Lam Research Corporation
LAM RESEARCH CORP (Form: 10-Q, Received: 02/06/2014 16:13:15)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended December 29, 2013

or

 

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

For the transition period from                      to                     

Commission file number 0-12933

 

 

LAM RESEARCH CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   94-2634797

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

4650 Cushing Parkway

Fremont, California

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

(510) 572-0200

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

As of January 31, 2014, the Registrant had 162,312,544 shares of common stock outstanding.

 

 

 


Table of Contents

LAM RESEARCH CORPORATION

TA BLE OF CONTENTS

 

     Page No.  
PART I. Financial Information      3   

Item 1. Financial Statements (Unaudited):

     3  

Consolidated Balance Sheets as of December 29, 2013 and June 30, 2013

     3  

Condensed Consolidated Statements of Operations for the three and six months ended December  29, 2013 and December 23, 2012

     4  

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended December  29, 2013 and December 23, 2012

     5  

Condensed Consolidated Statements of Cash Flows for the six months ended December  29, 2013 and December 23, 2012

     6  

Notes to Condensed Consolidated Financial Statements

     7  

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

     25   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     34   

Item 4. Controls and Procedures

     35   
PART II. Other Information      36   

Item 1. Legal Proceedings

     36   

Item 1A. Risk Factors

     36   

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

     45   

Item 3. Defaults Upon Senior Securities

     46   

Item 4. Mine Safety Disclosures

     46   

Item 5. Other Information

     46   

Item 6. Exhibits

     46   

Signatures

     47   

Exhibit Index

     48   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

LAM RESEARCH CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

 

     December 29,
2013
    June 30,
2013
 
     (unaudited)     (1)  
ASSETS     

Cash and cash equivalents

   $ 1,132,555      $ 1,162,473   

Short-term investments

     1,389,735        1,334,745   

Accounts receivable, less allowance for doubtful accounts of $5,315 as of December 29, 2013 and $5,448 as of June 30, 2013

     909,720        602,624   

Inventories

     661,572        559,317   

Deferred income taxes

     17,095        27,674   

Prepaid expenses and other current assets

     138,359        106,996   
  

 

 

   

 

 

 

Total current assets

     4,249,036        3,793,829   

Property and equipment, net

     546,193        603,910   

Restricted cash and investments

     166,395        166,536   

Goodwill

     1,457,320        1,452,196   

Intangible assets, net

     995,746        1,074,345   

Other assets

     141,108        159,499   
  

 

 

   

 

 

 

Total assets

   $ 7,555,798      $ 7,250,315   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Trade accounts payable

   $ 252,586      $ 200,254   

Accrued expenses and other current liabilities

     529,119        464,528   

Deferred profit

     224,386        225,038   

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

     516,481        514,655   
  

 

 

   

 

 

 

Total current liabilities

     1,522,572        1,404,475   

Long-term debt, convertible notes, and capital leases

     803,276        789,256   

Income taxes payable

     248,996        246,479   

Other long-term liabilities

     129,710        134,313   
  

 

 

   

 

 

 

Total liabilities

     2,704,554        2,574,523   

Commitments and contingencies

    

Senior convertible notes

     185,154        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 - 162,169 shares as of December 29, 2013 and 162,873 shares as of June 30, 2013

     162        163   

Additional paid-in capital

     5,153,414        5,084,544   

Treasury stock, at cost; 91,764 shares as of December 29, 2013 and 89,205 shares as of June 30, 2013

     (3,679,151     (3,539,830

Accumulated other comprehensive loss

     (15,521     (28,693

Retained earnings

     3,207,186        2,972,688   
  

 

 

   

 

 

 

Total stockholders’ equity

     4,666,090        4,488,872   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 7,555,798      $ 7,250,315   
  

 

 

   

 

 

 

 

(1) Derived from audited financial statements

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

LAM RESEARCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

     Three Months Ended     Six Months Ended  
     December 29,
2013
    December 23,
2012
    December 29,
2013
    December 23,
2012
 

Revenue

   $ 1,116,061      $ 860,886      $ 2,131,120      $ 1,767,774   

Cost of goods sold

     628,272        545,472        1,211,473        1,118,474   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     487,789        315,414        919,647        649,300   

Research and development

     174,477        165,951        345,044        329,262   

Selling, general and administrative

     148,838        145,421        304,721        299,284   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     323,315        311,372        649,765        628,546   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     164,474        4,042        269,882        20,754   

Other expense, net

     (3,837     (13,390     (18,099     (23,328
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     160,637        (9,348     251,783        (2,574

Income tax expense (benefit)

     11,645        (15,756     17,285        (11,750
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 148,992      $ 6,408      $ 234,498      $ 9,176   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share:

        

Basic

   $ 0.92      $ 0.04      $ 1.44      $ 0.05   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.87      $ 0.04      $ 1.37      $ 0.05   
  

 

 

   

 

 

   

 

 

   

 

 

 

Number of shares used in per share calculations:

        

Basic

     162,305        170,699        162,603        175,314   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     171,757        173,027        171,592        177,490   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

LAM RESEARCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

     Three Months Ended     Six Months Ended  
     December 29,
2013
    December 23,
2012
    December 29,
2013
    December 23,
2012
 

Net income

   $ 148,992      $ 6,408      $ 234,498      $ 9,176   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax:

        

Foreign currency translation adjustment

     6,284        8,969        9,843        4,844   

Cash flow hedges:

        

Net unrealized gains during the period

     4,328        2,347        8,835        1,628   

Net losses (gains) reclassified into earnings

     (3,017     363        (6,819     2,289   
  

 

 

   

 

 

   

 

 

   

 

 

 
     1,311        2,710        2,016        3,917   

Available-for-sale investments:

        

Net unrealized gains (losses) during the period

     386        (1,497     1,073        1,192   

Net gains reclassified into earnings

     (218     (923     (145     (942
  

 

 

   

 

 

   

 

 

   

 

 

 
     168        (2,420     928        250   

Defined benefit plan, net change in unrealized component

     71        164        385        323   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax

     7,834        9,423        13,172        9,334   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 156,826      $ 15,831      $ 247,670      $ 18,510   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

LAM RESEARCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Six Months Ended  
     December 29,
2013
    December 23,
2012
 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 234,498      $ 9,176   

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

    

Depreciation and amortization

     147,883        153,204   

Deferred income taxes

     12,457        (19,337

Impairment of long-lived asset

     7,632        —     

Equity-based compensation expense

     46,281        48,441   

Amortization of convertible note discount

     16,339        15,595   

Other, net

     1,687        25,744   

Changes in operating assets and liabilities

     (285,829     209,665   
  

 

 

   

 

 

 

Net cash provided by operating activities

     180,948        442,488   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Capital expenditures

     (62,101     (82,889

Cash paid for business acquisition

     (18,388     (8,716

Purchases of available-for-sale securities

     (459,290     (628,074

Sales and maturities of available-for-sale securities

     413,103        588,186   

Repayments of notes receivable

     10,000        —     

Proceeds from sale of assets

     21,635        660   

Transfer of restricted cash and investments

     150        179   
  

 

 

   

 

 

 

Net cash used for investing activities

     (94,891     (130,654
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Principal payments on long-term debt and capital lease obligations

     (807     (780

Treasury stock purchases

     (152,195     (710,089

Reissuances of treasury stock related to employee stock purchase plan

     15,119        9,925   

Proceeds from issuance of common stock

     21,023        7,534   
  

 

 

   

 

 

 

Net cash used for financing activities

     (116,860     (693,410
  

 

 

   

 

 

 

Effect of exchange rate changes on cash

     885        7,013   

Net decrease in cash and cash equivalents

     (29,918     (374,563

Cash and cash equivalents at beginning of period

     1,162,473        1,564,752   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,132,555      $ 1,190,189   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

LAM RESEARCH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 29, 2013

(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 quarters ended December 29, 2013 (the “December 2013 quarter”) and December 23, 2012 (the “December 2012 quarter”) both included 13 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 the Company’s stock at a set price. An RSU award is an agreement to issue shares of the Company’s stock at the time of vesting. The Company’s options and RSU awards typically vest over a period of three years or less, although awards assumed in connection with the 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      Six Months Ended  
     December 29,
2013
     December 23,
2012
     December 29,
2013
     December 23,
2012
 
     (in millions)  

Equity-based compensation expense

   $ 23.0       $ 24.0       $ 46.3       $ 48.4   

Income tax benefit related to equity-based compensation expense

   $ 3.7       $ 3.3       $ 7.6       $ 9.0   

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

 

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Table of Contents

Stock Options and RSUs

The 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 December 29, 2013, there was a total of 5,545,356 shares reserved to cover options and RSUs issued and outstanding under the Plans. As of December 29, 2013, there were an additional 13,247,547 shares reserved and available for future equity-based awards under the Plans.

A summary of stock option activity under the Plans as of December 29, 2013 and changes during the six months then ended is presented below:

 

Options

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

December 29, 2013
(in thousands)
 

Outstanding at June 30, 2013

     2,571      $ 26.87         4.48      

Exercised

     (842   $ 24.98         

Forfeited or expired

     (1   $ 29.71         
  

 

 

         

Outstanding at December 29, 2013

     1,728      $ 27.79         4.88       $ 45,607   
  

 

 

         

Exercisable at December 29, 2013

     1,270      $ 24.17         4.30       $ 38,118   
  

 

 

         

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 December 29, 2013 and December 23, 2012 was $8.1 million and $4.1 million, respectively. The total intrinsic value of options exercised during the six months ended December 29, 2013 and December 23, 2012 was $22.2 million and $4.7 million, respectively. As of December 29, 2013, there was $4.2 million of total unrecognized compensation cost related to unvested stock options granted and outstanding; that cost is expected to be recognized over a weighted-average remaining vesting period of 1.1 years.

A summary of the Company’s RSUs as of December 29, 2013 and changes during the six months then ended is presented below:

 

Unvested Restricted Stock Units

   Shares
(in thousands)
    Average Grant-
Date Fair Value
 

Unvested at June 30, 2013

     4,842      $ 39.32   

Granted

     127      $ 51.97   

Vested

     (1,014   $ 39.45   

Forfeited

     (138   $ 39.49   
  

 

 

   

Unvested at December 29, 2013

     3,817      $ 39.70   
  

 

 

   

The fair value of the Company’s RSUs was calculated based upon the fair market value of the Common Stock at the date of grant. As of December 29, 2013, there was $90.4 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 1.5 years.

ESPP

The 1999 Employee Stock Purchase Plan, as amended and restated (the “1999 ESPP”), allows employees to designate a portion of their base compensation to be withheld through payroll deductions and used to purchase the Company’s Common Stock at a purchase price per share equal to the lower of 85% of the fair market value of the Company’s Common Stock on the first or last day of the applicable purchase period. Each offering period generally lasts up to 12 months and includes up to three interim purchase dates. As of December 29, 2013, there was a total of 9,073,882 shares available for issuance under the 1999 ESPP.

 

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Table of Contents

Purchase rights under the 1999 ESPP were valued using the Black-Scholes option valuation model assuming no expected dividends and the following weighted-average assumptions for the six months ended December 29, 2013:

 

     Six Months Ended
December 29,
2013
 

Expected term (years)

     0.66   

Expected stock price volatility

     31.43

Risk-free interest rate

     0.11

As of December 29, 2013, there was $8.6 million of unrecognized compensation expense related to the 1999 ESPP, which is expected to be recognized over a remaining period of approximately 8 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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Table of Contents

The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis at December 29, 2013:

 

            Fair Value Measurement at December 29, 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

   $ 730,194       $ 730,194       $ —         $ —     

Municipal Notes and Bonds

     252,261         —           252,261         —     

US Treasury and Agencies

     175,673         175,673         —           —     

Government-Sponsored Enterprises

     38,399         —           38,399         —     

Foreign Government Bonds

     29,708         —           29,708         —     

Corporate Notes and Bonds

     928,123         164,885         763,238         —     

Mortgage Backed Securities - Residential

     26,941         —           26,941         —     

Mortgage Backed Securities - Commercial

     103,515         —           103,515         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Short-Term Investments

   $ 2,284,814       $ 1,070,752       $ 1,214,062       $ —     

Mutual Funds

     22,324         22,324         —           —     

Derivative Assets

     5,618         —           5,618         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 2,312,756       $ 1,093,076       $ 1,219,680       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Derivative Liabilities

   $ 293       $ —         $ 244       $ 49   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amounts in the table above are reported in the Consolidated Balance Sheet as of December 29, 2013 as follows:

 

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

Cash Equivalents

   $ 730,194       $ 730,194       $ —         $ —     

Short-Term Investments

     1,389,735         175,673         1,214,062         —     

Restricted Cash and Investments

     164,885         164,885         —           —     

Prepaid Expenses and Other Current Assets

     5,618         —           5,618         —     

Other Assets

     22,324         22,324         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Assets

   $ 2,312,756       $ 1,093,076       $ 1,219,680       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Accrued Expenses and Other Current Liabilities

   $ 244       $ —         $ 244       $ —     

Other Non-current Liabilities

     49         —           —           49   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Liabilities

   $ 293       $ —         $ 244       $ 49   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

10


Table of Contents

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   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

11


Table of Contents

Investments

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

 

    December 29, 2013     June 30, 2013  
    Cost     Unrealized
Gain
    Unrealized
(Loss)
    Fair Value     Cost     Unrealized
Gain
    Unrealized
(Loss)
    Fair Value  

Cash

  $ 403,871      $ —        $ —        $ 403,871      $ 438,813      $ —        $ —        $ 438,813   

Fixed Income Money Market Funds

    730,194        —          —          730,194        725,311        —          —          725,311   

Municipal Notes and Bonds

    251,397        911        (47     252,261        268,390        805        (449     268,746   

US Treasury and Agencies

    175,810        29        (166     175,673        155,648        18        (373     155,293   

Government-Sponsored Enterprises

    38,363        53        (17     38,399        54,835        65        (95     54,805   

Foreign Government Bonds

    29,712        59        (63     29,708        24,950        47        (25     24,972   

Corporate Notes and Bonds

    926,954        1,843        (674     928,123        861,109        1,328        (1,945     860,492   

Mortgage Backed Securities - Residential

    27,240        22        (321     26,941        27,618        29        (282     27,365   

Mortgage Backed Securities - Commercial

    103,828        242        (555     103,515        108,204        426        (672     107,958   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Cash and Short-Term Investments

  $ 2,687,369      $ 3,159      $ (1,843   $ 2,688,685      $ 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

    19,575        2,749        —          22,324        16,611        1,619        (14     18,216   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Financial Instruments

  $ 2,706,944      $ 5,908      $ (1,843   $ 2,711,009      $ 2,692,099      $ 5,823      $ (3,855   $ 2,694,067   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reported Within

               

Cash and Cash Equivalents

  $ 1,132,555      $ —        $ —        $ 1,132,555      $ 1,162,473      $ —        $ —        $ 1,162,473   

Short-Term Investments

    1,388,419        3,159        (1,843     1,389,735        1,335,868        2,718        (3,841     1,334,745   

Restricted Cash and Investments

    166,395        —          —          166,395        166,536        —          —          166,536   

Other assets

    19,575        2,749        —          22,324        27,222        3,105        (14     30,313   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2,706,944      $ 5,908      $ (1,843   $ 2,711,009      $ 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 six months ended December 29, 2013 or December 23, 2012. Additionally, gross realized gains and gross realized (losses) from sales of investments were approximately $0.2 million and $(0.5) million, respectively, in the three months ended December 29, 2013 and $0.9 million and $(0.3) million, respectively, in the three months ended December 23, 2012. Gross realized gains and gross realized (losses) from sales of investments were approximately $0.4 million and $(1.0) million, respectively, in the six months ended December 29, 2013 and $1.1 million and $(0.7) million, respectively, in the six months ended December 23, 2012.

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

 

     December 29, 2013  
     Unrealized Losses
Less Than 12 Months
    Unrealized Losses
12 Months or Greater
    Total  
     Fair Value      Gross
Unrealized
Loss
    Fair Value      Gross
Unrealized
Loss
    Fair Value      Gross
Unrealized
Loss
 

Short-Term Investments

               

Municipal Notes and Bonds

   $ 22,814       $ (47   $ —         $ —        $ 22,814       $ (47

US Treasury and Agencies

     127,143         (166     —           —          127,143         (166

Government-Sponsored Enterprises

     11,466         (17     —           —          11,466         (17

Foreign Government Bonds

     16,906         (63     —           —          16,906         (63

Corporate Notes and Bonds

     260,575         (643     4,709         (31     265,284         (674

Mortgage Backed Securities - Residential

     21,186         (296     2,050         (25     23,236         (321

Mortgage Backed Securities - Commercial

     66,447         (436     5,756         (119     72,203         (555
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total Short-Term Investments

   $ 526,537       $ (1,668   $ 12,515       $ (175   $ 539,052       $ (1,843
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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 December 29, 2013:

 

     Cost      Estimated Fair
Value
 
     (in thousands)  

Due in one year or less

   $ 1,140,750       $ 1,141,168   

Due after one year through five years

     986,845         988,339   

Due in more than five years

     155,903         155,307   
  

 

 

    

 

 

 
   $ 2,283,498       $ 2,284,814   
  

 

 

    

 

 

 

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 Condensed 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 six months ended December 29, 2013 or December 23, 2012 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 December 29, 2013, the Company had gains of $4.8 million accumulated in other comprehensive income, which it expects to reclassify from other comprehensive income into earnings over the next 12 months.

 

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Table of Contents

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).

