Lam Research Corporation
LAM RESEARCH CORP (Form: 10-Q, Received: 01/31/2013 16:23:22)
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 December 23, 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 January 25, 2013 there were 162,346,938 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 December 23, 2012 and June 24, 2012

     3   

Condensed Consolidated Statements of Operations for the three and six months ended December 23, 2012 and December 25, 2011

     4   

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended December 23, 2012 and December 25, 2011

     5   

Condensed Consolidated Statements of Cash Flows for the six months ended December 23, 2012 and  December 25, 2011

     6   

Notes to Condensed Consolidated Financial Statements

     7   

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

     28   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     36   

Item 4. Controls and Procedures

     38   
PART II. Other Information      39   

Item 1. Legal Proceedings

     39   

Item 1A. Risk Factors

     39   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     47   

Item 3. Defaults Upon Senior Securities

     48   

Item 4. Mine Safety Disclosures

     48   

Item 5. Other Information

     49   

Item 6. Exhibits

     49   

Signatures

     50   

Exhibit Index

     51   

EXHIBIT 4.20

  

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

  

 

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Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

LAM RESEARCH CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

 

     December 23,     June 24,  
     2012     2012  
     (unaudited)     (1)  
ASSETS     

Cash and cash equivalents

   $ 1,190,189      $ 1,564,752   

Short-term investments

     1,330,498        1,297,931   

Accounts receivable, less allowance for doubtful accounts of $5,425 as of December 23, 2012 and $5,248 as of June 24, 2012

     590,925        765,818   

Inventories

     530,272        632,853   

Deferred income taxes

     139,300        47,782   

Prepaid expenses and other current assets

     65,224        105,973   
  

 

 

   

 

 

 

Total current assets

     3,846,408        4,415,109   

Property and equipment, net

     590,547        584,596   

Restricted cash and investments

     166,166        166,335   

Deferred income taxes

     344        —     

Goodwill

     1,454,920        1,446,303   

Intangible assets, net

     1,153,301        1,240,427   

Other assets

     151,478        151,882   
  

 

 

   

 

 

 

Total assets

   $ 7,363,164      $ 8,004,652   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Trade accounts payable

   $ 156,237      $ 258,778   

Accrued expenses and other current liabilities

     498,787        492,178   

Deferred profit

     168,994        164,833   

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

     1,464        511,139   
  

 

 

   

 

 

 

Total current liabilities

     825,482        1,426,928   

Long-term debt, convertible notes, and capital leases

     1,286,729        761,783   

Income taxes payable

     260,063        274,240   

Other long-term liabilities

     294,300        219,577   
  

 

 

   

 

 

 

Total liabilities

     2,666,574        2,682,528   

Commitments and contingencies

    

Senior convertbile notes (Note 13)

     —          190,343   

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— 165,846 shares as of December 23, 2012 and 186,656 shares as of June 24, 2012

     166        187   

Additional paid-in capital

     5,190,192        4,943,539   

Treasury stock, at cost; 84,260 shares as of December 23, 2012 and 62,068 shares as of June 24, 2012

     (3,337,269     (2,636,936

Accumulated other comprehensive loss

     (24,484     (33,818

Retained earnings

     2,867,985        2,858,809   
  

 

 

   

 

 

 

Total stockholders’ equity

     4,696,590        5,131,781   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 7,363,164      $ 8,004,652   
  

 

 

   

 

 

 

 

(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     Six Months Ended  
     December 23,     December 25,     December 23,     December 25,  
     2012     2011     2012     2011  

Revenue

   $ 860,886      $ 583,981      $ 1,767,774      $ 1,264,417   

Cost of goods sold

     545,472        350,014        1,118,474        746,567   

Cost of goods sold—restructuring

     —          (859     —          (859
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of goods sold

     545,472        349,155        1,118,474        745,708   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     315,414        234,826        649,300        518,709   

Research and development

     165,951        104,024        329,262        206,583   

Selling, general and administrative

     144,400        83,256        298,263        163,456   

Restructuring and impairments

     1,021        —          1,021        1,725   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     311,372        187,280        628,546        371,764   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     4,042        47,546        20,754        146,945   

Other expense, net

     (13,390     (7,785     (23,328     (19,858
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (9,348     39,761        (2,574     127,087   

Income tax expense (benefit)

     (15,756     6,549        (11,750     22,037   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 6,408      $ 33,212      $ 9,176      $ 105,050   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share:

        

Basic net income per share

   $ 0.04      $ 0.28      $ 0.05      $ 0.87   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income per share

   $ 0.04      $ 0.27      $ 0.05      $ 0.86   
  

 

 

   

 

 

   

 

 

   

 

 

 

Number of shares used in per share calculations:

        

Basic

     170,699        119,739        175,314        121,435   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     173,027        120,873        177,490        122,382   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

LAM RESEARCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

     Three Months Ended     Six Months Ended  
     December 23,     December 25,     December 23,     December 25,  
     2012     2011     2012     2011  

Net income

   $ 6,408      $ 33,212      $ 9,176      $ 105,050   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

        

Foreign currency translation adjustment

     8,969        (16,979     4,844        (31,889

Cash flow hedges:

        

Change in unrealized gain (loss)

     2,347        (3,581     1,628        (11,793

Reclassification adjustment for losses (gains) included in net income

     363        2,906        2,289        5,513   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change

     2,710        (675     3,917        (6,280

Available-for-sale investments:

        

Change in unrealized gain (loss)

     (1,497     898        1,192        39   

Reclassification adjustment for gains included in net income

     (923     (97     (942     (392
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change

     (2,420     801        250        (353

Postretirement benefit plan actuarial losses, net

     164        157        323        (4,369
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     9,423        (16,696     9,334        (42,891
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 15,831      $ 16,516      $ 18,510      $ 62,159   
  

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

     Six Months Ended  
     December 23,     December 25,  
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 9,176      $ 105,050   

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

    

Depreciation and amortization

     153,204        43,732   

Deferred income taxes

     (19,337     (633

Restructuring and impairment charges

     1,021        866   

Impairment of investment

     —          1,724   

Equity-based compensation expense

     48,441        35,968   

Income tax benefit on equity-based compensation plans

     —          1,129   

Excess tax benefit on equity-based compensation plans

     —          (2,155

Amortization of convertible note discount

     15,595        13,264   

Other, net

     24,723        2,506   

Changes in operating assets and liabilities

     209,665        54,465   
  

 

 

   

 

 

 

Net cash provided by operating activities

     442,488        255,916   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Capital expenditures and intangible assets

     (82,889     (42,414

Cash paid for business acquisition

     (8,716     —     

Purchases of available-for-sale securities

     (628,074     (234,576

Sales and maturities of available-for-sale securities

     588,186        145,123   

Purchase of equity method investment

     —          (10,740

Receipt of loan payment

     —          8,375   

Proceeds from sale of assets

     660        2,677   

Transfer of restricted cash and investments

     179        20   
  

 

 

   

 

 

 

Net cash used for investing activities

     (130,654     (131,535
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Principal payments on long-term debt and capital lease obligations

     (780     (3,140

Excess tax benefit on equity-based compensation plans

     —          2,155   

Net cash paid in advance for stock repurchase contracts

     —          (23,995

Treasury stock purchases

     (710,089     (92,695

Reissuances of treasury stock related to employee stock purchase plan

     9,925        8,858   

Proceeds from issuance of common stock

     7,534        1,475   
  

 

 

   

 

 

 

Net cash used for financing activities

     (693,410     (107,342
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     7,013        (2,243

Net increase (decrease) in cash and cash equivalents

     (374,563     14,796   

Cash and cash equivalents at beginning of period

     1,564,752        1,492,132   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,190,189      $ 1,506,928   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

LAM RESEARCH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 23, 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 24, 2012, which are included in the Annual Report on Form 10-K as of and for the year ended June 24, 2012 (the “2012 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 30, 2013 and includes 53 weeks. The quarters ended December 23, 2012 (the “December 2012 quarter”) and December 25, 2011 (the “December 2011 quarter”) each included 13 weeks.

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. The Company adopted this guidance in the September 2012 quarter. The implementation of this authoritative guidance did not have an impact on the Company’s financial position or results of operations, but did change the presentation of the Company’s 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 three years or less, although awards assumed in connection with the Novellus acquisition have vesting terms up to four years. 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      Six Months Ended  
     December 23,      December 25,      December 23,      December 25,  
     2012      2011      2012      2011  
     (in millions)  

Equity-based compensation expense

   $ 24.0       $ 18.2       $ 48.4       $ 36.0   

Income tax benefit related to equity-based compensation expense

   $ 3.3       $ 2.1       $ 9.0       $ 4.8   

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. The increase in stock compensation expense during the three and six months ended December 23, 2012 as compared to the three and six months ended December 25, 2011 was primarily due to the increased number of RSUs and stock options outstanding as a result of awards assumed in connection with the Novellus acquisition.

