shipments

 

     Three Months Ended  
     March 25,
2012
    December 25,
2011
    March 27,
2011
 

Shipments (in millions)

   $ 713      $ 563      $ 813   

North America

     12     19     23

Europe

     8     8     16

Japan

     7     10     11

Korea

     48     37     19

Taiwan

     14     18     18

Asia Pacific

     11     8     13

Shipments for the March 2012 quarter increased 27% compared to the December 2011 quarter and decreased 12% year over year. During the March 2012 quarter, applications at or below the 4x nanometer technology node were 91% of total systems shipments. The system shipments in the memory, foundry, and logic/integrated device manufacturing markets were approximately 40%, 53% and 7%, respectively. Starting with the December 2011 quarter we have modified the foundry category to include manufacturers that have a majority of their logic capacity available for the foundry business. These shipments were previously reported in the logic/integrated device manufacturing category.

 

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Revenue

 

     Three Months Ended     Nine Months Ended  
     March 25,
2012
    December 25,
2011
    March 27,
2011
    March 25,
2012
    March 27,
2011
 

Revenue (in millions)

   $ 659      $ 584      $ 809      $ 1,923      $ 2,486   

North America

     20     18     23     19     11

Europe

     9     9     18     10     14

Japan

     7     14     13     13     12

Korea

     37     34     18     32     24

Taiwan

     16     17     14     15     25

Asia Pacific

     11     8     14     11     14

Revenue for the March 2012 quarter increased 13% compared to the December 2011 quarter primarily due to increased capacity investments by leading-edge foundry customers. Revenue for the three and nine months ended March 25, 2012 decreased 19% and 23% year over year, respectively. These trends reflect the impact of reduced overall macroeconomic activity on customer investments for the comparative periods. Regions other than North America and Europe continue to account for a majority of our revenues as a substantial amount of worldwide capacity additions for semiconductor manufacturing continue to occur in Asia and the Far East. Our deferred revenue balance increased to $246 million as of March 25, 2012 compared to $192 million as of December 25, 2011. Our deferred revenue balance does not include shipments to Japanese customers, to whom title does not transfer until customer acceptance. Shipments to Japanese customers are classified as inventory at cost until the time of acceptance. The anticipated future revenue value from shipments to Japanese customers was approximately $19 million as of March 25, 2012 compared to $16 million as of December 25, 2011.

Gross Margin

 

     Three Months Ended     Nine Months Ended  
     March 25,
2012
    December 25,
2011
    March 27,
2011
    March 25,
2012
    March 27,
2011
 
     (in thousands, except percentages)  

Gross margin

   $ 267,147      $ 234,826      $ 374,019      $ 785,856      $ 1,158,778   

Percent of revenue

     40.5     40.2     46.2     40.9     46.6

The increase in gross margin during the March 2012 quarter as compared to the December 2011 quarter is due to improvements in factory utilization from the increased levels of business, partially offset by customer mix. The decrease in gross margin as a percentage of revenue during the three and nine months ended March 2012 quarter as compared to the same periods in the prior year is attributable to reduced factory and field utilization as a result of the decline in business volume, customer and product mix. Additionally, gross margin during the March 2012 quarter was negatively impacted by expense of approximately $3 million related to a customer bankruptcy filing.

Research and Development

 

     Three Months Ended     Nine Months Ended  
     March 25,
2012
    December 25,
2011
    March 27,
2011
    March 25,
2012
    March 27,
2011
 
     (in thousands, except percentages)  

Research and development (“R&D”)

   $ 113,448      $ 104,024      $ 96,880      $ 320,031      $ 273,710   

Percent of revenue

     17.2     17.8     12.0     16.6     11.0

We continue to make significant R&D investments focused on leading-edge plasma etch, single-wafer clean and other semiconductor manufacturing requirements. The increase in R&D expenses during the March 2012 quarter compared to the December 2011 quarter was primarily due to increased salaries and benefits as well as a $5 million increase in supplies related to new product development.

The increase in R&D expenses during the March 2012 quarter compared to the same period in the prior year was primarily due to $12 million of higher outside services, supplies and depreciation related to new product development and $7 million of increased salary and benefit costs related to higher headcount.

The increase in R&D expenses during the nine months ended March 25, 2012 as compared to the same period prior year was primarily due to approximately $37 million of higher outside services, supplies, and depreciation related to new product development. There was also $17 million of increased salary and benefit costs related to higher headcount.

 

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Selling, General and Administrative

 

     Three Months Ended     Nine Months Ended  
     March 25,
2012
    December 25,
2011
    March 27,
2011
    March 25,
2012
    March 27,
2011
 
     (in thousands, except percentages)  

Selling, general and administrative (“SG&A”)

   $ 95,581      $ 83,256      $ 80,143      $ 259,037      $ 228,137   

Percent of revenue

     14.5     14.3     9.9     13.5     9.2

The increase in SG&A expenses during the March 2012 quarter as compared to the December 2011 quarter was due to $5 million of acquisition and integration costs related to the Novellus transaction, and $6 million due to higher salaries, benefits, and variable compensation levels.

The increase in SG&A expenses in the March 2012 quarter compared to the same period in the prior year was primarily due to $12 million of Novellus-related acquisition and integration costs.