As of December 29, 2013, the Company had the following outstanding foreign currency forward contracts that were entered into under its cash flow and balance sheet hedge program:

 

     Derivatives Designated as
Hedging Instruments:
     Derivatives Not Designated as
Hedging Instruments:
 
     (in thousands)  
Foreign Currency Forward Contracts                            
     Buy Contracts      Sell Contracts      Buy Contracts      Sell Contracts  

Japanese Yen

   $ —         $ 66,619       $ —         $ 116,339   

Euro

     64,771         —           —           15,271   

Korean Won

     —           —           29,431         —     

Taiwan Dollar

     —           —           139,067         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 64,771       $ 66,619       $ 168,498       $ 131,610   
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of derivative instruments in the Company’s Consolidated Balance Sheets as of December 29, 2013 and June 30, 2013 were as follows:

 

   

December 29, 2013

   

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   $ 5,585      Accrued liabilities   $ —        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     33      Accrued liabilities     244      Prepaid expense and other assets     71      Accrued liabilities     43   
   

 

 

     

 

 

     

 

 

     

 

 

 

Total derivatives

    $ 5,618        $ 244        $ 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 December 29, 2013, the potential effect of netting the above foreign exchange contracts would be an offset to both assets and liabilities by $0.2 million, resulting in a net derivative asset of $5.4 million. As of June 30, 2013, the potential effect of netting the above foreign exchange contracts would be 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 related to these derivative transactions.

 

14


Table of Contents

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

 

        Three Months Ended
December 29, 2013
    Six Months Ended
December 29, 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 (Loss)
Reclassified
from AOCI
into Income
    Gain (Loss)
Recognized
in Income
    Gain
(Loss)
Recognized
in AOCI
    Gain (Loss)
Reclassified
from AOCI
into Income
    Gain (Loss)
Recognized
in Income
 
Derivatives Designated as Hedging
Instruments
      (in thousands)     (in thousands)  

Foreign Exchange Contracts

 

Revenue

  $ 3,226      $ 2,777      $ 85      $ 8,104      $ 6,159      $ 178   

Foreign Exchange Contracts

 

Cost of goods sold

    1,262        467        (24     1,410        1,118        (56

Foreign Exchange Contracts

  Selling, general, and administrative     506        193        (9     554        510        (24

Foreign Exchange Contracts

 

Other income (expense)

    —          —          —          —          —          —     
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $ 4,994      $ 3,437      $ 52      $ 10,068      $ 7,787      $ 98   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

        Three Months Ended
December 23, 2012
    Six Months Ended
December 23, 2012
 
        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 (Loss)
Reclassified
from AOCI
into Income
    Gain (Loss)
Recognized
in Income
    Gain
(Loss)
Recognized
in AOCI
    Gain (Loss)
Reclassified
from AOCI
into Income
    Gain (Loss)
Recognized
in Income
 
Derivatives Designated as Hedging
Instruments
      (in thousands)     (in thousands)  

Foreign Exchange Contracts

 

Revenue

  $ 1,432      $ (133   $ 52      $ (1,294   $ 724      $ 196   

Foreign Exchange Contracts

 

Cost of goods sold

    644        (239     (52     1,895        (2,263     (163

Foreign Exchange Contracts

  Selling, general, and administrative     271        9        (26     1,027        (750     (80

Foreign Exchange Contracts

 

Other income (expense)

    —          —          —          —          —          8   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $ 2,347      $ (363   $ (26   $ 1,628      $ (2,289   $ (39
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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     Six Months Ended  
        December 29, 2013     December 23, 2012     December 29, 2013     December 23, 2012  
Derivatives Not Designated as
Hedging Instruments:
 

Location of Gain

(Loss) Recognized in Income

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

Foreign Exchange Contracts

  Other income (expense)   $ 5,012      $ 5,667      $ 11,040      $ 286   

 

15


Table of Contents

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments, restricted cash and investments, trade accounts receivable, and derivative financial instruments used in hedging activities. Cash is placed on deposit 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.

NOTE 5 — INVENTORIES

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

 

     December 29,
2013
     June 30,
2013
 
     (in thousands)  

Raw materials

   $ 413,762       $ 312,484   

Work-in-process

     94,967         101,530   

Finished goods

     152,843         145,303   
  

 

 

    

 

 

 
   $ 661,572       $ 559,317   
  

 

 

    

 

 

 

NOTE 6 — PROPERTY AND EQUIPMENT, NET

Property and equipment, net, consists of the following:

 

     December 29,
2013
    June 30,
2013
 
     (in thousands)  

Manufacturing, engineering and office equipment

   $ 561,623      $ 521,047   

Computer equipment and software

     125,220        120,144   

Land

     56,528        65,360   

Buildings

     205,407        249,126   

Leasehold improvements

     80,501        76,225   

Furniture and fixtures

     24,830        21,110   
  

 

 

   

 

 

 
     1,054,109        1,053,012   

Less: accumulated depreciation and amortization

     (507,916     (449,102
  

 

 

   

 

 

 
   $ 546,193      $ 603,910   
  

 

 

   

 

 

 

During the six months ended December 29, 2013, 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.

 

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NOTE 7 — GOODWILL AND INTANGIBLE ASSETS

Goodwill

There was no significant change in the goodwill balance during the six months ended December 29, 2013. Of the $1.5 billion goodwill balance as of December 29, 2013, $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 six months ended December 29, 2013 or December 23, 2012.

Intangible Assets

The following table provides details of the Company’s intangible assets, including the impact of foreign currency translation adjustments, as of December 29, 2013 (in thousands, except years):

 

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

Customer relationships

   $ 624,902       $ (139,270   $ 485,632         9.01   

Existing technology

     657,273         (185,093     472,180         6.96   

Patents

     32,053         (23,219     8,834         6.09   

Other intangible assets

     35,216         (35,216     —           4.10   
  

 

 

    

 

 

   

 

 

    

Intangible assets subject to amortization

     1,349,444         (382,798     966,646      

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

   $ 1,378,544       $ (382,798   $ 995,746      
  

 

 

    

 

 

   

 

 

    

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 (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 $40.9 million and $44.7 million in intangible asset amortization expense during the three months ended December 29, 2013 and December 23, 2012, respectively. The Company recognized $82.5 million and $89.3 million in intangible asset amortization expense during the six months ended December 29, 2013 and December 23, 2012, respectively.

 

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The estimated future amortization expense of purchased intangible assets as of December 29, 2013 is as follows (in thousands):

 

Fiscal Year

   Amount  

2014 (6 months)

   $ 80,250   

2015

     159,718   

2016

     157,510   

2017

     155,790   

2018

     154,625   

Thereafter

     258,753   
  

 

 

 
   $ 966,646   
  

 

 

 

NOTE 8 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following:

 

     December 29,
2013
     June 30,
2013
 
     (in thousands)  

Accrued compensation

   $ 308,628       $ 254,795   

Warranty reserves

     66,338         52,252   

Income and other taxes payable

     38,716         39,420   

Other

     115,437         118,061   
  

 

 

    

 

 

 
   $ 529,119       $ 464,528   
  

 

 

    

 

 

 

NOTE 9 — OTHER EXPENSE, NET

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

 

     Three Months Ended     Six Months Ended  
     December 29,
2013
    December 23,
2012
    December 29,
2013
    December 23,
2012
 
     (in thousands)  

Interest income

   $ 2,828      $ 4,376      $ 5,551      $ 8,176   

Interest expense

     (15,297     (14,975     (30,599     (30,119

Gains on deferred compensation plan related assets

     5,360        1,234        5,397        3,975   

Foreign exchange gains (losses)

     125        (3,274     (97     (3,642

Other, net

     3,147        (751     1,649        (1,718
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (3,837   $ (13,390   $ (18,099   $ (23,328
  

 

 

   

 

 

   

 

 

   

 

 

 

NOTE 10 — INCOME TAX EXPENSE

The Company recorded an income tax expense of $11.6 million and $17.3 million for the three and six months ended December 29, 2013, respectively, which yielded an effective tax rate for the three and six months ended December 29, 2013 of approximately 7.2% and 6.9%, respectively. The difference between the U.S. federal statutory tax rate of 35% and the Company’s effective tax rate for the three and six months ended December 29, 2013 is primarily due to the geographic mix of income, the tax effect of non-deductible stock-based compensation, and the recognition of previously unrecognized tax benefits due to lapse of statutes of limitation.

 

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Table of Contents

NOTE 11 — NET INCOME PER SHARE

Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the treasury stock method, for dilutive stock options, 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     Six Months Ended  
    December 29,
2013
    December 23,
2012
    December 29,
2013
    December 23,
2012
 
    (in thousands, except per share data)  

Numerator:

       

Net income

  $ 148,992      $ 6,408      $ 234,498      $ 9,176   
 

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

       

Basic average shares outstanding

    162,305        170,699        162,603        175,314   

Effect of potential dilutive securities:

       

Employee stock plans

    2,847        2,328        2,869        2,176   

Convertible notes

    6,605        —          6,120        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted average shares outstanding

    171,757        173,027        171,592        177,490   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share - basic

  $ 0.92      $ 0.04      $ 1.44      $ 0.05   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share - diluted

  $ 0.87      $ 0.04      $ 1.37      $ 0.05   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

 

    Three Months Ended     Six Months Ended  
    December 29,
2013
    December 23,
2012
    December 29,
2013
    December 23,
2012
 
    (in thousands)  

Number of potential dilutive securities excluded

    —          1,543        296        1,551   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

    9,843        8,835        1,073        385        20,136   

Gains reclassified from accumulated other comprehensive income to net income

    —          (6,819 )  (1)       (145 )  (2)       —          (6,964
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income

  $ 9,843      $ 2,016      $ 928      $ 385      $ 13,172   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 29, 2013

  $ (7,335   $ 4,838      $ 913      $ (13,937   $ (15,521
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Amount of after tax gain reclassified from accumulated other comprehensive income into net income located in revenue: $5,484, cost of goods sold: $953 and selling, general and administrative expenses: $382.
(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

The following table reflects the carrying value of the Company’s convertible senior notes and other long-term debt as of December 29, 2013 and June 30, 2013:

 

     December 29,
2013
    June 30,
2013
 
     (in millions)  

0.50% Notes due 2016

   $ 450.0      $ 450.0   

Less: Unamortized interest discount

     (38.2     (45.7
  

 

 

   

 

 

 

Net carrying amount of 0.50% Notes due 2016

     411.8        404.3   
  

 

 

   

 

 

 

1.25% Notes due 2018

     450.0        450.0   

Less: Unamortized interest discount

     (69.9     (76.9
  

 

 

   

 

 

 

Net carrying amount of 1.25% Notes due 2018

     380.1        373.1   
  

 

 

   

 

 

 

2.625% Notes due 2041

     699.9        699.9   

Less: Unamortized interest discount

     (185.1     (186.9
  

 

 

   

 

 

 

Net carrying amount of 2.625% Notes due 2041

     514.8        513.0   
  

 

 

   

 

 

 
    
  

 

 

   

 

 

 

Total debt

     1,306.7        1,290.4   
  

 

 

   

 

 

 

Less: current portion of debt

     (514.8     (513.0
  

 

 

   

 

 

 

Long-term debt

   $ 791.9      $ 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.

 

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Table of Contents

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 December 29, 2013. The effective interest rates on the liability components of the 2016 Notes, the 2018 Notes, and the 2041 Notes for the three and six months ended December 29, 2013 were 4.29%, 5.27%, and 4.28%, respectively. The following table presents the amount of interest cost recognized relating to both the contractual interest coupon and amortization of the discount on the liability component of the Notes during the three and six months ended December 29, 2013 and December 23, 2012.

 

     Three Months Ended      Six Months Ended  
     December 29,      December 23,      December 29,      December 23,  
     2013      2012      2013      2012  
     (in millions)  

Contractual interest coupon

   $ 6.6       $ 6.6         13.1         13.1   

Amortization of interest discount

     8.2         7.8         16.3         15.6   

Amortization of issuance costs

     0.6         0.6         1.2         1.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest cost recognized

   $ 15.4       $ 15.0       $ 30.6       $ 29.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

The remaining bond discount of the 2016 Notes, the 2018 Notes, and the 2041 Notes of $38.2 million, $69.9 million, and $185.1 million, respectively, as of December 29, 2013 will be amortized over their respective remaining lives of approximately 2.4 years, 4.4 years, and 27.4 years. As of December 29, 2013, the if-converted value of the 2016 Notes and 2018 Notes did not exceed the aggregate principal amount. As of December 29, 2013, the if-converted value of the 2041 Notes exceeded the aggregate principal amount by $380 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 December 29, 2013, the warrants had not been exercised and remained outstanding. In addition, counterparties agreed to sell to the Company up to approximately 7.1 million shares of the Company’s common stock, which is the number of shares initially issuable upon conversion of the 2016 Notes in full, at a price of $63.02 per share. The convertible note hedge transaction will be settled in net shares and will terminate upon the earlier of the maturity date of the 2016 Notes or the first day none of the 2016 Notes remains outstanding due to conversion or otherwise. Settlement of the convertible note hedge in net shares, based on the number of shares issued upon conversion of the 2016 Notes, on the expiration date would result in the Company receiving net shares equivalent to the number of shares issuable by the Company upon conversion of the 2016 Notes.

Concurrent with the issuance of the 2018 Notes, the Company sold warrants to purchase up to approximately 7.1 million shares of Common Stock at an exercise price of $76.10 per share. The warrants expire on a series of dates between August 15, 2018 and October 23, 2018. At expiration, the Company may, at its option, elect to settle the warrants on a net share basis. As of December 29, 2013, the warrants had not been exercised and remained outstanding. In addition, counterparties agreed to sell to the Company up to approximately 7.1 million shares of the Company’s common stock, which is the number of shares initially issuable upon conversion of the 2018 Notes in full, at a price of $63.02 per share. The convertible note hedge transaction will be settled in net shares and will terminate upon the earlier of the maturity date of the 2018 Notes or the first day none of the 2018 Notes remains outstanding due to conversion or otherwise. Settlement of the convertible note hedge in net shares, based on the number of shares issued upon conversion of the 2018 Notes, on the expiration date would result in the Company receiving net shares equivalent to the number of shares issuable by the Company upon conversion of the 2018 Notes.

 

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Table of Contents

Conversion Period

During the fiscal quarters ended June 30, 2013 and December 29, 2013 the Company’s common stock for 20 or more trading days of the 30 consecutive trading days preceding the quarter end was greater than or equal to 130% of the 2041 Note conversion price. As a result, the 2041 Notes became convertible at the option of the holder anytime during the fiscal quarters ending December 29, 2013 and March 30, 2014 (the “March 2014 quarter”). However, there were no conversions of the 2041 Notes during the December 2013 quarter or the March 2014 quarter as of February 6, 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 December 29, 2013 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 December 29, 2013 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 December 29, 2013, the face values of the 2016 Notes, the 2018 Notes, and the 2041 Notes were $450.0 million, $450.0 million, and $699.9 million, respectively. As of December 29, 2013, the fair values of the 2016 Notes, the 2018 Notes, and the 2041 Notes, which includes the debt and equity components, were approximately $508.5 million, $544.5 million, and $1,161.9 million, respectively, based on quoted market prices (Level 1 inputs within the fair value hierarchy).

NOTE 14 — COMMITMENTS

Operating Leases and Related Guarantees

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

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

The Operating Leases have a term of approximately seven years ending on the first business day in January 2015. The Company may, at its discretion and with 30 days’ notice, elect to purchase the property that is the subject of the Operating 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.

The Company is required, pursuant to the terms of the Operating Leases, to maintain collateral in an aggregate of approximately $164.9 million in separate interest-bearing accounts as security for the Company’s obligations under the Operating Leases. This amount is recorded as restricted cash in the Company’s Consolidated Balance Sheet as of December 29, 2013.

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 $141.7 million; however, under certain default circumstances, the guarantee with regard to an Operating Lease may be 100% of the lessor’s aggregate investment in the applicable property, which in no case will exceed $164.9 million, in the aggregate.

In prior fiscal years, the Company recognized aggregate restructuring charges of $26.7 million related to the reassessment of the residual value guarantee for such lease. This amount has been recorded in other long-term liabilities as of December 29, 2013.

 

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Subsequent to December 29, 2013, the Company entered into a series of six amended operating leases (the “Amended Operating Leases”) regarding the Livermore, California, and Fremont, California properties noted above. As a result of the Company’s entry into the Amended Operating Leases, all lease balances under the existing Operating Leases were paid and the Company’s obligations under those leases were terminated. Each Amended Operating Lease has a seven-year term ending on December 31, 2020. Scheduled rent payments under the Amended Operating Leases during the aggregate lease term are estimated to be approximately $43.8 million.

During the term of an Amended Operating Lease and upon expiration of the term of an Amended Operating Lease, the property subject to that lease may be remarketed. The Company has guaranteed to the lessor that each property will have a certain minimum residual value. The aggregate guarantee made by the Company under the Amended Operating Leases is generally no more than approximately $191.2 million. However, under certain default circumstances, the guarantee with regard to an Amended Operating Lease may be 100% of the lessor’s investment in the applicable property; in the aggregate, the amounts payable under such guarantees will be no more than $220.0 million plus related indemnification or other obligations.

Other Guarantees

The Company has issued certain indemnifications to its lessors for taxes and general liability under some of its agreements. The Company has entered into certain insurance contracts that may limit its exposure to such indemnifications. As of December 29, 2013, 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 December 29, 2013, the maximum potential amount of future payments that we could be required to make under these arrangements and letters of credit was $21.6 million. We do not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid.

