Lam Research Corporation
LAM RESEARCH CORP (Form: 10-Q, Received: 05/08/2014 16:15:40)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 30, 2014

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 May 2, 2014, the Registrant had 162,130,379 shares of common stock outstanding.

 

 

 


Table of Contents

LAM RESEARCH CORPORATION

TABLE OF CONTENTS

 

     Page No.  
PART I. Financial Information      3   

Item 1. Financial Statements (Unaudited):

     3   

Consolidated Balance Sheets as of March 30, 2014 and June 30, 2013

     3   

Condensed Consolidated Statements of Operations for the three and nine months ended March  30, 2014 and March 31, 2013

     4   

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended March  30, 2014 and March 31, 2013

     5   

Condensed Consolidated Statements of Cash Flows for the nine months ended March 30, 2014 and March 31, 2013

     6   

Notes to Condensed Consolidated Financial Statements

     7   

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

     24   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     33   

Item 4. Controls and Procedures

     33   
PART II. Other Information      34   

Item 1. Legal Proceedings

     34   

Item 1A. Risk Factors

     34   

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

     42   

Item 3. Defaults Upon Senior Securities

     43   

Item 4. Mine Safety Disclosures

     43   

Item 5. Other Information

     43   

Item 6. Exhibits

     43   

Signatures

     44   

Exhibit Index

     45   

 

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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)

 

     March 30,     June 30,  
     2014     2013  
     (unaudited)     (1)  
ASSETS     

Cash and cash equivalents

   $ 1,292,301      $ 1,162,473   

Short-term investments

     1,462,171        1,334,745   

Accounts receivable, less allowance for doubtful accounts of $5,377 as of March 30, 2014 and $5,448 as of June 30, 2013

     818,390        602,624   

Inventories

     717,356        559,317   

Prepaid expenses and other current assets

     157,131        134,670   
  

 

 

   

 

 

 

Total current assets

     4,447,349        3,793,829   

Property and equipment, net

     552,591        603,910   

Restricted cash and investments

     143,914        166,536   

Goodwill

     1,457,320        1,452,196   

Intangible assets, net

     951,593        1,074,345   

Other assets

     154,600        159,499   
  

 

 

   

 

 

 

Total assets

   $ 7,707,367      $ 7,250,315   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Trade accounts payable

   $ 252,517      $ 200,254   

Accrued expenses and other current liabilities

     515,504        464,528   

Deferred profit

     257,283        225,038   

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

     517,401        514,655   
  

 

 

   

 

 

 

Total current liabilities

     1,542,705        1,404,475   

Long-term debt, convertible notes, and capital leases

     810,688        789,256   

Income taxes payable

     251,080        246,479   

Other long-term liabilities

     111,346        134,313   
  

 

 

   

 

 

 

Total liabilities

     2,715,819        2,574,523   

Commitments and contingencies

    

Senior convertible notes

     184,256        186,920   

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 - 161,988 shares as of March 30, 2014 and 162,873 shares as of June 30, 2013

     162        163   

Additional paid-in capital

     5,187,053        5,084,544   

Treasury stock, at cost; 92,467 shares as of March 30, 2014 and 89,205 shares as of June 30, 2013

     (3,724,434     (3,539,830

Accumulated other comprehensive loss

     (27,071     (28,693

Retained earnings

     3,371,582        2,972,688   
  

 

 

   

 

 

 

Total stockholders’ equity

     4,807,292        4,488,872   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 7,707,367      $ 7,250,315   
  

 

 

   

 

 

 

 

(1) Derived from audited financial statements

See Notes to Condensed Consolidated Financial Statements

 

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LAM RESEARCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

     Three Months Ended     Nine Months Ended  
     March 30,     March 31,     March 30,     March 31,  
     2014     2013     2014     2013  

Revenue

   $ 1,227,392      $ 844,928      $ 3,358,512      $ 2,612,702   

Cost of goods sold

     696,594        505,096        1,908,067        1,623,570   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     530,798        339,832        1,450,445        989,132   

Research and development

     185,978        174,206        531,022        503,468   

Selling, general and administrative

     152,883        154,807        457,604        454,091   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     338,861        329,013        988,626        957,559   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     191,937        10,819        461,819        31,573   

Other expense, net

     (9,855     (15,834     (27,954     (39,162
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     182,082        (5,015     433,865        (7,589

Income tax expense (benefit)

     17,686        (24,011     34,971        (35,761
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 164,396      $ 18,996      $ 398,894      $ 28,172   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share:

        

Basic

   $ 1.01      $ 0.12      $ 2.46      $ 0.16   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.96      $ 0.11      $ 2.33      $ 0.16   
  

 

 

   

 

 

   

 

 

   

 

 

 

Number of shares used in per share calculations:

        

Basic

     162,238        163,034        161,904        171,016   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     171,636        168,504        171,051        174,306   
  

 

 

   

 

 

   

 

 

   

 

 

 

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     Nine Months Ended  
     March 30,     March 31,     March 30,     March 31,  
     2014     2013     2014     2013  

Net income

   $ 164,396      $ 18,996      $ 398,894      $ 28,172   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

        

Foreign currency translation adjustment

     (8,160     (5,398     1,680        (554

Cash flow hedges:

        

Net unrealized gains (losses) during the period

     (205     8,400        8,632        10,028   

Net gains reclassified into earnings

     (3,248     (5,389     (10,066     (3,100
  

 

 

   

 

 

   

 

 

   

 

 

 
     (3,453     3,011        (1,434     6,928   

Available-for-sale investments:

        

Net unrealized gains (losses) during the period

     (111     67        962        (105

Net losses (gains) reclassified into earnings

     25        2,899        (120     3,321   
  

 

 

   

 

 

   

 

 

   

 

 

 
     (86     2,966        842        3,216   

Defined benefit plan, net change in unrealized component

     149        160        534        483   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (11,550     739        1,622        10,073   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 152,846      $ 19,735      $ 400,516      $ 38,245   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

LAM RESEARCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Nine Months Ended  
     March 30,     March 31,  
     2014     2013  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 398,894      $ 28,172   

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

    

Depreciation and amortization

     221,139        228,065   

Deferred income taxes

     11,641        (47,271

Impairment of long-lived asset

     11,632        —     

Impairment of investments

     —          3,711   

Equity-based compensation expense

     70,615        74,089   

Amortization of convertible note discount

     24,652        23,530   

Other, net

     4,428        31,915   

Changes in operating assets and liabilities

     (271,843     202,734   
  

 

 

   

 

 

 

Net cash provided by operating activities

     471,158        544,945   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Capital expenditures

     (103,739     (117,655

Cash paid for business acquisition

     (18,388     (9,116

Purchases of available-for-sale securities

     (823,932     (832,913

Sales and maturities of available-for-sale securities

     695,001        780,950   

Repayments of notes receivable

     10,000        —     

Proceeds from sale of assets

     21,635        660   

Transfer of restricted cash and investments

     28,722        147   
  

 

 

   

 

 

 

Net cash used for investing activities

     (190,701     (177,927
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Principal payments on long-term debt and capital lease obligations

     (919     (1,536

Excess tax benefit on equity-based compensation plans

     (296     (903

Treasury stock purchases

     (204,610     (953,386

Reissuances of treasury stock related to employee stock purchase plan

     28,329        18,419   

Proceeds from issuance of common stock

     26,134        22,666   
  

 

 

   

 

 

 

Net cash used for financing activities

     (151,362     (914,740
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     733        2,079   

Net increase (decrease) in cash and cash equivalents

     129,828        (545,643

Cash and cash equivalents at beginning of period

     1,162,473        1,564,752   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,292,301      $ 1,019,109   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

LAM RESEARCH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 30, 2014

(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 30, 2013, which are included in the Annual Report on Form 10-K as of and for the year ended June 30, 2013 (the “2013 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 and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company’s reporting period is a 52/53-week fiscal year. The Company’s current fiscal year (the “2014 fiscal year”) will end June 29, 2014 and includes 52 weeks. The quarter ended March 30, 2014 (the “March 2014 quarter”) included 13 weeks. The quarter ended March 31, 2013 (the “March 2013 quarter”) included 14 weeks.

NOTE 2 — RECENT ACCOUNTING PRONOUNCEMENTS

In July 2013, the FASB released Accounting Standards Update 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” The new standard requires that an unrecognized tax benefit should be presented as a reduction of a deferred tax asset for a net operating loss carryforward or other tax credit carryforward when settlement in this manner is available under the tax law. We are required to adopt this standard starting fiscal year 2015 and are currently in the process of determining the impact, if any, on our financial position.

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 Common Stock at a set price. An RSU award is an agreement to issue shares of Common 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 acquisition of Novellus Systems, Inc. (“Novellus”), 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      Nine Months Ended  
     March 30,      March 31,      March 30,      March 31,  
     2014      2013      2014      2013  
     (in millions)  

Equity-based compensation expense

   $ 24.3       $ 25.6       $ 70.6       $ 74.1   

Income tax benefit related to equity-based compensation expense

   $ 4.1       $ 4.3       $ 11.7       $ 13.3   

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.

Stock Options and RSUs

The Lam Research Corporation 2007 Stock Incentive Plan and 2011 Stock Incentive Plan (collectively the “Stock Plans”) provide for the grant of non-qualified equity-based awards to eligible employees, consultants and advisors, and non-employee directors of the Company and its subsidiaries. As of March 30, 2014, there was a total of 6,395,328 shares reserved to cover options and RSUs issued and outstanding under the Plans. As of March 30, 2014, there were an additional 11,008,283 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 March 30, 2014 and changes during the nine months then ended is presented below:

 

Options

   Shares
(in thousands)
    Weighted-
Average
Exercise Price
     Weighted-Average
Remaining
Contractual Term

(years)
     Aggregate Intrinsic
Value as of

March 30, 2014
(in thousands)
 

Outstanding at June 30, 2013

     2,571      $   26.87         4.48      

Granted

     166      $ 51.76         

Exercised

     (1,065   $ 24.50         

Forfeited or expired

     (1   $ 29.71         
  

 

 

         

Outstanding at March 30, 2014

     1,671      $ 30.86         4.78       $ 39,501   
  

 

 

         

Exercisable at March 30, 2014

     1,066      $ 24.62         3.86       $ 31,840   
  

 

 

         

The fair value of the Company’s stock options was estimated using a Black-Scholes option valuation model. The total intrinsic value of options exercised during the three months ended March 30, 2014 and March 31, 2013 was $7.1 million and $8.0 million, respectively. The total intrinsic value of options exercised during the nine months ended March 30, 2014 and March 31, 2013 was $29.3 million and $12.7 million, respectively. As of March 30, 2014, there was $5.9 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 March 30, 2014 and changes during the nine months then ended is presented below:

 

     Shares     Average Grant-  

Unvested Restricted Stock Units

   (in thousands)     Date Fair Value  

Unvested at June 30, 2013

     4,842      $ 39.32   

Granted

     1,376      $ 49.47   

Vested

     (1,313   $ 39.84   

Forfeited

     (181   $ 39.48   
  

 

 

   

Unvested at March 30, 2014

     4,724      $ 42.12   
  

 

 

   

The fair value of the Company’s RSUs was calculated based upon the fair market value of Common Stock at the date of grant. As of March 30, 2014, there was $130.3 million of total unrecognized compensation expense related to unvested RSUs granted; that expense is expected to be recognized over a weighted-average remaining period of 1.9 years.

During the three months ended March 30, 2014, the Company issued restricted stock units with both a market condition and a service condition (market-based performance RSUs “market-based PRSUs”). Based upon the terms of such awards, the number of shares of Common Stock to be issued at vesting will range from 0% to 150% of the target amount, based on the total stockholder return (“TSR”) of Common Stock measured against the benchmark TSR of the Philadelphia Semiconductor Sector Index over a two and three year period, and continued employment. TSR is a measure of stock price appreciation in this performance period. As of March 30, 2014, 0.6 million market-based PRSUs were outstanding. These market-based performance restricted stock units generally vest two or three years from the grant date. Stock compensation expense for the market-based PRSUs was $1.2 million for the three and nine months ended March 30, 2014. No market-based PRSUs were awarded in earlier periods. The total unrecognized compensation expense and weighted-average remaining life for these awards is included in the above table.

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 Common Stock at a purchase price per share equal to the lower of 85% of the fair market value of Common Stock on the first or last day of the applicable purchase period. Each offering period generally lasts up to 12 months and includes up to three interim purchase dates. As of March 30, 2014, there was a total of 8,741,208 shares available for issuance under the 1999 ESPP.

 

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Purchase rights under the 1999 ESPP were valued using the Black-Scholes option valuation model assuming no expected dividends and the following weighted-average assumptions for the three and nine months ended March 30, 2014:

 

     Three Months Ended     Nine Months Ended  
     March 30,     March 30,  
     2014     2014  

Expected term (years)

     0.51        0.68   

Expected stock price volatility

     28.89     30.24

Risk-free interest rate

     0.09     0.07

As of March 30, 2014, there was $5.7 million of unrecognized compensation expense related to the 1999 ESPP, which is expected to be recognized over a remaining period of approximately 5 months.

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.