Stock Options and RSUs

The 2007 Stock Incentive Plan provides for grants of equity-based awards to eligible participants. In June 2012, as part of the Novellus acquisition, Lam also assumed the Novellus Systems, Inc. 2011 Stock Incentive Plan (together with the 2007 Stock Incentive Plan, collectively the “Plans”), which provides for grants of equity-based awards to eligible participants. As of December 23, 2012, there were a total of 8,369,202 shares reserved to cover options and RSUs issued and outstanding under the Plans. As of December 23, 2012, there were an additional 14,351,909 shares reserved and available for future equity-based awards under the Plans.

 

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Table of Contents

A summary of stock option activity under the Plans as of December 23, 2012 and changes during the six 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

December 23, 2012
(in thousands)
 

Outstanding at June 24, 2012

     3,902      $ 25.14         4.79      

Exercised

     (342   $ 22.04         

Forfeited or expired

     (32   $ 24.37         
  

 

 

         

Outstanding at December 23, 2012

     3,528      $ 25.45         4.38       $ 38,111   
  

 

 

         

Exercisable at December 23, 2012

     2,999      $ 25.25         3.80       $ 32,982   
  

 

 

         

The total intrinsic value of options exercised during the three months ended December 23, 2012 and December 25, 2011 was $4.1 million and $0.9 million, respectively. The total intrinsic value of options exercised during the six months ended December 23, 2012 and December 25, 2011 was $4.7 million and $1.1 million, respectively. As of December 23, 2012, there was $7.2 million of total unrecognized compensation cost related to unvested stock options granted and outstanding; that cost is expected to be recognized over a weighted average remaining vesting period of 1.7 years.

A summary of the Company’s RSUs as of December 23, 2012 and changes during the six months then ended is presented below:

 

     Shares     Average Grant-  

Unvested Restricted Stock Units

   (in thousands)     Date Fair Value  

Unvested at June 24, 2012

     4,331      $ 41.01   

Granted

     1,612      $ 35.01   

Vested

     (987   $ 40.46   

Forfeited

     (115   $ 39.96   
  

 

 

   

Unvested at December 23, 2012

     4,841      $ 39.13   
  

 

 

   

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 December 23, 2012, there was $131.8 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 2.1 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 December 23, 2012, there were a total of 10,304,484 shares available for issuance under the 1999 ESPP.

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 six months ended December 23, 2012:

 

     Six Months Ended  
     December 23,  
     2012  

Expected term (years)

     0.7   

Expected stock price volatility

     33.26

Risk-free interest rate

     0.16

As of December 23, 2012, there was $5.8 million of unrecognized compensation expense related to the 1999 ESPP, which is expected to be recognized over a remaining period of approximately 8 months.

 

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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 Condensed 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.

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

 

            Fair Value Measurement at December 23, 2012  
            Quoted Prices in             Significant  
            Active Markets for      Significant Other      Unobservable  
            Identical Assets      Observable Inputs      Inputs  
     Total      (Level 1)      (Level 2)      (Level 3)  
     (In thousands)  

Assets

           

Short-Term Investments

           

Money Market Funds

   $ 884,982       $ 884,982       $ —         $ —     

Municipal Notes and Bonds

     270,486         —           270,486         —     

US Treasury and Agencies

     177,584         173,974         3,610         —     

Government-Sponsored Enterprises

     94,120         —           94,120         —     

Foreign Government Bonds

     20,568         —           20,568         —     

Corporate Notes and Bonds

     805,112         164,885         640,227         —     

Mortgage Backed Securities—Residential

     32,608         —           32,608         —     

Mortgage Backed Securities—Commercial

     96,405         —           96,405         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Short-Term Investments

   $ 2,381,865       $ 1,223,841       $ 1,158,024       $ —     

Equities

     4,545         4,545         —           —     

Mutual Funds

     20,940         20,940         —           —     

Derivative Assets

     3,645         —           3,645         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 2,410,995       $ 1,249,326       $ 1,161,669       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Derivative Liabilities

   $ 715       $ —         $ 465       $ 250   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

9


Table of Contents

The amounts in the table above are reported in the Consolidated Balance Sheet as of December 23, 2012 as follows:

 

     Total      (Level 1)      (Level 2)      (Level 3)  
     (In thousands)  

Reported Within:

           

Cash Equivalents

   $ 886,482       $ 884,982       $ 1,500       $ —     

Short-Term Investments

     1,330,498         173,974         1,156,524         —     

Restricted Cash and Investments

     164,885         164,885         —           —     

Prepaid Expenses and Other Current Assets

     3,645         —           3,645         —     

Other Assets

     25,485         25,485         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 2,410,995       $ 1,249,326       $ 1,161,669       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Accrued Expenses and Other Current Liabilities

   $ 465       $ —         $ 465       $ —     

Other Non-current Liabilities

     250         —           —           250   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

   $ 715       $ —         $ 465       $ 250   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 24, 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

   $ 1,318,812       $ 1,318,812       $ —         $ —     

Municipal Notes and Bonds

     322,567         —           322,567         —     

US Treasury and Agencies

     137,446         130,624         6,822         —     

Government-Sponsored Enterprises

     123,268         —           123,268         —     

Foreign Government Bond

     6,358         —           6,358         —     

Corporate Notes and Bonds

     768,901         164,885         604,016         —     

Mortgage Backed Securities—Residential

     25,972         —           25,972         —     

Mortgage Backed Securities—Commercial

     84,853         —           84,853         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Short-Term Investments

   $ 2,788,177       $ 1,614,321       $ 1,173,856       $ —     

Equities

     5,913         5,913         —           —     

Mutual Funds

     17,754         17,754         —           —     

Derivative Assets

     5,020         —           5,020         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 2,816,864       $ 1,637,988       $ 1,178,876       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Derivative Liabilities

   $ 4,529       $ —         $ 4,328       $ 201   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

10


Table of Contents

The amounts in the table above are reported in the Consolidated Balance Sheet as of June 24, 2012 as follows:

 

     Total      (Level 1)      (Level 2)      (Level 3)  
     (In thousands)  

Reported Within:

           

Cash Equivalents

   $ 1,325,361       $ 1,318,812       $ 6,549       $ —     

Short-Term Investments

     1,297,931         130,624         1,167,307         —     

Restricted Cash and Investments

     164,885         164,885         —           —     

Prepaid Expenses and Other Current Assets

     5,020         —           5,020         —     

Other Assets

     23,667         23,667         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 2,816,864       $ 1,637,988       $ 1,178,876       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Accrued Expenses and Other Current Liabilities

   $ 4,328       $ —         $ 4,328       $ —     

Other Non-current Liabilities

     201         —           —           201   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

   $ 4,529       $ —         $ 4,328       $ 201   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 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 for additional information regarding the fair value of the Company’s convertible notes.

Investments

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

 

    December 23, 2012     June 24, 2012  
    Cost     Unrealized
Gain
    Unrealized
(Loss)
    Fair Value     Cost     Unrealized
Gain
    Unrealized
(Loss)
    Fair Value  

Cash

  $ 304,988      $ —        $ —        $ 304,988      $ 240,841      $ —        $ —        $ 240,841   

Fixed Income Money Market Funds

    884,982        —          —          884,982        1,318,812        —          —          1,318,812   

Municipal Notes and Bonds

    269,347        1,185        (46     270,486        321,001        1,574        (8     322,567   

US Treasury and Agencies

    177,520        92        (28     177,584        137,516        43        (113     137,446   

Government-Sponsored Enterprises

    93,953        169        (2     94,120        123,269        67        (68     123,268   

Foreign Government Bonds

    20,470        103        (5     20,568        6,315        43        —          6,358   

Corporate Notes and Bonds

    802,788        2,603        (279     805,112        767,847        1,443        (389     768,901   

Mortgage Backed Securities—Residential

    32,558        107        (57     32,608        25,857        121        (6     25,972   

Mortgage Backed Securities—Commercial

    96,118        673        (386     96,405        84,682        555        (384     84,853   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Cash and Short -Term Investments

  $ 2,682,724      $ 4,932      $ (803   $ 2,686,853      $ 3,026,140      $ 3,846      $ (968   $ 3,029,018   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Publicly Traded Equity Security

  $ 9,321      $ —        $ (4,776   $ 4,545      $ 9,320      $ —        $ (3,407   $ 5,913   

Private Equity Security

    5,000        —          —          5,000        5,000        —          —          5,000   

Mutual Funds

    19,635        1,305        —          20,940        17,459        366        (71     17,754   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Financial Instruments

  $ 2,716,680      $ 6,237      $ (5,579   $ 2,717,338      $ 3,057,919      $ 4,212      $ (4,446   $ 3,057,685   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reported Within