Warranties

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

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

 

     Three Months Ended     Six Months Ended  
     December 29,
2013
    December 23,
2012
    December 29,
2013
    December 23,
2012
 
     (in thousands)  

Balance at beginning of period

   $ 59,871      $ 67,836      $ 58,078      $ 70,161   

Warranties issued during the period

     25,546        14,856        42,299        34,548   

Settlements made during the period

     (18,967     (21,484     (33,272     (45,859

Changes in liability for pre-existing warranties

     963        1,714        308        4,072   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 67,413      $ 62,922      $ 67,413      $ 62,922   
  

 

 

   

 

 

   

 

 

   

 

 

 

NOTE 15 — RESTRUCTURING AND IMPAIRMENTS

From time to time, Lam 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.

 

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Table of Contents

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. The remaining liability under this plan of $26.7 million relates to the residual value guarantee under certain of the Company’s unoccupied operating leases. 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 $11.4 million, as of December 29, 2013, 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. 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 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   

 

* 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.

In addition to shares repurchased under the Board-authorized repurchase program shown above, during the six months ended December 29, 2013, the Company acquired 204,000 shares at a total cost of $10.6 million, which the Company withheld through net share settlements to cover minimum tax withholding obligations upon the vesting of restricted stock unit awards granted under the Company’s equity compensation plans. The shares retained by the Company through these net share settlements are not a part of the Board-authorized repurchase program but instead are authorized under the Company’s equity compensation plans.

As part of its share repurchase program, the Company may from time-to-time enter into structured share repurchase arrangements with financial institutions using general corporate funds. Such arrangements entered into or settled during the six months ended December 29, 2013 included the following:

Collared Accelerated Share Repurchases

During the three months ended September 29, 2013, 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.

 

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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 December 29, 2013, 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.

 

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

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

With the exception of historical facts, the statements contained in this discussion are forward-looking statements, which are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Certain, but not all, of the forward-looking statements in this report are specifically identified as forward-looking, by use of phrases and words such as “we believe,” “we anticipate,” “we expect,” “may,” “should,” “could” and other future-oriented terms. The identification of certain statements as “forward-looking” is not intended to mean that other statements not specifically identified are not forward-looking. Forward-looking statements include, but are not limited to, statements that relate to: trends in the global economic environment and the semiconductor industry; the anticipated levels of, and rates of change in, future shipments, margins, market share, capital expenditures, revenue and operating expenses generally; 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 (“R&D”) 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 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”) 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.

 

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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 six months ended December 29, 2013, 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.

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

 

     Three Months Ended  
     December 29,
2013
    September 29,
2013
    December 23,
2012
 

Revenue

   $ 1,116,061      $ 1,015,059      $ 860,886   

Gross margin

   $ 487,789      $ 431,858      $ 315,414   

Gross margin as a percentage of revenue

     43.7     42.5     36.6

Total operating expenses

   $ 323,315      $ 326,450      $ 311,372   

Net income

   $ 148,992      $ 85,506      $ 6,408   

Diluted net income per share

   $ 0.87      $ 0.50      $ 0.04   

 

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In the December 2013 quarter, revenue increased compared to the quarter ended September 29, 2013 (the “September 2013 quarter”), reflecting increased investments by our customers. Gross margin as a percentage of revenues increased as compared to the September 2013 quarter due to a more favorable business mix combined with factory and manufacturing savings including integration cost synergies. Operating expenses in the December 2013 quarter remained relatively flat as compared to the September 2013 quarter.

Our cash and cash equivalents, short-term investments, and restricted cash and investments balances totaled approximately $2.7 billion as of December 29, 2013 compared to $2.6 billion as of September 29, 2013. Cash generated by operations was approximately $129 million during the December 2013 quarter. We used cash during the December 2013 quarter to repurchase $48 million of our shares and purchase $38 million of property and equipment. Employee headcount increased slightly as of December 29, 2013 as compared to September 29, 2013 to approximately 6,550 people.

RESULTS OF OPERATIONS

Shipments

 

     Three Months Ended  
     December 29,
2013
    September 29,
2013
    December 23,
2012
 

Shipments (in millions)

   $ 1,139      $ 987      $ 803   

Korea

     24     18     12

Taiwan

     22     21     22

China

     21     8     6

Japan

     13     17     14

United States

     9     17     29

Europe

     7     8     9

Southeast Asia

     4     11     8

Shipments for the December 2013 quarter increased 15% compared to the September 2013 quarter and increased 42% compared to the December 2012 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  
     December 29,
2013
    September 29,
2013
    December 23,
2012
 

Memory

     64     48     20

Foundry

     28     36     51

Logic/integrated device manufacturing

     8     16     29

Revenue

 

     Three Months Ended     Six Months Ended  
     December 29,
2013
    September 29,
2013
    December 23,
2012
    December 29,
2013
    December 23,
2012
 

Revenue (in millions)

   $ 1,116      $ 1,015      $ 861      $ 2,131      $ 1,768   

Taiwan

     28     24     26     26     27

Korea

     19     23     12     21     18

Japan

     17     13     10     15     9

United States

     13     14     24     13     21

China

     12     8     9     10     10

Southeast Asia

     6     9     11     8     7

Europe

     5     9     8     7     8

Revenue for the December 2013 quarter increased 10% compared to the September 2013 quarter, increased 30% as compared to the December 2012 quarter, and increased 21% during the six months ended December 29, 2013 as compared to the same period last year, reflecting increased customer demand. Our deferred revenue balance increased to $405 million as of December 29, 2013 compared to $334 million as of September 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 $53 million as of December 29, 2013 compared to $97 million as of September 29, 2013.

 

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Gross Margin

 

     Three Months Ended     Six Months Ended  
     December 29,
2013
    September 29,
2013
    December 23,
2012
    December 29,
2013
    December 23,
2012
 
     (in thousands, except percentages)  

Gross margin

   $ 487,789      $ 431,858      $ 315,414      $ 919,647      $ 649,300   

Percent of revenue

     43.7     42.5     36.6     43.2     36.7

The increase in gross margin as a percentage of revenue during the December 2013 quarter as compared to the September 2013 quarter is primarily due to a more favorable business mix combined with factory and manufacturing efficiencies including integration cost synergies.

The increase in gross margin as a percentage of revenue during the December 2013 quarter as compared to the December 2012 quarter is primarily due to improved factory efficiencies, 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 $26 million and $17 million, respectively, in the December 2013 quarter as compared to the same quarter last year.

The increase in gross margin as a percentage of revenue during the six months ended December 29, 2013 quarter as compared to the same period in the prior year is primarily due to higher improved factory 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 $67 million and $21 million, respectively, in the six months ended December 29, 2013 as compared to the same period last year.

Research and Development

 

     Three Months Ended     Six Months Ended  
     December 29,
2013
    September 29,
2013
    December 23,
2012
    December 29,
2013
    December 23,
2012
 
     (in thousands, except percentages)  

Research and development (“R&D”)

   $ 174,477      $ 170,567      $ 165,951      $ 345,044      $ 329,262   

Percent of revenue

     15.6     16.8     19.3     16.2     18.6

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 December 2013 quarter compared to the September 2013 quarter was primarily due to a $3 million increase in employee compensation and temporary labor required to increase our investments in product development. A significant portion of the increase in benefit cost is due to changes in the market value of securities in our deferred compensation plan.

The increase in R&D expenses during the December 2013 quarter compared to the same period in the prior year was primarily due to an $8 million increase in salaries and benefits, reflecting an increase in our product development investments. The increase in R&D expenses during the six months ended December 29, 2013 as compared to the same period in the prior year was primarily due to a $17 million increase in salaries, benefits and temporary labor related to new product development.

Selling, General and Administrative

 

     Three Months Ended     Six Months Ended  
     December 29,
2013
    September 29,
2013
    December 23,
2012
    December 29,
2013
    December 23,
2012
 
     (in thousands, except percentages)  

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

   $ 148,838      $ 155,883      $ 145,421      $ 304,721      $ 299,284   

Percent of revenue

     13.3     15.4     16.9     14.3     16.9

The decrease in SG&A expenses during the December 2013 quarter compared to the September 2013 quarter was primarily due to a $7 million impairment of a long-lived asset in the September quarter.

The increase in SG&A expenses in the December 2013 quarter compared to the same period in the prior year was primarily due to a $6 million increase in employee compensation and a $5 million increase in marketing, offset by a $6 million decrease in integration costs.

 

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The increase in SG&A expenses in the six months ended December 29, 2013 quarter as compared to the same period in the prior year was primarily due to a $4 million increase in employee compensation, $9 million increase in marketing, and a $7 million impairment of a long-lived asset in the September 2013 quarter offset by a reduction of $12 million in integration-related costs and a $5 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     Six Months Ended  
     December 29,
2013
    September 29,
2013
    December 23,
2012
    December 29,
2013
    December 23,
2012
 
     (in thousands)  

Interest income

   $ 2,828      $ 2,723      $ 4,376      $ 5,551      $ 8,176   

Interest expense

     (15,297     (15,302     (14,975     (30,599     (30,119

Gains on deferred compensation plan related assets

     5,360        37        1,234        5,397        3,975   

Foreign exchange gains (losses)

     125        (222     (3,274     (97     (3,642

Other, net

     3,147        (1,498     (751     1,649        (1,718
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ (3,837   $ (14,262   $ (13,390   $ (18,099   $ (23,328
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest income decreased in the three and the six months ended December 29, 2013 as compared to the three and six months ended December 23, 2012 as a result of lower interest rate yields.

We incurred insignificant foreign exchange gains (losses) in both the three and six months ended December 29, 2013 and the three months ended September 29, 2013. Foreign exchange losses in the three and six months ended December 23, 2012 were related to un-hedged portions of the balance sheet exposures.

In the three and six months ended December 29, 2013 as compared to the three and six months ended December 23, 2012, 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 three and the six months ended December 29, 2013 as compared to the three and six months ended December 23, 2012 primarily due to a $4.8 million gain on the disposition of a private equity investment.

Income Tax Expense

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

 

     Three Months Ended     Six Months Ended  
     December 29,
2013
    December 23,
2012
    December 29,
2013
    December 23,
2012
 
     (in thousands, except percentages)  

Provision for income taxes

   $ 11,645      $ (15,756   $ 17,285      $ (11,750

Effective tax rate

     7.2     168.6     6.9     456.4

The change in the effective tax rate for the three and six months ended December 29, 2013 compared to the three and six months ended December 23, 2012 was primarily due to the level of income and the treatment of integration and impairment expenses as a discrete event in determining the effective tax rate. In addition, the U.S. federal research and development credit is available through December 31, 2013 for the calculation of the tax provision for the three and six months ended December 29, 2013. The credit was not available for the three and six months ended December 23, 2012 and therefore no tax benefit was included in the calculation of the tax provision.

The effective tax rate of 7.2% for the three months ended December 29, 2013 includes $1.2 million of tax expense related to the tax impact of integration, impairment expenses, and asset sale, offset by the tax impact of gain on sale of investment. The effective tax rate of 6.9% for the six months ended December 29, 2013 includes $2.9 million of tax benefit related to the tax impact of integration, impairment expenses, restructuring, and asset sale, offset by the tax impact of gain on sale of investment.

The effective tax rate of 168.6% and 456.4% for the three and six months ended December 23, 2012 included $3.1 million and $3.5 million, respectively, of tax benefit related to the tax impact of integration and impairment expenses.

 

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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 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.

 

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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”) based upon the fair market value of Company stock at the date of grant. We estimate the fair value of our stock options and ESPP awards using the Black-Scholes option valuation model. This model requires us to input highly subjective assumptions, including expected stock price volatility and the estimated life of each award. We amortize the fair value of equity-based awards over the vesting periods of the awards, and we have elected to use the straight-line method of amortization.

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

 

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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 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 December 29, 2013, we had $2.7 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 $2.0 billion of our total cash and investments as of both December 29, 2013 and June 30, 2013 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 $181 million during the six months ended December 29, 2013 consisted of (in millions):

 

Net income

   $ 234.5   

Non-cash charges:

  

Depreciation and amortization

     147.9   

Equity-based compensation

     46.3   

Amortization of convertible note discount

     16.3   

Impairment of long lived assets

     7.6   

Deferred income taxes

     12.5   

Changes in operating asset and liability accounts

     (285.8

Other

     1.6   
  

 

 

 
   $ 180.9   
  

 

 

 

Changes in operating asset and liability accounts, net of foreign exchange impact, included the following uses of cash: increases in accounts receivable of $302.5 million and inventories of $90.3 million, partially offset by sources of cash resulting from increases in accrued liabilities of $54.2 million and trade accounts payable of $45.7 million.

Cash Flows from Investing Activities

Net cash used for investing activities during the six months ended December 29, 2013 was $94.9 million, primarily consisting of capital expenditures of $62.1 million and net purchases of available for sale securities of $46.2 million.

Cash Flows from Financing Activities

Net cash used for financing activities during the six months ended December 29, 2013 was $116.9 million, primarily consisting of $152.2 million in treasury stock repurchases partially offset by net proceeds from issuance of Lam Research common stock (“Common Stock”) related to employee equity-based plans of $36.1 million.

 

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Liquidity

Given the cyclical nature of the semiconductor equipment industry, we believe that maintaining sufficient liquidity reserves is important to support sustaining levels of investment in R&D and capital infrastructure. 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 December 29, 2013 are expected to be sufficient to support our anticipated levels of operations, investments, debt service requirements, and capital expenditures, through at least the next 12 months. However, uncertainty in the global economy and the semiconductor industry, as well as disruptions in credit markets have in the past, and could in the future, impact customer demand for our products, as well as our ability to manage normal commercial relationships with our customers, suppliers, and creditors.

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. Q uantitative 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 December 29, 2013. 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 December 29, 2013 were as follows:

 

     Valuation of Securities
Given an Interest Rate
Decrease of X Basis Points
     Fair Value as of
December 29, 2013
     Valuation of Securities
Given an Interest Rate
Increase of X Basis Points
 
     (150 BPS)      (100 BPS)      (50 BPS)      0.00%      50 BPS      100 BPS      150 BPS  
     (in thousands)  

Municipal Notes and Bonds

   $ 253,851       $ 253,784       $ 253,392       $ 252,261       $ 250,864       $ 249,466       $ 248,069   

US Treasury & Agencies

     177,240         177,240         177,148         175,673         173,939         172,205         170,472   

Government-Sponsored Enterprises

     38,685         38,685         38,648         38,399         38,105         37,811         37,516   

Foreign Government Bond

     30,192         30,136         29,948         29,708         29,463         29,218         28,973   

Corporate Notes and Bonds

     935,412         934,870         932,524         928,123         923,626         919,130         914,634   

Mortgage Backed Securities - Residential

     27,961         27,631         27,288         26,941         26,594         26,247         25,900   

Mortgage Backed Securities - Commercial

     105,194         104,705         104,129         103,515         102,901         102,287         101,673   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,568,535       $ 1,567,051       $ 1,563,077       $ 1,554,620       $ 1,545,492       $ 1,536,364       $ 1,527,237   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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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 December 29, 2013, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer, along with our Chief Financial Officer, concluded that our disclosure controls and procedures are effective at the reasonable assurance level.

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

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.

 

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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;

 

    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;

 

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    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 research and development (“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.

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 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.

 

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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 Potential 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. While in certain instances this could work to our advantage, if our equipment becomes the basis for the function or process as the tool of choice for the larger consolidated customer or alliance, it could also work to our disadvantage if a competitor’s tools or equipment become the standard equipment for such functions or processes.

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 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.

 

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

Non-U.S. sales accounted for approximately 87% of total revenue in the six months ended December 29, 2013, 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.

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.

 

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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 outsource providers or third parties such as vendors and contractors. 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 information stored on these information systems could be compromised. To the extent that these information systems are under our control, we have implemented security procedures, such as virus protection software and emergency recovery processes, to mitigate the outlined risks. However, security procedures for information systems 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.

In addition, we have recently merged the enterprise system used by Novellus prior to its acquisition by Lam with our global enterprise system. Combining these two systems was a complex process and there is possibility for error in the merger process. While we have exerted considerable efforts to ensure a fully operational system, should an error occur there could be a short-term adverse effect on our ability to conduct business in an efficient manner.

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.

 

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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;

 

    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.

 

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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 actions or omissions of third parties or even our own employees. Additionally, 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. 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.

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.

 

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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.

 

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. 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 six months ended December 29, 2013 included the following:

Collared Accelerated Share Repurchases

During the six months ended December 29, 2013, 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.

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.