 

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The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis at March 30, 2014:

 

            Fair Value Measurement at March 30, 2014  
            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

   $ 1,042,596       $ 1,042,596       $ —         $ —     

Municipal Notes and Bonds

     248,949         —           248,949         —     

US Treasury and Agencies

     182,967         182,967         —           —     

Government-Sponsored Enterprises

     41,089         —           41,089         —     

Foreign Government Bonds

     34,988         —           34,988         —     

Corporate Notes and Bonds

     961,378         132,549         828,829         —     

Mortgage Backed Securities - Residential

     26,580         —           26,580         —     

Mortgage Backed Securities - Commercial

     104,857         —           104,857         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Short-Term Investments

   $ 2,643,404       $ 1,358,112       $ 1,285,292       $ —     

Mutual Funds

     28,559         28,559         —           —     

Derivative Assets

     2,487         —           2,487         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 2,674,450       $ 1,386,671       $ 1,287,779       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Derivative Liabilities

   $ 1,340       $ —         $ 1,190       $ 150   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amounts in the table above are reported in the Consolidated Balance Sheet as of March 30, 2014 as follows:

 

Reported Within:

   Total      Level 1      Level 2      Level 3  
     (In thousands)  

Cash Equivalents

   $ 1,042,596       $ 1,042,596       $ —         $ —     

Short-Term Investments

     1,462,171         176,879         1,285,292         —     

Restricted Cash and Investments

     138,637         138,637         —           —     

Prepaid Expenses and Other Current Assets

     2,487         —           2,487         —     

Other Assets

     28,559         28,559         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 2,674,450       $ 1,386,671       $ 1,287,779       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Accrued Expenses and Other Current Liabilities

   $ 1,190       $ —         $ 1,190       $ —     

Other Non-current Liabilities

     150         —           —           150   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

   $ 1,340       $ —         $ 1,190       $ 150   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis at June 30, 2013:

 

            Fair Value Measurement at June 30, 2013  
     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

   $ 725,311       $ 725,311       $ —         $ —     

Municipal Notes and Bonds

     268,746         —           268,746         —     

US Treasury and Agencies

     155,293         155,293         —           —     

Government-Sponsored Enterprises

     54,805         —           54,805         —     

Foreign Government Bond

     24,972         —           24,972         —     

Corporate Notes and Bonds

     860,492         164,885         695,607         —     

Mortgage Backed Securities - Residential

     27,365         —           27,365         —     

Mortgage Backed Securities - Commercial

     107,958         —           107,958         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Short-Term Investments

   $ 2,224,942       $ 1,045,489       $ 1,179,453       $ —     

Equities

     7,096         7,096         —           —     

Mutual Funds

     18,216         18,216         —           —     

Derivative Assets

     4,929         —           4,929         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 2,255,183       $ 1,070,801       $ 1,184,382       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Derivative Liabilities

   $ 1,815       $ —         $ 1,620       $  195   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The amounts in the table above are reported in the Consolidated Balance Sheet as of June 30, 2013 as follows:

 

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

Cash Equivalents

   $ 725,311       $ 725,311       $ —         $ —     

Short-Term Investments

     1,334,746         155,293         1,179,453         —     

Restricted Cash and Investments

     164,885         164,885         —           —     

Prepaid Expenses and Other Current Assets

     4,929         —           4,929         —     

Other Assets

     25,312         25,312         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 2,255,183       $ 1,070,801       $ 1,184,382       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Accrued Expenses and Other Current Liabilities

   $ 1,620       $ —         $ 1,620       $ —     

Other Non-current Liabilities

     195         —           —           195   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

   $ 1,815       $ —         $ 1,620       $ 195   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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Investments

The following tables summarize the Company’s investments:

 

     March 30, 2014      June 30, 2013  
     Cost      Unrealized
Gain
     Unrealized
(Loss)
    Fair Value      Cost      Unrealized
Gain
     Unrealized
Loss
    Fair Value  
     (In thousands)      (In thousands)  

Cash

   $ 254,982       $ —         $ —        $ 254,982       $ 438,813       $ —         $ —        $ 438,813   

Fixed Income Money Market Funds

     1,042,596         —           —          1,042,596         725,311         —           —          725,311   

Municipal Notes and Bonds

     248,050         927         (28     248,949         268,390         805         (449     268,746   

US Treasury and Agencies

     183,072         61         (166     182,967         155,648         18         (373     155,293   

Government-Sponsored Enterprises

     41,068         51         (30     41,089         54,835         65         (95     54,805   

Foreign Government Bonds

     34,979         95         (86     34,988         24,950         47         (25     24,972   

Corporate Notes and Bonds

     960,356         1,771         (749     961,378         861,109         1,328         (1,945     860,492   

Mortgage Backed Securities - Residential

     26,802         30         (252     26,580         27,618         29         (282     27,365   

Mortgage Backed Securities - Commercial

     105,264         141         (548     104,857         108,204         426         (672     107,958   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Cash and Short -Term Investments

   $ 2,897,169       $ 3,076       $ (1,859   $ 2,898,386       $ 2,664,878       $ 2,718       $ (3,841   $ 2,663,755   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Publicly Traded Equity Security

   $ —         $ —         $ —        $ —         $ 5,610       $ 1,486       $ —        $ 7,096   

Private Equity Security

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

Mutual Funds

     25,656         2,903         —          28,559         16,611         1,619         (14     18,216   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Financial Instruments

   $ 2,922,825       $ 5,979       $ (1,859   $ 2,926,945       $ 2,692,099       $ 5,823       $ (3,855   $ 2,694,067   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Reported Within

                     

Cash and Cash Equivalents

   $ 1,292,301       $ —         $ —        $ 1,292,301       $ 1,162,473       $ —         $ —        $ 1,162,473   

Short-Term Investments

     1,460,954         3,076         (1,859     1,462,171         1,335,868         2,718         (3,841     1,334,745   

Restricted Cash and Investments

     143,914         —           —          143,914         166,536         —           —          166,536   

Other assets

     25,656         2,903         —          28,559         27,222         3,105         (14     30,313   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 2,922,825       $ 5,979       $ (1,859   $ 2,926,945       $ 2,692,099       $ 5,823       $ (3,855   $ 2,694,067   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

The Company accounts for its investment portfolio at fair value. Realized gains (losses) for investment sales 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 and nine months ended March 30, 2014. The Company recognized a $3.7 million other-than-temporary impairment of a public equity investment during the three and nine months ended March 31, 2013. Additionally, gross realized gains and gross realized (losses) from sales of investments were approximately $0.4 million and $(0.7) million, respectively, in the three months ended March 30, 2014 and $0.2 million and $(0.4) million, respectively, in the three months ended March 31, 2013. Gross realized gains and gross realized (losses) from sales of investments were approximately $0.8 million and $(1.7) million, respectively, in the nine months ended March 30, 2014 and $1.4 million and $(1.1) million, respectively, in the nine months ended March 30, 2013.

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

 

     March 30, 2014  
     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
 
     (In thousands)  

Short-Term Investments

               

Municipal Notes and Bonds

   $ 17,114       $ (28   $ —         $ —        $ 17,114       $ (28

US Treasury and Agencies

     96,394         (166     —           —          96,394         (166

Government-Sponsored Enterprises

     14,071         (30     —           —          14,071         (30

Foreign Government Bonds

     18,487         (86     —           —          18,487         (86

Corporate Notes and Bonds

     261,299         (729     6,465         (20     267,764         (749

Mortgage Backed Securities - Residential

     20,974         (243     127         (9     21,101         (252

Mortgage Backed Securities - Commercial

     75,081         (404     4,249         (144     79,330         (548
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Short-Term Investments

   $ 503,420       $ (1,686   $ 10,841       $ (173   $ 514,261       $ (1,859
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

12


Table of Contents

The amortized cost and fair value of cash equivalents, short-term investments, and restricted cash and investments with contractual maturities are as follows as of March 30, 2014:

 

     Cost      Estimated Fair
Value
 
     (in thousands)  

Due in one year or less

   $ 1,316,589       $ 1,317,140   

Due after one year through five years

     1,035,559         1,036,852   

Due in more than five years

     290,039         289,412   
  

 

 

    

 

 

 
   $ 2,642,187       $ 2,643,404   
  

 

 

    

 

 

 

Management has the ability, if necessary, to liquidate 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 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

The Company’s financial position is routinely subjected to market risk associated with foreign currency exchange rate fluctuations on non-U.S. 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-U.S. dollar denominated transactions or cash flows through a foreign currency cash flow hedging program, using forward contracts that generally expire within 12 months and no later than 24 months. These foreign currency forward contracts are designated as cash flow hedges and are carried on the Company’s balance sheet at fair value with the effective portion of the contracts’ gains or losses included in accumulated other comprehensive income (loss) and subsequently recognized in revenue/expense in the same period the hedged items are 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 the forward contracts due to changes in time value are excluded from the assessment of effectiveness and are recognized in revenue or expense 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 and nine months ended March 30, 2014 or March 31, 2013 associated with ineffectiveness or forecasted transactions that failed to occur.

To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge and the hedges must be tested to demonstrate an expectation of providing highly effective offsetting changes to future cash flows on hedged transactions. When derivative instruments are designated and qualify as effective cash flow hedges, the Company recognizes effective changes in the fair value of the hedging instrument within accumulated other comprehensive income (loss) until the hedged exposure is realized. Consequently, with the exception of excluded time value and hedge ineffectiveness recognized, the Company’s results of operations are not subject to fluctuation as a result of changes in the fair value of the derivative instruments. If hedges are not highly effective or if the Company does not believe that the underlying hedged forecasted transactions will occur, the Company may not be able to account for its derivative instruments as cash flow hedges. If this were to occur, future changes in the fair values of the Company’s derivative instruments would be recognized in earnings. Additionally, related amounts previously recorded in other comprehensive income would be reclassified to income immediately. At March 30, 2014, the Company had gains of $1.4 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 third party accounts receivables, accounts payables and intercompany receivables and payables. These 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, which are also recorded in other income (expense).

 

13


Table of Contents

As of March 30, 2014, 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      Derivatives Not Designated as  
     Hedging Instruments:      Hedging Instruments:  
     (in thousands)  
Foreign Currency Forward Contracts                            
     Buy Contracts      Sell Contracts      Buy Contracts      Sell Contracts  

Japanese Yen

   $ —         $ 123,282       $ —         $ 65,959   

Swiss Franc

           7,496         —     

Euro

     60,487         —           —           8,901   

Korean Won

     —           —           36,386         —     

Taiwan Dollar

     —           —           188,583         65,899   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 60,487       $ 123,282       $ 232,465       $ 140,759   
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of derivative instruments in the Company’s Consolidated Balance Sheets as of March 30, 2014 and June 30, 2013 were as follows:

 

    

March 30, 2014

    

June 30, 2013

 
    

Fair Value of Derivative Instruments

    

Fair Value of Derivative Instruments

 
    

Asset Derivatives

    

Liability Derivatives

    

Asset Derivatives

     Liability Derivatives  
    

Balance Sheet
Location

  Fair Value     

Balance Sheet
Location

  Fair Value     

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   $ 2,297       Accrued liabilities   $ 619       Prepaid expense and other assets   $ 4,858       Accrued
liabilities
   $ 1,577   

Derivatives not designated as hedging instruments:

                    

Foreign exchange forward contracts

   Prepaid expense and other assets     190       Accrued liabilities     571       Prepaid expense and other assets     71       Accrued
liabilities
     43   
    

 

 

      

 

 

      

 

 

       

 

 

 

Total derivatives

     $ 2,487         $ 1,190         $ 4,929          $ 1,620   
    

 

 

      

 

 

      

 

 

       

 

 

 

Under the master netting agreements with the respective counterparties to the Company’s foreign exchange contracts, subject to applicable requirements, the Company is allowed to net settle transactions of the same currency with a single net amount payable by one party to the other. However, the Company has elected to present the derivative assets and derivative liabilities on a gross basis in its balance sheet. As of March 30, 2014, the potential effect of netting the above foreign exchange contracts would be an offset to assets and liabilities by $0.7 million, resulting in a net derivative asset of $1.3 million. As of June 30, 2013, the potential effect of netting the above foreign exchange contracts was an offset to both assets and liabilities by $1.6 million, resulting in a net derivative asset of $3.3 million. The Company is not required to pledge, nor is the Company entitled to receive, cash collateral for these derivative transactions.

 

14


Table of Contents

The effect of derivative instruments designated as cash flow hedges on the Company’s Condensed Consolidated Statements of Operations, including accumulated other comprehensive income (“AOCI”) was as follows:

 

     Three Months Ended March 30, 2014     Nine Months Ended March 30, 2014  
     Effective Portion      Ineffective Portion and
Amount Excluded from
Effectiveness Testing
    Effective Portion     Ineffective Portion and
Amount Excluded from
Effectiveness Testing
 
Location of Gain (Loss) Recognized in or
Reclassified into Income
   Gain (Loss)
Recognized
in AOCI
    Gain
Reclassified
from AOCI
into Income
     Gain (Loss)
Recognized
in Income
    Gain 
Recognized
in AOCI
     Gain
Reclassified
from AOCI
into Income
    Gain (Loss)
Recognized
in Income
 
     (in thousands)     (in thousands)  

Revenue

   $ (621   $ 2,787       $ 54      $ 7,483       $ 8,947      $ 232   

Cost of goods sold

     307        646         (10     1,717         1,764        (66

Selling, general, and administrative

     112        291         (5     667         800        (29

Other income (expense)

     —          —           —          —           —          —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
   $ (202   $ 3,724       $ 39      $ 9,867       $ 11,511      $ 137   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     Three Months Ended March 31, 2013     Nine Months Ended March 31, 2013  
     Effective Portion      Ineffective Portion and
Amount Excluded from
Effectiveness Testing
    Effective Portion     Ineffective Portion and
Amount Excluded from
Effectiveness Testing
 
Location of Gain (Loss) Recognized in or
Reclassified into Income
   Gain (Loss)
Recognized
in AOCI
    Gain
Reclassified
from AOCI
into Income
     Gain (Loss)
Recognized
in Income
    Gain
Recognized
in AOCI
     Gain (Loss)
Reclassified
from AOCI
into Income
    Gain (Loss)
Recognized
in Income
 
     (in thousands)     (in thousands)  

Revenue

   $ 9,454      $ 3,850       $ 78      $ 8,159       $ 4,574      $ 274   

Cost of goods sold

     (563     1,194         (44     1,332         (1,069     (208

Selling, general, and administrative

     (491     345         (20     537         (405     (100

Other income (expense)

     —          —           —          —           —          (8
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
   $ 8,400      $ 5,389       $ 14      $ 10,028       $ 3,100      $ (42
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

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

 

          Three Months Ended      Nine Months Ended  
          March 30, 2014     March 31, 2013      March 30, 2014      March 31, 2013  

Derivatives Not Designated

as Hedging Instruments:

   Location of Gain (Loss) Recognized in
Income
   Loss
Recognized
in Income
    Gain
Recognized
in Income
     Gain
Recognized
in Income
     Gain
Recognized
in Income
 
          (in thousands)  

Foreign Exchange Contracts

   Other income (expense)    $ (6,527   $ 2,061       $ 4,512       $ 2,347   

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 at 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 overall 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 hedge contracts and on structured share repurchase arrangements. 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.

 

15


Table of Contents

NOTE 5 — INVENTORIES

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

 

     March 30,      June 30,  
     2014      2013  
     (in thousands)  

Raw materials

   $ 440,772       $ 312,484   

Work-in-process

     114,890         101,530   

Finished goods

     161,694         145,303   
  

 

 

    

 

 

 
   $ 717,356       $ 559,317   
  

 

 

    

 

 

 

NOTE 6 — PROPERTY AND EQUIPMENT, NET

Property and equipment, net, consists of the following:

 

     March 30,     June 30,  
     2014     2013  
     (in thousands)  

Manufacturing, engineering and office equipment

   $ 590,505      $ 521,047   

Computer equipment and software

     128,753        120,144   

Land

     55,951        65,360   

Buildings

     207,537        249,126   

Leasehold improvements

     79,152        76,225   

Furniture and fixtures

     24,824        21,110   
  

 

 

   

 

 

 
     1,086,722        1,053,012   

Less: accumulated depreciation and amortization

     (534,131     (449,102
  

 

 

   

 

 

 
   $ 552,591      $ 603,910   
  

 

 

   

 

 

 

During the nine months ended March 30, 2014, the Company sold or reclassified to assets held-for-sale property and equipment with a net book value of $69 million as a result of facility consolidation. These assets consisted primarily of buildings and land, resulting in the decreases to those asset categories in the table above.

NOTE 7 — GOODWILL AND INTANGIBLE ASSETS

Goodwill

There was no significant change in the goodwill balance during the nine months ended March 30, 2014. Of the $1.5 billion goodwill balance as of March 30, 2014, $61 million is tax deductible and the remaining balance is not tax deductible due to purchase accounting and applicable foreign law.

Goodwill is assessed at least annually for impairment. The Company did not record impairments of goodwill during the three or nine months ended March 30, 2014 or March 31, 2013.

 

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Intangible Assets

The following table provides details of the Company’s intangible assets, including the impact of foreign currency translation adjustments, as of March 30, 2014:

 

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

Customer relationships

   $ 625,072       $ (156,121   $ 468,951         9.01   

Existing technology

     662,357         (207,981     454,376         6.96   

Patents

     32,053         (23,887     8,166         6.09   

Other intangible assets

     35,216         (35,216     —           4.10   
  

 

 

    

 

 

   

 

 

    

Intangible assets subject to amortization

     1,354,698         (423,205     931,493      

In process research and development

     11,000           11,000      

Development rights

     9,100           9,100      
  

 

 

      

 

 

    

Intangible assets not subject to amortization

     20,100           20,100      
  

 

 

    

 

 

   

 

 

    

Total intangible assets

   $ 1,374,798       $ (423,205   $ 951,593      
  

 

 

    

 

 

   

 

 

    

The following table provides details of the Company’s intangible assets, including the impact of foreign currency translation adjustments, as of June 30, 2013 (in thousands, except years):

 

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

Customer relationships

   $ 624,686       $ (103,519   $ 521,167         9.01   

Existing technology

     653,628         (139,894     513,734         6.97   

Patents

     32,053         (22,036     10,017         6.09   

Backlog

     10,000         (10,000     —           1.00   

Other intangible assets

     35,216         (34,889     327         4.10   
  

 

 

    

 

 

   

 

 

    

Intangible assets subject to amortization

     1,355,583         (310,338     1,045,245      

In process research and development

     20,000           20,000      

Development rights

     9,100           9,100      
  

 

 

      

 

 

    

Intangible assets not subject to amortization

     29,100           29,100      
  

 

 

    

 

 

   

 

 

    

Total intangible assets

   $ 1,384,683       $ (310,338   $ 1,074,345      
  

 

 

    

 

 

   

 

 

    

The Company recognized $40.4 million and $45.0 million in intangible asset amortization expense during the three months ended March 30, 2014 and March 31, 2013, respectively. The Company recognized $122.9 million and $134.3 million in intangible asset amortization expense during the nine months ended March 30, 2014 and March 31, 2013, respectively. The Company recognized a $4.0 million impairment of in process research and development during the three and nine months ended March 31, 2014 due to the cancellation of a project.

The estimated future amortization expense of purchased intangible assets as of March 30, 2014 is as follows:

 

Fiscal Year

   Amount  
     (in thousands)  

2014 (3 months)

   $ 39,842   

2015

     159,718   

2016

     157,510   

2017

     155,790   

2018

     154,625   

Thereafter

     264,008   
  

 

 

 
   $ 931,493   
  

 

 

 

 

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NOTE 8 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following:

 

     March 30,      June 30,  
     2014      2013  
     (in thousands)  

Accrued compensation

   $ 283,594       $ 254,795   

Warranty reserves

     71,489         52,252   

Income and other taxes payable

     51,178         39,420   

Other

     109,243         118,061   
  

 

 

    

 

 

 
   $ 515,504       $ 464,528   
  

 

 

    

 

 

 

NOTE 9 — OTHER EXPENSE, NET

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

 

     Three Months Ended     Nine Months Ended  
     March 30,     March 31,     March 30,     March 31,  
     2014     2013     2014     2013  
     (in thousands)  

Interest income

   $ 3,110      $ 3,235      $ 8,661      $ 11,411   

Interest expense

     (15,621     (15,175     (46,220     (45,294

Gains on deferred compensation plan related assets

     3,137        3,112        8,534        7,087   

Foreign exchange gains (losses)

     (85     (1,294     (181     (4,936

Other, net

     (396     (5,712     1,252        (7,430
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (9,855   $ (15,834   $ (27,954   $ (39,162
  

 

 

   

 

 

   

 

 

   

 

 

 

NOTE 10 — INCOME TAX EXPENSE

The Company recorded an income tax expense of $17.7 million and $35.0 million for the three and nine months ended March 30, 2014, respectively, which yielded an effective tax rate for the three and nine months ended March 30, 2014 of approximately 9.7% and 8.1%, respectively. The difference between the U.S. federal statutory tax rate of 35% and the Company’s effective tax rate for the three and nine months ended March 30, 2014 is primarily due to the geographic mix of income and the recognition of previously unrecognized tax benefits due to lapse of statutes of limitation, offset by the tax effect of non-deductible stock-based compensation and unrecognized tax benefits due to uncertain tax positions.

NOTE 11 — NET INCOME PER SHARE

Basic net income per share is computed by dividing net income by the weighted-average number of shares of Common Stock outstanding during the period. Diluted net income per share is computed using the treasury stock method, for dilutive stock options, RSUs, and convertible notes. Dilutive shares outstanding include only the effect of the 2041 Notes. The following table reconciles the numerators and denominators of the basic and diluted computations for net income per share.

 

     Three Months Ended      Nine Months Ended  
     March 30,      March 31,      March 30,      March 31,  
     2014      2013      2014      2013  
     (in thousands, except per share data)  

Numerator:

           

Net income

   $ 164,396       $ 18,996       $ 398,894       $ 28,172   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

Basic average shares outstanding

     162,238         163,034         161,904         171,016   

Effect of potential dilutive securities:

           

Employee stock plans

     2,641         2,729         2,810         2,390   

Convertible notes

     6,757         2,741         6,337         900   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted average shares outstanding

     171,636         168,504         171,051         174,306   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share - basic

   $ 1.01       $ 0.12       $ 2.46       $ 0.16   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income per share - diluted

   $ 0.96       $ 0.11       $ 2.33       $ 0.16   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

     Three Months Ended      Nine Months Ended  
     March 30,      March 31,      March 30,      March 31,  
     2014      2013      2014      2013  
     (in thousands)  

Number of potential dilutive securities excluded

     75         298         85         567   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted shares outstanding do not include any effect resulting from warrants, assumed conversion of the notes, or note hedges associated with the Company’s 2016 or 2018 Notes (as described in Note 13) as their impact would have been anti-dilutive.

NOTE 12 — ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of accumulated other comprehensive income (loss), net of tax at the end of the period, as well as the activity during the period, were as follows:

 

    Accumulated
foreign
currency
translation
adjustment
    Accumulated
unrealized
holding gain
(loss) on cash
flow hedges
    Accumulated
unrealized
holding gain
(loss) on
available-for-sale
investments
    Accumulated
unrealized
components
of defined
benefit plans
    Total  
    (in thousands)  

Balance as of June 30, 2013

  $ (17,178   $ 2,822      $ (15   $ (14,322   $ (28,693

Other comprehensive income before reclassifications

    1,680        8,632        962        534        11,808   

Gains reclassified from accumulated other comprehensive income to net income

    —          (10,066 )  (1)       (120 )  (2)       —          (10,186
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income

  $ 1,680      $ (1,434   $ 842      $ 534      $ 1,622   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 30, 2014

  $ (15,498   $ 1,388      $ 827      $ (13,788   $ (27,071
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Amount of after tax gain reclassified from accumulated other comprehensive income into net income located in revenue: $7,961, cost of goods sold: $1,505 and selling, general and administrative expenses: $600.
(2) Amount of after tax gain reclassified from accumulated other comprehensive income into net income located in other expense, net.

 

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NOTE 13 — LONG-TERM DEBT AND OTHER BORROWINGS

The following table reflects the carrying value of the Company’s convertible senior notes and other long-term debt as of March 30, 2014 and June 30, 2013:

 

     March 30,     June 30,  
     2014     2013  
     (in millions)  

0.50% Notes due 2016

   $ 450.0      $ 450.0   

Less: Unamortized interest discount

     (34.3     (45.7
  

 

 

   

 

 

 

Net carrying amount of 0.50% Notes due 2016

     415.7        404.3   
  

 

 

   

 

 

 

1.25% Notes due 2018

     450.0        450.0   

Less: Unamortized interest discount

     (66.3     (76.9
  

 

 

   

 

 

 

Net carrying amount of 1.25% Notes due 2018

     383.7        373.1   
  

 

 

   

 

 

 

2.625% Notes due 2041

     699.9        699.9   

Less: Unamortized interest discount

     (184.2     (186.9
  

 

 

   

 

 

 

Net carrying amount of 2.625% Notes due 2041

     515.7        513.0   
  

 

 

   

 

 

 

Total debt

     1,315.1        1,290.4   
  

 

 

   

 

 

 

Less: current portion of debt

     (515.7     (513.0
  

 

 

   

 

 

 

Long-term debt

   $ 799.4      $ 777.4   
  

 

 

   

 

 

 

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, on a semi-annual basis on May 15 and November 15 of each year.

In June 2012, with the acquisition of Novellus, 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%, on a semi-annual basis on May 15 and November 15 of each year. The 2041 Notes also have a contingent interest payment provision that may require the Company 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.

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 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 March 30, 2014. The effective interest rates on the liability components of the 2016 Notes, the 2018 Notes, and the 2041 Notes for the three and nine months ended March 30, 2014 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 nine months ended March 30, 2014 and March 31, 2013.

 

     Three Months Ended      Nine Months Ended  
     March 30,      March 31,      March 30,      March 31,  
     2014      2013      2014      2013  
     (in millions)  

Contractual interest coupon

   $ 6.6       $ 6.6         19.7         19.7   

Amortization of interest discount

     8.3         7.9         24.7         23.5   

Amortization of issuance costs

     0.6         0.6         1.8         1.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest cost recognized

   $ 15.5       $ 15.1       $ 46.2       $ 45.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The remaining bond discount of the 2016 Notes, the 2018 Notes, and the 2041 Notes of $34.3 million, $66.3 million, and $184.2 million, respectively, as of March 30, 2014 will be amortized over their respective remaining lives of approximately 2.1 years, 4.1 years, and 27.1 years. As of March 30, 2014, the if-converted value of the 2016 Notes and 2018 Notes did not exceed the aggregate principal amount. As of March 30, 2014, the if-converted value of the 2041 Notes exceeded the aggregate principal amount by $386.3 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 below.

Concurrent with the issuance of the 2016 Notes, the Company sold warrants to purchase up to approximately 7.1 million shares of Common Stock at an exercise price of $71.34 per share. The warrants expire on a series of dates between August 15, 2016 and October 21, 2016. At expiration, the Company may, at its option, elect to settle the warrants on a net share basis. As of March 30, 2014, 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 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 Common Stock at an exercise price of $76.10 per share. The warrants expire on a series of dates between August 15, 2018 and October 23, 2018. At expiration, the Company may, at its option, elect to settle the warrants on a net share basis. As of March 30, 2014, 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 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.

Conversion Period

During the fiscal quarters ended June 30, 2013, December 29, 2013 and March 30, 2014 the market value of the Common Stock was greater than or equal to 130% of the 2041 Note conversion price for 20 or more trading days of the 30 consecutive trading days preceding the quarter end. As a result, the 2041 Notes became convertible at the option of the holder anytime during the fiscal quarters ending December 29, 2013 and continue to be convertible through June 29, 2014 (the “June 2014 quarter”). However, there were no conversions of the 2041 Notes during the March 2014 quarter or the June 2014 quarter as of May 5, 2014.