The increase in SG&A expenses during the nine months ended March 25, 2012 as compared to the same period prior year was due to $18 million of Novellus-related acquisition and integration costs and $10 million related to depreciation, supplies, travel, and insurance expenses.

Restructuring and Asset Impairments

The Company did not incur any restructuring and asset impairment charges during the three months ended March 25, 2012 or March 27, 2011. During the nine months ended March 25, 2012 the Company incurred asset impairment charges of $1.7 million related to a decline in the market value of certain facilities and released $0.9 million related to a recorded obligation not realized for a previously restructured product line. During the nine months ended March 27, 2011 the Company reversed $5.2 million in restructuring and asset impairment charges under the March 2009 Plan as a result of a decision to occupy previously restructured facilities.

The following table summarizes charges and reversals under each of the plans described below for the nine-month periods indicated:

 

     Nine Months Ended  
     March 25,
2012
    March 27,
2011
 
     (in thousands)  

June 2008 Plan

   $ (859   $ —     

March 2009 Plan

     —          (5,163

Asset impairments outside of specific restructuring plans

     1,725        —     
  

 

 

   

 

 

 

Total restructuring and assset impairment charges (recoveries)

   $ 866      $ (5,163
  

 

 

   

 

 

 

For further details related to restructuring and asset impairment, see Note 15 of the Notes to Consolidated Financial Statements.

Other Income (Expense), Net

Other income (expense), net consisted of the following:

 

     Three Months Ended     Nine Months Ended  
     March 25,
2012
    December 25,
2011
    March 27,
2011
    March 25,
2012
    March 27,
2011
 
     (in thousands)  

Interest income

   $ 2,959      $ 2,472      $ 2,237      $ 8,020      $ 7,283   

Interest expense

     (9,422     (9,346     (107     (28,028     (318

Gains (losses) on deferred compensation plan related assets

     2,717        (348     2,220        504        4,798   

Foreign exchange gain (loss)

     (126     (142     (1,982     (1,358     (8,269

Other, net

     304        (421     (705     (2,564     (1,772
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ (3,568   $ (7,785   $ 1,663      $ (23,426   $ 1,722   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense increased in the three and nine months ended March 25, 2012 as compared to the same periods in the prior year due to interest expense related to the $900 million convertible notes issued May 2011.

We recognized gains on assets which are related to obligations under our deferred compensation plan, in the three months ended December 25, 2011 as compared to gains during the three and nine months ended March 25, 2012 and March 27, 2011 due to changes in the market value of securities in this portfolio.

 

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We recognized smaller losses as a result of changes in the value of our foreign currency denominated assets and liabilities net of hedging activities in the three and nine months ended March 25, 2012 as compared to the three and nine months ended March 27, 2011.

Other expenses, net was higher during the nine months ended March 25, 2012 as compared to the same period prior year primarily due to a $1.7 million other-than-temporary impairment of a strategic private equity investment recognized during the September 2011 quarter.

Income Tax Expense

Our effective tax rates for the three and nine months ended March 25, 2012 were 16.4% and 17.1%, respectively. Our effective tax rate for the three and nine months ended March 27, 2011 were approximately 8.3% and 9.9%, respectively. The increase in the effective tax rate for the three months ended March 25, 2012 compared to the three months ended March 27, 2011 was primarily due to the level of income, a decrease in the percentage of profits in jurisdictions with lower tax rates, and an increase in the non-deductible stock-based compensation. The increase in the effective tax rate for the nine months ended March 25, 2012 compared to the nine months ended March 27, 2011 was primarily due to the level of income, a decrease in the percentage of profits in jurisdictions with lower tax rates, and an increase in the non-deductible stock-based compensation.

The effective tax rate of 16.4% and 17.1% for the three and nine months ended March 25, 2012 includes the tax impact of the following discrete items which are recorded in the period in which they occur: (1) a tax benefit of $1.0 million and a tax expense of $2.8 million, respectively, related to the filing of prior year U.S. federal and foreign tax returns and the associated provision to return adjustments, (2) a tax benefit of $0.2 million and $7.4 million respectively due to the recognition of previously unrecognized tax benefits and the reversal of the related interest accruals due to resolution of certain foreign uncertain tax positions, (3) a tax benefit of $4.2 million and $7.9 million, respectively, related to acquisition, integration, restructuring and asset impairment related expenses, and (4) a tax expense of $0.9 million and $2.6 million, respectively, of interest related to uncertain tax positions.

The effective tax rates of 8.3% and 9.9% for the three and nine months ended March 27, 2011, respectively, included the tax impact of the following discrete items that are recorded in the period in which they occur: (1) a tax benefit of $0 and $4.8 million related to the retroactive extension of the U.S. federal research and development credit for part of fiscal year 2010, (2) a tax benefit of $2.8 million and $6.0 million, respectively, due to the recognition of previously unrecognized tax benefits and the reversal of the related interest accruals due to resolution of certain foreign uncertain tax positions, (3) a tax benefit of $1.9 million and $2.5 million, respectively, related to the filing of prior year U.S. federal and foreign tax returns, (4) a tax expense of $1.0 million and $3.0 million, respectively, of interest related to uncertain tax positions, and (5) a tax expense of $0 and $2.1 million, respectively, related to the reversal of accrued restructuring expenses.