 

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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 December 29, 2013, 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 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   

September 30, 2013 - October 29, 2013

     10       $ 51.97         —         $ 153,538   

October 30, 2013 - November 29, 2013

     501       $ 52.28         387       $ 133,276   

November 30, 2013 - December 29, 2013

     456       $ 51.92         375       $ 113,738   
  

 

 

       

 

 

    

Total

     3,060       $ 50.68         2,697      
  

 

 

       

 

 

    

 

* 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 204,000 shares acquired at a total cost of $10.6 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. E xhibits

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: February 6, 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*

   Form of Restricted Stock Unit Award Agreement (U.S. Participants) – Lam Research Corporation 2007 Stock Incentive Plan

  10.2*

   Form of Restricted Stock Unit Award Agreement (International Participants) – Lam Research Corporation 2007 Stock Incentive Plan

  10.3*

   Form of Nonstatutory Stock Option Award Agreement (U.S. Participants) – Lam Research Corporation 2007 Stock Incentive Plan

  10.4*

   Form of Nonstatutory Stock Option Award Agreement (International Participants) – Lam Research Corporation 2007 Stock Incentive Plan

  10.5*

   Form of Market-Based Performance Restricted Stock Unit Award Agreement (U.S. Participants) – Lam Research Corporation 2007 Stock Incentive Plan

  10.6*

   Form of Market-Based Performance Restricted Stock Unit Award Agreement (International Participants) – Lam Research Corporation 2007 Stock Incentive Plan

  10.7*

   Form of Restricted Stock Unit Award Agreement (U.S. Participants) – Lam Research Corporation (Novellus Systems, Inc.) 2011 Stock Incentive Plan (As Amended)

  10.8*

   Form of Restricted Stock Unit Award Agreement (International Participants) – Lam Research Corporation (Novellus Systems, Inc.) 2011 Stock Incentive Plan (As Amended)

  10.9*

   Form of Nonstatutory Stock Option Award Agreement (U.S. Participants) – Lam Research Corporation (Novellus Systems, Inc.) 2011 Stock Incentive Plan (As Amended)

  10.11*

   Form of Nonstatutory Stock Option Award Agreement (International Participants) – Lam Research Corporation (Novellus Systems, Inc.) 2011 Stock Incentive Plan (As Amended)

  10.12*

   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)

  10.13*

   Form of Market-Based Performance Restricted Stock Unit Award Agreement (International Participants) – Lam Research Corporation (Novellus Systems, Inc.) 2011 Stock Incentive Plan (As Amended)

  10.14

   Participation Agreement between Lam Research Corporation and BTMU Capital Leasing & Finance, Inc, dated December 31, 2013

  10.15

   Amended and Restated Lease Agreement (1 Portola Avenue Building) between Lam Research Corporation and BTMU Capital Leasing & Finance, Inc, dated December 31, 2013

  10.16

   Pledge Agreement (1 Portola Avenue Building) between Lam Research Corporation and BTMU Capital Leasing & Finance, Inc, dated December 31, 2013

  10.17

   Amended and Restated Lease Agreement (101 Portola Avenue Building) between Lam Research Corporation and BTMU Capital Leasing & Finance, Inc, dated December 31, 2013

  10.18

   Pledge Agreement (101 Portola Avenue Building) between Lam Research Corporation and BTMU Capital Leasing & Finance, Inc, dated December 31, 2013

  10.19

   Amended and Restated Lease Agreement (Fremont Building #1) between Lam Research Corporation and BTMU Capital Leasing & Finance, Inc, dated December 31, 2013

  10.20

   Pledge Agreement (Fremont Building #1) between Lam Research Corporation and BTMU Capital Leasing & Finance, Inc, dated December 31, 2013

 

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  10.21

   Amended and Restated Lease Agreement (Fremont Building #3) between Lam Research Corporation and BTMU Capital Leasing & Finance, Inc, dated December 31, 2013

  10.22

   Pledge Agreement (Fremont Building #3) between Lam Research Corporation and BTMU Capital Leasing & Finance, Inc, dated December 31, 2013

  10.23

   Amended and Restated Lease Agreement (Fremont Building #3E) between Lam Research Corporation and BTMU Capital Leasing & Finance, Inc, dated December 31, 2013

  10.24

   Pledge Agreement (Fremont Building #3E) between Lam Research Corporation and BTMU Capital Leasing & Finance, Inc, dated December 31, 2013

  10.25

   Amended and Restated Lease Agreement (Fremont Building #4) between Lam Research Corporation and BTMU Capital Leasing & Finance, Inc, dated December 31, 2013

  10.26

   Pledge Agreement (Fremont Building #4) between Lam Research Corporation and BTMU Capital Leasing & Finance, Inc, dated December 31, 2013

  10.27

   Construction Agency Agreement (Fremont Building #3E) between Lam Research Corporation and BTMU Capital Leasing & Finance, Inc, dated December 31, 2013

  10.28*

   Form of Amendment to Employment Agreement

  10.29*

   Form of Amendment to Change in Control Agreement

  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

 

49

Exhibit 10.1

LAM RESEARCH CORPORATION

2007 Stock Incentive Plan

Restricted Stock Unit Award Agreement

(U.S. Participants)

Pursuant to the terms of the 2007 Stock Incentive Plan (the “Plan”) Lam Research Corporation, a Delaware corporation (the “Company”), hereby awards restricted stock units (“RSUs”) to the Participant on the terms and conditions as set forth in this Restricted Stock Unit Award Agreement (including the attached Exhibit A) (the “Agreement”) and the Plan. Capitalized terms used but not defined in this Agreement shall have the meaning specified in the Plan. This Agreement is effective as of the Grant Date.

NOW, THEREFORE , it is hereby agreed as follows:

1. Award of RSUs . Subject to the terms and conditions of this Agreement and the Plan (the terms of which are incorporated herein by reference) and effective as of the date set forth above, the Company hereby grants to the Participant a Number of RSUs as set forth in Exhibit A. The RSUs represent an unfunded, unsecured promise by the Company to deliver Shares subject to the terms and conditions of this Agreement.

2. Vesting .

(a) Subject to the terms and conditions of this Agreement and provided that the Participant continues to provide Service (as defined in Section 3 below) to the Company (or any Affiliate) through the applicable Vesting Date(s) as set forth in Exhibit A, the RSUs will vest and become payable in Shares pursuant to the applicable Vesting Date(s) as set forth in Exhibit A.

(b) In the event of a Change of Control of the Company, the RSUs are governed by Section 10 of the Plan (subject to the terms of any applicable Employment or Change in Control Agreement).

3. Effect of Termination of Service or Leave of Absence .

(a) For purposes of this Agreement, “Service” shall mean the performance of services for the Company (or any Affiliate) in the capacity of an Employee or Company Director and shall be considered terminated on the later of the last day the Participant is on payroll or the last day of service as a director for a Company Director. In the event of termination of the Participant’s Service by the Participant or by the Company or an Affiliate for any reason, excluding Participant’s death or disability (as determined by the Administrator) before all RSUs have vested, the unvested RSUs shall be cancelled by the Company.

(b) In the event of termination of the Participant’s Service due to death, a portion of the RSUs granted to the Participant shall vest on the date of death. To determine the applicable number of Shares, the Number of RSUs (as set forth in Exhibit A) shall be multiplied by the greater of (x) 50% or (y) the percentage of full months worked from the Grant Date until the date of death (the “Death Vesting Date”) over the total number of full months from the Grant

 

Page 1 of 9


2007 Stock Incentive Plan RSU Award Agreement for U.S. Participants

 

Date until the last Vesting Date (as set forth in Exhibit A). Any remaining unvested portion of the RSUs shall be cancelled.

(c) In the event of termination of the Participant’s Service due to disability (as determined by the Administrator) a portion of the RSUs granted to the Participant shall vest on the date the disability is incurred. To determine the applicable number of Shares, the Number of RSUs (as set forth in Exhibit A) shall be multiplied by the greater of (x) 50% or (y) the percentage of full months worked from the Grant Date until the date the disability is incurred (the “Disability Vesting Date”, and collectively, with the Vesting Date(s) set forth in Exhibit A, and the “Death Vesting Date”, the “Vesting Date”) over the total number of full months from the Grant Date until the last Vesting Date (as set forth in Exhibit A). Any remaining unvested portion of the RSUs shall be cancelled.

(d) Vesting of the RSUs will be suspended and vesting credit will no longer accrue as of the day of the leave of absence as set forth in Exhibit A, unless otherwise determined by the Administrator or required by contract or statute. If the Participant returns to Service immediately after the end of an approved leave of absence, vesting credit shall continue to accrue from that date of continued Service.

4. Form and Timing of Payment .

(a) Subject to Section 5 of this Agreement and provided that the Participant has satisfied the vesting requirements of Section 2 of this Agreement, on each Vesting Date, as applicable, the RSUs shall automatically be converted into unrestricted Shares. Such Shares will be issued to the Participant (as evidenced by the appropriate entry in the books of the Company or a duly authorized transfer agent of the Company) on the applicable Vesting Date (or as soon as practicable), but in any event, within the period ending on the later to occur of the date that is 2  1 2 months after the end of (i) the Participant’s tax year that includes the applicable Vesting Date, or (ii) the Company’s tax year that includes the applicable Vesting Date.

(b) Shares issued in respect of RSUs shall be deemed to be issued in consideration of past services actually rendered by the Participant to the Company or an Affiliate or for its benefit for which the Participant has not previously been compensated or for future services to be rendered, as the case may be, which the Company deems to have a value at least equal to the aggregate par value of the Shares subject to the RSUs.

5. Tax Withholding Obligations . Regardless of any action the Company or the Participant’s employer (the “Employer”) takes with respect to any or all income tax (including federal, state and local taxes), social insurance, payroll tax, or other tax-related withholding (“Tax-Related Items”), the Participant acknowledges that the ultimate liability for all Tax-Related Items legally due by the Participant is and remains the Participant’s responsibility and that the Company and/or the Employer (i) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the RSUs, including the grant of the RSUs, the vesting of the RSUs, or the receipt of an equivalent cash payment, the subsequent sale of any Shares acquired at vesting and the receipt of any dividends; and (ii) do not commit to structure the terms of the grant or any aspect of the RSUs to reduce or eliminate the Participant’s liability for Tax-Related Items or achieve any particular tax result.

 

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2007 Stock Incentive Plan RSU Award Agreement for U.S. Participants

 

Prior to the issuance of Shares upon vesting of the RSUs (or any other tax or withholding event), the Participant shall pay, or make arrangements satisfactory to the Company (in the Company’s sole discretion) to satisfy all withholding obligations. In those cases where a prior arrangement has not been made (or where the amount of money provided under the prior arrangement is insufficient to satisfy the obligations for Tax-Related Items), the Company shall withhold a number of whole Shares otherwise deliverable at vesting having a Fair Market Value sufficient to satisfy the statutory minimum (or such higher amount as is allowable without adverse accounting consequences) of the Participant’s estimated obligations for Tax-Related Items applicable to the RSUs; such withholding will result in the issuance to the participant of a lower number of Shares.

The Company and/or the Employer may also, in lieu of or in addition to the foregoing, at the Company’s sole discretion, as authorized herein by the Participant, withhold all applicable Tax-Related Items legally payable by the Participant from the Participant’s wages or other cash compensation or to withhold in one of the following ways, as determined by the Company: (i) require the Participant to deposit with the Company an amount of cash sufficient to meet his or her obligation for Tax-Related Items, and/or (ii) sell or arrange for the sale of Shares to be issued on the vesting of the RSUs to satisfy the withholding obligation. If the Participant’s obligation for Tax-Related Items is satisfied as described in (ii) of this section, the Company will endeavor to sell only the number of Shares required to satisfy the Participant’s obligations for Tax-Related Items; however, the Participant agrees that the Company may sell more Shares than necessary to cover the Tax-Related Items and that in such event, the Company will reimburse the Participant for the excess amount withheld, in cash and without interest. The Participant shall pay the Employer any amount of Tax-Related Items the Employer may be required to withhold as a result of the Participant’s receipt of the RSUs or the vesting of the RSUs that cannot be satisfied by the means previously described. The Company may refuse to deliver Shares to the Participant if the Participant fails to comply with his or her obligation in connection with the Tax-Related Items as described herein. The Participant hereby consents to any action reasonably taken by the Company and/or the Employer to meet his or her obligation for Tax-Related Items.

Further, in consideration of the grant of the RSUs, no claim or entitlement to compensation or damages arises if, in satisfying the Participant’s (and/or the Employer’s) obligation for Tax-Related Items, the Company and/or the Employer withholds an amount in excess of the amount legally required to be withheld, the Participant irrevocably releases the Company and the Employer from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by signing this Agreement, the Participant shall be deemed irrevocably to have waived his or her entitlement to pursue such claim or damages.

6. Restriction on Transferability . Prior to vesting and delivery of the Shares, neither the RSUs, nor the Shares or any beneficial interest therein, may be sold, transferred, pledged, assigned, or otherwise alienated at any time. Any attempt to do so contrary to the provisions hereof shall be null and void. Notwithstanding the above, distribution can be made pursuant to will, the laws of descent and distribution, and if provided by the Administrator, intra-family transfer instruments, or to an inter vivos trust, or as otherwise provided by the Administrator. The terms of this Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Participant.

 

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2007 Stock Incentive Plan RSU Award Agreement for U.S. Participants

 

7. Requirements of Law . The issuance of Shares upon vesting of the RSUs is subject to Section 13 of the Plan, which generally provides that any such issuance shall be subject to compliance by the Company and the Participant with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange on which the Shares may be listed for trading at the time of such issuance. The inability of the Company to obtain approval from any regulatory body having authority deemed by the Company to be necessary to the lawful issuance of any Shares hereby shall relieve the Company of any liability with respect to the non-issuance of the Shares as to which such approval shall not have been obtained. The Company, however, shall use its reasonable efforts to obtain all such approvals.

8. Rights as Stockholder . The Participant shall not have voting, dividend or any other rights as a stockholder of the Company with respect to the RSUs. Upon settlement of the Participant’s RSUs into Shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), the Participant will obtain full voting, dividend and other rights as a stockholder of the Company.

9. No Compensation Deferrals . Neither the Plan nor this Agreement is intended to provide for an elective deferral of compensation that would be subject to Section 409A (“Section 409A”) of the Internal Revenue Code of 1986, as amended (the “Code”). If, notwithstanding the parties’ intent in this regard, at the time of the Participant’s termination of Service, he or she is determined to be a “specified employee” as defined in Code Section 409A, and one or more of the payments or benefits received or to be received by the Participant pursuant to the RSUs would constitute deferred compensation subject to Code Section 409A, no such payment or benefit will be provided under the RSUs until the earliest of (A) the date which is six (6) months after the Participant’s “separation from service” for any reason, other than death or “disability” (as such terms are used in Section 409A(a)(2) of the Code), (B) the date of the Participant’s death or “disability” (as such term is used in Section 409A(a)(2)(C) of the Code), or (C) the effective date of a “change in the ownership or effective control” or a “change in ownership of a substantial portion of the assets” of the Company (as such terms are used in Section 409A(a)(2)(A)(v) of the Code). The provisions of this Section 9 shall only apply to the extent required to avoid the Participant’s incurrence of any additional tax or interest under Code Section 409A or any regulations or U.S. Department of the Treasury (“Treasury”) guidance promulgated thereunder. In addition, if any provision of the RSUs would cause the Participant to incur any additional tax or interest under Code Section 409A or any regulations or Treasury guidance promulgated thereunder, the Company reserves the right, to the extent the Company deems necessary or advisable in its sole discretion, to unilaterally amend or modify the Plan and/or this Agreement to conform it to the maximum extent practicable to the original intent of the applicable provision without violating the provisions of Code Section 409A, including without limitation to limit payment or distribution of any amount of benefit hereunder in connection with a Change in Control to a transaction meeting the definitions referred to in clause (C) above, or in connection with any disability to a “disability” as referred to in (B) above; provided however that the Company makes no representation that these RSUs are not subject to Section 409A nor makes any undertaking to preclude Section 409A from applying to these RSUs. In addition, to the extent the Company determines it appropriate to accelerate any vesting conditions applicable to this award, then to the extent necessary to avoid the Participant’s incurring any additional tax or interest as a result of such vesting acceleration under Code Section 409A or any regulations or Treasury guidance promulgated thereunder, and notwithstanding Section 4 above, the Company

 

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2007 Stock Incentive Plan RSU Award Agreement for U.S. Participants

 

may as a condition to extending such acceleration benefits provide for the Shares to be issued upon settlement of the RSUs to be issued on the earliest date (the “Permitted Distribution Date”) that would obviate application of such additional tax or interest rather than issuing them upon the date on which such vesting is effective as would otherwise be required under Section 2 (or as soon as practicable after such Permitted Distribution Date and in no event later than that last day of the grace period following such date permitted under Code Section 409A).

10. Administration . The Administrator shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation, and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Administrator shall be final and binding upon the Participant, the Company, and all other interested persons. No Administrator shall be personally liable for any action, determination, or interpretation made in good faith with respect to the Plan or this Agreement.

11. Effect on Other Employee Benefit Plans . The value of the RSUs granted pursuant to this Agreement shall not be included as compensation, earnings, salaries, or other similar terms used when calculating the Participant’s benefits under any employee benefit plan sponsored by the Company or any Affiliate, except as such plan otherwise expressly provides. The Company expressly reserves its rights to amend, modify, or terminate any of the Company’s or any Affiliate’s employee benefit plans.

12. No Employment Rights . The award of the RSUs pursuant to this Agreement shall not give the Participant any right to continue providing Service to the Company or an Affiliate and shall not interfere with the ability of the Employer to terminate the Participant’s Service with the Company at any time with or without cause.