               

Cash and Cash Equivalents

  $ 1,190,189      $ —        $ —        $ 1,190,189      $ 1,564,752      $ —        $ —        $ 1,564,752   

Short-Term Investments

    1,326,369        4,932        (803     1,330,498        1,295,053        3,846        (968     1,297,931   

Restricted Cash and Investments

    166,166        —          —          166,166        166,335        —          —          166,335   

Other assets

    33,956        1,305        (4,776     30,485        31,779        366        (3,478     28,667   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2,716,680      $ 6,237      $ (5,579   $ 2,717,338      $ 3,057,919      $ 4,212      $ (4,446   $ 3,057,685   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 did not recognize any losses on investments due to other-than-temporary impairments during the three or six months ended December 23, 2012 or the three months ended December 25, 2011. The Company recognized a $1.7 million other-than-temporary impairment of a strategic private equity investment during the six months ended December 25, 2011. Additionally, gross realized gains and gross realized (losses) from sales of investments were approximately $0.9 million and $(0.3) million, respectively, in the three months ended December 23, 2012 and $0.1 million and $(0.2) million, respectively, in the three months ended December 25, 2011. Gross realized gains and gross realized (losses) from sales of investments were approximately $1.1 million and $(0.7) million, respectively, in the six months ended December 23, 2012 and $0.2 million and $(0.3) million, respectively, in the six months ended December 25, 2011.

 

11


Table of Contents

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

 

     December 23, 2012  
     Unrealized Losses     Unrealized Losses               
     Less Than 12 Months     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

   $ 39,212       $ (46   $ —         $ —        $ 39,212       $ (46

US Treasury and Agencies

     33,860         (28     —           —          33,860         (28

Government-Sponsored Enterprises

     3,513         (2     —           —          3,513         (2

Foreign Government Bonds

     7,601         (5     —           —          7,601         (5

Corporate Notes and Bonds

     184,816         (279     295         —          185,111         (279

Mortgage Backed Securities—Residential

     3,746         (57     —           —          3,746         (57

Mortgage Backed Securities—Commercial

     53,576         (348     2,056         (38     55,632         (386
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Short-Term Investments

   $ 326,324       $ (765   $ 2,351       $ (38   $ 328,675       $ (803
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The amortized cost and fair value of cash equivalents, short-term investments, and restricted cash and investments with contractual maturities are as follows as of December 23, 2012:

 

     Cost      Estimated Fair
Value
 
     (in thousands)  

Due in one year or less

   $ 1,299,524       $ 1,299,915   

Due after one year through five years

     905,888         909,053   

Due in more than five years

     172,324         172,897   
  

 

 

    

 

 

 
   $ 2,377,736       $ 2,381,865   
  

 

 

    

 

 

 

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 global 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 the same period the hedged transaction 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 six months ended December 23, 2012 or December 25, 2011 associated with ineffectiveness or forecasted transactions that failed to occur.

 

12


Table of Contents

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 December 23, 2012, the Company had gains of $3.7 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).

As of December 23, 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)  
     Buy Contracts      Sell Contracts      Buy Contracts      Sell Contracts  

Foreign Currency Forward Contracts

           

Japanese Yen

   $ —         $ 47,126       $ —         $ 42,593   

Swiss Francs

     —           —           16,159         —     

British Pound Sterling

     —           —           4,614         —     

Euro

     60,477         —           782         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 60,477       $ 47,126       $ 21,555       $ 42,593   
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of derivative instruments in the Company’s Consolidated Balance Sheet as of December 23, 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
  
  
   $ 3,458         Accrued liabilities       $ 70   

Derivatives not designated as hedging instruments:

           

Foreign exchange forward contracts

    
 
Prepaid expense
and other assets
  
  
   $ 187         Accrued liabilities       $ 395   
     

 

 

       

 

 

 

Total derivatives

      $ 3,645          $ 465   
     

 

 

       

 

 

 

 

13


Table of Contents

The fair value of derivative instruments in the Company’s Consolidated Balance Sheet as of June 24, 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
  
  
  $ 3,358        Accrued liabilities      $ 3,403   

Derivatives not designated as hedging instruments:

       

Foreign exchange forward contracts

   
 
Prepaid expense
and other assets
  
  
  $ 1,662        Accrued liabilities      $ 925   
   

 

 

     

 

 

 

Total derivatives

    $ 5,020        $ 4,328   
   

 

 

     

 

 

 

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

 

    Three Months Ended December 23, 2012     Six Months Ended December 23, 2012  
    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)  

Derivatives Designated as Hedging Instruments:

               

Foreign exchange forward contracts

  $ 2,347      $ (363   $ 8      $ (26   $ 1,628      $ (2,289   $      $ (47

 

    Three Months Ended December 25, 2011     Six Months Ended December 25, 2011  
    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)  

Derivatives Designated as Hedging Instruments:

               

Foreign exchange forward contracts

  $ (3,581   $ (2,906   $ (1   $ 223      $ (11,793   $ (5,513   $ (2   $ 754   

 

(1) Amount recognized in other comprehensive income (loss) (effective portion).
(2) Amount of gain (loss) reclassified from accumulated other comprehensive income into income (loss) (effective portion) located in revenue.
(3) Amount of gain (loss) recognized in income on derivative (ineffective portion) located in other expense, net.
(4) Amount of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing) located in other 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     Six Months Ended  
     December 23,
2012
     December 25,
2011
    December 23,
2012
     December 25,
2011
 
     Gain (Loss)
Recognized (5)
     Gain (Loss)
Recognized (5)
    Gain (Loss)
Recognized (5)
     Gain (Loss)
Recognized (5)
 
     (in thousands)  

Derivatives Not Designated as Hedging Instruments:

          

Foreign exchange forward contracts

   $ 5,667       $ (20,411   $ 286       $ (42,823

 

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

 

14


Table of Contents

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 global financial institutions. Such deposits may be in excess of insured limits. Management believes that the financial institutions that hold the Company’s cash are creditworthy and, accordingly, minimal credit risk exists with respect to these balances.

The Company’s over-all portfolio of available-for-sale securities must maintain an average minimum rating of “AA- or Aa3” as rated by Standard and Poor’s or Moody’s Investor Services, respectively. 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 global 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.

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 finished goods inventory and carried at cost until title transfers. Inventories consist of the following:

 

     December 23,      June 24,  
     2012      2012  
     (in thousands)  

Raw materials

   $ 307,806       $ 342,283   

Work-in-process

     78,459         118,566   

Finished goods

     144,007         172,004   
  

 

 

    

 

 

 
   $ 530,272       $ 632,853   
  

 

 

    

 

 

 

During the three months and six ended December 23, 2012, the Company incurred charges of $15.5 million and $18.7 million resulting from the write-off of inventory related to the decision to stop future development of certain product configurations and transition them to a sustaining mode with existing customers. These charges were included in cost of goods sold in the Condensed Consolidated Statement of Operations.

NOTE 6 — PROPERTY AND EQUIPMENT, NET

Property and equipment, net, consists of the following:

 

     December 23,     June 24,  
     2012     2012  
     (in thousands)  

Manufacturing, engineering and office equipment

   $ 487,647      $ 468,739   

Computer equipment and software

     111,255        104,919   

Land

     65,289        65,228   

Buildings

     238,581        231,536   

Leasehold improvements

     63,025        54,327   

Furniture and fixtures

     20,957        19,770   
  

 

 

   

 

 

 
     986,754        944,519   

Less: accumulated depreciation and amortization

     (396,207     (359,923
  

 

 

   

 

 

 
   $ 590,547      $ 584,596   
  

 

 

   

 

 

 

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 an impairment of long lived assets held for use during the three or six months ended December 23, 2012 or December 25, 2011.

 

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NOTE 7 — GOODWILL AND INTANGIBLE ASSETS

Goodwill

There was no significant change in the goodwill balance during the six months ended December 23, 2012. Of the $1,455 million goodwill balance as of December 23, 2012, $69.7 million is tax deductible and the remaining balance is not tax deductible due to purchase accounting and applicable foreign law.

The Company’s goodwill is measured at fair value when an impairment exists. Goodwill is assessed at least annually for impairment. The Company did not record impairments of goodwill during the three or six months ended December 23, 2012 or December 25, 2011.