Deferred Income Taxes

We had gross deferred tax assets, related primarily to reserves and accruals that are not currently deductible and tax credit carryforwards, of $147.5 million and $147.2 million as of March 25, 2012 and June 26, 2011, respectively. The gross deferred tax assets were offset by deferred tax liabilities of $39.6 million and a valuation allowance of $46.2 million as of March 25, 2012. The gross deferred tax assets were offset by deferred tax liabilities of $31.7 million and a valuation allowance of $46.2 million as of June 26, 2011.

We record a valuation allowance to reduce our deferred tax assets to the amount that is more-likely-than-not to be realized. Realization of our net deferred tax assets is dependent on future taxable income. We believe it is more likely than not that such assets will be realized; however, ultimate realization could be negatively impacted by market conditions and other variables not known or anticipated at this time. In the event that we determine that we would not be able to realize all or part of our net deferred tax assets, an adjustment would be charged to earnings in the period such determination is made. Likewise, if we later determine that it is more-likely-than-not that the deferred tax assets would be realized, then the previously provided valuation allowance would be reversed.

We evaluate the realizability of the deferred tax assets quarterly and will continue to assess the need for changes in valuation allowances, if any.

Uncertain Tax Positions

We reevaluate uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

A critical accounting policy is defined as one that has both a material impact on our financial condition and results of operations and requires us to make difficult, complex and/or subjective judgments, often as a result of the need to make estimates about matters that are inherently uncertain. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make certain judgments, estimates and assumptions that could affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates and assumptions on historical experience and on various other assumptions we believe to be applicable and evaluate them on an ongoing basis to ensure they remain reasonable under current conditions. Actual results could differ significantly from those estimates, which could have a material impact on our business, results of operations, and financial condition.

 

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We believe that the following critical accounting policies reflect the more significant judgments and estimates we use in preparing our Consolidated Financial Statements.

Revenue Recognition: We recognize all revenue when persuasive evidence of an arrangement exists, delivery has occurred and title has passed or services have been rendered, the selling price is fixed or determinable, collection of the receivable is reasonably assured, and we have received customer acceptance, completed our system installation obligations, or are otherwise released from our installation or customer acceptance obligations. If terms of the sale provide for a lapsing customer acceptance period, we recognize revenue upon the expiration of the lapsing acceptance period or customer acceptance, whichever occurs first. If the practices of a customer do not provide for a written acceptance or the terms of sale do not include a lapsing acceptance provision, we recognize revenue when it can be reliably demonstrated that the delivered system meets all of the agreed-to customer specifications. In situations with multiple deliverables, we recognize revenue upon the delivery of the separate elements to the customer and when we receive customer acceptance or are otherwise released from our customer acceptance obligations. We allocate revenue from multiple-element arrangements among the separate elements based on their relative selling prices, provided the elements have value on a stand-alone basis. Our sales arrangements do not include a general right of return. The maximum revenue we recognize on a delivered element is limited to the amount that is not contingent upon the delivery of additional items. We generally recognize revenue related to sales of spare parts and system upgrade kits upon shipment. We generally recognize revenue related to services as services are performed. We recognize revenue for extended maintenance service contracts with a fixed payment amount on a straight-line basis over the term of the contract. When goods or services have been delivered to the customer but all conditions for revenue recognition have not been met, we record deferred revenue and/or deferred costs of sales in deferred profit on our Consolidated Balance Sheet.

Inventory Valuation: Inventories are stated at the lower of cost or market using standard costs that generally approximate actual costs on a first-in, first-out basis. We maintain a perpetual inventory system and continuously record the quantity on-hand and standard cost for each product, including purchased components, subassemblies, and finished goods. We maintain the integrity of perpetual inventory records through periodic physical counts of quantities on hand. Finished goods are reported as inventories until the point of title transfer to the customer. Generally, title transfer is documented in the terms of sale. Unless specified in the terms of sale, title generally transfers when we complete physical transfer of the products to the freight carrier. Transfer of title for shipments to Japanese customers generally occurs at the time of customer acceptance. We eliminate all intercompany profits related to the sales and purchases of inventory between our legal entities from our Consolidated Financial Statements.

Management evaluates the need to record adjustments for impairment of inventory at least quarterly. Our policy is to assess the valuation of all inventories including manufacturing raw materials, work-in-process, finished goods, and spare parts in each reporting period. Obsolete inventory or inventory in excess of management’s estimated usage requirements over the next 12 to 36 months is written down to its estimated market value if less than cost. Estimates of market value include, but are not limited to, management’s forecasts related to our future manufacturing schedules, customer demand, technological and/or market obsolescence, general semiconductor market conditions, and possible alternative uses. If future customer demand or market conditions are less favorable than our projections, additional inventory write-downs may be required and would be reflected in cost of goods sold in the period in which we make the revision.

Warranty: Typically, the sale of semiconductor capital equipment includes providing parts and service warranty to customers as part of the overall price of the system. We provide standard warranties for our systems. When appropriate, we record a provision for estimated warranty expenses to cost of sales for each system when we recognize revenue. We do not maintain general or unspecified reserves; all warranty reserves are related to specific systems. The amount recorded is based on an analysis of historical activity that uses factors such as type of system, customer, geographic region, and any known factors such as tool reliability trends. All actual or estimated parts and labor costs incurred in subsequent periods are charged to those established reserves on a system-by-system basis.