13. Nature of the Grant . In accepting the RSUs, the Participant acknowledges that:

(a) the Plan is established voluntarily by the Company, it is discretionary in nature and may be modified, amended, suspended or terminated by the Company at any time, unless otherwise provided in the Plan and this Agreement;

(b) the grant of the RSUs is voluntary and occasional and does not create any contractual or other right to receive future awards of the RSUs, or benefits in lieu of RSUs even if RSUs have been awarded repeatedly in the past;

(c) all decisions with respect to future grants of RSUs, if any, will be at the sole discretion of the Company;

(d) the Participant’s participation in the Plan is voluntary;

(e) the RSUs are outside the scope of the Participant’s employment contract, if any;

(f) the RSUs are not part of normal or expected compensation or salary for any purpose, including, but not limited to, calculation of any overtime, severance, resignation,

 

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2007 Stock Incentive Plan RSU Award Agreement for U.S. Participants

 

termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments;

(g) in the event that the Participant is not an employee of the Company, the grant of the RSUs will not be interpreted to form an employment contract or relationship with the Company; and furthermore, the grant of the RSUs will not be interpreted to form an employment contract with the Employer or any Affiliate;

(h) the future value of the underlying Shares is unknown and cannot be predicted with certainty;

(i) if the Participant receives Shares upon vesting of the RSUs, the value of such Shares may increase or decrease in value;

(j) in consideration of the grant of the RSUs, no claim or entitlement to compensation or damages arises from termination of the RSUs or diminution in value of the RSUs or Shares received upon vesting of RSUs resulting from termination of the Participant’s Service to the Company or the Employer (for any reason whatsoever and whether or not in breach of local labor laws) and the Participant irrevocably releases the Company and the Employer from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by signing this Agreement, the Participant shall be deemed irrevocably to have waived his or her entitlement to pursue such claim.

14. Amendment of Agreement . This Agreement may be amended only by a writing which specifically states that it amends this Agreement. Notwithstanding the foregoing, this Agreement may be amended unilaterally by the Committee by a writing which specifically states that it is amending this Agreement, so long as a copy of such amendment is delivered to the Participant, and provided that no such amendment adversely affects the rights of the Participant. Limiting the foregoing, the Committee reserves the right to change, by written notice to the Participant, the provisions of the RSUs or this Agreement in any way it may deem necessary or advisable to carry out the purpose of the grant as a result of any change in applicable laws or regulations or any future law, regulation, ruling, or judicial decision, or, to the extent permissible under the Plan (including, but not limited to Sections 10 and 14 of the Plan).

15. Notices . Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of its Administrator. Any notice to be given to the Participant shall be addressed to the Participant at the address listed in the Employer’s records. By a notice given pursuant to this Section, either party may designate a different address for notices. Any notice shall have been deemed given when actually delivered.

16. Severability . The provisions of this Agreement are severable and if all or any part of this Agreement or the Plan is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity shall not invalidate any portion of this Agreement or the Plan not declared to be unlawful or invalid. Any Section of this Agreement (or part of such a Section) so declared to be unlawful or invalid shall, if possible, be construed in a manner which

 

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2007 Stock Incentive Plan RSU Award Agreement for U.S. Participants

 

will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining lawful and valid.

17. Construction . The RSUs are being issued pursuant to the Plan and are subject to the terms of the Plan. A copy of the Plan is available upon request during normal business hours at the principal executive offices of the Company. To the extent that any provision of this Agreement violates or is inconsistent with a provision of the Plan, the Plan provision shall govern and any inconsistent provision in this Agreement shall be of no force or effect.

18. Electronic Delivery . The Company may, in its sole discretion, decide to deliver any documents related to the RSUs granted under the Plan and participation in the Plan or future RSUs that may be granted under the Plan by electronic means or to request the Participant’s consent to participate in the Plan by electronic means. The Participant hereby consents to receive such documents by electronic delivery and, if requested, to agree to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company.

19. Entire Agreement . The Plan is incorporated herein by reference. The Plan and this Agreement constitute the entire agreement of the Company and the Participant with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Participant with respect to the subject matter hereof.

20. Miscellaneous .

(a) The Company has established the Plan voluntarily, it is discretionary in nature and the Board may terminate, amend, or modify the Plan at any time; provided, however, that no such termination, amendment, or modification of the Plan may in any way adversely affect the Participant’s rights under this Agreement, without the Participant’s written approval unless such termination, amendment, or modification of the Plan is necessary in order to comply with any change in applicable laws or regulations or any future law, regulation, ruling, or judicial decision or otherwise permissible under the Plan (including, but not limited to Sections 10 and 14 of the Plan).

(b) All obligations of the Company under the Plan and this Agreement in a Change of Control shall be governed by the Plan, other than as set forth in Section 2(b) above.

(c) By signing this Agreement, the Participant acknowledges that his or her personal employment or Service information regarding participation in the Plan and information necessary to determine and pay, if applicable, benefits under the Plan must be shared with other entities, including companies related to the Company and persons responsible for certain acts in the administration of the Plan. By signing this Agreement, the Participant consents to such transmission of personal data as the Company believes is appropriate to administer the Plan.

(d) To the extent not preempted by federal law, this Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, without regard to its principles of conflict of laws.

 

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2007 Stock Incentive Plan RSU Award Agreement for U.S. Participants

 

21. Acceptance of Terms and Conditions . By accepting the terms of this Agreement, the Participant agrees to abide by all of the governing terms and provisions of the Plan and this Agreement. Additionally, the Participant acknowledges having read and understood the terms and conditions of the Plan and this Agreement and has had an opportunity to obtain the advice of counsel prior to accepting this Agreement. The Participant must acknowledge his or her agreement to abide by the terms and conditions of the Plan and Agreement by executing this Agreement electronically or, if otherwise instructed by the Company, by printing and signing a paper copy of this Agreement and returning it to the appropriate Company representative. In addition, the transfer or sale of the shares obtained at vesting by the Participant shall be considered an additional acknowledgment of the terms and conditions contained in the Plan and Agreement.

*    *    *    *    *

PARTICIPANT SIGNATURE

PRINTED NAME

DATE

 

Page 8 of 9


LAM RESEARCH CORPORATION

2007 Stock Incentive Plan

Restricted Stock Unit Award Agreement

EXHIBIT A

Participant (Name & Employee Number):

Grant Date:

Number of RSUs :

 

Vesting Date(s):  

[Insert Number] RSUs on [Insert Date]

 

[Insert Number] RSUs on [Insert Date]

 

[Insert Number] RSUs on [Insert Date]

Leave of Absence: 31 st day (or 91 st day if reemployment guaranteed by statute or contract)

 

Page 9 of 9

Exhibit 10.2

LAM RESEARCH CORPORATION

2007 Stock Incentive Plan

Restricted Stock Unit Award Agreement

(International Participants)

Pursuant to the terms of the 2007 Stock Incentive Plan (the “Plan”) Lam Research Corporation, a Delaware corporation (the “Company”), hereby awards restricted stock units (“RSUs”) to the Participant on the terms and conditions as set forth in this Restricted Stock Unit Award Agreement (including the attached Exhibit A) (the “Agreement”) and the Plan. Capitalized terms used but not defined in this Agreement shall have the meaning specified in the Plan. This Agreement is effective as of the Grant Date.

NOW, THEREFORE , it is hereby agreed as follows:

1. Award of RSUs . Subject to the terms and conditions of this Agreement and the Plan (the terms of which are incorporated herein by reference) and effective as of the date set forth above, the Company hereby grants to the Participant a Number of RSUs as set forth in Exhibit A. The RSUs represent an unfunded, unsecured promise by the Company to deliver Shares subject to the terms and conditions of this Agreement.

2. Vesting .

(a) Subject to the terms and conditions of this Agreement and provided that the Participant continues to provide Service (as defined in Section 3 below) to the Company (or any Affiliate) through the applicable Vesting Date(s) as set forth in Exhibit A, the RSUs will vest and become payable in Shares pursuant to the applicable Vesting Date(s) as set forth in Exhibit A.

(b) In the event of a Change of Control of the Company, the RSUs are governed by Section 10 of the Plan (subject to the terms of any applicable Employment or Change in Control Agreement).

3. Effect of Termination of Service or Leave of Absence .

(a) For purposes of this Agreement, “Service” shall mean the performance of services for the Company (or any Affiliate) in the capacity of an Employee or Company Director and shall be considered terminated on the later of the last day the Participant is on payroll or the last day of Service as a director for a Company Director. In the event of termination of the Participant’s Service by the Participant or by the Company or an Affiliate for any reason, excluding Participant’s death or disability (as determined by the Administrator) before all RSUs have vested, the unvested RSUs shall be cancelled by the Company.

(b) In the event of termination of the Participant’s Service due to death, a portion of the RSUs granted to the Participant shall vest on the date of death. To determine the applicable number of Shares, the Number of RSUs (as set forth in Exhibit A) shall be multiplied by the greater of (x) 50% or (y) the percentage of full months worked from the Grant Date until the date of death (the “Death Vesting Date”) over the total number of full months from the Grant

 

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2007 Stock Incentive Plan RSU Award Agreement for International Participants

 

Date until the last Vesting Date (as set forth in Exhibit A). Any remaining unvested portion of the RSUs shall be cancelled.

(c) In the event of termination of the Participant’s Service due to disability (as determined by the Administrator) a portion of the RSUs granted to the Participant shall vest on the date the disability is incurred. To determine the applicable number of Shares, the Number of RSUs (as set forth in Exhibit A) shall be multiplied by the greater of (x) 50% or (y) the percentage of full months worked from the Grant Date until the date the disability is incurred (the “Disability Vesting Date”, and collectively, with the Vesting Date(s) set forth in Exhibit A, and the “Death Vesting Date”, the “Vesting Date”) over the total number of full months from the Grant Date until the last Vesting Date (as set forth in Exhibit A). Any remaining unvested portion of the RSUs shall be cancelled.

(d) Vesting of the RSUs will be suspended and vesting credit will no longer accrue as of the day of the leave of absence as set forth in Exhibit A, unless otherwise determined by the Administrator or required by contract, statute or applicable local law. If the Participant returns to Service immediately after the end of an approved leave of absence, vesting credit shall continue to accrue from that date of continued Service.

4. Form and Timing of Payment .

(a) Subject to Section 5 of this Agreement and provided that the Participant has satisfied the vesting requirements of Section 2 of this Agreement, on each Vesting Date, as applicable, the RSUs shall automatically be converted into unrestricted Shares. Such Shares will be issued to the Participant (as evidenced by the appropriate entry in the books of the Company or a duly authorized transfer agent of the Company) on the applicable Vesting Date (or as soon as practicable) , but in any event, within the period ending on the later to occur of the date that is 2  1 2 months after the end of (i) the Participant’s tax year that includes the applicable Vesting Date, or (ii) the Company’s tax year that includes the applicable Vesting Date.

(b) Shares issued in respect of RSUs shall be deemed to be issued in consideration of past services actually rendered by the Participant to the Company or an Affiliate or for its benefit for which the Participant has not previously been compensated or for future services to be rendered, as the case may be, which the Company deems to have a value at least equal to the aggregate par value of the Shares subject to RSUs.

5. Tax Withholding Obligations . Regardless of any action the Company or the Participant’s employer (the “Employer”) takes with respect to any or all income tax (including federal, state and local taxes), social insurance, payroll tax, payment on account or other tax-related withholding (“Tax-Related Items”), the Participant acknowledges that the ultimate liability for all Tax-Related Items legally due by the Participant is and remains the Participant’s responsibility and that the Company and/or the Employer (i) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the RSUs, including the grant of the RSUs, the vesting of the RSUs, or the receipt of an equivalent cash payment, the subsequent sale of any Shares acquired at vesting and the receipt of any dividends; and (ii) do not commit to structure the terms of the grant or any aspect of the

 

Page 2 of 15


2007 Stock Incentive Plan RSU Award Agreement for International Participants

 

RSUs to reduce or eliminate the Participant’s liability for Tax-Related Items or achieve any particular tax result.

Prior to the issuance of Shares upon vesting of the RSUs (or any other tax or withholding event), the Participant shall pay, or make arrangements satisfactory to the Company (in the Company’s sole discretion) to satisfy all withholding (and payment on account, where applicable) obligations. In those cases where a prior arrangement has not been made (or where the amount of money provided under the prior arrangement is insufficient to satisfy the obligations for Tax-Related Items), the Company shall withhold a number of whole Shares otherwise deliverable at vesting having a Fair Market Value sufficient to satisfy the statutory minimum (or such higher amount as is allowable without adverse accounting consequences) of the Participant’s estimated obligations for Tax-Related Items applicable to the RSUs; such withholding will result in the issuance to the participant of a lower number of Shares.

The Company and/or the Employer may also, in lieu of or in addition to the foregoing, at the Company’s sole discretion as authorized herein by the Participant, withhold all applicable Tax-Related Items legally payable by the Participant from the Participant’s wages or other cash compensation or to withhold in one of the following ways, as determined by the Company: (i) require the Participant to deposit with the Company an amount of cash sufficient to meet his or her obligation for Tax-Related Items, and/or (ii) sell or arrange for the sale of Shares to be issued on the vesting of the RSUs to satisfy the withholding (or payment on account, when applicable) obligation. If the Participant’s obligation for Tax-Related Items is satisfied as described in (ii) of this section, the Company will endeavor to sell only the number of Shares required to satisfy the Participant’s obligations for Tax-Related Items; however, the Participant agrees that the Company may sell more Shares than necessary to cover the Tax-Related Items and that in such event, the Company will reimburse the Participant for the excess amount withheld, in cash and without interest. The Participant shall pay to the Employer any amount of Tax-Related Items that the Employer may be required to withhold as a result of the Participant’s receipt of the RSUs or the vesting of the RSUs that cannot be satisfied by the means previously described. The Company may refuse to deliver Shares to the Participant if the Participant fails to comply with his or her obligation in connection with the Tax-Related Items as described herein. The Participant hereby consents to any action reasonably taken by the Company and/or the Employer to meet his or her obligation for Tax-Related Items.

Further, in consideration of the grant of the RSUs, no claim or entitlement to compensation or damages arises if, in satisfying the Participant’s (and/or the Employer’s) obligation for Tax-Related Items, the Company and/or the Employer withholds an amount in excess of the amount legally required to be withheld, the Participant irrevocably releases the Company and the Employer from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by signing this Agreement, the Participant shall be deemed irrevocably to have waived his or her entitlement to pursue such claim or damages.

6. Restriction on Transferability . Prior to vesting and delivery of the Shares, neither the RSUs, nor the Shares or any beneficial interest therein, may be sold, transferred, pledged, assigned, or otherwise alienated at any time. Any attempt to do so contrary to the provisions hereof shall be null and void. Notwithstanding the above, distribution can be made pursuant to

 

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2007 Stock Incentive Plan RSU Award Agreement for International Participants

 

will, the laws of descent and distribution, and if provided by the Administrator, intra-family transfer instruments, or to an inter vivos trust, or as otherwise provided by the Administrator. The terms of this Agreement shall be binding upon the executors, administrators, heirs, successors and assigns of the Participant.

7. Requirements of Law . The issuance of Shares upon vesting of the RSUs is subject to Section 13 of the Plan, which generally provides that any such issuance shall be subject to compliance by the Company and the Participant with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange on which the Shares may be listed for trading at the time of such issuance. The inability of the Company to obtain approval from any regulatory body having authority deemed by the Company to be necessary to the lawful issuance of any Shares hereby shall relieve the Company of any liability with respect to the non-issuance of the Shares as to which such approval shall not have been obtained. The Company, however, shall use its reasonable efforts to obtain all such approvals.

8. Rights as Stockholder . The Participant shall not have voting, dividend or any other rights as a stockholder of the Company with respect to the RSUs. Upon settlement of the Participant’s RSUs into Shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), the Participant will obtain full voting, dividend and other rights as a stockholder of the Company.

9. No Compensation Deferrals . Neither the Plan nor this Agreement is intended to provide for an elective deferral of compensation that would be subject to Section 409A (“Section 409A”) of the Internal Revenue Code of 1986, as amended (the “Code”). If, notwithstanding the parties’ intent in this regard, at the time of the Participant’s termination of Service, he or she is determined to be a “specified employee” as defined in Code Section 409A, and one or more of the payments or benefits received or to be received by the Participant pursuant to the RSUs would constitute deferred compensation subject to Code Section 409A, no such payment or benefit will be provided under the RSUs until the earliest of (A) the date which is six (6) months after the Participant’s “separation from service” for any reason, other than death or “disability” (as such terms are used in Section 409A(a)(2) of the Code), (B) the date of the Participant’s death or “disability” (as such term is used in Section 409A(a)(2)(C) of the Code), or (C) the effective date of a “change in the ownership or effective control” or a “change in ownership of a substantial portion of the assets” of the Company (as such terms are used in Section 409A(a)(2)(A)(v) of the Code). The provisions of this Section 9 shall only apply to the extent required to avoid the Participant’s incurrence of any additional tax or interest under Code Section 409A or any regulations or U.S. Department of the Treasury (“Treasury”) guidance promulgated thereunder. In addition, if any provision of the RSUs would cause the Participant to incur any additional tax or interest under Code Section 409A or any regulations or Treasury guidance promulgated thereunder, the Company reserves the right, to the extent the Company deems necessary or advisable in its sole discretion, to unilaterally amend or modify the Plan and/or this Agreement to conform it to the maximum extent practicable to the original intent of the applicable provision without violating the provisions of Code Section 409A, including without limitation to limit payment or distribution of any amount of benefit hereunder in connection with a Change in Control to a transaction meeting the definitions referred to in clause (C) above, or in connection with any disability to a “disability” as referred to in (B) above; provided however that the Company makes no representation that these RSUs are not subject to Section 409A nor

 

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2007 Stock Incentive Plan RSU Award Agreement for International Participants

 

makes any undertaking to preclude Section 409A from applying to these RSUs. In addition, to the extent the Company determines it appropriate to accelerate any vesting conditions applicable to this award, then to the extent necessary to avoid the Participant’s incurring any additional tax or interest as a result of such vesting acceleration under Code Section 409A or any regulations or Treasury guidance promulgated thereunder, and notwithstanding Section 4 above, the Company may as a condition to extending such acceleration benefits provide for the Shares to be issued upon settlement of the RSUs to be issued on the earliest date (the “Permitted Distribution Date”) that would obviate application of such additional tax or interest rather than issuing them upon the date on which such vesting is effective as would otherwise be required under Section 2 (or as soon as practicable after such Permitted Distribution Date and in no event later than that last day of the grace period following such date permitted under Code Section 409A).