Intangible Assets

The following table provides details of the Company’s intangible assets, including the impact of foreign currency translation adjustments, as of December 23, 2012 (in thousands, except years):

 

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

Customer relationships

   $ 615,771       $ (67,568   $ 548,203         9.04   

Existing technology

     643,032         (94,079     548,953         6.97   

Patents

     32,053         (19,911     12,142         6.05   

Backlog

     10,000         (5,548     4,452         1.00   

Other intangible assets

     35,216         (34,765     451         4.10   
  

 

 

    

 

 

   

 

 

    

Intangible assets subject to amortization

     1,336,072         (221,871     1,114,201      

In process research and development

     30,000           30,000      

Development rights

     9,100           9,100      
  

 

 

      

 

 

    

Intangible assets not subject to amortization

     39,100           39,100      
  

 

 

    

 

 

   

 

 

    

Total intangible assets

   $ 1,375,172       $ (221,871   $ 1,153,301      
  

 

 

    

 

 

   

 

 

    

 

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The following table provides details of the Company’s intangible assets, including the impact of foreign currency translation adjustments, as of June 24, 2012 (in thousands, except years):

 

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

Customer relationships

   $ 615,411       $ (32,041   $ 583,370         9.04   

Existing technology

     642,311         (48,378     593,933         6.97   

Patents

     30,870         (17,525     13,345         6.05   

Backlog

     10,000         (548     9,452         1.00   

Other intangible assets

     35,216         (33,989     1,227         4.10   
  

 

 

    

 

 

   

 

 

    

Intangible assets subject to amortization

     1,333,808         (132,481     1,201,327      

In process research and development

     30,000           30,000      

Development rights

     9,100           9,100      
  

 

 

      

 

 

    

Intangible assets not subject to amortization

     39,100           39,100      
  

 

 

    

 

 

   

 

 

    

Total intangible assets

   $ 1,372,908       $ (132,481   $ 1,240,427      
  

 

 

    

 

 

   

 

 

    

The Company recognized $44.7 million and $4.5 million in intangible asset amortization expense during the three months ended December 23, 2012 and December 25, 2011, respectively. The Company recognized $89.3 million and $9.0 million in intangible asset amortization expense during the six months ended December 23, 2012 and December 25, 2011, respectively.

The estimated future amortization expense of purchased intangible assets as of December 23, 2012 is as follows (in thousands):

 

Fiscal Year

   Amount  

2013 (6 months)

   $ 87,174   

2014

     161,136   

2015

     152,897   

2016

     151,074   

2017

     150,844   

Thereafter

     411,076   
  

 

 

 
   $ 1,114,201   
  

 

 

 

NOTE 8 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following:

 

     December 23,      June 24,  
     2012      2012  
     (in thousands)  

Accrued compensation

   $ 305,747       $ 274,165   

Warranty reserves

     56,191         63,988   

Income and other taxes payable

     17,954         24,745   

Other

     118,895         129,280   
  

 

 

    

 

 

 
   $ 498,787       $ 492,178   
  

 

 

    

 

 

 

 

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NOTE 9 — OTHER EXPENSE, NET

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

 

     Three Months Ended     Six Months Ended  
     December 23,     December 25,     December 23,     December 25,  
     2012     2011     2012     2011  
     (in thousands)  

Interest income

   $ 4,376      $ 2,472      $ 8,176      $ 5,061   

Interest expense

     (14,975     (9,346     (30,119     (18,606

Gains (losses) on deferred compensation plan related assets

     1,234        (348     3,975        (2,213

Foreign exchange losses

     (3,274     (142     (3,642     (1,232

Other, net

     (751     (421     (1,718     (2,868
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (13,390   $ (7,785   $ (23,328   $ (19,858
  

 

 

   

 

 

   

 

 

   

 

 

 

NOTE 10 — INCOME TAX EXPENSE

The Company recorded an income tax benefit of $(15.8) million and $(11.8) million for the three and six months ended December 23, 2012, respectively. The income tax benefit yielded an effective tax rate of 168.6% and 456.4% for the three and six months ended December 23, 2012, respectively.

The differences between the U.S. federal statutory tax rate of 35% and the Company’s effective tax rates for the three and six months ended December 23, 2012 were primarily due to the recognition of previously unrecognized tax benefits due to lapse of statute of limitations and successful resolution of certain tax matters, the geographic mix of income, and the treatment of discrete items in determining the effective tax rate, partially offset by the tax effect of non-deductible stock-based compensation. The effective tax rates recorded during the three and six months ended December 23, 2012 included the tax impact of discrete items, which were recorded during the quarter in which they occurred. During the three and six months ended December 23, 2012, tax discrete items primarily consisted of: (1) a tax benefit of $30.5 million and $30.9 million for the three months and six months, respectively, from the recognition of previously unrecognized tax benefits due to lapse of statutes of limitation and successful resolution of certain tax matters, and (2) the effective tax rate impact of integration and impairment expenses of $28.3 million and $45.3 million for the three months and six months, respectively, for which little tax benefit is derived.

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

 

     December 23,      June 24,  
     2012      2012  
     (in millions)  

Total gross unrecognized tax benefits

   $ 333.9       $ 343.8   

If the gross unrecognized tax benefits were recognized in a future period, it would result in a net tax benefit of $264.4 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 (benefit). As of December 23, 2012, the Company had accrued approximately $24.7 million for the payment of gross interest and penalties, relating to unrecognized tax benefits, compared to $25.2 million as of June 24, 2012.

The Internal Revenue Service (“IRS”) is examining the Company’s U.S. income tax returns for fiscal years 2008 and 2009. As of December 23, 2012, no significant adjustments have been proposed by the IRS. The IRS has completed its audit of Novellus’ calendar year 2006 through calendar year 2008 tax returns. No significant adjustments were proposed by the IRS. The Company is also subject to audits by foreign tax authorities. The Company is unable to make a reasonable estimate as to when cash settlements, if any, with the relevant taxing authorities will occur.

The Company files U.S. federal, U.S. state, and foreign income tax returns. As of December 23, 2012, tax years 2003-2012 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 a significant 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.

 

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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 $55.2 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 December 23, 2012, approximately $55.2 million would be credited to the statement of operations.

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, RSUs, and convertible notes. The following table reconciles the numerators and denominators of the basic and diluted computations for net income per share.

 

     Three Months Ended      Six Months Ended  
     December 23,      December 25,      December 23,      December 25,  
     2012      2011      2012      2011  
     (in thousands, except per share data)  

Numerator:

           

Net income

   $ 6,408       $ 33,212       $ 9,176       $ 105,050   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Basic average shares outstanding

     170,699         119,739         175,314         121,435   

Effect of potential dilutive securities:

           

Employee stock plans

     2,328         1,134         2,176         947   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted average shares outstanding

     173,027         120,873         177,490         122,382   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share—basic

   $ 0.04       $ 0.28       $ 0.05       $ 0.87   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share—diluted

   $ 0.04       $ 0.27       $ 0.05       $ 0.86   
  

 

 

    

 

 

    

 

 

    

 

 

 

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      Six Months Ended  
     December 23,      December 25,      December 23,      December 25,  
     2012      2011      2012      2011  
     (in thousands)  

Number of potential dilutive securities excluded

     1,543         90         1,551         841   
  

 

 

    

 

 

    

 

 

    

 

 

 

In addition to the above, 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 — ACCUMULATED OTHER COMPREHENSIVE LOSS

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

 

     December 23,     June 24,  
     2012     2012  
     (in thousands)  

Accumulated foreign currency translation adjustment

   $ (17,637   $ (22,481

Accumulated unrealized gain (loss) on cash flow hedges

     3,705        (212

Accumulated unrealized gain (loss) on available-for-sale investments

     (58     (308

Unrealized components of post retirement benefit plan

     (10,494     (10,817
  

 

 

   

 

 

 

Accumulated other comprehensive loss

   $ (24,484   $ (33,818
  

 

 

   

 

 

 

 

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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 December 23, 2012 and June 24, 2012:

 

     December 23,     June 24,  
     2012     2012  
     (in millions)  

0.50% Notes due 2016

   $ 450.0      $ 450.0   

Less: Unamortized interest discount

     (53.1     (60.3
  

 

 

   

 

 

 

Net carrying amount of 0.50% Notes due 2016

     396.9        389.7   
  

 

 

   

 

 

 

1.25% Notes due 2018

     450.0        450.0   

Less: Unamortized interest discount

     (83.7     (90.4
  

 

 

   

 

 

 

Net carrying amount of 1.25% Notes due 2018

     366.3        359.6   
  

 

 

   

 

 

 

2.625% Notes due 2041

     699.9        699.9   

Less: Unamortized interest discount

     (188.6     (190.3
  

 

 

   

 

 

 

Net carrying amount of 2.625% Notes due 2041

     511.3        509.6   
  

 

 

   

 

 

 

Total debt

     1,274.5        1,258.9   
  

 

 

   

 

 

 

Less: current portion of debt

     —          (509.6
  

 

 

   

 

 

 

Long-term debt

   $ 1,274.5      $ 749.3   
  

 

 

   

 

 

 

Convertible Senior Notes

In May 2011, the Company issued and sold $450.0 million in aggregate principal amount of 0.50% Convertible Senior Notes due May 2016 (the “2016 Notes”) at par. At the same time, the Company issued and sold $450.0 million in aggregate principal amount of 1.25% Convertible Senior Notes due May 2018 (the “2018 Notes”) at par. The 2016 Notes and the 2018 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 2016 Notes and the 2018 Notes were $835.5 million. The Company pays cash interest at an annual rate of 0.5% and 1.25%, respectively, on the 2016 Notes and the 2018 Notes, payable semi-annually on May 15 and November 15 of each year.

In June 2012, with the acquisition of Novellus Systems, Inc. (see Note 16), the Company assumed $700.0 million in aggregate principal amount of 2.625% Convertible Senior Notes due May 2041 (the “2041 Notes,” and collectively with the 2016 Notes and the 2018 Notes, the “Notes”). The 2041 Notes may be converted, under certain circumstances, based on an initial conversion rate of 28.4781 shares of common stock per $1,000 principal amount of notes (which represents an initial conversion price of approximately $35.11 per share of common stock). The Company pays cash interest at an annual rate of 2.625%, payable semi-annually on May 15 and November 15 of each year. The 2041 Notes also have a contingent interest payment provision that may require us to pay additional interest based on certain thresholds, beginning with the semi-annual interest payment commencing on May 15, 2021, and upon the occurrence of certain events, as outlined in the indenture governing the 2041 Notes. The maximum amount of the contingent interest will accrue at a rate of 2.1% per annum, excluding any potential impact from dividends deemed payable to holders of the 2041 Notes. The contingent interest payment provision has been identified as an embedded derivative, to be accounted for separately, and is recorded at fair value at the end of each reporting period in other non-current liabilities, with any gains and losses recorded in interest expense, within the Condensed Consolidated Statements of Operations.

In connection with the acquisition of Novellus in June 2012, the 2041 Notes could have been converted into the Company’s common stock at any time from and after the later of (1) the date that was 30 scheduled trading days immediately prior to the anticipated closing date of the merger and (2) the date on which we delivered to the note holders notice of the merger, until 35 business days after the actual closing date of the merger, or July 24, 2012. Accordingly, the carrying amount of the 2041 Notes was classified in current liabilities in our Consolidated Balance Sheet as of June 24, 2012. The excess of the amount of cash payable, if converted, over the carrying amount of the 2041 Notes was classified as temporary equity as of June 24, 2012. When the conversion period closed, on July 24, 2012, all 2041 Notes not converted were reclassified back to noncurrent liabilities and the temporary equity was reclassified to permanent equity. During the period ending June 24, 2012, 65 of the 2041 Notes, with a total par value of $65,000, were converted at the note holders’ option. In conjunction with the conversion, 137 shares of common stock were issued.

The Company separately accounts for the liability and equity components of the Notes. The initial debt components of the 2016 Notes, the 2018 Notes, and the 2041 Notes were valued at $373.8 million, $345.1 million, and $509.5 million, respectively, based on the present value of the future cash flows using discount rates of 4.29%, 5.27%, and 4.28%, respectively, the Company’s borrowing

 

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rate at the date of the issuance or assumption for similar debt instruments without the conversion feature. The carrying values of the equity components of the 2016 Notes, the 2018 Notes, and the 2041 Notes were $76.2 million, $104.9 million, and $328.1 million, respectively as of December 23, 2012. The effective interest rates on the liability components of the 2016 Notes, the 2018 Notes, and the 2041 Notes for the three months ended December 23, 2012 were 4.29%, 5.27%, and 4.28% 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 six months ended December 23, 2012 and December 25, 2011.

 

     Three Months Ended      Six Months Ended  
     December 23,      December 25,      December 23,      December 25,  
     2012      2011      2012      2011  
     (in millions)  

Contractual interest coupon

   $ 6.6       $ 1.9         13.1         3.9   

Amortization of interest discount

     7.8         6.7         15.6         13.3   

Amortization of issuance costs

     0.6         0.6         1.2         1.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest cost recognized

   $ 15.0       $ 9.2       $ 29.9       $ 18.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

The remaining bond discount of the 2016 Notes of $53.1 million as of December 23, 2012 will be amortized over their remaining life, which is approximately 3.4 years. The remaining bond discount of the 2018 Notes of $83.7 million as of December 23, 2012 will be amortized over their remaining life, which is approximately 5.4 years. The remaining bond discount of the 2041 Notes of $188.6 million as of December 23, 2012 will be amortized over their remaining life, which is approximately 28.4 years. As of December 23, 2012, the if-converted value of the 2016 Notes and the 2018 Notes did not exceed the aggregate principal amount. As of December 23, 2012, the if-converted value of the 2041 Notes exceeded the aggregate principal amount by $22.5 million.

Convertible Note Hedges and Warrants

Concurrently with the issuance of the 2016 Notes and the 2018 Notes, the Company purchased convertible note hedges 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 the 2018 Notes and to increase the effective initial conversion price to $71.34 and $76.10 per share, respectively. Each of these components is discussed separately below:

Concurrent with the issuance of the 2016 Notes, the Company sold 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 December 23, 2012, the warrants had not been exercised and remained outstanding. In addition, 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.

Concurrent with the issuance of the 2018 Notes, the Company sold 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 December 23, 2012, the warrants had not been exercised and remained outstanding. In addition, 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.

Fair Value of Notes

As of December 23, 2012, the face values of the 2016 Notes, the 2018 Notes, and the 2041 Notes were $450.0 million, $450.0 million, and $699.9 million, respectively. As of December 23, 2012, the fair values of the 2016 Notes, the 2018 Notes, and the 2041 Notes, which includes the debt and equity components, were approximately $432.0 million, $446.4 million, and $880.2 million respectively, based on quoted market prices (level 1 inputs within the fair value hierarchy).

 

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Table of Contents

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.

The Company’s contractual cash obligations relating to its existing capital leases, including interest, as of December 23, 2012 were as follows:

 

     Capital  
     Leases  
     (in thousands)  

Payments due by period:

  

One year

   $ 1,685   

Two years

     1,565   

Three years

     1,497   

Four years

     9,636   

Five years

     —     

Over 5 years

     —     
  

 

 

 

Total

     14,383   

Less: Interest on capital leases

     649   
  

 

 

 

Less: Current portion of capital leases

     1,464   
  

 

 

 

Long-tern portion of capital leases

   $ 12,270   
  

 

 

 

Operating Leases and Related Guarantees

The Company leases certain 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 December 23, 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 Condensed Consolidated 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 December 23, 2012, the unamortized portion of the fair value of the residual value guarantees remaining in other long-term liabilities and prepaid rent was $0.1 million.

 

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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 December 23, 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.

The Company provides guarantees and standby letters of credit to certain parties as required for certain transactions initiated during the ordinary course of business. As of December 23, 2012, the maximum potential amount of future payments that we could be required to make under these arrangements and letters of credit was $21.4 million. We do not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid.

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     Six Months Ended  
     December 23,     December 25,     December 23,     December 25,  
     2012     2011     2012     2011  
     (in thousands)  

Balance at beginning of period

   $ 67,836      $ 36,160      $ 70,161      $ 40,951   

Warranties issued during the period

     14,856        8,421        34,548        16,353   

Settlements made during the period

     (21,484     (11,925     (45,859     (23,146

Changes in liability for pre-existing warranties

     1,714        78        4,072        (1,424
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 62,922      $ 32,734      $ 62,922      $ 32,734   
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: Long-term portion

     (6,731     —          (6,731     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Accrued warranty, curent

   $ 56,191      $ 32,734      $ 56,191      $ 32,734   
  

 

 

   

 

 

   

 

 

   

 

 

 

NOTE 15 — RESTRUCTURING AND 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.

The following table summarizes restructuring and impairment charges and adjustments during the three and six months ended December 23, 2012 and December 25, 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.

 

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     Three Months Ended     Six Months Ended  
     December 23,     December 25,     December 23,     December 25,  
     2012     2011     2012     2011  
                 (in thousands)  

June 2008 Plan

   $ —        $ (859   $ —        $ (859

March 2009 Plan

     (1,440     —          (1,440     —     

Adjustments to restructuring liability assumed in acquisition

     2,461        —          2,461        —     

Asset impairments outside of specific restructuring plans

     —          —          —          1,725   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total restructuring and impairment charges (adjustments)

   $ 1,021      $ (859   $ 1,021      $ 866   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Three Months Ended     Six Months Ended  
     December 23,      December 25,     December 23,      December 25,  
     2012      2011     2012      2011  
                  (in thousands)  

Cost of goods sold

   $ —         $ (859   $ —         $ (859

Operating expense

     1,021         —          1,021         1,725   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total restructuring and impairment charges (adjustments)

   $ 1,021       $ (859   $ 1,021       $ 866   
  

 

 

    

 

 

   

 

 

    

 

 

 

June 2008 Plan

During the June 2008 quarter, the Company incurred restructuring expenses 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 remaining liabilities related to the June 2008 Plan as of either December 23, 2012 or June 24, 2012.

March 2009 Plan

Beginning in the March 2009 quarter, the Company incurred restructuring expenses designed to align the Company’s cost structure with its outlook for the current economic environment and future business opportunities (“March 2009 Plan”). During the three and six months ended December 23, 2012, the Company released charges of $1.4 million primarily as the result of changes in sublease assumptions for a previously restructured building. There were no charges incurred under the March 2009 Plan during the three or six months ended December 25, 2011. Total charges incurred through December 23, 2012 under the March 2009 Plan were $59.9 million.

Below is a table summarizing activity relating to the March 2009 Plan during the six months ended December 23, 2012:

 

     Facilities  
     (in thousands)  

Balance at June 24, 2012

   $ 27,749   

Fiscal year 2013 release

     (1,440
  

 

 

 

Balance at December 23, 2012

   $ 26,309   
  

 

 

 

This balance expected to be paid by the end of fiscal year 2015.

Acquired Restructuring Liabilities

In addition to restructuring plans initiated by the Company, a restructuring liability of $11.2 million was assumed in the Novellus acquisition, related to future rent obligations on unoccupied facilities. During the three months ended December 23, 2012, the Company incurred charges of $2.5 million as the result of changes in sublease assumptions for a previously restructured building. No other restructuring expenses have been recognized related to this obligation subsequent to the Novellus acquisition. The liability balance as of December 23, 2012 was $12.2 million.

 

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NOTE 16 – BUSINESS COMBINATIONS

On June 4, 2012 (“the acquisition date”), the Company acquired all of the outstanding common shares of Novellus in an all-stock transaction valued at approximately $3.0 billion. The results of Novellus’ operations have been included in the consolidated financial statements from the date of acquisition. Lam’s primary reasons for this acquisition were to complement existing product offerings and to provide opportunities for revenue and cost synergies. Novellus’ primary business focus is to develop, manufacture, sell and support equipment used in the fabrication of integrated circuits, commonly called semiconductors. Customers for this equipment manufacture semiconductors for sale or for incorporation in their own products, or provide semiconductor-manufacturing services to third parties. Novellus also develops, manufactures, sells and supports grinding, lapping and polishing equipment for a broad spectrum of industrial applications.

Consideration Transferred

The table below details the consideration transferred to acquire Novellus:

 

     Conversion      Estimated  

(in thousands, except per share amounts)

   Calculation      Fair Value  

Lam common stock issued at merger

     82,689      

Per share price of Lam common stock as of June 4, 2012

   $ 35.99       $ 2,975,977   
  

 

 

    

Estimated fair value of vested Lam equivalent restricted stock (1)

      $ 9,599   

Estimated fair value of vested Lam equivalent stock options (2)

        41,412   
     

 

 

 

Estimated purchase price consideration

      $ 3,026,988   
     

 

 

 

 

(1) The fair value of Lam Research equivalent restricted stock as of the acquisition date was estimated based upon the per share price of Lam Research common stock as of June 4, 2012, and giving effect to the exchange ratio of 1.125.
(2) The fair value of the Lam Research equivalent stock options as of the acquisition date was estimated using the Black-Scholes valuation model. Assumptions used are the same as those for acquired awards as disclosed in Note 11 of Notes to Condensed Consolidated Financial Statements.

Net Assets Acquired

The transaction has been accounted for using the acquisition method of accounting which requires that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The following table summarizes the assets acquired and liabilities assumed as of the acquisition date:

 

     June 4, 2012  
     (in thousands)  

Cash and investments

   $ 1,059,859   

Accounts receivable

     241,924   

Inventory

     309,213   

Other current assets

     56,314   

Property and equipment

     289,126   

Intangible assets

     1,219,100   

Goodwill

     1,277,121   

Other long-term assets

     35,826   
  

 

 

 

Total assets acquired

     4,488,483   

Accounts payable

     (83,028

Accrued expenses and other current liabilities

     (196,677

Deferred revenue

     (20,388

Debt

     (509,805

Other long-term liabilities

     (323,471

Convertible notes—equity component

     (328,126
  

 

 

 

Net assets acquired

   $ 3,026,988   
  

 

 

 

The goodwill recognized is attributable primarily to expected synergies and other benefits that the Company believes will result from combining the operations of Novellus with the operations of Lam. The $1.3 billion goodwill that was acquired is not expected to be deductible for income tax purposes. As of December 23, 2012, there were no changes in the recognized amounts of goodwill resulting from the acquisition of Novellus.

 

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Preliminary Pre-Acquisition Contingencies Assumed

The Company evaluated and continues to evaluate pre-acquisition contingencies relating to Novellus that existed as of the acquisition date. The Company determined that certain of these pre-acquisition contingencies are probable in nature and estimable as of the acquisition date and, accordingly, has preliminarily recorded the best estimates for these contingencies as a part of the purchase price allocation for Novellus. The Company continues to gather information for and evaluate these pre-acquisition contingencies, primarily related to tax positions that were assumed from Novellus. If changes are made to the amounts recorded or additional pre-acquisition contingencies are identified during the remainder of the measurement period, such amounts will be included in the purchase price allocation during the measurement period and, subsequently, in the Company’s results of operations.

NOTE 17 — STOCK REPURCHASE PROGRAM

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. 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 24, 2012

            $ 911,933   

Quarter ended September 23, 2012

     11,970       $ 344,001       $ 34.79       $ 567,932   

Quarter ended December 23, 2012

     10,190         354,029       $ 34.74         213,903   

 

* Average price paid per share excludes accelerated share repurchases for which cost was incurred in fiscal year 2012, but shares were received in fiscal year 2013. See Collared Accelerated Share Repurchases section below for details regarding average price associated with these transactions.

In addition to shares repurchased under Board authorized repurchase program shown above, during the six months ended December 23, 2012, the Company acquired 322,000 shares at a total cost of $11.4 million which the Company withheld through net share settlements to cover minimum tax withholding obligations upon the vesting 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. Such arrangements entered into or settled during the six months ended December 23, 2012 included the following.

Collared Accelerated Share Repurchases

During the year ended June 24, 2012, the Company entered into two share repurchase transactions under one master repurchase arrangement. Under these collared accelerated share repurchase transactions (“ASRs”), the Company made up-front cash payments of $375 million and $200 million, respectively, three days after the respective trade date in exchange for an initial delivery of 6.6 million and 3.9 million shares of its common stock, respectively. The number of shares to ultimately be repurchased by the Company is based generally on the volume-weighted average price (“VWAP”) of the Company’s common stock during the term of the ASR minus a pre-determined discount set at inception of the ASR, subject to collar provisions that provide a minimum and maximum number of shares that the Company could repurchase under the agreements.

The minimum and maximum thresholds for each transaction are established based on the average of the VWAP prices for the Company’s common stock during an initial hedge period. The Company received incremental shares on top of the initial shares delivered such that the total number of shares received after the initial hedge period equaled 8.8 million and 4.8 million shares, equivalent to the minimum number of shares to be delivered under the terms of the ASRs, respectively. The ASRs were scheduled to end on or before December 18, 2012 and October 9, 2012, respectively. However, each ASR is subject to acceleration at the option of the counterparty at any time after June 27, 2012 and July 19, 2012, respectively. At the conclusion of the ASRs, the Company may receive additional shares based on the VWAP of the Company’s common stock during the term of the agreement minus the pre-determined fixed discount, such that the total number of shares received under the ASRs does not exceed the maximum of 10.8 million and 6.6 million shares, respectively.

 

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The Company accounted for each ASR as two separate transactions: (a) as shares of common stock acquired in a treasury stock transaction recorded on the acquisition date and (b) as a forward contract indexed to the Company’s own common stock and classified in stockholders’ equity. As such, the Company accounted for the shares that it received under the ASRs as a repurchase of its common stock for the purpose of calculating earnings per common share. The Company has determined that the forward contract indexed to the Company’s common stock met all of the applicable criteria for equity classification in accordance with the Derivatives and Hedging topic of the FASB ASC, and, therefore, the ASRs were not accounted for as derivative instruments. As of June 24, 2012, the aggregate repurchase price of $575.0 million is reflected as Treasury stock, at cost, in the Consolidated Balance Sheet.

The counterparty designated July 6, 2012 as the accelerated termination date, at which time the Company settled the $375 million ASR and received an additional 1.3 million shares of common stock in addition to the minimum shares already received, which represented a weighted average share price of approximately $36.80 for the transaction period. The counterparty designated July 25, 2012 as the accelerated termination date, at which time the Company settled the $200 million ASR and received an additional 0.7 million shares of common stock in addition to the minimum shares already received, which represented a weighted average share price of approximately $36.12 for the transaction period.

NOTE 18 — LEGAL PROCEEDINGS

The Company is either a defendant or plaintiff in various actions that have arisen from time to time in the normal course of business, including intellectual property claims. The Company accrues for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued, the Company believes that the amount of any such additional loss would be immaterial to the Company’s business, financial condition, and results of operations.

 

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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 24, 2012 (our “2012 Form 10-K”), our quarterly report on Form 10-Q for the quarter ended September 23, 2012, 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 months ended December 23, 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 2012 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 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, microprocessors, and other 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 semiconductor processing to develop technology and productivity solutions that typically benefit our customers through lower defect rates, enhanced yields, faster processing time, and reduced cost as well as by facilitating their ability to meet more stringent performance and design standards.

 

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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), industry supply and 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.

Demand for our products declined during the second half of calendar year 2012 as certain semiconductor device manufacturers, particularly NAND memory manufacturers, reduced their investment levels. We believe demand for mobile products, which require semiconductor devices such as NAND memory, will continue to grow in calendar year 2013, eventually requiring additional investment in capital equipment. As a result, we believe capital equipment spending has the potential to increase in calendar year 2013, and currently believe that the second half of the year has greater potential than the first half of 2013. Further, we believe that, over the long term, demand for our products will increase as customers’ capital expenditures rise to address the increasing complexity of semiconductor device manufacturing and meet growing demand for semiconductor devices, particularly in the mobility space.

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

 

     Three Months Ended  
     December 23,     September 23,     December 25,  
     2012     2012     2011  

Revenue

   $ 860,886      $ 906,888      $ 583,981   

Gross margin

   $ 315,414      $ 333,886      $ 234,826   

Gross margin as a percent of revenue

     36.6     36.8     40.2

Total operating expenses

   $ 311,372      $ 317,174      $ 187,280   

Net income

   $ 6,408      $ 2,768      $ 33,212   

Diluted net income per share

   $ 0.04      $ 0.02      $ 0.27   

In the quarter ended December 23, 2012, revenue decreased as compared to the quarter ended September 23, 2012 due to the decline in demand for semiconductor capital equipment. Gross margin as a percent of revenues decreased as compared to the September 2012 quarter due primarily to increased costs related to rationalization of certain product configurations, unfavorable factory utilization, as well as product mix changes, offset by a decrease in costs associated with Novellus acquisition-related inventory fair value adjustments. Operating expenses in the December 2012 quarter decreased as compared to the quarter ended September 2012, as a result of reductions in field and support group spending, lower integration costs, and lower variable compensation associated with the decline in operating income.

Our cash and cash equivalents, short-term investments, and restricted cash and investments balances totaled approximately $2.7 billion as of December 23, 2012 compared to $2.9 billion as of September 23, 2012. Cash generated by operations was approximately $193 million during the December 2012 quarter. We used cash during the December 2012 quarter to repurchase $355 million of our shares and purchase $39 million of property and equipment. As of December 23, 2012, employee headcount remained flat to the September quarter at approximately 6,600 people.

RESULTS OF OPERATIONS

Shipments

 

     Three Months Ended  
     December 23,     September 23,     December 25,  
     2012     2012     2011  

Shipments (in millions)

   $ 803      $ 935      $ 563   

North America

     29     18     19

Taiwan

     22     29     18

Asia Pacific

     14     22     8

Japan

     14     8     10

Korea

     12     16     37

Europe

     9     7     8

 

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Shipments for the December 2012 quarter decreased 14% compared to the September 2012 quarter and increased 43% year over year. The year over year increase reflects operations post-acquisition of Novellus, which occurred on June 4, 2012. During the December 2012 quarter, applications below the 40 nanometer technology node were 78% of total systems shipments. The system shipments in the memory, foundry, and logic/integrated device manufacturing markets were approximately 20%, 51% and 29%, respectively. During the September 2012 quarter, applications below the 40 nanometer technology node were 81% of total systems shipments. The system shipments in the memory, foundry, and logic/integrated device manufacturing markets were approximately 42%, 48% and 10%, respectively.

Revenue

 

     Three Months Ended     Six Months Ended  
     December 23,     September 23,     December 25,     December 23,     December 25,  
     2012     2012     2011     2012     2011  

Revenue (in millions)

   $ 861      $ 907      $ 584      $ 1,768      $ 1,264   

Taiwan

     26     28     17     27     15

North America

     24     18     18     21     19

Korea

     12     24     34     18     29

Asia Pacific

     20     15     8     17     11

Japan

     10     8     14     9     16

Europe

     8     7     9     8     10

Revenue for the December 2012 quarter decreased 5% compared to the September 2012 quarter due to the decline in demand for semiconductor capital equipment. Revenue for the three and six months ended December 23, 2012 increased 47% and 40%, respectively, as compared to the same periods last year, reflecting operations post-acquisition of Novellus. Our deferred revenue balance decreased to $282 million as of December 23, 2012 compared to $364 million as of September 23, 2012. 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 $46 million as of December 23, 2012 compared to $21 million as of September 23, 2012.

Gross Margin

 

     Three Months Ended     Six Months Ended  
     December 23,     September 23,     December 25,     December 23,     December 25,  
     2012     2012     2011     2012     2011  
     (in thousands, except percentages)  

Gross margin

   $ 315,414      $ 333,886      $ 234,826      $ 649,300      $ 518,709   

Percent of revenue

     36.6     36.8     40.2     36.7     41.0

The decrease in gross margin as a percentage of revenue during the December 2012 quarter as compared to the September 2012 quarter is primarily due to costs incurred related to rationalization of certain product configurations, which increased from $3 million to $17 million, unfavorable factory utilization, as well as product mix changes. These declines were partially offset by costs associated with Novellus acquisition-related inventory fair value adjustments, which decreased from approximately $44 million to $27 million.

The decrease in gross margin as a percentage of revenue during the December 2012 quarter as compared to the December 2011 quarter is primarily due to $27 million in costs associated with Novellus acquisition-related inventory fair value adjustments, $21 million of amortization of acquired Novellus intangible assets, and $17 million of costs incurred related to rationalization of certain product configurations.

The decrease in gross margin as a percentage of revenue during the six months ended December 23, 2012 quarter as compared to the same period in the prior year is primarily due to acquisition-related inventory fair value adjustments of approximately $71 million and amortization of acquired intangible assets of approximately $41 million, which did not occur in the six months ended December, 25 2011.

 

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Research and Development

 

     Three Months Ended     Six Months Ended  
     December 23,     September 23,     December 25,     December 23,     December 25,  
     2012     2012     2011     2012     2011  
     (in thousands, except percentages)  

Research and development (“R&D”)

   $ 165,951      $ 163,311      $ 104,024      $ 329,262      $ 206,583   

Percent of revenue

     19.3     18.0     17.8     18.6     16.3

We continue to make significant R&D investments focused on leading-edge plasma etch, single-wafer clean, deposition, and other semiconductor manufacturing requirements. The increase in R&D expenses during the December 2012 quarter compared to the September 2012 quarter was primarily due to an increase in supplies and outside services costs offset by a reduction in variable compensation due to lower operating income levels.

While December 2011 reflects Lam standalone results, December 2012 reflects combined operations with Novellus. The increase in R&D expenses during the December 2012 quarter compared to the same period in the prior year was primarily due to a $27 million increase in employee compensation and benefits, mainly as a result of higher headcount, a $16 million increase in supplies and facilities costs, a $7 million increase in depreciation and amortization, and a $5 million increase in outside services.

While the six months ended December 25, 2011 reflect Lam standalone results, the six months ended December 23, 2012 reflect combined operations with Novellus. The increase in R&D expenses during the six months ended December 23, 2012 compared to the same period in the prior year was primarily due to a $57 million increase in employee compensation and benefits, mainly as a result of higher headcount, a $24 million increase in supplies and facilities costs, a $14 million increase in depreciation and amortization, and a $10 million increase in outside services.

Selling, General and Administrative

 

     Three Months Ended     Six Months Ended  
     December 23,     September 23,     December 25,     December 23,     December 25,  
     2012     2012     2011     2012     2011  
     (in thousands, except percentages)  

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

   $ 144,400      $ 153,863      $ 83,256      $ 298,263      $ 163,456   

Percent of revenue

     16.8     17.0     14.3     16.9     12.9

The decrease in SG&A expenses during the December 2012 quarter compared to the September 2012 quarter was primarily due to an $8 million decline in salaries and benefits as a result of reduction in variable compensation on lower operating income and $5 million lower integration costs.

The increase in SG&A expenses during the December 2012 quarter compared to the same period in the prior year was primarily due to the impact of combined operations with Novellus. Increased expenses included $29 million in employee compensation and benefits, $19 million in intangible asset amortization, and $10 million in supplies and facilities costs.

The increase in SG&A expenses in the six months ended December 23, 2012 compared to the same period in the prior year was primarily due to the impact of combined operations with Novellus. Increased expenses included $63 million in employee compensation and benefits, $39 million in intangible asset amortization, $14 million in integration and acquisition-related expenses, and $18 million in supplies and facilities costs.

Restructuring and Asset Impairments

During the three and six months ended December 23, 2012 we incurred net restructuring charges of $1.0 million primarily related to changes in sublease assumptions for previously restructured buildings. During the six months ended December 25, 2011, the Company incurred asset impairment charges of $1.7 million related to a decline in the market value of certain facilities.

 

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Other Expense, Net

Other expense, net consisted of the following:

 

     Three Months Ended     Six Months Ended  
     December 23,     September 23,     December 25,     December 23,     December 25,  
     2012     2012     2011     2012     2011  
     (in thousands)  

Interest income

   $ 4,376      $ 3,800      $ 2,472      $ 8,176      $ 5,061   

Interest expense

     (14,975     (15,144     (9,346     (30,119     (18,606

Gains (losses) on deferred compensation plan related assets

     1,234        2,741        (348     3,975        (2,213

Foreign exchange losses

     (3,274     (368     (142     (3,642     (1,232

Other, net

     (751     (967     (421     (1,718     (2,868
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ (13,390   $ (9,938   $ (7,785   $ (23,328   $ (19,858
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense increased in the three and six months ended December 23, 2012 as compared to the same periods in the prior year due to the 2041 Notes assumed in June 2012 in connection with the Novellus acquisition.

Foreign exchange losses in December 2012 were related to un-hedged portions of the balance sheet exposures, primarily in the Taiwan dollar and Korean Won.

In the three and six months ended December 23, 2012, we recognized gains on assets which are related to obligations under our deferred compensation plan, whereas during the same periods in the prior year we recognized losses on assets due to changes in the market value of securities in this portfolio.

Income Tax Expense

Our tax benefits for the three and six months ended December 23, 2012 were $(15.8) million and $(11.8) million, respectively, which yielded effective income tax rates of 168.6% and 456.4%, respectively. Our tax expenses for the three and six months ended December 25, 2011 were $6.5 million and $22.0 million, respectively, which yielded effective income tax rates of 16.5% and 17.3%, respectively. The increase in the effective tax rate for the three and six months ended December 23, 2012 compared to the three and six months ended December 25, 2011 was primarily due to the recognition of previously unrecognized tax benefits due to lapse of statute of limitations and the successful resolution of certain tax matters, the reduced level of income, an increase in the percentage of profits in jurisdictions with lower tax rates combined with a projected pre-tax loss in higher tax jurisdictions, and the treatment of integration and impairment expenses as a discrete event in determining the annual effective tax rate, offset by an increase in the non-deductible stock based compensation. In addition, the U.S. federal research and development (R&D) tax credit has expired as of December 31, 2011 and no tax benefit has been included in the calculation of the provision for income taxes for the three and six months ended December 23, 2012. On January 2, 2013 the “American Taxpayer Relief Act of 2012” was signed into law, which includes retroactive extension of the U.S. federal R&D tax credit through December 31, 2013. The Company is currently evaluating the impact of this R&D credit extension on the provision for income taxes for the remainder of fiscal year 2013.

The effective tax rate of 168.6% and 456.4% for the three and six months ended December 23, 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 $30.5 million and $30.9 million for the three months and six months, respectively, due to the recognition of previously unrecognized tax benefits due to lapse of statute of limitations and successful resolution of certain tax matters, and (2) the effective tax rate impact of integration and impairment expenses of $28.3 million and $45.3 million for the three months and six months, respectively, for which little tax benefit is derived. The effective tax rate of 16.5% and 17.3% for the three and six months ended December 25, 2011 includes the tax impact of the following discrete items which are recorded in the period in which they occur: (1) a tax expense of $2.2 million and $3.8 million, respectively, related to the filing of prior year foreign tax returns, which resulted in provision to return true-ups, (2) a tax expense of $0.8 million and $1.7 million, respectively, of interest related to uncertain tax positions, (3) a tax benefit of $2.5 million and $3.7 million, respectively, related to the acquisition, restructuring and asset impairment related expenses, and (4) a tax benefit of $6.9 million and $7.1 million, respectively, related to the recognition of previously unrecognized tax benefits and the reversal of the related interest accruals due to finalization of certain foreign uncertain tax positions.

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 $345.6 million and $253.7 million as of December 23, 2012 and June 24, 2012, respectively. The gross deferred tax assets were offset by deferred tax liabilities of $357.7 million and a valuation allowance of $55.2 million as of December 23, 2012. The gross deferred tax assets were offset by deferred tax liabilities of $285.6 million and a valuation allowance of $55.2 million as of June 24, 2012.

 

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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 (“GAAP”) 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 based our estimates and assumptions on historical experience and on various other assumptions we believed 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.

We believe that the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of 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 upon completion of the services requested by a customer order. 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.

 

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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.

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. 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 FASB ASC 740-10. 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.

 

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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. Beginning with our fiscal year 2012 goodwill impairment analysis, we adopted new accounting guidance that allowed us to first assess qualitative factors to determine whether it was necessary to perform a quantitative analysis. Under the revised guidance, an entity is no longer 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.

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 our failure to reach our internal forecasts, which could impact our ability to achieve our forecasted levels of cash flows and reduce the estimated discounted cash flow 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 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. We adopted this guidance in the September 2012 quarter. The implementation of this authoritative guidance did not have an impact on our financial position or results of operations, but did change the presentation of our financial statements.

 

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LIQUIDITY AND CAPITAL RESOURCES

As of December 23, 2012, we had $2.7 billion in cash and cash equivalents, short-term investments, and restricted cash and investments (total cash and investments) compared to $3.0 billion as of June 24, 2012.

Cash Flows from Operating Activities

Net cash provided by operating activities of $442.5 million during the six months ended December 23, 2012 consisted of (in millions):

 

Net income

   $ 9.2   

Non-cash charges:

  

Depreciation and amortization

     153.2   

Equity-based compensation

     48.4   

Amortization of convertible note discount

     15.6   

Restructuring charges

     1.0   

Deferred income taxes

     (19.3

Changes in operating asset and liability accounts

     209.7   

Other

     24.7   
  

 

 

 
   $ 442.5   
  

 

 

 

Changes in operating asset and liability accounts, net of foreign exchange impact, included the following sources of cash: decreases in accounts receivable of $171.3 million, inventories of $105.3 million, and prepaid and other assets of $37.9 million and increases in deferred profit of $4.2 million, partially offset by a use of cash resulting from decreases in trade accounts payable of $102.1 million and accrued liabilities of $6.9 million.

Cash Flows from Investing Activities

Net cash used for investing activities during the six months ended December 23, 2012 was $130.7 million, primarily consisting of capital expenditures of $82.9 million, net purchases of available-for-sale securities of $40.0 million, and cash paid for a business acquisition of $8.7 million.

Cash Flows from Financing Activities

Net cash used for financing activities during the six months ended December 23, 2012 was $693.4 million, primarily consisting of $710.0 million in treasury stock repurchases partially offset by net proceeds from issuance of common stock related to employee equity-based plans of $17.5 million.

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 December 23, 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 we have 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.

 

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 2012 Form 10-K. Other than noted below, our exposure related to market risk has not changed materially since June 24, 2012. All of the potential changes noted below are based on sensitivity analyses performed on our financial position as of December 23, 2012. Actual results may differ materially.

 

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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.

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. The majority of our revenues and expenses are denominated in U.S. dollars except for certain revenues denominated in Japanese yen, certain revenues and expenses denominated in the Euro, certain spares and service contracts denominated in various currencies, and expenses related to our non-U.S. sales and support offices denominated in the related countries’ local currency. We currently enter into foreign currency forward contracts to minimize the short-term impact of foreign currency exchange rate fluctuations on Japanese yen-denominated revenue and monetary asset and liability exposure, Euro-denominated expenses and monetary assets and liabilities, as well as monetary assets and liabilities denominated in Swiss francs, Taiwanese dollars, and Great British pounds. We currently believe these are our primary exposures to currency rate fluctuation.

We enter into foreign currency forward contracts to hedge the gains and losses generated by the remeasurement of Japanese yen, Euros, Swiss franc, Taiwanese dollar, and Great British pound -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 December 23, 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)
December 23, 2012
     Valuation of Fx Contracts Given an X%
Increase (+)/Decrease(-)  in Each Fx Rate
 
                   + / - (10%)