As a result of the open conversion period, the carrying amount of the 2041 Notes was classified in current liabilities in the Company’s Consolidated Balance Sheets as of March 30, 2014 and June 30, 2013. 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 March 30, 2014 and June 30, 2013. Upon closure of a conversion period, all 2041 Notes not converted will be reclassified back to noncurrent liabilities and the temporary equity is reclassified to permanent equity.

Fair Value of Notes

As of March 30, 2014, 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 March 30, 2014, the fair values of the 2016 Notes, the 2018 Notes, and the 2041 Notes, which includes the debt and equity components, were approximately $518.6 million, $558.4 million, and $1,196.9 million, respectively, based on quoted market prices (Level 1 inputs within the fair value hierarchy).

Revolving Credit Facility

On March 12, 2014 the Company entered into a $300 million revolving unsecured credit facility with a syndicate of lenders that matures on March 12, 2019. The facility includes an option for the Company to, subject to certain requirements, request an increase in the facility of up to an additional $200 million, for a potential total commitment of $500 million. Proceeds from the credit facility can be used for general corporate purposes.

Interest on amounts borrowed under the credit facility is, at the Company’s option, based on (i) a base rate, defined as the greatest of (a) prime rate, (b) Federal Funds rate plus 0.5%, or (c) one-month LIBOR plus 1.0%, plus a spread of 0.0% to 0.5%, or (ii) LIBOR plus a spread of 0.9% to 1.5%, in each case the applicable spread is determined based on the rating of the Company’s non-credit enhanced, senior unsecured

 

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Table of Contents

long-term debt. Principal, and any accrued and unpaid interest, is due and payable upon maturity. Additionally, the Company will pay the lenders a quarterly commitment fee that varies based on the Company’s rating described above. The credit facility contains certain restrictive covenants including maintaining a total consolidated indebtedness to consolidated capitalization ratio of no more than 0.5 to 1.0 and maintaining unrestricted or unencumbered cash and investments of no less than $1.0 billion. As of March 30, 2014, we had no borrowings outstanding under the credit facility and were in compliance with all financial covenants.

NOTE 14 — COMMITMENTS

Operating Leases and Related Guarantees

The Company leases certain of its administrative, research and development (“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 31, 2013, the Company extinguished its two operating leases regarding certain improved properties in Livermore, California and its four amended and restated operating leases regarding certain improved properties in Fremont, California and entered into six amended operating leases (the “Operating Leases”) regarding certain improved properties at the Company’s headquarters in Fremont, California and certain other improved properties in Livermore, California.

The Operating Leases have a term of approximately seven years ending on December 31, 2020. The Company may, at its discretion and with 30 days’ notice, elect to purchase the property that is the subject of the Operating Leases 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.

As of March 30, 2014, the Company was required, pursuant to the terms of the Operating Leases, to maintain cash collateral in an aggregate of approximately $132.5 million in separate interest-bearing accounts and marketable securities collateral in an aggregate of approximately $6.1 million as security for the Company’s obligations under the Operating Leases. These amounts are recorded as restricted cash and investments in the Company’s Consolidated Balance Sheet as of March 30, 2014.

During the term of the Operating Leases and when the terms of the Operating Leases expire, the property subject to those Operating Leases 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 $191.2 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 $220.0 million, in the aggregate.

Other Guarantees

The Company has issued certain indemnifications to its lessors for taxes and general liability under some of its agreements. The Company has entered into certain insurance contracts that may limit its exposure to such indemnifications. As of March 30, 2014, the Company had not recorded any liability 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 March 30, 2014, the maximum potential amount of future payments that we could be required to make under these arrangements and letters of credit was $20.9 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.

 

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Table of Contents

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

 

     Three Months Ended     Nine Months Ended  
     March 30,     March 31,     March 30,     March 31,  
     2014     2013     2014     2013  
     (in thousands)  

Balance at beginning of period

   $ 67,413      $ 62,922      $ 58,078      $ 70,161   

Warranties issued during the period

     25,106        18,829        67,405        53,377   

Settlements made during the period

     (19,686     (27,101     (52,958     (72,960

Changes in liability for pre-existing warranties

     (258     90        50        4,162   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 72,575      $ 54,740      $ 72,575      $ 54,740   
  

 

 

   

 

 

   

 

 

   

 

 

 

NOTE 15 — RESTRUCTURING AND IMPAIRMENTS

From time to time, the Company initiates restructuring activities to appropriately align its cost structure relative to prevailing economic and industry conditions and associated customer demand as well as in connection with certain acquisitions. Costs associated with restructuring actions can include termination benefits and related charges in addition to facility closure, contract termination and other related activities.

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.

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 economic environment and business opportunities. During the March 2014 quarter, the Company entered into the Operating Leases and de-recognized the remaining liability associated with the residual value guarantee. See Note 14 to the Condensed Consolidated Financial Statements for additional information regarding residual value guarantees.

Acquired Restructuring Liabilities

In addition to restructuring plans initiated by the Company, a restructuring liability related to future rent obligations on unoccupied facilities was assumed in the Novellus acquisition. The associated liability balance of $10.3 million, as of March 30, 2014, is expected to be paid by the end of fiscal year 2017.

NOTE 16 — STOCK REPURCHASE PROGRAM

On April 22, 2013, the Board of Directors authorized the repurchase of up to $250 million of Common Stock. In addition, on April 29, 2014, the Board of Directors authorized the repurchase of up to $850 million of Common Stock, which includes the remaining value available under the Company’s prior authorization. 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 on-shore cash and on-shore cash generation. This repurchase program has no termination date and may be suspended or discontinued at any time.

Repurchases under the 2013 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 30, 2013

            $  250,000   

Quarter ended September 29, 2013

     1,935       $ 96,462       $ 48.06       $ 153,538   

Quarter ended December 29, 2013

     762       $ 39,800       $ 52.20       $ 113,738   

Quarter ended March 30, 2014

     930       $ 49,414       $ 53.13       $ 64,324   

 

* Average price paid per share excludes accelerated share repurchases for which cost was incurred during the September 2013 quarter, but that did not settle until the December 2013 quarter. See Collared Accelerated Share Repurchases section below for details regarding average price associated with these transactions.

 

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In addition to shares repurchased under the Board-authorized repurchase program shown above, during the nine months ended March 30, 2014, the Company acquired 468,585 shares at a total cost of $23.9 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 nine months ended March 30, 2014 included the following:

Collared Accelerated Share Repurchases

During the nine months ended March 30, 2014, the Company entered into a collared accelerated share repurchase (“ASR”) transaction under a master repurchase arrangement. Under the ASR, the Company made an up-front cash payment of $75 million, in exchange for an initial delivery of 1.2 million shares of its Common Stock and a subsequent delivery of 0.3 million shares following the initial hedge period.

The number of shares to ultimately be repurchased by the Company is based generally on the volume-weighted average price (“VWAP”) of the 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 the transaction were established based on the average of the VWAP prices for the Common Stock during an initial hedge period. The ASR was scheduled to end at any time after September 27, 2013 and on or before November 27, 2013. At the conclusion of the ASR, the Company may receive additional shares based on the VWAP of the Common Stock during the term of the agreement minus the pre-determined fixed discount, however, the total number of shares received under the ASR would not exceed the maximum of 1.7 million shares.

The counterparty designated October 28, 2013 as the termination date, at which time the Company settled the ASR. No additional shares were received at final settlement, which represented a weighted-average share price of approximately $50.40 for the transaction period.

The Company accounted for the 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 ASR 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 Common Stock met all of the applicable criteria for equity classification in accordance with the Derivatives and Hedging topic of the FASB Accounting Standards Codification, and, therefore, the ASR was not accounted for as a derivative instrument. As of March 30, 2014, the aggregate repurchase price of $75 million was reflected as Treasury stock, at cost, in the Consolidated Balance Sheet.

NOTE 17 — 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.

NOTE 18 — SUBSEQUENT EVENTS

On April 29, 2014 our Board of Directors announced its plan to initiate a quarterly dividend, and declared a dividend of $0.18 per share payable on July 2, 2014 to stockholders of record as of June 11, 2014. Our ability to pay future quarterly dividends will be subject to capital availability and periodic determinations by our Board of Directors that cash dividends are in the best interest of our stockholders and are in compliance with all laws and agreements applicable to the declaration and payment of cash dividends by us.

In addition, on April 29, 2014 our Board of Directors has authorized the repurchase of up to $850 million of common stock, which includes the remaining value available under the Company’s prior authorization.

 

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 “believe,” “anticipate,” “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,

 

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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; management’s plans and objectives for our current and future operations and business focus; volatility in our quarterly results; customer requirements and our ability to satisfy those requirements; customer capital spending and their demand for our products, and the reliability of indicators of change in customer spending and demand; our ability to defend our market share and to gain new market share; factors that affect our tax rates; 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 expenditures; outsourced activities; 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 intention to pay quarterly dividends and the amounts thereof, if any; our intention to repurchase our shares; 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 30, 2013 (our “2013 Form 10-K”), our quarterly reports on Form 10-Q for the quarters ended September 29, 2013 and December 29, 2013, 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 do not undertake any 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 of this report or to reflect the occurrence or effect of anticipated or unanticipated events.

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

For a full understanding of our financial position and results of operations for the three and nine months ended March 30, 2014, 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 2013 Form 10-K.

Overview

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

The semiconductor capital equipment industry has been highly competitive and subject to business cycles that historically have been characterized by rapid changes in demand. The variability in our customers’ investments during any particular period is dependent on several factors including but not limited to electronics demand, economic conditions (both general and in the semiconductor and electronics industries), industry supply and demand, prices for semiconductors, and our customers’ ability to develop and manufacture increasingly complex and costly semiconductor devices. More recently, customer consolidation and the timing and scope of customer spending at industry inflection points have led to higher levels of variability quarter-to-quarter. Demand for our equipment can vary significantly from period to period as a result of these factors and our ability to develop, acquire, and market competitive products. For these and other reasons, our results of operations during any particular period are not necessarily indicative of future operating results.

 

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

 

     Three Months Ended  
     March 30,     December 29,     March 31,  
     2014     2013     2013  

Revenue

   $ 1,227,392      $ 1,116,061      $ 844,928   

Gross margin

   $ 530,798      $ 487,789      $ 339,832   

Gross margin as a percentage of revenue

     43.2     43.7     40.2

Total operating expenses

   $ 338,861      $ 323,315      $ 329,013   

Net income

   $ 164,396      $ 148,992      $ 18,996   

Diluted net income per share

   $ 0.96      $ 0.87      $ 0.11   

In the March 2014 quarter, revenue increased compared to the quarter ended December 29, 2013 (the “December 2013 quarter”), reflecting increased investments by our customers. Gross margin as a percentage of revenues decreased as compared to the December 2013 quarter due to unfavorable product mix, as well as approximately $5 million in costs we incurred in the March 2014 quarter for rationalization of certain product configurations. Operating expenses in the March 2014 quarter increased compared to the December 2013 quarter due primarily to costs for rationalization of certain product configurations, expenses incurred for the operating lease financing for our Fremont and Livermore buildings executed in the March 2014 quarter, and increased R&D spending.

Our cash and cash equivalents, short-term investments, and restricted cash and investments balances totaled approximately $2.9 billion as of March 30, 2014 compared to $2.7 billion as of December 29, 2013. Cash generated by operations was approximately $290 million during the March 2014 quarter. We used cash during the March 2014 quarter to repurchase $52 million of our shares and purchase $42 million of property and equipment. Employee headcount increased slightly as of March 30, 2014 as compared to December 29, 2013 to approximately 6,600 people.

RESULTS OF OPERATIONS

Shipments

 

     Three Months Ended  
     March 30,     December 29,     March 31,  
     2014     2013     2013  

Shipments (in millions)

   $  1,264      $  1,139      $  896   

Taiwan

     22     22     33

Korea

     28     24     12

China

     20     21     7

Japan

     11     13     11

United States

     11     9     21

Europe

     5     7     9

Southeast Asia

     3     4     7

Shipments for the March 2014 quarter increased 11% compared to the December 2013 quarter and increased 41% compared to the March 2013 quarter as customer demand for semiconductor equipment increased, particularly for the memory market. The percentage of total system shipments to each of the market segments we serve were as follows for the periods presented:

 

     Three Months Ended  
     March 30,     December 29,     March 31,  
     2014     2013     2013  

Memory

     66     64     31

Foundry

     28     28     56

Logic/integrated device manufacturing

     6     8     13

 

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Revenue

 

     Three Months Ended     Nine Months Ended  
     March 30,     December 29,     March 31,     March 30,     March 31,  
     2014     2013     2013     2014     2013  

Revenue (in millions)

   $ 1,227      $ 1,116      $ 845      $ 3,359      $ 2,613   

Taiwan

     19     28     26     24     27

Korea

     28     19     14     23     16

China

     22     12     7     15     9

Japan

     11     17     11     13     10

United States

     10     13     26     12     23

Europe

     6     5     10     7     8

Southeast Asia

     4     6     6     6     7

Revenue for the March 2014 quarter increased 10% compared to the December 2013 quarter, increased 45% as compared to the March 2013 quarter, and increased 29% during the nine months ended March 30, 2014 as compared to the same period last year, reflecting increased customer and industry demand. Our deferred revenue balance increased to $432 million as of March 30, 2014 compared to $405 million as of December 29, 2013. 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 $57 million as of March 2014 compared to $53 million as of December 29, 2013.

Gross Margin

 

     Three Months Ended     Nine Months Ended  
     March 30,     December 29,     March 31,     March 30,     March 31,  
     2014     2013     2013     2014     2013  
     (in thousands, except percentages)  

Gross margin

   $ 530,798      $ 487,789      $ 339,832      $ 1,450,445      $ 989,132   

Percent of revenue

     43.2     43.7     40.2     43.2     37.9

The decrease in gross margin as a percentage of revenue during the March 2014 quarter as compared to the December 2013 quarter is due to a slightly unfavorable product mix, a higher customer concentration, as well as approximately $5 million in costs we incurred in the March 2014 quarter for the rationalization of certain product configurations.

The increase in gross margin as a percentage of revenue during the March 2014 quarter as compared to the March 2013 quarter is primarily due to improved factory and field efficiencies, as well as a more favorable product mix. Additionally, the acquisition-related inventory fair value impact decreased by $7 million in the March 2014 quarter, as compared to the same quarter last year.

The increase in gross margin as a percentage of revenue during the nine months ended March 2014 quarter as compared to the same period in the prior year is related to higher improved factory and field utilization, as well as a more favorable product mix. Additionally, the acquisition-related inventory fair value impact and costs associated with rationalization of certain product configurations decreased by $75 million and $16 million, respectively, in the nine months ended March 30, 2014 as compared to the same period last year.

Research and Development

 

     Three Months Ended     Nine Months Ended  
     March 30,     December 29,     March 31,     March 30,     March 31,  
     2014     2013     2013     2014     2013  
     (in thousands, except percentages)  

Research and development (“R&D”)

   $ 185,978      $ 174,477      $ 174,206      $ 531,022      $ 503,468   

Percent of revenue

     15.2     15.6     20.6     15.8     19.3

We continue to make significant R&D investments focused on leading-edge plasma etch, deposition, single-wafer clean and other semiconductor manufacturing requirements. The increase in R&D expenses during the March 2014 quarter compared to the December 2013 quarter was primarily due to an $8 million increase in salaries and benefits as a result of additional headcount to support our investment in product development and related increases in incentive and equity compensation.

The increase in R&D expenses during the March 2014 quarter compared to the same period in the prior year was primarily due to a $9 million increase in salaries and benefits, reflecting an increase in our product development investments. The increase in R&D expenses during the nine months ended March 30, 2014 as compared to the same period in the prior year was primarily due to a $30 million increase in salaries, benefits, incentive and equity compensation, and temporary labor related to new product development.

 

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Selling, General and Administrative

 

     Three Months Ended     Nine Months Ended  
     March 30,     December 29,     March 31,     March 30,     March 31,  
     2014     2013     2013     2014     2013  
     (in thousands, except percentages)  

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

   $  152,883      $ 148,838      $ 154,807      $  457,604      $  454,091   

Percent of revenue

     12.5     13.3     18.3     13.6     17.4

The increase in SG&A expenses during the March 2014 quarter compared to the December 2013 quarter was primarily due to a $5 million charge associated with the execution of our Fremont and Livermore buildings’ operating leases.

The decrease in SG&A expenses in the March 2014 quarter compared to the same period in the prior year was primarily due to a $13 million decrease in integration costs offset by a $5 million charge associated with the renewal of our Fremont and Livermore buildings’ operating leases and $6 million in costs incurred for rationalization of certain product configurations.

The increase in SG&A expenses in the nine months ended March 30, 2014 quarter as compared to the same period in the prior year was primarily due to an $11 million increase in marketing expenses, $7 million in costs incurred for rationalization of certain product configurations, an $12 million impairment of long-lived assets, and a $5 million charge associated with the execution of our Fremont and Livermore buildings operating leases. This increase was offset by a $25 million reduction of integration-related costs and an $8 million decrease in amortization related to intangible assets acquired in the Novellus transaction.

Other Expense, Net

Other expense, net consisted of the following:

 

     Three Months Ended     Nine Months Ended  
     March 30,     December 29,     March 31,     March 30,     March 31,  
     2014     2013     2013     2014     2013  
     (in thousands)  

Interest income

   $ 3,110      $ 2,828      $ 3,235      $ 8,661      $ 11,411   

Interest expense

     (15,621     (15,297     (15,175     (46,220     (45,294

Gains on deferred compensation plan related assets

     3,137        5,360        3,112        8,534        7,087   

Foreign exchange gains (losses)

     (85     125        (1,294     (181     (4,936

Other, net

     (396     3,147        (5,712     1,252        (7,430
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ (9,855   $ (3,837   $ (15,834   $ (27,954   $ (39,162
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income decreased in the three and the nine months ended March 30, 2014 as compared to the three and nine months ended March 31, 2013 as a result of lower interest rate yields.

We incurred insignificant foreign exchange gains (losses) in both the three and nine months ended March 30, 2014 and the three months ended December 29, 2013. Foreign exchange losses in the three and nine months ended March 31, 2013 were related to un-hedged portions of the balance sheet exposures.

In the three and nine months ended March 30, 2014 as compared to the three and nine months ended March 31, 2013, we recognized gains on assets which are related to obligations under our deferred compensation plan, due to changes in the market value of securities in this portfolio.

Other income, net was higher during the nine months ended March 30, 2014 as compared to nine months ended March 31, 2013 primarily due to a $4.8 million gain on the disposition of a private equity investment. Other expense during the three and nine months ended March 31, 2013 was primarily due to a $3.7 million other-than-temporary impairment of a strategic public equity investment, net of foreign exchange.

 

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Income Tax Expense

Our provision for income taxes and effective tax rate for the periods indicated were as follows:

 

     Three Months Ended     Nine Months Ended  
     March 30,     March 31,     March 30,     March 31,  
     2014     2013     2014     2013  
     (in thousands, except percentages)  

Provision for income taxes

   $ 17,686      $ (24,011   $ 34,971      $ (35,761

Effective tax rate

     9.7     478.9     8.1     471.2

The change in the effective tax rate for the three and nine months ended March 30, 2014 compared to the three and nine months ended March 31, 2013 was primarily due to the level of income, the impact of the retroactive extension for part of the fiscal year 2012 of the U.S. Federal R&D tax credit in fiscal year 2013 and the treatment of integration and impairment expenses as a discrete event in determining the effective tax rate.

The effective tax rate of 9.7% for the three months ended March 30, 2014 includes $4.9 million of tax benefit related to the tax impact of synthetic lease impairment, restructuring, and impairment expenses. The effective tax rate of 8.1% for the nine months ended March 30, 2014 includes $7.8 million of tax benefit related to the tax impact of synthetic lease impairment integration, restructuring, asset sale, and impairment expenses, offset by the tax impact of gain on sale of investment.

The effective tax rate of 478.9% and 471.2% for the three and nine months ended March 31, 2013 included (1) a tax benefit of $11.5 million, due to the retroactive extension of the U.S. Federal R&D tax credit for part of fiscal 2012, and (2) $2.1 million and $5.6 million, respectively, of tax benefit related to the tax impact of integration and impairment expenses, which had a significant impact on the effective tax rate due to the low level of income in fiscal year 2013, in comparison to fiscal year 2014.

International revenues account for a significant portion of our total revenues, such that a material portion of our pre-tax income is earned and taxed outside the United States at rates that are generally lower than in the United States. Please refer to Note 10 of the Notes to Condensed Consolidated Financial Statements.

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 Sheets.

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

 

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periodic physical counts of quantities on hand. Finished goods are reported as inventories until the point of title transfer to the customer. 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.

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

Warranty : Typically, the sale of semiconductor capital equipment includes providing parts and service warranties 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”), excluding market-based performance restricted stock units, based upon the fair market value of Company stock at the date of grant. We estimate the fair value of our market-based performance restricted stock units using a Monte Carlo simulation model at the date of the 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 Condensed 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 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 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.

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 a two-step process. 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.

 

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Goodwill and Intangible Assets: The valuation of intangible assets acquired in a business combination requires the use of management estimates including but not limited to estimating future expected cash flows from assets acquired and determining discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Estimates associated with the accounting for acquisitions may change as additional information becomes available.

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. Each component of the Company for which discrete financial information is available and for which segment management regularly reviews the results of operations is considered a reporting unit. All goodwill acquired in a business combination is assigned to one or more reporting units as of the acquisition date. Goodwill is assigned to the Company’s reporting units that are expected to benefit from the synergies of the combination. The goodwill assigned to a reporting unit is the difference between the acquisition consideration assigned to the reporting unit on a relative fair value basis and the fair value of acquired assets and liabilities that can be specifically attributed to the reporting unit. We test goodwill and identifiable intangible assets with indefinite useful lives for impairment at least annually. We amortize intangible assets with estimable useful lives over their respective estimated useful lives, and we review for impairment whenever events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable and the carrying amount exceeds its fair value.

We review goodwill at least annually for impairment. If certain events or indicators of impairment occur between annual impairment tests, we would perform an impairment test of goodwill at that date. In testing for a potential impairment of goodwill, we: (1) allocate goodwill to our reporting units to which the acquired goodwill relates; (2) estimate the fair value of our reporting units; and (3) determine the carrying value (book value) of those reporting units, as some of the assets and liabilities related to those reporting units are not held by those reporting units but by a corporate function. Prior to this allocation of the assets to the reporting units, we are required to assess long-lived assets for impairment. Furthermore, if the estimated fair value of a reporting unit is less than the carrying value, we must estimate the fair value of all identifiable assets and liabilities of that reporting unit, in a manner similar to a purchase price allocation for an acquired business. This can require independent valuations of certain internally generated and unrecognized intangible assets such as in-process R&D and developed technology. Only after this process is completed can the amount of goodwill impairment, if any, be determined. 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. Our most recent annual goodwill impairment analysis, which was performed as of April 1, 2013, did not result in a goodwill impairment charge, nor did we record any goodwill impairment in fiscal 2012 or 2011. As a result of historical performance and growth potential, our Clean systems reporting unit may be at greater risk for goodwill impairment than our other reporting units if our actual results for this reporting unit differ from our projections.

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 July 2013, the FASB released Accounting Standards Update 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” The new standard requires that an unrecognized tax

 

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benefit should be presented as a reduction of a deferred tax asset for a net operating loss carryforward or other tax credit carryforward when settlement in this manner is available under the tax law. We are required to adopt this standard starting fiscal year 2015 and are currently in the process of determining the impact, if any, on our financial position.

LIQUIDITY AND CAPITAL RESOURCES

As of March 30, 2014, we had $2.9 billion in gross cash and cash equivalents, short-term investments, and restricted cash and investments (total cash and investments) compared to $2.7 billion as of June 30, 2013. Approximately $2.1 billion and $2.0 billion of our total cash and investments as of March 30, 2014 and June 30, 2013, respectively, was held outside the U.S. in our foreign subsidiaries, of which substantially all would be subject to tax at U.S. rates if it were to be repatriated.

Cash Flows from Operating Activities

Net cash provided by operating activities of $471.2 million during the nine months ended March 30, 2014 consisted of (in millions):

 

Net income

   $ 398.9   

Non-cash charges:

  

Depreciation and amortization

     221.1   

Equity-based compensation

     70.6   

Amortization of convertible note discount

     24.7   

Impairment of long lived assets

     11.6   

Deferred income taxes

     11.6   

Changes in operating asset and liability accounts

     (271.8

Other

     4.5   
  

 

 

 
   $ 471.2   
  

 

 

 

Changes in operating asset and liability accounts, net of foreign exchange impact, included the following uses of cash: increases in accounts receivable of $208.1 million and inventories of $145.6 million, partially offset by sources of cash resulting from increases in accrued liabilities of $10.3 million and trade accounts payable of $45.5 million.

Cash Flows from Investing Activities

Net cash used for investing activities during the nine months ended March 30, 2014 was $190.7 million, primarily consisting of capital expenditures of $103.7 million and net purchases of available for sale securities of $128.9 million.

Cash Flows from Financing Activities

Net cash used for financing activities during the nine months ended March 30, 2014 was $151.4 million, primarily consisting of $204.6 million in treasury stock repurchases partially offset by net proceeds from issuance of Common Stock related to employee equity-based plans of $54.5 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. Anticipated cash flows from operations based on our current business outlook, combined with our current levels of cash, cash equivalents, and short term investments at March 30, 2014, are expected to be sufficient to support our anticipated levels of operations, investments, debt service requirements, capital expenditures, capital redistributions and dividends, through at least the next 12 months. However, uncertainty in the global economy and the semiconductor industry, as well as disruptions in credit markets have in the past, and could in the future, impact customer demand for our products, as well as our ability to manage normal commercial relationships with our customers, suppliers, and creditors.

On March 12, 2014 the Company entered into a $300 million revolving unsecured credit facility with a syndicate of lenders that matures on March 12, 2019. The facility includes an option for the Company to, subject to certain requirements, request an increase in the facility of up to an additional $200 million, for a potential total commitment of $500 million. Proceeds from the credit facility can be used for general corporate purposes. Interest on amounts borrowed under the credit facility is, at the Company’s option, based on (i) a base rate, defined as the greatest of (a) prime rate, (b) Federal Funds rate plus 0.5%, or (c) one-month LIBOR plus 1.0%, plus a spread of 0.0% to 0.5% or (ii) LIBOR plus a spread of 0.9% to 1.5%, in each case the applicable spread is determined based on the rating of the Company’s non-credit enhanced, senior unsecured long-term debt. Principal, and any accrued and unpaid interest, is due and payable upon maturity. Additionally, the Company will pay the lenders a quarterly commitment fee that varies based on the Company’s rating described above. The credit facility contains certain restrictive covenants including maintaining a total consolidated indebtedness to consolidated capitalization ratio of no more than 0.5 to 1.0 and maintaining unrestricted or unencumbered cash and investments of no less than $1.0 billion. As of March 30, 2014, we had no borrowings outstanding under the credit facility and were in compliance with all financial covenants.

 

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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 2013 Form 10-K. Other than noted below, our exposure related to market risk has not changed materially since June 30, 2013. All of the potential changes noted below are based on sensitivity analyses performed on our financial position as of March 30, 2014. Actual results may differ materially.

Fixed Income Securities

Our investments in various interest earning securities carry a degree of market risk for changes in interest rates. At any time, a sharp rise in interest rates could have a material adverse impact on the fair value of our fixed income investment portfolio. Conversely, declines in interest rates could have a material adverse impact on interest income for our investment portfolio. We target to maintain a conservative investment policy, which focuses on the safety and preservation of our capital by limiting default risk, market risk, reinvestment risk, and concentration risk. The following table presents the hypothetical fair values of fixed income securities that would result from selected potential decreases and increases in interest rates. Market changes reflect immediate hypothetical parallel shifts in the yield curve of plus or minus 50 basis points (“BPS”), 100 BPS, and 150 BPS. The hypothetical fair values as of March 30, 2014 were as follows:

 

   

Valuation of Securities

           

Valuation of Securities

 
   

Given an Interest Rate

     Fair Value as of     

Given an Interest Rate

 
    Decrease of X Basis Points      March 30, 2014      Increase of X Basis Points  
    (150 BPS)      (100 BPS)      (50 BPS)      0.00%      50 BPS      100 BPS      150 BPS  
   

(in thousands)

 

Municipal Notes and Bonds

  $ 250,332       $ 250,305       $ 249,996       $ 248,949       $ 247,556       $ 246,164       $ 244,772   

US Treasury & Agencies

    184,796         184,796         184,456         182,967         181,214         179,462         177,710   

Government-Sponsored Enterprises

    41,411         41,406         41,315         41,089         40,822         40,554         40,286   

Foreign Government Bond

    35,608         35,566         35,330         34,988         34,644         34,299         33,953   

Corporate Notes and Bonds

    970,543         969,528         966,431         961,378         956,225         951,075         945,925   

Mortgage Backed Securities - Residential

    27,533         27,232         26,908         26,580         26,253         25,926         25,598   

Mortgage Backed Securities - Commercial

    106,713         106,243         105,571         104,857         104,143         103,428         102,714   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

  $ 1,616,936       $ 1,615,076       $ 1,610,007       $ 1,600,808       $ 1,590,857       $ 1,580,908       $ 1,570,958   
 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

ITEM 4. Controls and Procedures

Design of Disclosure Controls and Procedures and Internal Control over Financial Reporting

We maintain disclosure controls and procedures and internal control over final reporting that are designed to comply with Rule 13a-15 of the Exchange Act. In designing and evaluating the controls and procedures associated with each, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and that the effectiveness of controls cannot be absolute because the cost to design and implement a control to identify errors or mitigate the risk of errors occurring should not outweigh the potential loss caused by the errors that would likely be detected by the control. Moreover, we believe that a control system cannot be guaranteed to be 100% effective all of the time. Accordingly, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met.

Disclosure Controls and Procedures

As required by Exchange Act Rule 13a-15(b), as of March 30, 2014, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer, along with our Chief Financial Officer, concluded that our disclosure controls and procedures are effective at the reasonable assurance level.

 

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

Changes in Internal Control over Financial Reporting

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

Effectiveness of Controls

While we believe the present design of our disclosure controls and procedures and internal control over financial reporting is effective, future events affecting our business may cause us to modify our disclosure controls and procedures or internal control over financial reporting.

PART II. OTHER INFORMATION

 

ITEM 1. 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.

 

ITEM 1A. Risk Factors

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

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

The business cycle in the semiconductor equipment industry has historically been characterized by frequent periods of rapid change in demand that challenge our management to adjust spending and other resources allocated to operating activities. During periods of rapid growth or decline in demand for our products and services, we face significant challenges in maintaining adequate financial and business controls, management processes, information systems, procedures for training and managing our work force, and in appropriately sizing our supply chain infrastructure, work force, and other components of our business on a timely basis. If we do not adequately meet these challenges during periods of demand decline, our gross margins and earnings may be negatively impacted.

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

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

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

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

 

    a decline in demand for our products or services;

 

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

 

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

 

    valuation allowances on deferred tax assets;

 

    restructuring charges;

 

    asset impairments including the potential impairment of goodwill and other intangible assets;

 

    a decline in the value of our investments;

 

    exposure to claims from our suppliers for payment on inventory that is ordered in anticipation of customer purchases that do not come to fruition;

 

    a decline in the value of certain facilities we lease to less than our residual value guarantee with the lessor; and

 

    challenges maintaining reliable and uninterrupted sources of supply.

Fluctuating levels of investment by semiconductor manufacturers may materially affect our aggregate shipments, revenues and operating results. Where appropriate, we will attempt to respond to these fluctuations with cost management programs aimed at aligning our expenditures with anticipated revenue streams, which sometimes result in restructuring charges. Even during periods of reduced revenues, we must continue to invest in R&D and maintain extensive ongoing worldwide customer service and support capabilities to remain competitive, which may temporarily harm our profitability and other financial results.

Our Quarterly Revenues and Operating Results Are Unpredictable

Our revenues and operating results may fluctuate significantly from quarter to quarter due to a number of factors, not all of which are in our control. We manage our expense levels based in part on our expectations of future revenues. Because our operating expenses are based in part on anticipated future revenues, and a certain amount of those expenses are relatively fixed, a change in the timing of recognition of revenue and/or the level of gross profit from a small number of transactions can unfavorably affect operating results in a particular quarter. Factors that may cause our financial results to fluctuate unpredictably include, but are not limited to:

 

    economic conditions in the electronics and semiconductor industries in general and specifically the semiconductor equipment industry;

 

    the size and timing of orders from customers;

 

    procurement shortages;

 

    the failure of our suppliers or outsource providers to perform their obligations in a manner consistent with our expectations;

 

    manufacturing difficulties;

 

    customer cancellations or delays in shipments, installations, and/or customer acceptances;

 

    the extent that customers continue to purchase and use our products and services in their business;

 

    changes in average selling prices, customer mix, and product mix;

 

    our ability in a timely manner to develop, introduce and market new, enhanced, and competitive products;

 

    our competitors’ introduction of new products;

 

    legal or technical challenges to our products and technology;

 

    transportation, communication, demand, information technology or supply disruptions based on factors outside our control such as strikes, acts of God, wars, terrorist activities, and natural disasters;

 

    legal, tax, accounting, or regulatory changes (including but not limited to change in import/export regulations) or changes in the interpretation or enforcement of existing requirements;

 

    changes in our estimated effective tax rate;

 

    foreign currency exchange rate fluctuations; and

 

    the dilutive impact of our convertible notes and related warrants on our earnings per share.

 

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Our Leverage and Debt Service Obligations and Potential Note Conversion or Related Hedging Activities May Adversely Affect Our Financial Condition, Results of Operations and Earnings Per Share

As a result of the sale of our 2016 and 2018 convertible notes and the assumption of the 2041 convertible notes in connection with our acquisition of Novellus Systems, Inc. (collectively the “Notes”), we have a greater amount of debt than we have maintained in the past. Our maintenance of higher levels of indebtedness could have adverse consequences including:

 

    impacting our ability to satisfy our obligations;

 

    increasing the portion of our cash flows that may have to be dedicated to interest and principal payments and may not be available for operations, working capital, capital expenditures, expansion, acquisitions or general corporate or other purposes; and

 

    impairing our ability to obtain additional financing in the future.

Our ability to meet our expenses and debt obligations will depend on our future performance, which will be affected by financial, business, economic, regulatory and other factors. Furthermore, our operations may not generate sufficient cash flows to enable us to meet our expenses and service our debt. As a result, we may need to enter into new financing arrangements to obtain the necessary funds. If we determine it is necessary to seek additional funding for any reason, we may not be able to obtain such funding or, if funding is available, obtain it on acceptable terms. If we fail to make a payment on our debt, we could be in default on such debt, and this default could cause us to be in default on our other outstanding indebtedness.

Conversion of our Notes may cause dilution to our shareholders and to our earnings per share. Upon conversion of any Notes, we will deliver cash in the amount of the principal amount of the Notes and, with respect to any excess conversion value greater than the principal amount of the Notes, shares of our Common Stock, which would result in dilution to our shareholders. This dilution may be mitigated to some extent by the hedging transactions we entered into in connection with the sale of the 2016 and 2018 Notes or through share repurchases. Prior to the maturity of the Notes, if the price of our Common Stock exceeds the conversion price, U.S. GAAP requires that we report an increase in diluted share count, which would result in lower reported earnings per share. The price of our Common Stock could also be affected by sales of our Common Stock by investors who view the Notes as a more attractive means of equity participation in our company and by hedging activity that may develop involving our Common Stock by holders of the Notes.

Our Credit Agreements Contain Covenant Restrictions That May Limit Our Ability To Operate Our Business.

We may be unable to respond to changes in business and economic conditions, engage in transactions that might otherwise be beneficial to us, or obtain additional financing, because our debt agreements contain, and any of our other future similar agreements may contain, covenant restrictions that limit our ability to, among other things:

 

    Incur additional debt, assume obligations in connection with letters of credit, or issue guarantees;

 

    Create liens;

 

    Enter into transactions with our affiliates;

 

    Sell certain assets; and,

 

    Merge or consolidate with any person.

Our ability to comply with these covenants is dependent on our future performance, which will be subject to many factors, some of which are beyond our control, including prevailing economic conditions. In addition, our failure to comply with these covenants could result in a default under the 2016, 2018 or 2041 senior convertible debentures or our other debt, which could permit the holders to accelerate such debt. If any of our debt is accelerated, we may not have sufficient funds available to repay such debt, which could materially and negatively affect our financial condition and results of operation.

We Have a Limited Number of Key Customers

Sales to a limited number of large customers constitute a significant portion of our overall revenue, shipments and profitability. As a result, the actions of even one customer may subject us to variability in those areas that are difficult to predict. In addition, large customers may be able to negotiate requirements that result in decreased pricing, increased costs and/or lower margins for us, such as regional manufacturing expectations, compliance to specific environmental, social and corporate governance standards, and limitations on our ability to share jointly developed technology with others. Similarly, significant portions of our credit risk may, at any given time, be concentrated among a limited number of customers, so that the failure of even one of these key customers to pay its obligations to us could significantly impact our financial results.

We Depend on New Products and Processes for Our Success. Consequently, We are Subject to Risks Associated with Rapid Technological Change

Rapid technological changes in semiconductor manufacturing processes subject us to increased pressure to develop technological advances that enable those processes. We believe that our future success depends in part upon our ability to develop and offer new products with improved capabilities and to continue to enhance our existing products. If new products have reliability, quality, or design problems, our performance may

 

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be impacted by reduced orders, higher manufacturing costs, delays in acceptance of and payment for new products, and additional service and warranty expenses. We may be unable to develop and manufacture new products successfully, or new products that we introduce may fail in the marketplace. The expected industry transition to a 450mm platform represents an emerging challenge for our business, and our failure to address that transition in a timely manner with productive and cost-effective products could adversely affect our business in a material way. Our failure to commercialize new products in a timely manner could result in loss of market share, unanticipated costs, and inventory obsolescence, which would adversely affect our financial results.

In order to develop new products and processes, we expect to continue to make significant investments in R&D and to pursue joint development relationships with customers, suppliers or other members of the industry. We must manage product transitions and joint development relationships successfully, as the introduction of new products could adversely affect our sales of existing products and certain jointly developed technologies may be subject to restrictions on our ability to share that technology with other customers, which could limit our market for products incorporating those technologies. Future technologies, processes or product developments may render our current product offerings obsolete, leaving us with non-competitive products, or obsolete inventory, or both. Moreover, customers may adopt new technologies or processes to address the complex challenges associated with next generation devices. This shift may result in a reduction in the size of our addressable markets or could increase the relative size of markets in which we either do not compete or have relatively low market share.

We are Subject to Risks Relating to Product Concentration and Lack of Product Revenue Diversification

We derive a substantial percentage of our revenues from a limited number of products. System sales constitute a significant portion of our total revenue. Our systems are priced up to approximately $9 million per unit, and our revenues in any given quarter are dependent upon customer acceptance of a limited number of systems. As a result, the inability to recognize revenue on even a few systems can cause a significantly adverse impact on our revenues for a given quarter, and, in the longer term, the continued market acceptance of these products is critical to our future success. Our business, operating results, financial condition, and cash flows could therefore be adversely affected by:

 

    a decline in demand for even a limited number of our products;

 

    a failure to achieve continued market acceptance of our key products;

 

    export restrictions or other regulatory or legislative actions that could limit our ability to sell those products to key customer or market segments;

 

    an improved version of products being offered by a competitor in the market in which we participate;

 

    increased pressure from competitors that offer broader product lines;

 

    technological changes that we are unable to address with our products; or

 

    a failure to release new or enhanced versions of our products on a timely basis.

In addition, the fact that we offer limited product lines creates the risk that our customers may view us as less important to their business than our competitors that offer additional products as well. This may impact our ability to maintain or expand our business with certain customers. Such product concentration may also subject us to additional risks associated with technology changes. Our business is affected by our customers’ use of our products in certain steps in their wafer fabrication processes. Should technologies change so that the manufacture of semiconductors requires fewer steps using our products, this could have a larger impact on our business than it would on the business of our less concentrated competitors.

Strategic Alliances and Customer Consolidation May Have Negative Effects on Our Business

Increasingly, semiconductor manufacturing companies are entering into strategic alliances or consolidating with one another to expedite the development of processes and other manufacturing technologies and/or achieve economies of scale. The outcomes of such an alliance can be the definition of a particular tool set for a certain function and/or the standardization of a series of process steps that use a specific set of manufacturing equipment; while the outcomes of consolidation can lead to an overall reduction in the market for semiconductor manufacturing equipment as customers’ operations achieve economies of scale and/or increased purchasing power based on their higher volumes. In certain instances this could work to our disadvantage if a competitor’s tools or equipment become the standard equipment for such functions or processes. Some semiconductor manufacturing companies are also exiting the industry. Additional outcomes of such consolidation may include our customers: (i) re-evaluating their future supplier relationships to consider other competitors’ products and/or (ii) gaining additional influence over the pricing of products and the control of intellectual property.