10. Administration . The Administrator shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation, and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Administrator shall be final and binding upon the Participant, the Company, and all other interested persons. No Administrator shall be personally liable for any action, determination, or interpretation made in good faith with respect to the Plan or this Agreement.

11. Effect on Other Employee Benefit Plans . The value of the RSUs granted pursuant to this Agreement shall not be included as compensation, earnings, salaries, or other similar terms used when calculating the Participant’s benefits under any employee benefit plan sponsored by the Company or any Affiliate, except as such plan otherwise expressly provides. The Company expressly reserves its rights to amend, modify, or terminate any of the Company’s or any Affiliate’s employee benefit plans.

12. No Employment Rights . The award of the RSUs pursuant to this Agreement shall not give the Participant any right to continued Service with the Company or an Affiliate and shall not interfere with the ability of the Employer to terminate the Participant’s Service with the Company at any time with or without cause.

13. Nature of the Grant . In accepting the RSUs, the Participant acknowledges that:

(a) the Plan is established voluntarily by the Company, it is discretionary in nature and may be modified, amended, suspended or terminated by the Company at any time, unless otherwise provided in the Plan and this Agreement;

(b) the grant of the RSUs is voluntary and occasional and does not create any contractual or other right to receive future awards of the RSUs, or benefits in lieu of RSUs even if RSUs have been awarded repeatedly in the past;

(c) all decisions with respect to future grants of RSUs, if any, will be at the sole discretion of the Company;

(d) the Participant’s participation in the Plan is voluntary;

 

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2007 Stock Incentive Plan RSU Award Agreement for International Participants

 

(e) the RSUs are outside the scope of the Participant’s employment contract, if any;

(f) the RSUs are not part of normal or expected compensation or salary for any purpose, including, but not limited to, calculation of any overtime, severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments;

(g) in the event that the Participant is not an employee of the Company, the grant of the RSUs will not be interpreted to form an employment contract or relationship with the Company; and furthermore, the grant of the RSUs will not be interpreted to form an employment contract with the Employer or any Affiliate;

(h) the future value of the underlying Shares is unknown and cannot be predicted with certainty;

(i) if the Participant receives Shares upon vesting of the RSUs, the value of such Shares may increase or decrease in value;

(j) in consideration of the grant of the RSUs, no claim or entitlement to compensation or damages arises from termination of the RSUs or diminution in value of the RSUs or shares received upon vesting of RSUs resulting from termination of the Participant’s Service to the Company or the Employer (for any reason whatsoever and whether or not in breach of local labor laws) and the Participant irrevocably releases the Company and the Employer from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by signing this Agreement, the Participant shall be deemed irrevocably to have waived his or her entitlement to pursue such claim.

14. Data Privacy Notice and Consent . The Participant hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of his or her personal data as described in this Agreement by and among, as applicable, the Employer, the Company and its Affiliates for the exclusive purpose of implementing, administering and managing the Participant’s participation in the Plan.

The Participant understands that the Company and the Employer may hold certain personal information about the Participant, including, but not limited to, the Participant’s name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of stock or directorships held in the Company, details of all RSUs or any other entitlement to shares awarded, canceled, vested, unvested or outstanding in the Participant’s favor, for the purpose of implementing, administering and managing the Plan (“Data”).

The Participant understands that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in the Participant’s country, or elsewhere, and that the recipient’s country may have different data privacy laws and protections than the Participant’s country. The Participant understands that the Participant may request a list with the names and addresses

 

Page 6 of 15


2007 Stock Incentive Plan RSU Award Agreement for International Participants

 

of any potential recipients of the Data by contacting his or her local human resources representative. The Participant authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing his or her participation in the Plan, including any requisite transfer of such Data as may be required to a broker, escrow agent or other third party with whom the shares received upon vesting of the RSUs may be deposited. The Participant understands that Data will be held only as long as is necessary to implement, administer and manage his or her participation in the Plan. The Participant understands that he or she may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing his or her local human resources representative. The Participant understands, however, that refusal or withdrawal of consent may affect his or her ability to participate in the Plan. For more information on the consequences of his or her refusal to consent or withdrawal of consent, the Participant understands that he or she may contact his or her local human resources representative.

15. Amendment of Agreement . This Agreement may be amended only by a writing which specifically states that it amends this Agreement. Notwithstanding the foregoing, this Agreement may be amended unilaterally by the Committee by a writing which specifically states that it is amending this Agreement, so long as a copy of such amendment is delivered to the Participant, and provided that no such amendment adversely affects the rights of the Participant. Limiting the foregoing, the Committee reserves the right to change, by written notice to the Participant, the provisions of the RSUs or this Agreement in any way it may deem necessary or advisable to carry out the purpose of the grant as a result of any change in applicable laws or regulations or any future law, regulation, ruling, or judicial decision, or, to the extent permissible under the Plan (including, but not limited to, Sections 10 and 14 of the Plan).

16. Notices . Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of its Administrator. Any notice to be given to the Participant shall be addressed to the Participant at the address listed in the Employer’s records. By a notice given pursuant to this Section, either party may designate a different address for notices. Any notice shall have been deemed given when actually delivered.

17. Severability . The provisions of this Agreement are severable and if all or any part of this Agreement or the Plan is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity shall not invalidate any portion of this Agreement or the Plan not declared to be unlawful or invalid. Any Section of this Agreement (or part of such a Section) so declared to be unlawful or invalid shall, if possible, be construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining lawful and valid.

18. Construction . The RSUs are being issued pursuant to the Plan and are subject to the terms of the Plan. A copy of the Plan is available upon request during normal business hours at the principal executive offices of the Company. To the extent that any provision of this Agreement violates or is inconsistent with a provision of the Plan, the Plan provision shall govern and any inconsistent provision in this Agreement shall be of no force or effect.

 

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2007 Stock Incentive Plan RSU Award Agreement for International Participants

 

19. Electronic Delivery . The Company may, in its sole discretion, decide to deliver any documents related to the RSUs granted under the Plan and participation in the Plan or future RSUs that may be granted under the Plan by electronic means or to request the Participant’s consent to participate in the Plan by electronic means. The Participant hereby consents to receive such documents by electronic delivery and, if requested, to agree to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company.

20. Entire Agreement . The Plan is incorporated herein by reference. The Plan and this Agreement constitute the entire agreement of the Company and the Participant with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Participant with respect to the subject matter hereof.

21. Language . If the Participant has received this Agreement or any other document related to the Plan translated into a language other than English and if the translated version is different than the English version, the English version will control.

22. Miscellaneous .

(a) The Company has established the Plan voluntarily, it is discretionary in nature and the Board may terminate, amend, or modify the Plan at any time; provided, however, that no such termination, amendment, or modification of the Plan may in any way adversely affect the Participant’s rights under this Agreement, without the Participant’s written approval unless such termination, amendment, or modification of the Plan is necessary in order to comply with any change in applicable laws or regulations or any future law, regulation, ruling, or judicial decision or as otherwise permissible under the Plan (including, but not limited, to Sections 10 and 14 of the Plan).

(b) All obligations of the Company under the Plan and this Agreement in a Change of Control shall be governed by the Plan, other than as set forth in Section 2(b) above.

(c) To the extent not preempted by United States federal law, this Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, without regard to its principles of conflict of laws.

23. Country Specific Terms . Appendix A contains additional terms and conditions of the Agreement applicable to Participants residing in those countries. In addition, Appendix A also contains information and notices of exchange control and certain other issues of which the Participant should be aware.

24. Acceptance of Terms and Conditions . By accepting the terms and conditions of this Agreement, the Participant agrees to abide by all of the governing terms and provisions of the Plan and this Agreement. Additionally, the Participant acknowledges having read and understood the terms and conditions of the Plan and this Agreement and has had an opportunity to obtain the advice of counsel prior to accepting this Agreement. The Participant must acknowledge his or her agreement to abide by the terms and conditions of the Plan and Agreement by executing this Agreement electronically or, if otherwise instructed by the Company, by printing and signing a paper copy of this Agreement and returning it to the

 

Page 8 of 15


2007 Stock Incentive Plan RSU Award Agreement for International Participants

 

appropriate Company representative. In addition, the transfer or sale of the shares obtained at vesting by the Participant shall be considered an additional acknowledgment of the terms and conditions contained in the Plan and Agreement.

*    *    *    *    *

PARTICIPANT SIGNATURE

PRINTED NAME

DATE

 

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2007 Stock Incentive Plan RSU Award Agreement for International Participants

 

APPENDIX A

TERMS AND CONDITIONS

This Appendix A, which is part of the Agreement, contains additional terms and conditions of the Agreement that will apply to the Participant if he or she resides in one of the countries listed below. Capitalized terms used but not defined herein shall have the same meanings assigned to them in the Plan and/or the Agreement.

NOTIFICATIONS

This Appendix A also includes information regarding exchange control and certain other issues of which the Participant should be aware with respect to his or her participation in the Plan. The information is based on the securities, exchange control and other laws in effect in the respective countries as of November 2013. Such laws are often complex and change frequently. The Company therefore strongly recommends that the Participant not rely on the information as the only source of information relating to the consequences of his or her participation in the Plan because such information may be outdated when the Participant vests in the RSUs and/or sells any Shares acquired pursuant to the RSUs.

AUSTRIA

Exchange Control Information . If the Participant holds Shares acquired under the Plan outside of Austria, the Participant must submit a report to the Austrian National Bank. An exemption applies if the value of the Shares as of any given quarter does not exceed €30,000,000 or as of December 31 does not exceed €5,000,000. If the former threshold is exceeded, quarterly obligations are imposed; whereas, if the latter threshold is exceeded, annual reports must be provided. The annual reporting date is December 31 and the deadline for filing the annual report is March 31 of the following year.

When the Participant sells Shares acquired under the Plan, there may be exchange control obligations if the cash proceeds are held outside of Austria. If the transaction volume of all accounts abroad exceeds €3,000,000 the movements and balances of all accounts must be reported monthly, as of the last day of the month, on or before the fifteenth day of the following month.

BELGIUM

Tax Reporting Information. You are required to report any bank accounts opened and maintained outside Belgium on your annual tax return.

 

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2007 Stock Incentive Plan RSU Award Agreement for International Participants

 

CHINA (PRC)

Exchange Control Restrictions. The Participant agrees to comply with any requirements that may be imposed by the Company in the future in order to facilitate compliance with exchange control requirements in China. These requirements may include, but are not limited to, immediate repatriation to China of the sale proceeds, an immediate sale of the RSUs at vesting, and/or repatriation of the cash proceeds through a special exchange control account.

FRANCE

Exchange Control Information.  If the Participant imports or exports cash ( e.g. , sales proceeds received under the Plan) with a value equal to or exceeding €7,600 and does not use a financial institution to do so, he or she must submit a report to the customs and excise authorities. If the Participant maintains a foreign bank account, he or she is required to report such account to the French tax authorities when filing his or her annual tax return.

GERMANY

Exchange Control Information.  Cross-border payments in excess of €12,500 must be reported monthly to the German Federal Bank. If the Participant uses a German bank to transfer a cross-border payment in excess of €12,500 under the Plan, the bank will make the report for the Participant.

IRELAND

Director Notification Requirement . If the Participant is a director, shadow director or secretary of an Irish Subsidiary or Related Entity of the Company, pursuant to Section 53 of the Irish Company Act 1990, he or she must notify the Irish Subsidiary or Related Entity of the Company in writing within five (5) business days of receiving or disposing of an interest in the Company ( e.g. , RSUs, Shares, etc.), or within five (5) business days of becoming aware of the event giving rise to the notification requirement, or within five (5) days of becoming a director, shadow director or secretary if such an interest exists at that time. This notification requirement also applies with respect to the interests of a spouse or minor child, whose interests will be attributed to the director, shadow director or secretary.

ISRAEL

No additional provisions apply.

 

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2007 Stock Incentive Plan RSU Award Agreement for International Participants

 

ITALY

Plan Document Acknowledgment. By accepting the terms and conditions of the RSUs, the Participant acknowledges that he or she has received a copy of the Plan and the Agreement and has reviewed the Plan and the Agreement, including this Appendix A, in their entirety and fully understands and accepts all provisions of the Plan and the Agreement.

Data Privacy. In addition to the data privacy provision that is set forth in the Agreement, the Participant also consents to the following additional data privacy-related terms:

I am aware that providing the Company and my Employer with Data is necessary for participation in the Plan and that my refusal to provide such Data may affect my ability to participate in the Plan. The Controller of personal data processing is the Company with registered offices at 4650 Cushing Parkway, Fremont, California, 94538, United States and, pursuant to D.lgs 196/2003, its representatives in Italy are Lam Research S.r.l., with registered offices in Centro Direzionale Colleoni, Palazzo Sirio 3-Ing, 20041 Agrate Brianza-MI, Italy.

I understand that I may at any time exercise the rights acknowledged by Section 7 of Legislative Decree June 30, 2003 n.196, including, but not limited to, the right to access, delete, update, request the rectification of my Data and cease, for legitimate reasons, the data processing. Furthermore, I am aware that my Data will not be used for direct marketing purposes.

Exchange Control Information. Participant is responsible for all reporting requirements regarding (i) any transfers of cash or shares to or from Italy and (ii) any foreign investments or investments (including proceeds from the sale of Shares) held outside of Italy.

JAPAN

Exchange Control Information. If the Participant acquired Shares valued at more than ¥100,000,000 in a single transaction, the Participant must file a Securities Acquisition Report with the Ministry of Finance through the Bank of Japan within 20 days of the purchase of Shares.

KOREA

Exchange Control Information. If the Participant receives US$500,000 or more from the sale of Shares, Korean exchange control laws require the Participant to repatriate the proceeds to Korea within 18 months of the sale.

MALAYSIA

Director Notification Requirement . If the Participant is a Director of the local Subsidiary, he or she must notify the local Subsidiary of the grant and also provide notice of any change in his or her interest in the RSUs ( e.g. vesting or the sale of Shares).

Exchange Control Information. Because exchange control regulations change frequently and without notice, you should consult your legal advisor before selling shares to ensure compliance with current regulations. It is Participant’s responsibility to comply with exchange control laws in Malaysia, and neither the Company nor your employer will be liable for any fines or penalties

 

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2007 Stock Incentive Plan RSU Award Agreement for International Participants

 

resulting from a failure to comply with applicable laws. For purposes of compiling balance of payment statistics on the inflow and outflow of funds from Malaysia, the Bank Negara Malaysia must be notified of any remittance of funds between residents and non-residents of an amount equal to RM200,001 or greater from Malaysia.

NETHERLANDS

Insider-Trading Notification. The Participant should be aware of the Dutch insider-trading rules, which may impact the sale of Shares acquired at vesting of the RSUs. In particular, the Participant may be prohibited from effectuating certain transactions involving Shares if the Participant has inside information about the Company. If the Participant is uncertain whether the insider-trading rules apply to him or her, the Participant should consult his or her personal legal advisor. By accepting the Agreement and participating in the Plan, the Participant acknowledges having read and understood this notification and acknowledges that it is the Participant’s responsibility to comply with the following Dutch insider-trading rules.

SINGAPORE

Director Notification Obligation. If the Participant is a director, associate director or shadow director of a Singaporean Subsidiary or Related Entity of the company, the Participant is subject to certain notification requirements under the Singapore Companies Act. Among these requirements is an obligation to notify the Singaporean Subsidiary or Related Entity of the Company in writing when the Participant receives an interest ( e.g. , RSUs or Shares) in the Company or any Subsidiary or Related Entity of the Company. In addition, the Participant must notify the Singaporean Subsidiary or Related Entity of the Company when the Participant sells Shares or shares of any Subsidiary or Related Entity of the Company (including when the Participant sells Shares acquired at vesting of the RSUs). These notifications must be made within two (2) days of acquiring or disposing of any interest in the Company or any Subsidiary or Related Entity of the Company. In addition, a notification of the Participant’s interests in the Company or any Subsidiary or Related Entity of the Company must be made within two (2) days of becoming a director.

Tax Information . The Participant may be eligible for certain tax favored schemes applicable to RSUs. The participant should consult with his or her tax advisor to determine if these tax favorable schemes apply to his or her situation.

SLOVAKIA

Exchange Control Information . It is the Participant’s obligation to comply with exchange control requirements in the Slovakia Republic, including any notification requirements applicable to opening or maintaining any foreign bank or brokerage accounts.

SLOVENIA

No additional provisions apply.

 

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2007 Stock Incentive Plan RSU Award Agreement for International Participants

 

SWITZERLAND

Securities Law Information. The offer of the RSUs is considered a private offering in Switzerland and is therefore not subject to securities registration in Switzerland.

TAIWAN

Exchange Control Information. The Participant may acquire and remit foreign currency (including funds for the purchase of Shares and proceeds from the sale of Shares) up to US$5,000,000 per year without prior approval.

If the transaction amount is TWD500,000 or more in a single transaction, the Participant must submit a Foreign Exchange Transaction Form. If the transaction amount is US$500,000 or more in a single transaction, the Participant must also provide supporting documentation to the satisfaction of the remitting bank.