Actual warranty expenses are accounted for on a system-by-system basis and may differ from our original estimates. While we periodically monitor the performance and cost of warranty activities, if actual costs incurred are different than our estimates, we may recognize adjustments to provisions in the period in which those differences arise or are identified. In addition to the provision of standard warranties, we offer customer-paid extended warranty services. Revenues for extended maintenance and warranty services with a fixed payment amount are recognized on a straight-line basis over the term of the contract. Related costs are recorded as incurred.

Equity-based Compensation — Employee Stock Purchase Plan (“ESPP”) and Employee Stock Plans: GAAP requires us to recognize the fair value of equity-based compensation in net income. We determine the fair value of our restricted stock units (“RSUs”) based upon the fair market value of Company stock at the date of grant. We estimate the fair value of our stock options and ESPP awards using the Black-Scholes option valuation model. This model requires us to input highly subjective assumptions, including expected stock price volatility and the estimated life of each award. We amortize the fair value of equity-based awards over the vesting periods of the awards, and we have elected to use the straight-line method of amortization.

We make quarterly assessments of the adequacy of our tax credit pool related to equity-based compensation to determine if there are any deficiencies that we are required to recognize in our Consolidated Statements of Operations. We will only recognize a benefit from stock-based compensation in paid-in-capital if we realize an incremental tax benefit after all other tax attributes currently available to us have been utilized. In addition, we have elected to account for the indirect benefits of stock-based compensation on the research tax credit through the income statement (continuing operations) rather than through paid-in-capital. We have also elected to net deferred tax assets and the associated valuation allowance related to net operating loss and tax credit carryforwards for the accumulated stock award tax benefits for income tax footnote disclosure purposes. We will track these stock award attributes separately and will only recognize these attributes through paid-in-capital.

 

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Income Taxes : Deferred income taxes reflect the net tax effect of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as the tax effect of carryforwards. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. Realization of our net deferred tax assets is dependent on future taxable income. We believe it is more-likely-than-not that such assets will be realized; however, ultimate realization could be negatively impacted by market conditions and other variables not known or anticipated at the time. In the event that we determine that we would not be able to realize all or part of our net deferred tax assets, an adjustment would be charged to earnings in the period such determination is made. Likewise, if we later determine that it is more-likely-than-not that the deferred tax assets would be realized, then the previously provided valuation allowance would be reversed.

We calculate our current and deferred tax provision based on estimates and assumptions that can differ from the actual results reflected in income tax returns filed during the subsequent year. These estimates and assumptions occur in the calculation of tax credits, benefits, and deductions, and in the calculation and valuation of certain tax assets and liabilities, which arise from temporary differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as the interest and penalties related to uncertain tax positions. Adjustments based on filed returns are recorded when identified.

We recognize the benefit from a tax position only if it is more-likely-than-not that the position would be sustained upon audit based solely on the technical merits of the tax position. Our policy is to include interest and penalties related to unrecognized tax benefits as a component of income tax expense. Please refer to Note 10 of the Notes to the Consolidated Financial Statements for additional information.

In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on the two-step process prescribed within the FASB interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more-likely-than-not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We reevaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period such determination is made.

Goodwill and Intangible Assets: Goodwill represents the amount by which the purchase price in each business combination exceeds the fair value of the net tangible and identifiable intangible assets acquired. We allocate the carrying value of goodwill to our reporting units. We test goodwill and identifiable intangible assets with indefinite useful lives for impairment at least annually. We amortize intangible assets with estimable useful lives over their respective estimated useful lives, and we review for impairment whenever events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable and the carrying amount exceeds its fair value.

We review goodwill at least annually for impairment. If certain events or indicators of impairment occur between annual impairment tests, we would perform an impairment test of goodwill at that date. In testing for a potential impairment of goodwill, we: (1) allocate goodwill to our reporting units to which the acquired goodwill relates; (2) estimate the fair value of our reporting units; and (3) determine the carrying value (book value) of those reporting units, as some of the assets and liabilities related to those reporting units are not held by those reporting units but by a corporate function. Prior to this allocation of the assets to the reporting units, we are required to assess long-lived assets for impairment. Furthermore, if the estimated fair value of a reporting unit is less than the carrying value, we must estimate the fair value of all identifiable assets and liabilities of that reporting unit, in a manner similar to a purchase price allocation for an acquired business. This can require independent valuations of certain internally generated and unrecognized intangible assets such as in-process R&D and developed technology. Only after this process is completed can the amount of goodwill impairment, if any, be determined.

The process of evaluating the potential impairment of goodwill is subjective and requires significant judgment at many points during the analysis. We determine the fair value of our reporting units by using a weighted combination of both a market and an income approach, as this combination is deemed to be the most indicative of fair value in an orderly transaction between market participants.

Under the market approach, we use information regarding the reporting unit as well as publicly available industry information to determine various financial multiples to value our reporting units. Under the income approach, we determine fair value based on estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of a reporting unit and the rate of return an outside investor would expect to earn.

In estimating the fair value of a reporting unit for the purposes of our annual or periodic analyses, we make estimates and judgments about the future cash flows of our reporting units, including estimated growth rates and assumptions about the economic environment. Although our cash flow forecasts are based on assumptions that are consistent with the plans and estimates we are using to manage the underlying businesses, there is significant judgment involved in determining the cash flows attributable to a reporting unit. In addition, we make certain judgments about allocating shared assets to the estimated balance sheets of our reporting units. We also consider our market capitalization and that of our competitors on the date we perform the analysis. Changes in judgment on these assumptions and estimates could result in a goodwill impairment charge.

As a result, several factors could result in impairment of a material amount of our goodwill balance in future periods, including, but not limited to: (1) weakening of the global economy, weakness in the semiconductor equipment industry, or failure of the Company to reach its internal forecasts, which could impact our ability to achieve our forecasted levels of cash flows and reduce the estimated discounted cash flow

 

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value of our reporting units; and (2) a decline in our stock price and resulting market capitalization, if we determine that the decline is sustained and indicates a reduction in the fair value of our reporting units below their carrying value. In addition, the value we assign to intangible assets, other than goodwill, is based on our estimates and judgments regarding expectations such as the success and life cycle of products and technology acquired. If actual product acceptance differs significantly from our estimates, we may be required to record an impairment charge to write down the asset to its realizable value.

Recent Accounting Pronouncements

In June 2011, the FASB issued new authoritative guidance that increases the prominence of items reported in other comprehensive income (OCI) by eliminating the option to present components of OCI as part of the statement of changes in stockholders’ equity. The amendments in this standard require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under either method, adjustments must be displayed for items that are reclassified from OCI to net income in the financial statements where the components of net income and the components of OCI are presented. This guidance does not affect the underlying accounting for components of OCI, but will change the presentation of our financial statements. We will adopt this authoritative guidance retrospectively in the first quarter of our fiscal year 2013.

In September 2011, the FASB issued revised guidance intended to simplify how an entity tests goodwill for impairment. The amendment will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more-likely-than-not that its fair value is less than its carrying amount. This accounting standard update will be effective for us beginning in the first quarter of fiscal 2013 and early adoption is permitted. We are currently evaluating this accounting standard update and do not expect it to have an impact on our Consolidated Financial Statements.

LIQUIDITY AND CAPITAL RESOURCES

As of March 25, 2012, we had $2.6 billion in cash and cash equivalents, short-term investments, and restricted cash and investments (total cash and investments) compared to $2.3 billion as of June 26, 2011.

Cash Flows from Operating Activities

Net cash provided by operating activities of $402.3 million during the nine months ended March 25, 2012 consisted of (in millions):

 

Net income

   $ 150.7   

Non-cash charges:

  

Depreciation and amortization

     66.2   

Equity-based compensation

     52.3   

Restructuring and impairment charges

     0.9   

Amortization of convertible note discount

     20.0   

Impairment of investment

     1.7   

Net tax benefit on equity-based compensation plans

     (2.2

Deferred income taxes

     3.0   

Changes in operating asset and liability accounts

     105.9   

Other

     3.8   
  

 

 

 
   $ 402.3   
  

 

 

 

Changes in operating asset and liability accounts, net of foreign exchange impact, included the following sources of cash: decreases in accounts receivable of $116.0 million, inventories of $20.4 million, and prepaid and other assets of $6.0 million and an increase in accounts payable of $16.0 million, partially offset by the following uses of cash: decreases in deferred profit of $14.1 million and accrued liabilities of $39.5 million. These changes in overall cash were all consistent with decreased business volumes.

Cash Flows from Investing Activities

Net cash used for investing activities during the nine months ended March 25, 2012 was $441.7 million, primarily consisting of net purchases of available-for-sale securities of $371.7 million, capital expenditures of $70.4 million, and the purchase of other investments of $10.7 million, partially offset by the receipt of an $8.4 million loan payment.

Cash Flows from Financing Activities

Net cash used for financing activities during the nine months ended March 25, 2012 was $39.7 million, primarily consisting of $111.6 million in treasury stock repurchases partially offset by $55.2 million net cash settlements under structured stock repurchase arrangement (see Note 17 of Notes to Condensed Consolidated Financial Statements) and net proceeds from issuance of common stock related to employee equity-based plans of $18.5 million.

 

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Liquidity

Given the cyclical nature of the semiconductor equipment industry, we believe that maintaining sufficient liquidity reserves is important to support sustaining levels of investment in R&D and capital infrastructure. Based upon our current business outlook, we expect that our levels of cash, cash equivalents, and short-term investments at March 25, 2012 will be sufficient to support our anticipated levels of operations, investments, debt service requirements, and capital expenditures, through at least the next 12 months.

In the longer term, liquidity will depend to a great extent on our future revenues and our ability to appropriately manage our costs based on demand for our products and services. While the company has substantial cash balances in the United States and offshore, we may require additional funding and need to raise the required funds through borrowings or public or private sales of debt or equity securities. We believe that, if necessary, we will be able to access the capital markets on terms and in amounts adequate to meet our objectives. However, given the possibility of changes in market conditions or other occurrences, there can be no certainty that such funding will be available in needed quantities or on terms favorable to us.

Off-Balance Sheet Arrangements and Contractual Obligations

We have certain obligations to make future payments under various contracts, some of which are recorded on our balance sheet and some of which are not. Obligations are recorded on our balance sheet in accordance with GAAP and include our long-term debt and capital leases which are outlined in the following table and noted below. Our off-balance sheet arrangements include contractual relationships and are presented as operating leases and purchase obligations in the table below. Our contractual cash obligations and commitments as of March 25, 2012, relating to these agreements are included in the following table. The amounts in the table below exclude $115.6 million of liabilities related to uncertain tax benefits as we are unable to reasonably estimate the ultimate amount or time of settlement.

 

     Operating
Leases
     Capital
Leases
     Purchase
Obligations
     Long-term
Debt and
Interest Expense
     Total  
     (in thousands)  

Payments due by period:

              

Less than 1 year

   $ 10,817       $ 1,852       $ 164,729       $ 8,863       $ 186,261   

1-3 years

     13,564         3,142         55,047         15,750         87,503   

3-5 years

     4,409         10,684         22,612         464,344         502,049   

Over 5 years

     —           —           700         457,734         458,434   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 28,790       $ 15,678       $ 243,088       $ 946,691       $ 1,234,247   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating Leases

We lease most of our administrative, R&D and manufacturing facilities, regional sales/service offices and certain equipment under non-cancelable operating leases. Certain of our facility leases for buildings located at our Fremont, California headquarters, Livermore facilities, and certain other facility leases provide us with an option to extend the leases for additional periods or to purchase the facilities. Certain of our facility leases provide for periodic rent increases based on the general rate of inflation. In addition to amounts included in the table above, we have guaranteed residual values for certain of our Fremont and Livermore facility leases of up to $164.9 million. See Note 14 of Notes to the Condensed Consolidated Financial Statements for further discussion.

Capital Leases

Capital leases reflect building and office equipment lease obligations. The amounts in the table above include the interest portion of payment obligations.

Purchase Obligations

Purchase obligations consist of significant contractual obligations either on an annual basis or over multi-year periods related to our outsourcing activities or other material commitments, including vendor-consigned inventories. We continue to enter into new agreements and maintain existing agreements to outsource certain activities, including elements of our manufacturing, warehousing, logistics, facilities maintenance, certain information technology functions, and certain transactional general and administrative functions. The contractual cash obligations and commitments table presented above contains our obligations at March 25, 2012 under these arrangements and others. Actual expenditures will vary based on the volume of transactions and length of contractual service provided. In addition to these obligations, certain of these agreements include early termination provisions and/or cancellation penalties which could increase or decrease amounts actually paid.

 

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Long-Term Debt

On May 11, 2011, we issued and sold $450.0 million in aggregate principal amount of 0.5% convertible notes due 2016 (the “2016 Notes”) and $450.0 million in aggregate principal amount of 1.25% convertible notes due 2018 (the “2018 Notes,” and collectively with the “2016 Notes”, the “Notes”). The 2016 Notes were issued at par and pay interest at a rate of 0.5% per annum and the 2018 Notes were issued at par and pay interest at rate of 1.25% per annum. The Notes may be converted into our common stock, under certain circumstances, based on an initial conversion rate of 15.8687 shares of our common stock per $1,000 principal amount of Notes, which is equal to a conversion price of approximately $63.02 per share of our common stock. The conversion price will be subject to adjustment in some events but will not be adjusted for accrued interest. Concurrently with the issuance of the Notes, we purchased convertible note hedges for $181.1 million and sold warrants for $133.8 million. The separate convertible note hedges and warrant transactions are structured to reduce the potential future economic dilution associated with the conversion of the Notes.

In addition to the convertible notes, our remaining total long-term debt, excluding interest, of $1.0 million as of March 25, 2012 consists of various bank loans and government subsidized technology loans supporting operating needs.

Other Guarantees

We have issued certain indemnifications to our lessors for taxes and general liability under some of our agreements. We have entered into certain insurance contracts that may limit our exposure to such indemnifications. As of March 25, 2012, we had not recorded any liability on our Consolidated Financial Statements in connection with these indemnifications, as we do not believe, based on information available, that it is probable that we will pay any amounts under these guarantees.

Generally, we indemnify, under pre-determined conditions and limitations, our customers for infringement of third-party intellectual property rights by our products or services. We seek to limit our liability for such indemnity to an amount not to exceed the sales price of the products or services subject to its indemnification obligations. We do not believe, based on information available, that it is probable that we will pay any material amounts under these guarantees.

Warranties

We offer standard warranties on our systems. The liability amount is based on actual historical warranty spending activity by type of system, customer, and geographic region, modified for any known differences such as the impact of system reliability improvements.

 

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

For financial market risks related to changes in interest rates, marketable equity security prices, and foreign currency exchange rates, refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk”, in our 2011 Form 10-K. Other than noted below, our exposure related to market risk has not changed materially since June 26, 2011. All of the potential changes noted below are based on sensitivity analyses performed on our financial position as of March 25, 2012. Actual results may differ materially.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio, long-term debt, and operating leases. We maintain a conservative investment policy, which focuses on the safety and preservation of our invested funds by limiting default risk, market risk, and reinvestment risk. We mitigate default risk by investing in high credit quality securities and by positioning our portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to achieve portfolio liquidity and maintain a prudent amount of diversification.

Our investments in various interest earning securities carry a degree of market risk for changes in interest rates. At any time, a sharp rise in interest rates could have a material adverse impact on the fair value of our fixed income investment portfolio. Conversely, declines in interest rates could have a material adverse impact on interest income for our investment portfolio. We target to maintain a conservative investment policy, which focuses on the safety and preservation of our invested funds by limiting default risk, market risk, reinvestment risk, and the amount of credit exposure to any one issuer. The following table presents the hypothetical fair values of fixed income securities that would result from selected potential decreases and increases in interest rates. Market changes reflect immediate hypothetical parallel shifts in the yield curve of plus or minus 50 basis points (“BPS”), 100 BPS, and 150 BPS. The hypothetical fair values as of March 25, 2012 were as follows:

 

     Valuation of Securities
Given an Interest Rate
Decrease of X Basis Points
     Fair Value as of
March 25, 2012
     Valuation of Securities
Given an Interest Rate
Increase of X Basis Points
 
     (150 BPS)      (100 BPS)      (50 BPS)      0.00%      50 BPS      100 BPS      150 BPS  
     (in thousands)  

Municipal Notes and Bonds

   $ 366,484       $ 364,477       $ 362,470       $ 360,464       $ 358,455       $ 356,448       $ 354,441   

US Treasury & Agencies

     79,850         79,074         78,298         77,523         76,746         75,970         75,194   

Government-Sponsored Enterprises

     50,193         49,774         49,354         48,935         48,515         48,096         47,677   

Foreign Government Bond

     2,649         2,614         2,579         2,544         2,509         2,474         2,440   

Corporate Notes and Bonds

     605,819         602,941         600,062         597,183         594,305         591,427         588,548   

Mortgage Backed Securities - Residential

     11,930         11,808         11,685         11,562         11,440         11,317         11,195   

Mortgage Backed Securities - Commercial

     61,595         61,187         60,779         60,371         59,963         59,555         59,147   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,178,520       $ 1,171,875       $ 1,165,227       $ 1,158,582       $ 1,151,933       $ 1,145,287       $ 1,138,642   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Foreign Currency Exchange (“FX”) Risk

We conduct business on a global basis in several major international currencies. As such, we are potentially exposed to adverse as well as beneficial movements in foreign currency exchange rates. To mitigate the impact of fluctuations in the value of forecasted Japanese yen-denominated revenue and Euro-denominated expenses, we enter into foreign currency forward contracts. These foreign currency forward contracts are designated as cash flow hedges and are carried on our balance sheet at fair value, with the effective portion of the contracts’ gains or losses included in accumulated other comprehensive income (loss) and subsequently recognized in earnings in the same period the hedged revenue and/or expense is recognized. The notional amount and unrealized gain of our outstanding forward contracts that are designated as cash flow hedges, as of March 25, 2012 are shown in the table below. This table also shows the change in fair value of these cash flow hedges assuming a hypothetical foreign currency exchange rate movement of plus-or-minus 10 percent and plus-or-minus 15 percent.

 

          Notional
Amount
     Unrealized FX Gain  /
(Loss)

March 25, 2012
    Valuation of Fx Contracts Given an X%
Increase (+)/Decrease(-) in Each Fx
Rate
 
                       + / - (10%)      + / - (15%)  
          (in $ Millions)  

Cash Flow Hedge

             

Sell

   JPY    $ 47.8       $ 4.3      $ 4.8       $ 7.2   

Buy

   EUR    $ 93.1       $ (1.3   $ 9.3       $ 14.0   
     

 

 

    

 

 

   

 

 

    

 

 

 
      $ 140.9       $ 3.0      $ 14.1       $ 21.2   

We also enter into foreign currency forward contracts to hedge the gains and losses generated by the remeasurement of Japanese yen, Euros, Swiss franc and Taiwanese dollar-denominated monetary assets and liabilities against the U.S. dollar. The change in fair value of these balance sheet hedge contracts is recorded into earnings as a component of other income (expense), net and offsets the change in fair value of the foreign currency denominated monetary assets and liabilities also recorded in other income (expense), net, assuming the hedge contract fully covers the intercompany and trade receivable balances. The notional amount and unrealized loss of our outstanding foreign currency forward contracts that are designated as balance sheet hedges, as of March 25, 2012 are shown in the table below. This table also shows the change in fair value of these balance sheet hedges, assuming a hypothetical foreign currency exchange rate movement of plus-or-minus 10 percent and plus-or-minus 15 percent. These changes in fair values would be offset in other income (expense), net, by corresponding change in fair values of the foreign currency denominated monetary assets and liabilities, assuming the hedge contract fully covers the intercompany and trade receivable balances.

 

          Notional
Amount
     Unrealized FX Gain
/ (Loss) March 25,
2012
    Valuation of Fx Contracts Given an X%
Increase (+)/Decrease(-) in Each Fx
Rate
 
                       + / - (10%)      + / - (15%)  
          (in $ Millions)  

Balance Sheet Hedge

             

Sell

   JPY    $ 4.2       $ 0.0      $ 0.4       $ 0.6   

Buy

   CHF    $ 245.9       $ 3.3      $ 24.6       $ 36.9   

Buy

   TWD    $ 83.6       $ (1.3   $ 8.4       $ 12.5   

Buy

   EUR    $ 40.7       $ 0.7      $ 4.1       $ 6.1   
     

 

 

    

 

 

   

 

 

    

 

 

 
      $ 374.4       $ 2.7      $ 37.5       $ 56.1   

We believe that maintaining sufficient liquidity reserves is important to support sustaining levels of investment in our business activities. Anticipated cash flows from operations based on our current business outlook, combined with our current levels of cash, cash equivalents, and short-term investments at March 25, 2012 are expected to be sufficient to support our anticipated levels of operations, investments, debt service requirements, and capital expenditures, through at least the next 12 months. However, uncertainty in the global economy and the semiconductor industry, as well as disruptions in credit markets have in the past, and could in the future, impact customer demand for our products, as well as our ability to manage normal commercial relationships with our customers, suppliers, and creditors.

 

ITEM 4. Controls and Procedures

Disclosure Controls and Procedures

As required by Exchange Act Rule 13a-15(b), as of March 25, 2012, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer, along with our Chief Financial Officer, concluded that our disclosure controls and procedures are effective at the reasonable assurance level.

We intend to review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis and to correct any material deficiencies that we may discover. Our goal is to ensure that our senior management has timely access to material information that could affect our business.

 

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Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Effectiveness of Controls

While we believe the present design of our disclosure controls and procedures and internal control over financial reporting is effective, future events affecting our business may cause us to modify our disclosure controls and procedures or internal control over financial reporting. The effectiveness of controls cannot be absolute because the cost to design and implement a control to identify errors or mitigate the risk of errors occurring should not outweigh the potential loss caused by the errors that would likely be detected by the control. Moreover, we believe that a control system cannot be guaranteed to be 100% effective all of the time. Accordingly, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met.

 

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PART II. OTHER INFORMATION

 

ITEM 1. Legal Proceedings

From time to time, we have received notices from third parties alleging infringement of such parties’ patent or other intellectual property rights by our products. In such cases it is our policy to defend the claims, or if considered appropriate, negotiate licenses on commercially reasonable terms. The Company does not believe that any of these matters will have a material adverse effect on its consolidated financial condition or results of operations. However, no assurance can be given that we will be able in the future to negotiate necessary licenses on commercially reasonable terms, or at all, or that any litigation resulting from such claims would not have a material adverse effect on our consolidated financial position or operating results.

 

ITEM 1A. Risk Factors

In addition to the other information in this Form 10-Q, the following risk factors should be carefully considered in evaluating the Company and its business because such factors may significantly impact our business, operating results, and financial condition. As a result of these risk factors, as well as other risks discussed in our other SEC filings, our actual results could differ materially from those projected in any forward-looking statements. No priority or significance is intended, nor should be attached, to the order in which the risk factors appear.

The Semiconductor Equipment Industry is Subject to Major Fluctuations and, as a Result, We Face Risks Related to Our Strategic Resource Allocation Decisions

The business cycle in the semiconductor equipment industry has historically been characterized by frequent periods of rapid change in demand that challenge our management to adjust spending and other resources allocated to operating activities. During periods of rapid growth or decline in demand for our products and services, we face significant challenges in maintaining adequate financial and business controls, management processes, information systems, procedures for training and managing our work force, and in appropriately sizing our supply chain infrastructure, work force, and other components of our business on a timely basis. If we do not adequately meet these challenges during periods of demand decline, our gross margins and earnings may be negatively impacted. In late 2008 and throughout 2009, the semiconductor industry experienced a general decline in demand, leading to a steep decline in demand for our products and services. In response to that industry demand decline and in an effort to minimize the disruptive effects of the deteriorating economic conditions on our business operating results, we made difficult resource allocation decisions, including layoffs and restructurings.

We continuously reassess our strategic resource allocation choices in response to the changing business environment. If we do not adequately adapt to the changing business environment, we may lack the infrastructure and resources to scale up our business to meet customer expectations and compete successfully during a period of growth, or we may expand our capacity too rapidly and/or beyond what is appropriate for the actual demand environment.

Especially during transitional periods, resource allocation decisions can have a significant impact on our future performance, particularly if we have not accurately anticipated industry changes. Our success will depend, to a significant extent, on the ability of our executive officers and other members of our senior management to identify and respond to these challenges effectively.

Future Declines in the Semiconductor Industry, and the Overall World Economic Conditions on Which it is Significantly Dependent, Could Have a Material Adverse Impact on Our Results of Operations and Financial Condition

Our business depends on the capital equipment expenditures of semiconductor manufacturers, which in turn depend on the current and anticipated market demand for integrated circuits. The semiconductor industry is cyclical in nature and historically experiences periodic downturns. Global economic and business conditions, which are often unpredictable, have historically impacted customer demand for our products and normal commercial relationships with our customers, suppliers, and creditors. Additionally, in times of economic uncertainty our customers’ budgets for our products, or their ability to access credit to purchase them, could be adversely affected. This would limit their ability to purchase our products and services. As a result, economic downturns can cause material adverse changes to our results of operations and financial condition including, but not limited to:

 

   

a decline in demand for our products;

 

   

an increase in reserves on accounts receivable due to our customers’ inability to pay us;

 

   

an increase in reserves on inventory balances due to excess or obsolete inventory as a result of our inability to sell such inventory;

 

   

valuation allowances on deferred tax assets;