Similarly, our customers may team with, or follow the lead of, educational or research institutions that establish processes for accomplishing various tasks or manufacturing steps. If those institutions utilize a competitor’s equipment when they establish those processes, it is likely that customers will tend to use the same equipment in setting up their own manufacturing lines. Even if they select our equipment, the institutions and the customers that follow their lead could impose conditions on acceptance of that equipment, such as adherence to standards and requirements or limitations on how we license our proprietary rights that increase our costs or require us to take on greater risk. These actions could adversely impact our market share and financial results.

 

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We Depend On a Limited Number of Key Suppliers and Outsource Providers, and We Run the Risk That They Might Not Perform as We Expect

Outsource providers and component suppliers have played and will continue to play a key role in our manufacturing operations and in many of our transactional and administrative functions, such as information technology, facilities management, and certain elements of our finance organization. These providers and suppliers might suffer financial setbacks, be acquired by third parties, become subject to exclusivity arrangements that preclude further business with us or suffer force majeure events that could interrupt or impair their continued ability to perform as we expect.

Although we attempt to select reputable providers and suppliers, and we attempt to secure their performance on terms documented in written contracts, it is possible that one or more of these providers or suppliers could fail to perform as we expect, and such failure could have an adverse impact on our business. In some cases, the requirements of our business mandate that we obtain certain components and sub-assemblies included in our products from a single supplier or a limited group of suppliers. Where practical, we endeavor to establish alternative sources to mitigate the risk that the failure of any single provider or supplier will adversely affect our business, but this is not feasible in all circumstances. There is therefore a risk that a prolonged inability to obtain certain components or secure key services could impair our ability to manage operations, ship products and generate revenues, which could adversely affect our operating results and damage our customer relationships.

We Face Risks Related to the Disruption of Our Primary Manufacturing Facilities

Our manufacturing facilities are concentrated in just a few locations. These locations are subject to disruption for a variety of reasons such as natural disasters, terrorist attacks, disruptions of our information technology resources and utility interruptions. Such disruptions may cause delays in shipping our products which could result in the loss of business or customer trust, adversely affecting our business and operating results.

Once a Semiconductor Manufacturer Commits to Purchase a Competitor’s Semiconductor Manufacturing Equipment, the Manufacturer Typically Continues to Purchase that Competitor’s Equipment, Making it More Difficult for Us to Sell Our Equipment to that Customer

Semiconductor manufacturers must make a substantial investment to qualify and integrate wafer processing equipment into a semiconductor production line. We believe that once a semiconductor manufacturer selects a particular supplier’s processing equipment, the manufacturer generally relies upon that equipment for that specific production line application for an extended period of time. Accordingly, we expect it to be more difficult to sell our products to a given customer if that customer initially selects a competitor’s equipment for the same product line application.

We Face a Challenging and Complex Competitive Environment

We face significant competition from multiple competitors. Other companies continue to develop systems and products that are competitive to ours and may introduce new products, which may affect our ability to sell our existing products. We face a greater risk if our competitors enter into strategic relationships with leading semiconductor manufacturers covering products similar to those we sell or may develop, as this could adversely affect our ability to sell products to those manufacturers.

We believe that to remain competitive we must devote significant financial resources to offer a broad range of products, to maintain customer service and support centers worldwide, and to invest in product and process R&D. Certain of our competitors, especially those that are created and financially backed by foreign governments, have substantially greater financial resources and more extensive engineering, manufacturing, marketing, and customer service and support resources than we do and therefore have the potential to offer customers a more comprehensive array of products and to therefore increasingly dominate the semiconductor equipment industry. These competitors may deeply discount or give away products similar to those that we sell, challenging or even exceeding our ability to make similar accommodations and threatening our ability to sell those products. We also face competition from our own customers, who in some instances have established affiliated entities that manufacture equipment similar to ours. For these reasons, we may fail to continue to compete successfully worldwide.

In addition, our competitors may be able to develop products comparable or superior to those we offer or may adapt more quickly to new technologies or evolving customer requirements. In particular, while we continue to develop product enhancements that we believe will address future customer requirements, we may fail in a timely manner to complete the development or introduction of these additional product enhancements successfully, or these product enhancements may not achieve market acceptance or be competitive. Accordingly, competition may intensify, and we may be unable to continue to compete successfully in our markets, which could have a material adverse effect on our revenues, operating results, financial condition, and/or cash flows.

Our Future Success Depends Heavily on International Sales and the Management of Global Operations

Non-U.S. sales accounted for approximately 88% of total revenue in the nine months ended March 30, 2014, 80% of total revenue in fiscal year 2013, and 83% of total revenue in fiscal year 2012. We expect that international sales will continue to account for a substantial majority of our total revenue in future years.

 

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We are subject to various challenges related to international sales and the management of global operations including, but not limited to:

 

    trade balance issues;

 

    global economic and political conditions;

 

    changes in currency controls;

 

    differences in the enforcement of intellectual property and contract rights in varying jurisdictions;

 

    our ability to respond to customer and foreign government demands for locally sourced systems, spare parts and services and develop the necessary relationships with local suppliers;

 

    compliance with U.S. and international laws and regulations affecting foreign operations, including U.S. and international export restrictions and foreign labor laws;

 

    fluctuations in interest and foreign currency exchange rates;

 

    our ability to repatriate cash in a tax-efficient manner;

 

    the need for technical support resources in different locations; and

 

    our ability to secure and retain qualified people in all necessary locations for the successful operation of our business.

Certain international sales depend on our ability to obtain export licenses from the U.S. government. Our failure or inability to obtain such licenses would substantially limit our markets and severely restrict our revenues. Many of the challenges noted above are applicable in China, which is a fast developing market for the semiconductor equipment industry and therefore an area of potential significant growth for our business. As the business volume between China and the rest of the world grows, there is inherent risk, based on the complex relationships among China, Taiwan, Japan, South Korea, and the United States, that political and diplomatic influences might lead to trade disruptions. This would adversely affect our business with China, Taiwan, Japan, and/or South Korea and perhaps the entire Asia Pacific region. A significant trade disruption in these areas could have a materially adverse impact on our future revenue and profits.

We are potentially exposed to adverse as well as beneficial movements in foreign currency exchange rates. The majority of our sales and expenses are denominated in U.S. dollars. However, we are exposed to foreign currency exchange rate fluctuations primarily related to revenues denominated in Japanese yen and expenses denominated in euro. Currently, we enter into foreign currency forward contracts to minimize the short-term impact of the foreign currency exchange rate fluctuations on certain foreign currency monetary assets and liabilities; primarily third party accounts receivables, accounts payables and intercompany receivables and payables. In addition, we hedge certain anticipated foreign currency cash flows, primarily anticipated revenues denominated in Japanese yen and euro-denominated expenses. We believe these are our primary exposures to currency rate fluctuation. We expect to continue to enter into hedging transactions, for the purposes outlined, for the foreseeable future. However, these hedging transactions may not achieve their desired effect because differences between the actual timing of the underlying exposures and our forecasts of those exposures may leave us either over-or under-hedged on any given transaction. Moreover, by hedging these foreign currency denominated revenues, expenses, monetary assets and liabilities with foreign currency forward contracts, we may miss favorable currency trends that would have been advantageous to us but for the hedges. Additionally, we are exposed to short-term foreign currency exchange rate fluctuations on non-U.S. dollar-denominated monetary assets and liabilities (other than those currency exposures previously discussed) and currently we do not enter into foreign currency hedge contracts against these exposures. Therefore, we are subject to both favorable and unfavorable foreign currency exchange rate fluctuations to the extent that we transact business (including intercompany transactions) for these currencies.

The magnitude of our overseas business also affects where our cash is generated. Certain uses of cash, such as share repurchases or the repayment of our convertible notes, can usually only be made with cash balances and cash generated on-shore. Since the majority of our cash is generated outside of the United States, this may limit certain business decisions and adversely affect business outcomes.

Our Ability to Attract, Retain and Motivate Key Employees Is Critical to Our Success

Our ability to compete successfully depends in large part on our ability to attract, retain and motivate key employees. This is an ongoing challenge due to intense competition for top talent, as well as fluctuations in industry economic conditions that may require cycles of hiring activity and workforce reductions. Our success in hiring depends on a variety of factors, including the attractiveness of our compensation and benefit programs and our ability to offer a challenging and rewarding work environment. We periodically evaluate our overall compensation programs and make adjustments, as appropriate, to maintain or enhance their competitiveness. If we are not able to successfully attract, retain and motivate key employees, we may be unable to capitalize on market opportunities and our operating results may be materially and adversely affected.

We Rely Upon Certain Critical Information Systems for the Operation of Our Business

We maintain and rely upon certain critical information systems for the effective operation of our business. These information systems include telecommunications, the internet, our corporate intranet, various computer hardware and software applications, network communications, and e-mail. These information systems may be owned and maintained by us, our outsourced providers or third parties such as vendors and contractors. Many of these outsourced service providers, including certain hosted software applications that we use for confidential data storage,

 

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employ “cloud computing” technology for such storage (which refers to an information technology hosting and delivery system in which data is not stored within the user’s physical infrastructure but instead are delivered to and consumed by the user as an Internet-based service). All of these information systems are subject to attacks, failures, and access denials from a number of potential sources including viruses, destructive or inadequate code, power failures, and physical damage to computers, hard drives, communication lines, and networking equipment. Confidential and/or sensitive information stored on these information systems could be intentionally or unintentionally compromised, lost and/or stolen. While we have implemented security procedures, such as virus protection software and emergency recovery processes, to mitigate the outlined risks with respect to information systems that are under our control, they cannot be guaranteed to be failsafe and our inability to use or access these information systems at critical points in time, or unauthorized releases of confidential information, could unfavorably impact the timely and efficient operation of our business.

Our Financial Results May be Adversely Impacted by Higher than Expected Tax Rates or Exposure to Additional Tax Liabilities

As a global company, our effective tax rate is highly dependent upon the geographic composition of worldwide earnings and tax regulations governing each region. We are subject to income taxes in the United States and various foreign jurisdictions, and significant judgment is required to determine worldwide tax liabilities. Our effective tax rate could be adversely affected by changes in the split of earnings between countries with differing statutory tax rates, in the valuation of deferred tax assets, in tax laws, by material audit assessments, or changes in or expirations of agreements with tax authorities. These factors could affect our profitability. In particular, the carrying value of deferred tax assets, which are predominantly in the United States, is dependent on our ability to generate future taxable income in the United States. In addition, the amount of income taxes we pay is subject to ongoing audits in various jurisdictions, and a material assessment by a governing tax authority could affect our profitability.

A Failure to Comply with Environmental Regulations May Adversely Affect Our Operating Results

We are subject to a variety of governmental regulations related to the handling, discharge, and disposal of toxic, volatile or otherwise hazardous chemicals. We believe that we are generally in compliance with these regulations and that we have obtained (or will obtain or are otherwise addressing the need for) all environmental permits necessary to conduct our business. These permits generally relate to the handling and disposal of hazardous wastes. Nevertheless, the failure to comply with present or future regulations could result in fines being imposed on us, require us to suspend production, or cease operations or cause our customers to not accept our products. These regulations could require us to alter our current operations, to acquire significant additional equipment or to incur substantial other expenses to comply with environmental regulations. Any failure to comply with regulations governing the use, handling, sale, transport or disposal of hazardous substances could subject us to future liabilities.

If We Choose to Acquire or Dispose of Businesses, Product Lines and Technologies, We May Encounter Unforeseen Costs and Difficulties That Could Impair Our Financial Performance

An important element of our management strategy is to review acquisition prospects that would complement our existing products, augment our market coverage and distribution ability, or enhance our technological capabilities. As a result, we may make acquisitions of complementary companies, products or technologies, or we may reduce or dispose of certain product lines or technologies that no longer fit our long-term strategies. Managing an acquired business, disposing of product technologies or reducing personnel entail numerous operational and financial risks, including difficulties in assimilating acquired operations and new personnel or separating existing business or product groups, diversion of management’s attention away from other business concerns, amortization of acquired intangible assets, adverse customer reaction to our decision to cease support for a product, and potential loss of key employees or customers of acquired or disposed operations. There can be no assurance that we will be able to achieve and manage successfully any such integration of potential acquisitions, disposition of product lines or technologies, or reduction in personnel or that our management, personnel, or systems will be adequate to support continued operations. Any such inabilities or inadequacies could have a material adverse effect on our business, operating results, financial condition, and cash flows.

In addition, any acquisition could result in changes such as potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities, the amortization of related intangible assets, and goodwill impairment charges, any of which could materially adversely affect our business, financial condition, and results of operations and/or the price of our Common Stock.

The Market for Our Common Stock is Volatile, Which May Affect Our Ability to Raise Capital, Make Acquisitions, or Subject Our Business to Additional Costs

The market price for our Common Stock is volatile and has fluctuated significantly over the past years. The trading price of our Common Stock could continue to be highly volatile and fluctuate widely in response to a variety of factors, many of which are not within our control or influence. These factors include but are not limited to the following:

 

    general market, semiconductor, or semiconductor equipment industry conditions;

 

    economic or political events and trends occurring globally or in any of our key sales regions;

 

    variations in our quarterly operating results and financial condition, including our liquidity;

 

    variations in our revenues, earnings or other business and financial metrics from forecasts by us or securities analysts, or from those experienced by other companies in our industry;

 

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    announcements of restructurings, reductions in force, departure of key employees, and/or consolidations of operations;

 

    government regulations;

 

    developments in, or claims relating to, patent or other proprietary rights;

 

    technological innovations and the introduction of new products by us or our competitors;

 

    commercial success or failure of our new and existing products;

 

    disruptions of relationships with key customers or suppliers; or

 

    dilutive impacts of our Notes and related warrants.

In addition, the stock market experiences significant price and volume fluctuations. Historically, we have witnessed significant volatility in the price of our Common Stock due in part to the actual or anticipated movement in interest rates and the price of and markets for semiconductors. These broad market and industry factors have and may again adversely affect the price of our Common Stock, regardless of our actual operating performance. In the past, following volatile periods in the price of their stock, many companies became the object of securities class action litigation. If we are sued in a securities class action, we could incur substantial costs, and it could divert management’s attention and resources and have an unfavorable impact on our financial performance and the price for our Common Stock.

Intellectual Property, Indemnity and Other Claims Against Us Can be Costly and We Could Lose Significant Rights That are Necessary to Our Continued Business and Profitability

Third parties may assert infringement, unfair competition, product liability, breach of contract, or other claims against us. From time to time, other parties send us notices alleging that our products infringe their patent or other intellectual property rights. In addition, law enforcement authorities may seek criminal charges relating to intellectual property or other issues. We also face risks of claims arising from commercial and other relationships. In addition, our Bylaws and other indemnity obligations provide that we will indemnify officers and directors against losses that they may incur in legal proceedings resulting from their service to us. From time to time, in the normal course of business, we indemnify third parties with whom we enter into contractual relationships, including customers and suppliers, with respect to certain matters. We have agreed, under certain conditions, to hold these third parties harmless against specified losses, such as those arising from a breach of representations or covenants, other third party claims that our products when used for their intended purposes infringe the intellectual property rights of such other third parties, or other claims made against certain parties. In such cases, it is our policy either to defend the claims or to negotiate licenses or other settlements on commercially reasonable terms. However, we may be unable in the future to negotiate necessary licenses or reach agreement on other settlements on commercially reasonable terms, or at all, and any litigation resulting from these claims by other parties may materially adversely affect our business and financial results, and we may be subject to substantial damage awards and penalties. Moreover, although we have insurance to protect us from certain claims and cover certain losses to our property, such insurance may not cover us for the full amount of any losses, or at all, and may be subject to substantial exclusions and deductibles.

We May Fail to Protect Our Critical Proprietary Technology Rights, Which Could Affect Our Business

Our success depends in part on our proprietary technology and our ability to protect key components of that technology through patents, copyrights and trade secret protection. Protecting our key proprietary technology helps us to achieve our goals of developing technological expertise and new products and systems that give us a competitive advantage; increasing market penetration and growth of our installed base; and providing comprehensive support and service to our customers. As part of our strategy to protect our technology we currently hold a number of U.S. and foreign patents and pending patent applications, and we keep certain information, processes and techniques as trade secrets. However, other parties may challenge or attempt to invalidate or circumvent any patents the United States or foreign governments issue to us, these governments may fail to issue patents for pending applications, or we may lose trade secret protection over valuable information due to the intentional or unintentional actions or omissions of third parties, of ours or even our own employees. Additionally, intellectual property litigation can be expensive and time-consuming and even when patents are issued or trade secret processes are followed, the legal systems in certain of the countries in which we do business do not enforce patents and other intellectual property rights as rigorously as the United States. The rights granted or anticipated under any of our patents, pending patent applications or trade secrets may be narrower than we expect or, in fact, provide no competitive advantages. Moreover, because we determine the jurisdictions in which to file patents at the time of filing, we may not have adequate protection in the future based on such previous decisions. Any of these circumstances could have a material adverse impact on our business.

We May Incur Impairments to Goodwill or Long-Lived Assets

We review our long-lived assets, including goodwill and other intangible assets, for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Negative industry or economic trends, including reduced market prices of our Common Stock, reduced estimates of future cash flows, disruptions to our business, slower growth rates, or lack of growth in our relevant business segments, could lead to impairment charges against our long-lived assets, including goodwill and other intangible assets. If, in any period, our stock price decreases to the point where our fair value, as determined by our market capitalization, is less than the book value of our assets, this could also indicate a potential impairment, and we may be required to record an impairment charge in that period, which could adversely affect our result of operations.

 

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Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely heavily on projections of future operating performance. We operate in a highly competitive environment and projections of future operating result and cash flows may vary significantly from actual results. Additionally, if our analysis indicates potential impairment to goodwill one or more of our business segments, we may be required to record additional charges to earnings in our financial statements, which could negatively affect our results of operations.

We Are Exposed to Various Risks from Our Regulatory Environment

We are subject to various risks related to (i) new, different, inconsistent or even conflicting laws, rules and regulations that may be enacted by legislative bodies and/or regulatory agencies in the countries that we operate; (ii) disagreements or disputes between national or regional regulatory agencies related to international trade; and (iii) the interpretation and application of laws, rules and regulations. As a public company with global operations, we are subject to the laws of multiple jurisdictions and the rules and regulations of various governing bodies, including those related to financial and other disclosures, corporate governance, privacy, anti-corruption, such as the Foreign Corrupt Practices Act and other local laws prohibiting corrupt payments to governmental officials, and antitrust regulations, among others. One of these laws imposes new disclosure requirements regarding the use of certain minerals, which may have originated from the Democratic Republic of the Congo and adjoining countries in our products. This new requirement could affect the pricing, sourcing and availability of minerals used in the manufacture of components we use in our products. In addition, there will be additional costs associated with complying with the disclosure requirements, such as costs related to determining the source of any of the covered minerals used in our products. Our supply chain is complex, and we may be unable to verify the origins for all metals used in our products. Financial reform legislation and the regulations enacted under such legislation have also added costs to our business by, among other things, requiring advisory votes on executive compensation and on severance packages upon a change in control.

To maintain high standards of corporate governance and public disclosure, we intend to invest all reasonably necessary resources to comply with all evolving standards. Changes in or ambiguous interpretations of laws, regulations and standards may create uncertainty regarding compliance matters. Efforts to comply with new and changing regulations have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management’s time and attention from revenue generating activities to compliance activities. If we are found by a court or regulatory agency not to be in compliance with the laws and regulations, our business, financial condition, and results of operations could be adversely affected.

There Can Be No Assurance That We Will Continue To Declare Cash Dividends At All Or In Any Particular Amounts.

Our Board of Directors announced its plans to declare a quarterly dividend on April 29, 2014, with the first dividend payment having been declared and will be payable on July 2, 2014. In addition, on April 29, 2014, we announced that our Board of Directors has authorized the Company to repurchase up to $850 million of Common Stock, which includes the remaining value available under the prior authorization. Our intent to continue to pay quarterly dividends and to repurchase our shares is subject to capital availability and, in the case of dividends, periodic determinations by our Board of Directors that cash dividends are in the best interest of our stockholders and are in compliance with all laws and agreements applicable to the declaration and payment of cash dividends by us. Future dividends and share repurchases may also be affected by, among other factors: our views on potential future capital requirements for investments in acquisitions and the funding of our research and development; legal risks; stock repurchase programs; changes in federal and state income tax laws or corporate laws; and changes to our business model. Our dividend payments and share repurchases may change from time to time, and we cannot provide assurance that we will continue to declare dividends or repurchase shares at all or in any particular amounts. A reduction in our dividend payments or a suspension of our share repurchase activity could have a negative effect on our stock price.

 

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

Repurchases of Company Shares

On April 22, 2013, the Board of Directors authorized the repurchase of up to $250 million of Common Stock. In addition, on April 29, 2014, the Board of Directors has authorized the Company to repurchase up to $850 million of common stock, which includes the remaining value available under the Company’s prior authorization. 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 on-shore cash and on-shore cash generation. This repurchase program has no termination date and may be suspended or discontinued at any time.

As part of our share repurchase program, we 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 three and nine months ended March 30, 2014 included the following:

Collared Accelerated Share Repurchases

During the nine months ended March 30, 2014, we entered into a collared accelerated share repurchase (“ASR”) transaction under a master repurchase arrangement. Under the ASR, we made an up-front cash payment of $75 million, in exchange for an initial delivery of 1.2 million shares of our Common Stock and a subsequent delivery of 0.3 million shares following the initial hedge period.

 

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The number of shares to ultimately be repurchased by us is based generally on the volume-weighted average price (“VWAP”) of the 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 we could repurchase under the agreements. The minimum and maximum thresholds for the transaction were established based on the average of the VWAP prices for the Common Stock during an initial hedge period. The ASR was scheduled to end at any time after September 27, 2013 and on or before November 27, 2013. At the conclusion of the ASR, we may receive additional shares based on the VWAP of the Common Stock during the term of the agreement minus the pre-determined fixed discount, however the total number of shares received under the ASR would not exceed the maximum of 1.7 million shares.

The counterparty designated October 28, 2013 as the termination date, at which time we settled the ASR. No additional shares were received at final settlement, which represented a weighted-average share price of approximately $50.40 for the transaction period.

We accounted for the 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 our own Common Stock and classified in stockholders’ equity. As such, we accounted for the shares that we received under the ASR as a repurchase of our Common Stock for the purpose of calculating earnings per common share. We had determined that the forward contract indexed to the Common Stock met all of the applicable criteria for equity classification in accordance with the Derivatives and Hedging topic of the FASB Accounting Standards Codification, and, therefore, the ASR was not accounted for as a derivative instrument. As of March 30, 2014, the aggregate repurchase price of $75 million was reflected as Treasury stock, at cost, in the Consolidated Balance Sheet.

Share repurchases, including those under the 2013 repurchase program, were as follows:

 

Period

  Total Number of Shares
Repurchased (1)
    Average Price Paid Per
Share*
    Total Number of Shares
Purchased as Part of
Publicly Announced Plan
or Program
    Amount Available Under
Repurchase Program
 
    (in thousands, except per share data)        

Amount available at June 30, 2013

        $  250,000   

Quarter ended September 29, 2013

    2,093      $ 48.39        1,935      $ 153,538   

Quarter ended December 29, 2013

    967      $ 50.68        762      $ 113,738   

December 30, 2013 - January 26, 2014

    288      $ 54.47        270      $ 99,029   

January 27, 2014 - February 23, 2014

    356      $ 51.37        285      $ 84,417   

February 24, 2014 - March 30, 2014

    392      $ 53.58        375      $ 64,324   
 

 

 

     

 

 

   

Total

    4,096      $ 51.63        3,627     
 

 

 

     

 

 

   

 

* Average price paid per share excludes accelerated share repurchases for which cost was incurred during the September 2013 quarter, but that did not settle until the December 2013 quarter. See Collared Accelerated Share Repurchases section above for details regarding average price associated with these transactions.
(1) In addition to shares repurchased under the Board-authorized repurchase program (as described above), included in this column are 468,585 shares acquired at a total cost of $23.9 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.

 

ITEM 3. Defaults Upon Senior Securities

None.

 

ITEM 4. Mine Safety Disclosures

Not applicable.

 

ITEM 5. Other Information

None.

 

ITEM 6. Exhibits

See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.

 

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LAM RESEARCH CORPORATION

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: May 8, 2014   

LAM RESEARCH CORPORATION

(Registrant)

  

/s/    Douglas R. Bettinger

   Douglas R. Bettinger
   Executive Vice President, Chief Financial Officer
   (Principal Financial Officer and Principal Accounting Officer)

 

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EXHIBIT INDEX

 

Exhibit
Number

 

Description

  10.1(1)*   Form of Market-Based Performance Restricted Stock Unit Award Agreement (U.S. Participants) – Lam Research Corporation 2007 Stock Incentive Plan
  10.2(1)*   Form of Market-Based Performance Restricted Stock Unit Award Agreement (International Participants) – Lam Research Corporation 2007 Stock Incentive Plan
  10.3(1)*   Form of Market-Based Performance Restricted Stock Unit Award Agreement (U.S. Participants) – Lam Research Corporation (Novellus Systems, Inc.) 2011 Stock Incentive Plan (As Amended)
  10.4(1)*   Form of Market-Based Performance Restricted Stock Unit Award Agreement (International Participants) – Lam Research Corporation (Novellus Systems, Inc.) 2011 Stock Incentive Plan (As Amended)
  10.5(2)   Credit Agreement dated March 12, 2014 among Lam Research Corporation and the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, BNP Paribas, Barclays Bank PLC, Citibank, N.A. and Deutsche Bank Securities Inc., as co-documentation agents, and J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint bookrunners and joint lead arrangers
  31.1   Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer)
  31.2   Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer)
  32.1   Section 1350 Certification (Principal Executive Officer)
  32.2   Section 1350 Certification (Principal Financial Officer)
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Indicates management contract or compensatory plan or arrangement in which executive officers of the Company are eligible to participate
(1) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on February 18, 2014.
(2) Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on March 13, 2014.

 

45

Exhibit 31.1

RULE 13a-14(a)/15d-14(a) CERTIFICATION (PRINCIPAL EXECUTIVE OFFICER)

I, Martin B. Anstice, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Lam Research Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

May 8, 2014

 

/s/ Martin B. Anstice

Martin B. Anstice
President and Chief Executive Officer

Exhibit 31.2

RULE 13a-14(a)/15d-14(a) CERTIFICATION (PRINCIPAL FINANCIAL OFFICER)

I, Douglas R. Bettinger, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Lam Research Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

May 8, 2014

 

/s/ Douglas R. Bettinger

Douglas R. Bettinger
Executive Vice President, Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)

Exhibit 32.1

SECTION 1350 CERTIFICATION (PRINCIPAL EXECUTIVE OFFICER)

In connection with the Quarterly Report of Lam Research Corporation (the “Company”) on Form 10-Q for the fiscal period ending March 30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Martin B. Anstice, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) , as applicable, of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

May 8, 2014

 

/s/ Martin B. Anstice

Martin B. Anstice
President and Chief Executive Officer

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to the liability of that section. Such certification will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.

Exhibit 32.2

SECTION 1350 CERTIFICATION (PRINCIPAL FINANCIAL OFFICER)

In connection with the Quarterly Report of Lam Research Corporation (the “Company”) on Form 10-Q for the fiscal period ending March 30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Douglas R. Bettinger, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) , as applicable, of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

May 8, 2014

 

/s/ Douglas R. Bettinger

Douglas R. Bettinger
Executive Vice President, Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)

The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or otherwise subject to the liability of that section. Such certification will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates it by reference.