UNITED KINGDOM

Securities Requirement. Due to legal requirements, all RSUs at the time of vesting will be settled in Shares.

 

Page 14 of 15


LAM RESEARCH CORPORATION

2007 Stock Incentive Plan

Restricted Stock Unit Award Agreement

EXHIBIT A

Participant (Name & Employee Number):

Grant Date:

Number of RSUs :

 

Vesting Date(s):  

[Insert Number] RSUs on [Insert Date]

 

[Insert Number] RSUs on [Insert Date]

 

[Insert Number] RSUs on [Insert Date]

Leave of Absence: 31 st day (or 91 st day if reemployment guaranteed by statute or contract)

 

Page 15 of 15

Exhibit 10.3

LAM RESEARCH CORPORATION

2007 Stock Incentive Plan

Nonstatutory Stock Option Award Agreement

(U.S. Participants)

Pursuant to the terms of the 2007 Stock Incentive Plan (the “Plan”) Lam Research Corporation, a Delaware corporation (the “Company”), hereby grants Options to the Optionee on the terms and conditions as set forth in this Nonstatutory Stock Option Award Agreement (including the attached Exhibit A) (the “Agreement”) and the Plan. Capitalized terms used but not defined in this Agreement shall have the meaning specified in the Plan. The Options are granted on the Grant Date. This Agreement is effective as of the Grant Date.

NOW, THEREFORE , it is hereby agreed as follows:

1. Award of Options . Subject to the terms and conditions of this Agreement and the Plan (the terms of which are incorporated herein by reference) and effective as of the Grant Date, the Company hereby grants to the Optionee a Number of Options to purchase Shares at the designated Exercise Price for each Share granted under these Options. The total Number of Options and the Exercise Price are set forth in Exhibit A.

2. Nature of the Options . These Options are intended by the Company and the Optionee to be nonstatutory stock options, and do not qualify for any special tax benefits to the Optionee. These Options are not Incentive Stock Options.

3. Vesting/Exercise of Options .

(a) Subject to the terms and conditions of this Agreement and provided that the Optionee continues to provide Service (as defined in Section 6 below) to the Company (or any Affiliate) through the applicable Vesting Date(s) as set forth in Exhibit A, these Options shall vest and become exercisable during its term as follows:

 

  (i) These Options will vest and become exercisable pursuant to the Vesting Date(s) set forth in Exhibit A.

 

  (ii) These Options may not be exercised for a fraction of a Share.

 

  (iii) In the event of Optionee’s death, disability or other termination of Service, the vesting and exercisability of the Shares is governed by Sections 3(d), 6, 7 and 8 below and, where applicable, Exhibit A. Notwithstanding anything to the contrary, if the Optionee has an Employment or Change in Control Agreement with the Company that provides for more favorable exercise periods under the circumstances set forth in Sections 3(d), 6, 7 and 8 below, such provisions shall apply.

 

Page 1 of 10


2007 Stock Incentive Plan Option Award Agreement for U.S. Optionees

 

(b) These Options are exercisable by delivery of an exercise notice or in such other form as permitted generally by the Company and designated by the Company (the “Exercise Notice”), which shall state the election to exercise the Options, the number of Options being exercised (the “Exercised Shares”), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be completed by the Optionee and delivered to the Administrator of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. These Options shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price.

(c) These Options may not be exercised after the Expiration Date as set forth in Exhibit A and may be exercised during such term only in accordance with the Plan and the terms of this Agreement.

(d) In the event of a Change of Control of the Company, the Options are governed by Section 10 of the Plan (subject to the terms of any applicable Employment or Change in Control Agreement).

4. Method of Payment . Unless otherwise determined by the Administrator in accordance with Section 6 or otherwise of the Plan, payment of the exercise price shall be made by cash, cash equivalent, through a cashless exercise program, or pursuant to a net exercise program (which may be required by the Administrator).

5. Restrictions on Exercise . These Options may not be exercised if the issuance of Shares upon exercise or the method of payment of consideration for such Shares would constitute a violation of any applicable federal or state securities or other law or regulation, or the requirement of any stock exchange on which the Company’s shares may be listed for trading at the time of issuance. The inability of the Company to obtain approval from any regulatory body having authority deemed by the Company to be necessary to the lawful issuance of any Company Share hereby shall relieve the Company of any liability with respect to the non-issuance of the Company Share as to which such approval shall not have been obtained. The Company, however, shall use its reasonable efforts to obtain all such approvals.

6. Termination of Service and Leave of Absence .

(a) For purposes of this Agreement, “Service” shall mean the performance of services for the Company (or any Affiliate) in the capacity of an Employee or Company Director and shall be considered terminated on the later of the last day the Optionee is on payroll or the last day of Service as a director for a Company Director.

(b) If Optionee’s Service terminates for any reason (whether voluntary or involuntary, with or without cause) other than as a result of disability or death, Optionee may, but only within the number of days as set forth in Exhibit A after the date such Service terminates and in no event beyond the Expiration Date, exercise these Options to the extent that the Options had vested and Optionee was entitled to exercise the Options at the date such Service terminated; provided that if such termination is not for cause and at the date of such termination the Optionee satisfies the definition of Retirement, as set forth in Exhibit A, the post termination

 

Page 2 of 10


2007 Stock Incentive Plan Option Award Agreement for U.S. Optionees

 

exercise period shall be extended for an additional period as set forth in Exhibit A and in no event beyond the Expiration Date (such extended period being called the “Retirement Extended Exercise Period”). Notwithstanding anything above to the contrary, if at any time during the Retirement Extended Exercise Period, the Optionee directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, shareholder (other than of a mutual fund owning an interest in a company that engages or assists any third party in engaging in any business competitive with the Company (or any Affiliate)), corporate officer, director or in any other capacity, engages or assists any third party in engaging in any business competitive with the Company (or any Affiliate); then all outstanding unvested Options shall immediately terminate and all outstanding vested unexercised Options shall immediately terminate. To the extent that certain Options had not vested or Optionee was not entitled to exercise these Options at the date such Service ceased, or if Optionee does not exercise these Options within the time specified herein, the Options shall be cancelled by the Company.

(c) Vesting of the Options will be suspended and vesting credit will no longer accrue as of the designated day of the leave of absence as set forth in Exhibit A, unless otherwise determined by the Administrator or required by contract or statute. If the Optionee returns to Service immediately after the end of an approved leave of absence, vesting credit shall continue to accrue from that date of continued Service.

7. Disability of Optionee . If the Optionee’s Service terminates as a result of a disability (as determined by the Administrator), a portion of the Options granted to the Optionee shall vest and be exercisable on the date the disability is incurred. To determine the applicable number of Options, the Number of Options (as set forth in Exhibit A) shall be multiplied by the greater of (x) 50% or (y) the percentage of full months worked from the Grant Date until the date the disability is incurred (the “Disability Vesting Date”) over the total number of full months from the Grant Date until the last Vesting Date (as set forth in Exhibit A). Any remaining unvested portion of the Options shall be cancelled. If Optionee’s Service terminates as a result of a disability (as determined by the Administrator), Optionee may, but only within the period as set forth in Exhibit A from the date of termination of Service, exercise the Options to the extent Optionee was entitled to exercise them at the date of such termination of Service and in no event beyond the Expiration Date. To the extent that the Shares had not vested or Optionee was not entitled to exercise the Options at the date of termination of Service, or if Optionee does not exercise these Options within the time specified herein, the Options shall be cancelled by the Company.

8. Death of Optionee . In the event of termination of the Optionee’s Service due to death, a portion of the Options granted to the Optionee shall vest on the date of death. To determine the applicable number of Options, the Number of Options (as set forth in Exhibit A) shall be multiplied by the greater of (x) 50% or (y) the percentage of full months worked from the Grant Date until the date of death (the “Death Vesting Date”, and collectively, with the Vesting Date(s) set forth in Exhibit A, and the “Disability Vesting Date”, the “Vesting Date”) over the total number of full months from the Grant Date until the last Vesting Date (as set forth in Exhibit A). Any remaining portion of the Options that had not vested or that the Optionee was not entitled to exercise at the date of termination of Service shall be cancelled. In the event of termination of the Optionee’s Service due to death, the Options may be exercised at any time within the period as set forth in Exhibit A following the date of death by the personal

 

Page 3 of 10


2007 Stock Incentive Plan Option Award Agreement for U.S. Optionees

 

representative of the Optionee’s estate or by a person to whom the Options were transferred pursuant to the Optionee’s will or in accordance with the laws of descent and distribution, but only to the extent the Options had vested and were exercisable as of the date of Optionee’s death and in no event beyond the Expiration Date.

9. Restriction on Transferability . Prior to exercise and delivery of the Shares, neither the Options, nor the Shares or any beneficial interest therein, may be sold, transferred, pledged, assigned, or otherwise alienated at any time. Any attempt to do so contrary to the provisions hereof shall be null and void. Notwithstanding the above, distribution can be made pursuant to will, the laws of descent and distribution, and if provided by the Administrator, intra-family transfer instruments, or to an inter vivos trust, or as otherwise provided by the Administrator. The terms of this Agreement shall be binding upon the executives, administrators, heirs, successors and assigns of the Optionee.

10. Tax Requirements . Regardless of any action the Company or the Optionee’s employer (the “Employer”) takes with respect to any or all income tax, social insurance, payroll tax, or other tax-related items related to the Optionee’s participation in the Plan and legally applicable to the Optionee (“Tax-Related Items”), the Optionee acknowledges that the ultimate liability for all Tax-Related Items is and remains the Optionee’s responsibility and may exceed the amount actually withheld by the Company or the Employer. The Optionee further acknowledges that the Company and/or the Employer (1) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Options, including, but not limited to, the grant, vesting, exercise/settlement of the Options, the issuance of Shares upon settlement of the Options, the subsequent sale of Shares acquired pursuant to such issuance and the receipt of any dividends and/or any dividend equivalents; and (2) do not commit to and are under no obligation to structure the terms of the grant or any aspect of the Options to reduce or eliminate the Optionee’s liability for Tax-Related Items or achieve any particular tax result.

Prior to any relevant taxable or tax withholding event, the Optionee will pay or make adequate arrangements satisfactory to the Company (in the Company’s sole discretion) to satisfy all withholding obligations. In this regard, in those cases where no such prior arrangement has been made (or where the amount of money provided is insufficient to satisfy the applicable obligations) the Optionee authorizes the Company and/or the Employer, in their discretion, to satisfy the obligations with regard to all Tax-Related Items by one or a combination of the following: (i) withholding from the Optionee’s wages or other cash compensation paid to the Optionee; (ii) withholding from proceeds of the sale of Shares acquired upon exercise of the Options through a sale arranged by the Company (on the Optionee’s behalf pursuant to this authorization); or (iii) withholding in Shares to be issued upon exercise of the Options.

If the Optionee’s obligation is satisfied as described in (ii) of this Section, the Company will endeavor to only sell only the number of Shares required to satisfy the Optionee’s obligations for Tax-Related Items; however the Optionee agrees that the Company may sell more Shares than necessary to cover the Tax-Related Item, and that in such event, the Company will reimburse the Optionee for the excess amount withheld, in cash and without interest. If the Optionee’s obligations are satisfied as described in (iii) of this Section, the Company shall withhold a number of Shares otherwise deliverable at exercise having a Fair Market Value

 

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2007 Stock Incentive Plan Option Award Agreement for U.S. Optionees

 

sufficient to satisfy the statutory minimum (or such higher amount as is acceptable without adverse accounting consequences) of the Optionee’s estimated tax obligations. The Optionee is deemed to have been issued the full number of Shares subject to the exercise, notwithstanding that a number of the Shares are held back solely for the purpose of paying the Tax-Related Items due as a result of any aspect of the Optionee’s participation in the Plan.

The Optionee shall pay to the Employer any amount of Tax-Related Items that the Employer may be required to withhold as a result of the Optionee’s participation in the Plan that cannot be satisfied by the means previously described. The Company may refuse to issue or deliver the Shares or the proceeds of the sale of Shares, if the Optionee fails to comply with the Optionee’s obligations in connection with the Tax-Related Items.

Further, in consideration of the grant of the Options, no claim or entitlement to compensation or damages arises if, in satisfying the Optionee’s (and/or the Employer’s) obligation for Tax-Related Items, the Company and/or the Employer withholds an amount in excess of the amount legally required to be withheld, the Optionee irrevocably releases the Company and the Employer from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by signing this Agreement, the Optionee shall be deemed irrevocably to have waived his or her entitlement to pursue such claim or damages.

11. No Employment Rights . The award of the Options pursuant to this Agreement shall not give the Optionee any right to continued service with the Company or an Affiliate and shall not interfere with the ability of the Employee to terminate the Optionee’s Service with the Company at any time with or without cause.

12. Severability . The provisions of this Agreement are severable and if all or any part of this Agreement or the Plan is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity shall not invalidate any portion of this Agreement or the Plan not declared to be unlawful or invalid. Any Section of this Agreement (or part of such a Section) so declared to be unlawful or invalid shall, if possible, be construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining lawful and valid.

13. Rights as Stockholder . The Optionee shall not have voting, dividend or any other rights as a stockholder of the Company with respect to the Options. Upon exercise of the Optionee’s Options into Shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), the Optionee will obtain full voting, dividend and other rights as a stockholder of the Company.

14. Administration . The Administrator shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation, and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Administrator shall be final and binding upon the Optionee, the Company, and all other interested persons. No Administrator shall be personally liable for any action, determination, or interpretation made in good faith with respect to the Plan or this Agreement.

 

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2007 Stock Incentive Plan Option Award Agreement for U.S. Optionees

 

15. Effect on Other Employee Benefit Plans . The value of the Options granted pursuant to this Agreement shall not be included as compensation, earnings, salaries, or other similar terms used when calculating the Optionees’s benefits under any employee benefit plan sponsored by the Company or any Affiliate, except as such plan otherwise expressly provides. The Company expressly reserves its rights to amend, modify, or terminate any of the Company’s or any Affiliate’s employee benefit plans.

16. Nature of the Grant . In accepting the Options, the Optionee acknowledges that:

(a) the Plan is established voluntarily by the Company, it is discretionary in nature and may be modified, amended, suspended or terminated by the Company at any time, unless otherwise provided in the Plan and this Agreement;

(b) the grant of the Options is voluntary and occasional and does not create any contractual or other right to receive future awards of options, or benefits in lieu of options even if options have been awarded repeatedly in the past;

(c) all decisions with respect to future grants of options, if any, will be at the sole discretion of the Company;

(d) the Optionee’s participation in the Plan is voluntary;

(e) the Options do not constitute compensation of any kind for services rendered to the Company or to the Employer, and the Options are outside the scope of the Optionee’s employment contract, if any;

(f) the Options are not part of normal or expected compensation or salary for any purpose, including, but not limited to, calculation of any overtime, severance, resignation, termination, redundancy, end of service payments, bonuses, long-service awards, pension or retirement benefits or similar payments and in no event should be considered as compensation for, or relating in any way to, past services for the Company or the Employer;

(g) in the event that the Optionee is not an Employee, the grant of the Options will not be interpreted to form an employment contract or relationship with the Company; and furthermore, the grant of the Options will not be interpreted to form an employment contract with the Employer or any Affiliate;

(h) the future value of the underlying Shares is unknown and cannot be predicted with certainty;

(i) if the Optionee receives Shares upon exercise of the Options, the value of such Shares may increase or decrease in value;

(j) in consideration of the grant of the Options, no claim or entitlement to compensation or damages arises from termination of the Options or diminution in value of the Options or Shares received upon vesting of the Options resulting from termination of the Optionee’s Service to the Company or the Employer (for any reason whatsoever and whether or not in breach of local labor laws) and the Optionee irrevocably releases the Company and the

 

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2007 Stock Incentive Plan Option Award Agreement for U.S. Optionees

 

Employer from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by signing this Agreement, the Optionee shall be deemed irrevocably to have waived his or her entitlement to pursue such claim.

17. Data Privacy Notice and Consent . The Optionee hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of his or her personal data as described in this Agreement by and among, as applicable, the Employer, the Company and its Affiliates for the exclusive purpose of implementing, administering and managing the Optionee’s participation in the Plan.

The Optionee understands that the Company and the Employer may hold certain personal information about the Optionee, including, but not limited to, the Optionee’s name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any Shares or directorships held in the Company, details of all options or any other entitlement to Shares awarded, canceled, vested, unvested or outstanding in the Optionee’s favor, for the purpose of implementing, administering and managing the Plan (“Data”).

The Optionee understands that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in the Optionee’s country, or elsewhere, and that the recipient’s country may have different data privacy laws and protections than the Optionee’s country. The Optionee understands that the Optionee may request a list with the names and addresses of any potential recipients of the Data by contacting his or her local human resources representative. The Optionee authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing his or her participation in the Plan, including any requisite transfer of such Data as may be required to a broker, escrow agent or other third party with whom the Shares received upon exercise of the Options may be deposited. The Optionee understands that Data will be held only as long as is necessary to implement, administer and manage his or her participation in the Plan. The Optionee understands that he or she may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing his or her local human resources representative. The Optionee understands, however, that refusal or withdrawal of consent may affect his or her ability to participate in the Plan. For more information on the consequences of his or her refusal to consent or withdrawal of consent, the Optionee understands that he or she may contact his or her local human resources representative.

18. Amendment of Agreement . This Agreement may be amended only by a writing which specifically states that it amends this Agreement. Notwithstanding the foregoing, this Agreement may be amended unilaterally by the Committee by a writing which specifically states that it is amending this Agreement, so long as a copy of such amendment is delivered to the Optionee, and provided that no such amendment adversely affects the rights of the Optionee. Limiting the foregoing, the Committee reserves the right to change, by written notice to the Optionee, the provisions of the Options or this Agreement in any way it may deem necessary or

 

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2007 Stock Incentive Plan Option Award Agreement for U.S. Optionees

 

advisable to carry out the purpose of the grant as a result of any change in applicable laws or regulations or any future law, regulation, ruling, or judicial decision, or, to the extent permissible under the Plan (including, but not limited to, Sections 10 and 14 of the Plan).

19. Notices . Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of its Stock Administrator. Any notice to be given to the Optionee shall be addressed to the Optionee at the address listed in the Employer’s records. By a notice given pursuant to this Section, either party may designate a different address for notices. Any notice shall have been deemed given when actually delivered.

20. Construction . The Options are being issued pursuant to the Plan and are subject to the terms of the Plan. A copy of the Plan is available upon request during normal business hours at the principal executive offices of the Company. To the extent that any provision of this Agreement violates or is inconsistent with a provision of the Plan, the Plan provision shall govern and any inconsistent provision in this Agreement shall be of no force or effect.

21. Entire Agreement . The Plan is incorporated herein by reference. The Plan and this Agreement constitute the entire agreement of the Company and the Optionee with respect to the subject matter hereof and, unless indicated otherwise herein, supersede in their entirety all prior undertakings and agreements of the Company and the Optionee with respect to the subject matter hereof.

22. Language . If the Optionee has received this Agreement or any other document related to the Plan translated into a language other than English and if the translated version is different than the English version, the English version will control.

23. Electronic Delivery . The Company may, in its sole discretion, decide to deliver any documents related to the Options granted under the Plan and participation in the Plan or future options that may be granted under the Plan by electronic means or to request the Optionee’s consent to participate in the Plan by electronic means. The Optionee hereby consents to receive such documents by electronic delivery and, if requested, to agree to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third party designated by the Company.

24. Miscellaneous .

(a) The Company has established the Plan voluntarily, it is discretionary in nature and the Board may terminate, amend, or modify the Plan at any time; provided, however, that no such termination, amendment, or modification of the Plan may in any way adversely affect the Optionee’s rights under this Agreement, without the Optionee’s written approval unless such termination, amendment, or modification of the Plan is necessary in order to comply with any change in applicable laws or regulations or any future law, regulation, ruling, or judicial decision or as otherwise permissible under the Plan (including, but not limited to, Sections 10 and 14 of the Plan).

(b) All obligations of the Company under the Plan and this Agreement in a Change of Control shall be governed by the Plan, other than as set forth in Section 3(a)(iii) above.

 

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2007 Stock Incentive Plan Option Award Agreement for U.S. Optionees

 

(c) To the extent not preempted by federal law, this Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware, without regard to its principles of conflict of laws.

25. Acceptance of Terms and Conditions . By accepting the terms and conditions applicable to the Options, the Optionee agrees to abide by all of the governing terms and provisions of the Plan and this Agreement. Additionally, the Optionee acknowledges having read and understood the terms and conditions of the Plan and this Agreement and has had an opportunity to obtain the advice of counsel prior to accepting this Agreement. The Optionee must accept his or her agreement to abide by the terms and conditions of the Plan and Agreement by executing this Agreement electronically or, if otherwise instructed by the Company, by printing and signing a paper copy of this Agreement and returning it to the appropriate Company representative. In addition, the exercise of these Options shall be considered an additional acknowledgment of the terms and conditions contained in the Plan and Agreement.

*    *    *    *    *

 

OPTIONEE SIGNATURE   
PRINTED NAME   
DATE   

 

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LAM RESEARCH CORPORATION

2007 Stock Incentive Plan

Nonstatutory Stock Option Award Agreement

EXHIBIT A

Optionee (Name & Employee Number):

Grant Date:

Number of Options :

Exercise Price:

 

Vesting Date(s):  

[Insert Number] Options on [Insert Date]

 

[Insert Number] Options on [Insert Date]

 

[Insert Number] Options on [Insert Date]

Expiration Date: 7 years from the Grant Date

Leave of Absence: 31st day (or 91st day if reemployment guaranteed by statute or contract)

Termination of Service Provisions:

Any Reason (except death, disability and Retirement): 90 days

Death: 12 months

Disability: 12 months

Retirement Extended Exercise Period: 90 days plus an additional 21 months

Retirement: At least 55 years old and has completed at least 5 years of Service

 

Page 10 of 10

Exhibit 10.4

LAM RESEARCH CORPORATION

2007 Stock Incentive Plan

Nonstatutory Stock Option Award Agreement

(International Participants)

Pursuant to the terms of the 2007 Stock Incentive Plan (the “Plan”) Lam Research Corporation, a Delaware corporation (the “Company”), hereby grants Options to the Optionee on the terms and conditions as set forth in this Nonstatutory Stock Option Award Agreement (including the attached Exhibit A) (the “Agreement”) and the Plan. Capitalized terms used but not defined in this Agreement shall have the meaning specified in the Plan. The Options are granted on the Grant Date. This Agreement is effective as of the Grant Date.

NOW, THEREFORE , it is hereby agreed as follows:

1. Award of Options . Subject to the terms and conditions of this Agreement and the Plan (the terms of which are incorporated herein by reference) and effective as of the Grant Date, the Company hereby grants to the Optionee a Number of Options to purchase Shares at the designated Exercise Price for each Share granted under these Options. The total Number of Options and the Exercise Price are set forth in Exhibit A.

2. Nature of the Options . These Options are intended by the Company and the Optionee to be nonstatutory stock options, and do not qualify for any special tax benefits to the Optionee. These Options are not Incentive Stock Options.

3. Vesting/Exercise of Options .

(a) Subject to the terms and conditions of this Agreement and provided that the Optionee continues to provide Service (as defined in Section 6 below) to the Company (or any Affiliate) through the applicable Vesting Date(s) as set forth in Exhibit A, these Options shall vest and become exercisable during their term as follows:

 

  (i) These Options will vest and become exercisable pursuant to the Vesting Date(s) set forth in Exhibit A.

 

  (ii) These Options may not be exercised for a fraction of a Share.

 

  (iii) In the event of Optionee’s death, disability or other termination of Service, the vesting and exercisability of the Shares is governed by Sections 3(d), 6, 7 and 8 below and, where applicable, Exhibit A. Notwithstanding anything to the contrary, if the Optionee has an Employment or Change in Control Agreement with the Company that provides for more favorable exercise periods under the circumstances set forth in Sections 3(d), 6, 7 and 8 below, such provisions shall apply.

 

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2007 Stock Incentive Plan Option Award Agreement for International Optionees

 

(b) These Options are exercisable by delivery of an exercise notice or in such other form as permitted generally by the Company and designated by the Company (the “Exercise Notice”), which shall state the election to exercise the Options, the number of Options being exercised (the “Exercised Shares”), and such other representations and agreements as may be required by the Company pursuant to the provisions of the Plan. The Exercise Notice shall be completed by the Optionee and delivered to the Administrator of the Company. The Exercise Notice shall be accompanied by payment of the aggregate Exercise Price as to all Exercised Shares. These Options shall be deemed to be exercised upon receipt by the Company of such fully executed Exercise Notice accompanied by such aggregate Exercise Price.

(c) These Options may not be exercised after the Expiration Date as set forth in Exhibit A and may be exercised during such term only in accordance with the Plan and the terms of this Agreement.

(d) In the event of a Change of Control of the Company, the Options are governed by Section 10 of the Plan (subject to the terms of any applicable Employment or Change in Control Agreement).

4. Method of Payment . Unless otherwise determined by the Administrator in accordance with Section 6 or otherwise of the Plan, payment of the exercise price shall be made by cash, cash equivalent, through a cashless exercise program, or pursuant to a net exercise program (which may be required by the Administrator).

5. Restrictions on Exercise . These Options may not be exercised if the issuance of Shares upon exercise or the method of payment of consideration for such Shares would constitute a violation of any applicable federal or state securities or other law or regulation, or the requirement of any stock exchange on which the Company’s shares may be listed for trading at the time of issuance. The inability of the Company to obtain approval from any regulatory body having authority deemed by the Company to be necessary to the lawful issuance of any Company Shares hereby shall relieve the Company of any liability with respect to the non-issuance of the Company Shares as to which such approval shall not have been obtained. The Company, however, shall use its reasonable efforts to obtain all such approvals.

6. Termination of Service and Leave of Absence .

(a) For purposes of this Agreement, “Service” shall mean the performance of services for the Company (or any Affiliate) in the capacity of an Employee or Company Director and shall be considered terminated on the later of the last day the Optionee is on payroll or the last day of Service as a director for a Company Director.

(b) If Optionee’s Service terminates for any reason (whether voluntary or involuntary, with or without cause) other than as a result of disability or death, Optionee may, but only within the number of days as set forth in Exhibit A after the date such Service terminates and in no event beyond the Expiration Date, exercise these Options to the extent that the Options had vested and Optionee was entitled to exercise the Options at the date such Service terminated; provided that if such termination is not for cause and at the date of such termination the Optionee satisfies the definition of Retirement, as set forth in Exhibit A, the post termination

 

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2007 Stock Incentive Plan Option Award Agreement for International Optionees

 

exercise period shall be extended for an additional period as set forth in Exhibit A and in no event beyond the Expiration Date (such extended period being called the “Retirement Extended Exercise Period”). Notwithstanding anything above to the contrary, if at any time during the Retirement Extended Exercise Period, the Optionee directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, shareholder (other than of a mutual fund owning an interest in a company that engages or assists any third party in engaging in any business competitive with the Company (or any Affiliate)), corporate officer, director or in any other capacity, engages or assists any third party in engaging in any business competitive with the Company (or any Affiliate); then all outstanding unvested Options shall immediately terminate and all outstanding vested unexercised Options shall immediately terminate. To the extent that certain Options had not vested or Optionee was not entitled to exercise these Options at the date such Service ceased, or if Optionee does not exercise these Options within the time specified herein, the Options shall be cancelled by the Company.

(c) Vesting of the Options will be suspended and vesting credit will no longer accrue as of the designated day of the leave of absence as set forth in Exhibit A, unless otherwise determined by the Administrator or required by contract or statute. If the Optionee returns to Service immediately after the end of an approved leave of absence, vesting credit shall continue to accrue from that date of continued Service.

7. Disability of Optionee . If the Optionee’s Service terminates as a result of a disability (as determined by the Administrator), a portion of the Options granted to the Optionee shall vest and be exercisable on the date the disability is incurred. To determine the applicable number of Options, the Number of Options (as set forth in Exhibit A) shall be multiplied by the greater of (x) 50% or (y) the percentage of full months worked from the Grant Date until the date the disability is incurred (the “Disability Vesting Date”) over the total number of full months from the Grant Date until the last Vesting Date (as set forth in Exhibit A). Any remaining unvested portion of the Options shall be cancelled. If Optionee’s Service terminates as a result of a disability (as determined by the Administrator), Optionee may, but only within the period as set forth in Exhibit A from the date of termination of Service, exercise the Options to the extent Optionee was entitled to exercise them at the date of such termination of Service and in no event beyond the Expiration Date. To the extent that the Shares had not vested or Optionee was not entitled to exercise the Options at the date of termination of Service, or if Optionee does not exercise these Options within the time specified herein, the Options shall be cancelled by the Company.

8. Death of Optionee . In the event of termination of the Optionee’s Service due to death, a portion of the Options granted to the Optionee shall vest on the date of death. To determine the applicable number of Options, the Number of Options (as set forth in Exhibit A) shall be multiplied by the greater of (x) 50% or (y) the percentage of full months worked from the Grant Date until the date of death (the “Death Vesting Date”, and collectively, with the Vesting Date(s) set forth in Exhibit A, and the “Disability Vesting Date”, the “Vesting Date”) over the total number of full months from the Grant Date until the last Vesting Date (as set forth in Exhibit A). Any remaining portion of the Options that had not vested or that the Optionee was not entitled to exercise at the date of termination of Service shall be cancelled. In the event of termination of the Optionee’s Service due to death, the Options may be exercised at any time within the period as set forth in Exhibit A following the date of death by the personal

 

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2007 Stock Incentive Plan Option Award Agreement for International Optionees

 

representative of the Optionee’s estate or by a person to whom the Options were transferred pursuant to the Optionee’s will or in accordance with the laws of descent and distribution, but only to the extent the Options had vested and were exercisable as of the date of Optionee’s death and in no event beyond the Expiration Date.

9. Restriction on Transferability . Prior to exercise and delivery of the Shares, neither the Options, nor the Shares or any beneficial interest therein, may be sold, transferred, pledged, assigned, or otherwise alienated at any time. Any attempt to do so contrary to the provisions hereof shall be null and void. Notwithstanding the above, distribution can be made pursuant to will, the laws of descent and distribution, and if provided by the Administrator, intra-family transfer instruments, or to an inter vivos trust, or as otherwise provided by the Administrator. The terms of this Agreement shall be binding upon the executives, administrators, heirs, successors and assigns of the Optionee.

10. Tax Requirements . Regardless of any action the Company or the Optionee’s employer (the “Employer”) takes with respect to any or all income tax, social insurance, payroll tax, or other tax-related items related to the Optionee’s participation in the Plan and legally applicable to the Optionee (“Tax-Related Items”), the Optionee acknowledges that the ultimate liability for all Tax-Related Items is and remains the Optionee’s responsibility and may exceed the amount actually withheld by the Company or the Employer. The Optionee further acknowledges that the Company and/or the Employer (1) make no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Options, including, but not limited to, the grant, vesting, exercise/settlement of the Options, the issuance of Shares upon settlement of the Options, the subsequent sale of Shares acquired pursuant to such issuance and the receipt of any dividends and/or any dividend equivalents; and (2) do not commit to and are under no obligation to structure the terms of the grant or any aspect of the Options to reduce or eliminate the Optionee’s liability for Tax-Related Items or achieve any particular tax result.

Prior to any relevant taxable or tax withholding event, the Optionee will pay or make adequate arrangements satisfactory to the Company (in the Company’s sole discretion) to satisfy all withholding obligations. In this regard, in those cases where no such prior arrangement has been made (or where the amount of money provided is insufficient to satisfy the applicable obligations) the Optionee authorizes the Company and/or the Employer, in their discretion, to satisfy the obligations with regard to all Tax-Related Items by one or a combination of the following: (i) withholding from the Optionee’s wages or other cash compensation paid to the Optionee; (ii) withholding from proceeds of the sale of Shares acquired upon exercise of the Options through a sale arranged by the Company (on the Optionee’s behalf pursuant to this authorization); or (iii) withholding in Shares to be issued upon exercise of the Options.

If the Optionee’s obligation is satisfied as described in (ii) of this Section, the Company will endeavor to only sell only the number of Shares required to satisfy the Optionee’s obligations for Tax-Related Items; however the Optionee agrees that the Company may sell more Shares than necessary to cover the Tax-Related Item, and that in such event, the Company will reimburse the Optionee for the excess amount withheld, in cash and without interest. If the Optionee’s obligations are satisfied as described in (iii) of this Section, the Company shall withhold a number of Shares otherwise deliverable at exercise having a Fair Market Value

 

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2007 Stock Incentive Plan Option Award Agreement for International Optionees

 

sufficient to satisfy the statutory minimum (or such higher amount as is acceptable without adverse accounting consequences) of the Optionee’s estimated tax obligations. The Optionee is deemed to have been issued the full number of Shares subject to the exercise, notwithstanding that a number of the Shares are held back solely for the purpose of paying the Tax-Related Items due as a result of any aspect of the Optionee’s participation in the Plan.

The Optionee shall pay to the Employer any amount of Tax-Related Items that the Employer may be required to withhold as a result of the Optionee’s participation in the Plan that cannot be satisfied by the means previously described. The Company may refuse to issue or deliver the Shares or the proceeds of the sale of Shares, if the Optionee fails to comply with the Optionee’s obligations in connection with the Tax-Related Items.

Further, in consideration of the grant of the Options, no claim or entitlement to compensation or damages arises if, in satisfying the Optionee’s (and/or the Employer’s) obligation for Tax-Related Items, the Company and/or the Employer withholds an amount in excess of the amount legally required to be withheld, the Optionee irrevocably releases the Company and the Employer from any such claim that may arise; if, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen, then, by signing this Agreement, the Optionee shall be deemed irrevocably to have waived his or her entitlement to pursue such claim or damages.

11. No Employment Rights . The award of the Options pursuant to this Agreement shall not give the Optionee any right to continued service with the Company or an Affiliate and shall not interfere with the ability of the Employee to terminate the Optionee’s Service with the Company at any time with or without cause.

12. Severability . The provisions of this Agreement are severable and if all or any part of this Agreement or the Plan is declared by any court or governmental authority to be unlawful or invalid, such unlawfulness or invalidity shall not invalidate any portion of this Agreement or the Plan not declared to be unlawful or invalid. Any Section of this Agreement (or part of such a Section) so declared to be unlawful or invalid shall, if possible, be construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining lawful and valid.

13. Rights as Stockholder . The Optionee shall not have voting, dividend or any other rights as a stockholder of the Company with respect to the Options. Upon exercise of the Optionee’s Options into Shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), the Optionee will obtain full voting, dividend and other rights as a stockholder of the Company.

14. Administration . The Administrator shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation, and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpre