Lam Research Corporation
LAM RESEARCH CORP (Form: 10-Q, Received: 11/03/2015 16:49:49)
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 September 27, 2015

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 October 23, 2015, the Registrant had 158,392,493 shares of common stock outstanding.

 

 

 


Table of Contents

LAM RESEARCH CORPORATION

TABLE OF CONTENTS

 

         Page No.  
 

PART I. Financial Information

     1  

Item 1.

 

Financial Statements (Unaudited):

     1  
 

Condensed Consolidated Statements of Operations for the three months ended September 27, 2015 and September 28, 2014

     1  
 

Condensed Consolidated Statements of Comprehensive Income for the three months ended September 27, 2015 and September 28, 2014

     2  
 

Condensed Consolidated Balance Sheets as of September 27, 2015 and June 28, 2015

     3  
 

Condensed Consolidated Statements of Cash Flows for the three months ended September 27, 2015 and September 28, 2014

     4  
 

Notes to Condensed Consolidated Financial Statements

     5  

Item 2.

 

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

     20  

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     27  

Item 4.

 

Controls and Procedures

     28  
 

PART II. Other Information

     29  

Item 1.

 

Legal Proceedings

     29  

Item 1A.

 

Risk Factors

     29  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     40  

Item 3.

 

Defaults Upon Senior Securities

     40  

Item 4.

 

Mine Safety Disclosures

     40  

Item 5.

 

Other Information

     40  

Item 6.

 

Exhibits

     40  

Signatures

     41  

Exhibit Index

     42  


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

LAM RESEARCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

     Three Months Ended  
     September 27,
2015
    September 28,
2014
 

Revenue

   $ 1,600,043      $ 1,152,368   

Cost of goods sold

     877,680        646,829   
  

 

 

   

 

 

 

Gross margin

     722,363        505,539   

Research and development

     234,209        188,934   

Selling, general and administrative

     152,726        148,307   
  

 

 

   

 

 

 

Total operating expenses

     386,935        337,241   
  

 

 

   

 

 

 

Operating income

     335,428        168,298   

Other expense, net

     (27,121     (5,648
  

 

 

   

 

 

 

Income before income taxes

     308,307        162,650   

Income tax expense

     (19,628     (21,569
  

 

 

   

 

 

 

Net income

   $ 288,679      $ 141,081   
  

 

 

   

 

 

 

Net income per share:

    

Basic

   $ 1.82      $ 0.87   
  

 

 

   

 

 

 

Diluted

   $ 1.66      $ 0.80   
  

 

 

   

 

 

 

Number of shares used in per share calculations:

    

Basic

     158,352        161,685   
  

 

 

   

 

 

 

Diluted

     174,374        177,118   
  

 

 

   

 

 

 

Cash dividend declared per common share

   $ 0.30      $ 0.18   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

1


Table of Contents

LAM RESEARCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

(in thousands)

 

     Three Months Ended  
     September 27,
2015
    September 28,
2014
 

Net income

   $ 288,679      $ 141,081   
  

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

    

Foreign currency translation adjustment

     (7,822     (8,959

Cash flow hedges:

    

Net unrealized (losses) gains during the period

     (544     298   

Net losses (gains) reclassified into earnings

     341        (102
  

 

 

   

 

 

 
     (203     196   

Available-for-sale investments:

    

Net unrealized gains (losses) during the period

     2,748        (1,759

Net losses reclassified into earnings

     20        379   
  

 

 

   

 

 

 
     2,768        (1,380

Defined benefit plans, net change in unrealized component

     95        66   
  

 

 

   

 

 

 

Other comprehensive loss, net of tax

     (5,162     (10,077
  

 

 

   

 

 

 

Comprehensive income

   $ 283,517      $ 131,004   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

2


Table of Contents

LAM RESEARCH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

 

     September 27,
2015
    June 28,
2015
 
     (unaudited)     (1)  
ASSETS     

Cash and cash equivalents

   $ 1,744,325      $ 1,501,539   

Investments

     2,587,474        2,574,947   

Accounts receivable, less allowance for doubtful accounts of $4,855 as of September 27, 2015 and $4,890 as of June 28, 2015

     1,088,942        1,093,582   

Inventories

     916,683        943,346   

Prepaid expenses and other current assets

     178,557        157,435   
  

 

 

   

 

 

 

Total current assets

     6,515,981        6,270,849   

Property and equipment, net

     636,769        621,418   

Restricted cash and investments

     183,455        170,969   

Goodwill

     1,387,213        1,387,509   

Intangible assets, net

     688,951        728,140   

Other assets

     182,062        185,763   
  

 

 

   

 

 

 

Total assets

   $ 9,594,431      $ 9,364,648   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Trade accounts payable

   $ 254,331      $ 300,203   

Accrued expenses and other current liabilities

     733,233        649,438   

Deferred profit

     324,985        322,070   

Current portion of convertible notes and capital leases

     969,392        1,359,650   
  

 

 

   

 

 

 

Total current liabilities

     2,281,941        2,631,361   

Senior notes, convertible notes, and capital leases, less current portion

     1,400,615        1,001,382   

Income taxes payable

     247,448        202,930   

Other long-term liabilities

     127,607        184,023   
  

 

 

   

 

 

 

Total liabilities

     4,057,611        4,019,696   

Commitments and contingencies

    

Temporary equity, convertible notes

     178,665        241,808   

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, 158,101 shares at September 27, 2015 and 158,531 shares at June 28, 2015

     158        159   

Additional paid-in capital

     5,479,238        5,366,773   

Treasury stock, at cost, 100,975 shares at September 27, 2015 and 99,562 shares at June 28, 2015

     (4,395,980     (4,302,847

Accumulated other comprehensive loss

     (62,958     (57,796

Retained earnings

     4,337,697        4,096,855   
  

 

 

   

 

 

 

Total stockholders’ equity

     5,358,155        5,103,144   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 9,594,431      $ 9,364,648   
  

 

 

   

 

 

 

 

(1) Derived from audited financial statements

See Notes to Condensed Consolidated Financial Statements

 

3


Table of Contents

LAM RESEARCH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Three Months Ended  
     September 27,
2015
    September 28,
2014
 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 288,679      $ 141,081   

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

    

Depreciation and amortization

     70,590        67,885   

Deferred income taxes

     (5,563     3,186   

Equity-based compensation expense

     35,774        32,040   

Income tax benefit on equity-based compensation plans

     3,545        9,861   

Excess tax benefit on equity-based compensation plans

     (3,572     (10,404

Amortization of note discounts and issuance costs

     9,831        7,861   

Gain on sale of business

     —          (7,431

Other, net

     10,011        5,526   

Changes in operating assets and liabilities

     39,702        (108,444
  

 

 

   

 

 

 

Net cash provided by operating activities

     448,997        141,161   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Capital expenditures and intangible assets

     (49,454     (41,871

Business acquisitions, net of cash acquired

     —          (1,137

Purchases of available-for-sale securities

     (358,854     (337,100

Sales and maturities of available-for-sale securities

     330,651        346,745   

Proceeds from sale of business

     —          41,212   

Other

     (1,500     22   
  

 

 

   

 

 

 

Net cash (used for) provided by investing activities

     (79,157     7,871   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Principal payments on long-term debt and capital lease obligations

     (96     (107

Excess tax benefit on equity-based compensation plans

     3,572        10,404   

Treasury stock purchases

     (98,385     (308,422

Dividends paid

     (47,659     (29,240

Reissuance of treasury stock related to employee stock purchase plan

     19,245        16,919   

Proceeds from issuance of common stock

     377        4,609   

Other

     (300     —     
  

 

 

   

 

 

 

Net cash used for financing activities

     (123,246     (305,837
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (3,808     (2,194

Net increase (decrease) in cash and cash equivalents

     242,786        (158,999

Cash and cash equivalents at beginning of period

     1,501,539        1,452,677   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 1,744,325      $ 1,293,678   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

4


Table of Contents

LAM RESEARCH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 27, 2015

(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 28, 2015, which are included in the Company’s Annual Report on Form 10-K as of and for the year ended June 28, 2015 (the “2015 Form 10-K”). The Company’s reports on Form 10-K, Form 10-Q and Form 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 reports on Form 10-K, Form 10-Q and Form 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 will end June 26, 2016 and includes 52 weeks. The quarters ended September 27, 2015 (the “September 2015 quarter”) and September 28, 2014 (the “September 2014 quarter”) included 13 weeks.

NOTE 2 — RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB released Accounting Standards Update 2014-9 “Revenue from Contracts with Customers” to supersede nearly all existing revenue recognition guidance under GAAP. The core principle of the standard is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The new standard defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The Company is required to adopt this standard starting in the first quarter of fiscal year 2019 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within the standard; or (ii) retrospective with the cumulative effect of initially applying the standard recognized at the date of initial application and providing certain additional disclosures as defined per the standard. The Company has not yet selected a transition method, and is in the process of determining the impact that the new standard will have on its consolidated financial statements.

In April 2015, the FASB released Accounting Standards Update 2015-3 “Interest – Imputation of Interest.” The amendment requires that debt issuance costs related to recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The Company is required to adopt this standard starting in the first quarter of fiscal year 2017 and does not anticipate that implementation will have a material impact on its Consolidated Financial Statements.

NOTE 3 — EQUITY-BASED COMPENSATION PLANS

The Company has stock plans that provide for grants of equity-based awards to eligible participants, including stock options, restricted stock units (“RSUs”), and market-based performance RSUs (“market-based PRSUs”) of Lam Research common stock (“Common Stock”). An option is a right to purchase Common Stock at a set price. An RSU award is an agreement to issue a set number of shares of Common Stock at the time of vesting. The Company’s market-based PRSUs contain both a market condition and a service condition. 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.

 

5


Table of Contents

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

 

     Three Months Ended  
     September 27,
2015
     September 28,
2014
 
     (in thousands)  

Equity-based compensation expense

   $ 35,774      $ 32,040   

Income tax benefit related to equity-based compensation expense

   $ 6,097      $ 4,724   

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

Stock Options and RSUs

The Lam Research Corporation 2007 Stock Incentive Plan, as amended and 2011 Stock Incentive Plan, as amended (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. A summary of stock plan transactions is as follows:

 

     Options Outstanding      Restricted Stock Units Outstanding  
     Number of
Shares
     Weighted-
Average
Exercise Price
     Number of
Shares
     Weighted-
Average
Fair Market
Value

at Grant
 

June 28, 2015

     835,832      $ 37.44         4,954,088      $ 60.13   

Granted

     —         $ —           73,614      $ 68.99   

Exercised

     (14,718 )    $ 25.81         N/A         N/A   

Cancelled

     —         $ —           (21,964 )    $ 61.87   

Vested restricted stock

     N/A         N/A         (652,543 )    $ 40.63   
  

 

 

       

 

 

    

September 27, 2015

     821,114      $ 37.66         4,353,195      $ 63.20   
  

 

 

       

 

 

    

As of September 27, 2015, there was $2.5 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 1.9 years. As of September 27, 2015, there was $169.9 million of total unrecognized compensation expense related to unvested RSUs granted; that expense is expected to be recognized over a weighted-average remaining period of 1.9 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 Common Stock at a purchase price per share equal to the lower of 85% of the fair market value of Common Stock on the first or last day of the applicable purchase period. Each offering period generally lasts up to 12 months and includes up to three interim purchase dates.

Purchase rights under the 1999 ESPP were valued using the Black-Scholes option valuation model and the following weighted-average assumptions for the three and nine months ended September 27, 2015 and September 28, 2014:

 

     Three Months Ended  
     September 27,
2015
    September 28,
2014
 

Expected term (years)

     0.68        0.68   

Expected stock price volatility

     31.56     29.07

Risk-free interest rate

     0.18     0.07

Dividend Yield

     0.93     0.29

As of September 27, 2015, there was $14.0 million of unrecognized compensation expense related to the 1999 ESPP, which is expected to be recognized over a remaining period of approximately 11 months.

 

6


Table of Contents

NOTE 4 — OTHER EXPENSE, NET

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

 

     Three Months Ended  
     September 27,
2015
     September 28,
2014
 
     (in thousands)  

Interest income

   $ 5,760       $ 3,288   

Interest expense

     (24,661      (15,704

Gains (losses) on deferred compensation plan related assets, net

     (5,164      2,416   

Foreign exchange gains (losses), net

     (698      906   

Other, net

     (2,358      3,446   
  

 

 

    

 

 

 
   $ (27,121    $ (5,648
  

 

 

    

 

 

 

NOTE 5 — INCOME TAX EXPENSE

The Company recorded an income tax expense of $19.6 million for the three months ended September 27, 2015, which yielded an effective tax rate for the three months ended September 27, 2015 of approximately 6.4%. The difference between the U.S. federal statutory tax rate of 35% and the Company’s effective tax rate for the three months ended September 27, 2015 is primarily due to estimated higher income in lower tax jurisdictions and the recognition of a discrete tax benefit of the Altera court ruling, offset by the tax effect of non-deductible stock-based compensation and unrecognized tax benefits due to uncertain tax positions.

In July 2015, the United States Tax Court (the “Court”) issued an opinion favorable to Altera Corporation (“Altera”) with respect to Altera’s litigation with the Internal Revenue Service (“IRS”). The litigation relates to the treatment of stock-based compensation expense in an inter-company cost-sharing arrangement with Altera’s foreign subsidiary. In its opinion, the Court accepted Altera’s position of excluding stock based compensation from its inter-company cost-sharing arrangement. The Company has evaluated the impact of the court case and recorded a discrete tax benefit of $21.9 million in its consolidated financial statements for the three months ended September 27, 2015. However, the U.S Department of the Treasury has not withdrawn the requirement to include stock-based compensation from its regulations. The Company will continue to monitor this matter and related potential impacts to its financial statements.

NOTE 6 — NET INCOME PER SHARE

Basic net income per share is computed by dividing net income by the weighted-average number of shares of Common Stock outstanding during the period. Diluted net income per share is computed using the treasury stock method, for dilutive stock options, RSUs, and convertible notes. Dilutive shares outstanding include the effect of the 2016, 2018, and 2041 Notes. The following table reconciles the numerators and denominators of the basic and diluted computations for net income per share.

 

     Three Months Ended  
     September 27,
2015
     September 28,
2014
 
     (in thousands, except per share data)  

Numerator:

     

Net income

   $ 288,679       $ 141,081   
  

 

 

    

 

 

 

Denominator:

     

Basic average shares outstanding

     158,352         161,685   

Effect of potential dilutive securities:

     

Employee stock plans

     2,544         3,560   

Convertible notes

     13,120         11,867   

Warrants

     358         6   
  

 

 

    

 

 

 

Diluted average shares outstanding

     174,374         177,118   
  

 

 

    

 

 

 

Net income per share - basic

   $ 1.82       $ 0.87   
  

 

 

    

 

 

 

Net income per share - diluted

   $ 1.66       $ 0.80   
  

 

 

    

 

 

 

 

7


Table of Contents

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  
     September 27,
2015
     September 28,
2014
 
     (in thousands)  

Number of options and RSUs excluded

     93        —     

Diluted shares outstanding do not include any effect resulting from the note hedges associated with the Company’s 2016 or 2018 Notes as their impact would have been anti-dilutive.

NOTE 7 — 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 investments are classified as available-for-sale and consequently are recorded in the Consolidated Balance Sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of tax.

Fair Value

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

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

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

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

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

The Company’s primary financial instruments include its cash, cash equivalents, investments, restricted cash and investments, long-term investments, accounts receivable, accounts payable, long-term debt and capital leases, and derivative instruments. 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 11 for additional information regarding the fair value of the Company’s convertible notes.

 

8


Table of Contents

The following table sets forth the Company’s cash, cash equivalents, investments, restricted cash and investments, and other assets measured at fair value on a recurring basis as of September 27, 2015 and June 28, 2015:

 

     September 27, 2015  
                                (Reported Within)  
     Cost      Unrealized
Gain
     Unrealized
(Loss)
    Fair Value      Cash and
Cash
Equivalents
     Investments      Restricted
Cash &
Investments
     Other
Assets
 
     (in thousands)  

Cash

   $ 557,698      $ —         $ —        $ 557,698      $ 552,559       $ —         $ 5,139       $ —     

Level 1:

                      

Time Deposit

     174,933        —           —          174,933        42,105         —           132,828         —     

Money Market Funds

     1,148,450         —           —          1,148,450         1,148,450         —           —           —     

U.S. Treasury and Agencies

     335,120        404         (28 )     335,496        —           290,008         45,488         —     

Mutual Funds

     30,760         2,099         (525     32,334         —           —           —           32,334   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Level 1 Total

   $ 1,689,263      $ 2,503       $ (553 )   $ 1,691,213      $ 1,190,555       $ 290,008       $ 178,316       $ 32,334   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Level 2:

                      

Municipal Notes and Bonds

     666,992        1,122         (71 )     668,043        —           668,043         —           —     

U.S. Treasury and Agencies

     8,057         —           (82     7,975         —           7,975         —           —     

Government-Sponsored Enterprises

     44,381        44         (20 )     44,405        —           44,405         —           —     

Foreign Government Bonds

     45,562         67         (65     45,564         —           45,564         —           —     

Corporate Notes and Bonds

     1,381,861        1,397         (3,320 )     1,379,938        1,211         1,378,727         —           —     

Mortgage Backed Securities - Residential

     31,715         106         (255     31,566         —           31,566         —           —     

Mortgage Backed Securities - Commercial

     121,673        65         (552 )     121,186        —           121,186         —           —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Level 2 Total

   $ 2,300,241      $ 2,801       $ (4,365 )   $ 2,298,677      $ 1,211       $ 2,297,466       $ —         $ —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,547,202      $ 5,304       $ (4,918 )   $ 4,547,588      $ 1,744,325       $ 2,587,474       $ 183,455       $ 32,334   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     June 28, 2015  
                                (Reported Within)  
     Cost      Unrealized
Gain
     Unrealized
(Loss)
    Fair Value      Cash and
Cash
Equivalents
     Investments      Restricted
Cash &
Investments
     Other
Assets
 
     (in thousands)  

Cash

   $ 276,663      $ —         $ —        $ 276,663      $ 271,452       $ —         $ 5,211       $ —     

Level 1:

                      

Time Deposit

     177,567        —           —          177,567        44,738         —           132,829         —     

Money Market Funds

     1,177,875         —           —          1,177,875         1,177,875         —           —           —     

U.S. Treasury and Agencies

     349,009        72        (861 )     348,220        —           315,291         32,929         —     

Mutual Funds

     30,584         2,926         (47     33,463         —           —           —           33,463   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Level 1 Total

   $ 1,735,035      $ 2,998      $ (908 )   $ 1,737,125      $ 1,222,613       $ 315,291       $ 165,758       $ 33,463   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Level 2:

                      

Municipal Notes and Bonds

     659,550        429        (335 )     659,644        7,474         652,170         —           —     

U.S. Treasury and Agencies

     4,007         —           (4     4,003            4,003         

Government-Sponsored Enterprises

     53,612        2        (249 )     53,365           53,365         —           —     

Foreign Government Bonds

     50,336         31         (161     50,206            50,206         —           —     

Corporate Notes and Bonds

     1,329,587        685        (3,797 )     1,326,475           1,326,475         —           —     

Mortgage Backed Securities - Residential

     32,231         72         (292     32,011            32,011         —           —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage Backed Securities - Commercial

   $ 141,988      $ 44      $ (606 )   $ 141,426         $ 141,426       $ —         $ —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Level 2 Total

   $ 2,271,311       $ 1,263       $ (5,444   $ 2,267,130       $ 7,474       $ 2,259,656       $ —         $ —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,283,009      $ 4,261      $ (6,352 )   $ 4,280,918      $ 1,501,539       $ 2,574,947       $ 170,969       $ 33,463   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 months ended September 27, 2015 or September 28, 2014. Additionally, gross realized gains and gross realized (losses) from sales of investments were approximately $0.2 million and $(0.7) million, respectively, in the three months ended September 27, 2015 and $0.5 million and $(0.6) million, respectively, in the three months ended September 28, 2014.

 

9


Table of Contents

The following is an analysis of the Company’s cash, cash equivalents, investments, and restricted cash and investments in unrealized loss positions:

 

     September 27, 2015  
     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
 
     (in thousands)  

 

Municipal Notes and Bonds

   $ 36,289       $ (71   $ —         $ —        $ 36,289       $ (71

 

U.S. Treasury & Agencies

     87,628         (110     —           —          87,628         (110

 

Mutual Funds

     18,043         (525     —           —          18,043         (525

 

Government-Sponsored Enterprises

     6,805         (20     —           —          6,805         (20

 

Foreign Government Bonds

     21,102         (65     —           —          21,102         (65

 

Corporate Notes and Bonds

     759,706         (3,240     25,380         (80     785,086         (3,320

 

Mortgage Backed Securities - Residential

     18,279         (165     1,943         (90     20,222         (255

 

Mortgage Backed Securities - Commercial

     80,320         (398     20,162         (154     100,482         (552
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
  

 

$

 

1,028,172

 

  

   $ (4,594   $ 47,485       $ (324   $ 1,075,657       $ (4,918
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The amortized cost and fair value of cash equivalents, investments and restricted investments with contractual maturities are as follows as of September 27, 2015:

 

     Cost      Estimated
Fair

Value
 
     (in thousands)  

Due in one year or less

   $ 1,816,857      $ 1,817,160   

Due after one year through five years

     1,941,115         1,940,258   

Due in more than five years

     200,772        200,138   
  

 

 

    

 

 

 
   $ 3,958,744       $ 3,957,556   
  

 

 

    

 

 

 

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

Derivative Instruments and Hedging

The Company carries derivative financial instruments (“derivatives”) on its Consolidated Balance Sheets at their fair values. The Company enters into derivative contracts with financial institutions with the primary objective of reducing volatility of earnings and cash flows related to foreign currency exchange rate and interest rate fluctuations. The counterparties to these derivative contracts are large global financial institutions that the Company believes are creditworthy, and therefore, it does 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 and Korean won-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.

In addition, during fiscal year ended June 28, 2015, the Company entered into and settled a series of forward-starting interest rate swap agreements, with a total notional value of $375 million, to hedge against the variability of cash flows due to changes in the benchmark interest rate of fixed rate debt. These instruments were designated as cash flow hedges at inception and were settled in conjunction with the issuance of debt during the three months ended March 29, 2015. The effective portion of the contracts’ loss is included in accumulated other comprehensive (loss) and will amortize into income as the hedged item impacts earnings.

 

10


Table of Contents

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 material gains or losses during the three months ended September 27, 2015 or September 28, 2014 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. As of September 27, 2015, the Company had losses of $3.1 million accumulated in other comprehensive income, net of tax, related to interest rate contracts which it expects to reclassify from other comprehensive income into earnings over the next 9.5 years.

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 September 27, 2015, the Company had the following outstanding foreign currency forward contracts that were entered into under its cash flow and balance sheet hedge program:

 

     Notional Value  
     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

   $ —         $ 76,362      $ —         $ 60,791   

Swiss franc

     —           —           2,866         —     

Euro

     21,929        —           —           14,535   

Korean won

     4,048         —           16,837         —     

Taiwan dollar

     —           —           26,577        —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 25,977       $ 76,362       $ 46,280       $ 75,326   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

11


Table of Contents

The fair value of derivative instruments in the Company’s Consolidated Balance Sheets as of September 27, 2015 and June 28, 2015 were as follows:

 

     September 27, 2015      June 28, 2015  
     Fair Value of Derivative Instruments (Level 2)      Fair Value of Derivative Instruments (Level 2)  
     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
   $ 1,801       Accrued
liabilities
   $ 573       Prepaid expense
and other assets
   $ 3,388       Accrued
liabilities
   $ 957   

 

Derivatives not designated as hedging instruments:

                       

Foreign exchange forward contracts

   Prepaid expense
and other assets
     619       Accrued
liabilities
     3,080       Prepaid expense
and other assets
     8       Accrued
liabilities
     960   
     

 

 

       

 

 

       

 

 

       

 

 

 

Total derivatives

      $ 2,420          $ 3,653          $ 3,396          $ 1,917   
     

 

 

       

 

 

       

 

 

       

 

 

 

Under the master netting agreements with the respective counterparties to the Company’s derivative 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 on its balance sheet. As of September 27, 2015, the potential effect of rights of off-set associated with the above foreign exchange contracts would be an offset to assets and liabilities by $1.8 million, resulting in a net derivative asset of $0.7 million and net derivative liability of $1.9 million. As of June 28, 2015, the potential effect of rights of set-off associated with the above foreign exchange contracts would be an offset to both assets and liabilities by $1.9 million, resulting in a net derivative asset of $1.5 million. The Company is not required to pledge, nor is the Company entitled to receive, cash collateral for these derivative transactions.

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

 

          Three Months Ended September 27, 2015     Three Months Ended September 28, 2014  
          Effective Portion     Ineffective Portion
and Amount
Excluded from
Effectiveness
    Effective Portion     Ineffective Portion
and Amount
Excluded from
Effectiveness
 
     Location of Gain (Loss)
Recognized in or Reclassified
into Income
   (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    $ (69 )   $ (1,378   $ 32      $ 3,024     $ 469      $ 42   

Foreign Exchange Contracts

   Cost of goods sold      (415     1,505        (22     (2,023     (276     (6

Foreign Exchange Contracts

   Selling, general, and
administrative
     (173 )     258        (7     (866 )     (105     (1

Interest Rate Contracts

   Other expense, net      —          (94     —          —          —          —     
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
      $ (657 )   $ 291      $ 3      $ 135     $ 88      $ 35   
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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  
          September 27, 2015      September 28, 2014  
Derivatives Not Designated as Hedging Instruments:    Location of Gain
Recognized in Income
   Gain Recognized
in Income
     Gain Recognized
in Income
 
          (in thousands)  

Foreign Exchange Contracts

   Other income    $ 6,007       $ 968   

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, 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, Moody’s Investor Services, or Fitch Ratings. To ensure diversification and minimize concentration, the Company’s policy limits the amount of credit exposure with any one financial institution or commercial issuer.

 

12


Table of Contents

The Company is exposed to credit losses in the event of nonperformance by counterparties on foreign currency forward hedge contracts that are used to mitigate the effect of exchange rate fluctuations, and on contracts related to 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 condition and payment performance. In general, the Company does not require collateral on sales.

NOTE 8 — INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out method) or market. System shipments to Japanese customers, for which 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:

 

     September 27,
2015
     June 28,
2015
 
     (in thousands)  

Raw materials

   $ 553,740       $ 566,645   

Work-in-process

     132,134         141,264   

Finished goods

     230,809         235,437   
  

 

 

    

 

 

 
   $ 916,683       $ 943,346   
  

 

 

    

 

 

 

NOTE 9 — GOODWILL AND INTANGIBLE ASSETS

Goodwill

The balance of Goodwill is approximately $1.4 billion as of September 27, 2015 and June 28, 2015. Of the $1.4 billion goodwill balance, $61 million is tax deductible and the remaining balance is not tax deductible due to purchase accounting and applicable foreign law.

Intangible Assets

The following table provides the Company’s intangible assets as of September 27, 2015:

 

     Gross      Accumulated
Amortization
     Net  
     (in thousands)  

Customer relationships

   $ 615,437       $ (251,410    $ 364,027   

Existing technology

     643,803         (335,090      308,713   

Patents

     33,553         (26,964      6,589   

Other intangible assets

     35,914         (35,392      522   
  

 

 

    

 

 

    

 

 

 

Intangible assets subject to amortization

     1,328,707         (648,856      679,851   

Development rights

     9,100            9,100   
  

 

 

       

 

 

 

Intangible assets not subject to amortization

     9,100            9,100   
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 1,337,807       $ (648,856    $ 688,951   
  

 

 

    

 

 

    

 

 

 

 

13


Table of Contents

The following table provides the Company’s intangible assets as of June 28, 2015:

 

     Gross      Accumulated
Amortization
     Net  
     (in thousands)  

Customer relationships

   $ 615,490       $ (234,968    $ 380,522   

Existing technology

     643,919         (313,071      330,848   

Patents

     33,553         (26,431      7,122   

Other intangible assets

     35,914         (35,366      548   
  

 

 

    

 

 

    

 

 

 

Intangible assets subject to amortization

     1,328,877         (609,836      719,040   

Development rights

     9,100            9,100   
  

 

 

       

 

 

 

Intangible assets not subject to amortization

     9,100            9,100   
  

 

 

    

 

 

    

 

 

 

Total intangible assets

   $ 1,337,976       $ (609,836    $ 728,140   
  

 

 

    

 

 

    

 

 

 

The Company recognized $39.0 million and $39.2 million in intangible asset amortization expense during the three months ended September 27, 2015 and September 28, 2014, respectively.

The estimated future amortization expense of intangible assets, excluding those with indefinite lives, as of September 27, 2015 was as follows:

 

Fiscal Year

   Amount  
     (in thousands)  

2016 (9 months)

   $ 117,042   

2017

     154,139   

2018

     152,935   

2019

     114,864   

2020

     49,981   

Thereafter

     90,890   
  

 

 

 
   $ 679,851   
  

 

 

 

NOTE 10 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following:

 

     September 27,
2015
     June 28,
2015
 
     (in thousands)  

Accrued compensation

   $ 326,638       $ 314,516   

Warranty reserves

     98,968         93,209   

Income and other taxes payable

     72,506         39,275   

Dividend payable

     47,896         47,659   

Other

     187,225         154,779   
  

 

 

    

 

 

 
   $ 733,233       $ 649,438   
  

 

 

    

 

 

 

NOTE 11 — LONG-TERM DEBT AND OTHER BORROWINGS

Convertible Senior Notes

In May 2011, the Company issued and sold $450 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 million in aggregate principal amount of 1.25% Convertible Senior Notes due May 2018 (the “2018 Notes”) at par. The Company pays cash interest at an annual rate of 0.50% 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 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 “Convertible Notes”). The Company pays cash interest at an annual rate of 2.625%, on a semi-annual basis on May 15 and

 

14


Table of Contents

November 15 of each year on the 2041 Notes. The 2041 Notes also have a contingent interest payment provision that may require the Company to pay additional interest, up to 0.60% per year, based on certain thresholds, beginning with the semi-annual interest payment on May 15, 2021, and upon the occurrence of certain events, as outlined in the indenture governing the 2041 Notes.

The Company separately accounts for the liability and equity components of the Convertible Notes. The initial debt components of the Convertible Notes were valued based on the present value of the future cash flows using the Company’s borrowing rate at the date of the issuance or assumption for similar debt instruments without the conversion feature, which equals the effective interest rate on the liability component disclosed in the following table, respectively.

Under certain circumstances, the Convertible Notes may be converted into shares of the Company’s Common Stock. The number of shares each debenture is convertible into is based on conversion rates, disclosed in the following table. The conversion rates are adjusted for certain corporate events, including dividends on the Company’s Common Stock. The Company will settle any conversion of the Convertible Notes in cash up to the face value, and any amount in excess of face value will be settled in Common Stock.

At September 27, 2015, the market value of the Company’s Common Stock was greater than 130% of the 2041 Notes conversion prices for 20 or more of the 30 consecutive trading days preceding the quarter end. As a result, the 2041 Notes are convertible at the option of the bondholder. The carrying amount of the 2041 Notes was classified in current liabilities and a portion of the equity component, representing the unamortized debt discount, was classified in temporary equity on the Company’s Consolidated Balance Sheets. Upon closure of the conversion period, 2041 Notes not converted will be reclassified back into noncurrent liabilities, and the temporary equity will be reclassified into permanent equity. The conversion window closed for the 2016 Notes and 2018 Notes as of September 27, 2015. As such, the 2018 Notes were reclassified into noncurrent liabilities, and the temporary equity for the 2016 Notes and 2018 Notes was reclassified back into permanent equity.

As of September 27, 2015 and June 28, 2015, the Convertible Notes consisted of the following:

 

     September 27, 2015     June 28, 2015  
     2016 Notes     2018 Notes     2041 Notes     2016 Notes      2018 Notes      2041 Notes  
     (in thousands, except years, percentages, conversion rate, and conversion price)  

 

Carrying value, long-term

   $ —        $ 406,189      $ —        $ —         $ —         $ —     

 

Carrying value, current portion

     439,583        —          521,270        435,493         402,320         520,313   

Unamortized discount

     10,417        43,811        178,665        14,507         47,680         179,622   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Principal amount

   $ 450,000      $ 450,000      $ 699,935      $ 450,000       $ 450,000       $ 699,935   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

Carrying amount of permanent equity component, net of tax

   $ 76,230      $ 104,895      $ 149,444      $ 61,723       $ 57,215       $ 148,487   

Carrying amount of temporary equity component, net of tax

   $ —        $ —        $ 178,665      $ 14,507       $ 47,680       $ 179,622   

 

Remaining amortization period (years)

     0.6        2.6        25.6           

 

Effective interest rate on liability component

     4.29     5.27     4.28        

Fair Value of Notes (Level 2)

   $ 498,375      $ 545,625      $ 1,362,241           

Conversion rate (shares of common stock per $1,000 principal amount of notes)

     16.1481        16.1481        28.9797           

Conversion price (per share of common stock)

   $ 61.93      $ 61.93      $ 34.51           

If-converted value in excess of par value

   $ 8,381      $ 8,381      $ 579,574           

Estimated share dilution using average quarterly stock price $73.74/share

     1,164        1,164        10,792           

Convertible Note Hedges and Warrants

Concurrent with the issuance of the 2016 Notes and 2018 Notes, the Company purchased a convertible note hedge and sold warrants. At expiration, the Company may, at its option, elect to settle the warrants on a net share basis. As of September 27, 2015, the warrants had not been exercised and remained outstanding. The exercise price is adjusted for certain corporate events, including dividends on the Company’s Common Stock.

In conjunction with the convertible note hedge, counterparties agreed to sell to the Company shares of Common Stock equal to the number of shares issuable upon conversion of the 2016 Notes and 2018 Notes in full. The convertible note hedge transactions will be settled in net shares and will terminate upon the earlier of the maturity date or the first day none of the respective notes remain 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 and 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 2016 Notes and 2018 Notes. The exercise price is adjusted for certain corporate events, including dividends on the Company’s Common Stock.

 

15


Table of Contents

The following table presents the details of the warrants and convertible note hedge arrangements as of September 27, 2015:

 

     2016 Notes      2018 Notes  
     (shares in thousands)  

Warrants:

     

Underlying shares

     7,267         7,267   

Estimated share dilution using average quarterly stock price $73.74/share

     358        —     

Exercise price

   $ 70.11       $ 74.78   

Expiration date range

    
 
August 15 -
October 21, 2016
  
  
    
 
August 15 -
October 23, 2018
  
  

 

Convertible Note Hedge:

     

 

Number of shares available from counterparties

     7,267        7,267   

Exercise price

   $ 61.93      $ 61.93   

Senior Notes

On March 12, 2015, the Company completed a public offering of $500 million aggregate principal amount of the Company’s Senior Notes due March 2020 (the “2020 Notes”) and $500 million aggregate principal amount of the Company’s Senior Notes due March 2025 (the “2025 Notes” and, together with the 2020 Notes, the “Senior Notes”). The Company will pay interest at an annual rate of 2.75% and 3.80%, respectively, on the 2020 Notes and 2025 Notes, on a semi-annual basis on March 15 and September 15 of each year, beginning September 15, 2015.

The Company may redeem the Senior Notes at a redemption price equal to 100% of the principal amount of such series (“par”), plus a “make whole” premium as described in the indenture in respect of the Senior Notes and accrued and unpaid interest before February 15, 2020, for the 2020 Notes and before December 15, 2024, for the 2025 Notes. The Company may redeem the Senior Notes at par, plus accrued and unpaid interest at any time on or after February 15, 2020 for the 2020 Notes and on or after December 24, 2024 for the 2025 Notes. In addition, upon the occurrence of certain events, as described in the indenture, the Company will be required to make an offer to repurchase the Senior Notes at a price equal to 101% of the principal amount of the Senior Notes, plus accrued and unpaid interest.

As of September 27, 2015 and June 28, 2015 the Senior Notes consisted of the following:

 

     September 27, 2015      June 28, 2015  
     2020 Notes      2025 Notes      2020 Notes      2025 Notes  
     (in thousands, except years)  

Carrying value, long-term

   $ 497,200       $ 496,966       $ 497,053       $ 496,907   

Unamortized discount

     2,800         3,034         2,947         3,093   
  

 

 

    

 

 

    

 

 

    

 

 

 

Principal amount

   $ 500,000       $ 500,000       $ 500,000       $ 500,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Remaining amortization period (years)

     4.5         9.5         

Fair Value of Notes (Level 2)

   $ 488,460       $ 486,870         

 

16


Table of Contents

Interest Cost

The following table presents the amount of interest cost recognized relating to both the contractual interest coupon and amortization of the debt discount, issuance costs, and effective portion of interest rate contracts with respect to the Senior Notes and the Convertible Notes during the three months ended September 27, 2015 and September 28, 2014.

 

     Three Months Ended  
     September 27,      September 28,  
     2015      2014  
     (in thousands)  

Contractual interest coupon

   $ 14,451       $ 6,562   

Amortization of interest discount

     9,122         8,509   

Amortization of issuance costs

     652         591   

Amortization of interest rate contract

     94         —     
  

 

 

    

 

 

 

Total interest cost recognized

   $ 24,319       $ 15,662   
  

 

 

    

 

 

 

Revolving Credit Facility

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

Interest on amounts borrowed under the credit facility is, at the Company’s option, based on (i) a base rate, defined as the greatest of (a) prime rate, (b) Federal Funds rate plus 0.5%, or (c) one-month LIBOR plus 1.0%, plus a spread of 0.0% to 0.5%, or (ii) LIBOR plus a spread of 0.9% to 1.5%, in each case as the applicable spread is determined based on the rating of the Company’s non-credit enhanced, senior unsecured long-term debt. Principal and any accrued and unpaid interest is due and payable upon maturity. Additionally, the Company will pay the lenders a quarterly commitment fee that varies based on the Company’s rating described above. The credit facility contains certain restrictive covenants including maintaining a total consolidated indebtedness to consolidated capitalization ratio of no more than 0.5 to 1.0 and maintaining unrestricted or unencumbered cash and investments of no less than $1.0 billion. As of September 27, 2015, the Company had no borrowings outstanding under the credit facility and was in compliance with all financial covenants.

NOTE 12 — COMMITMENTS AND CONTINGENCIES

Operating Leases and Related Guarantees

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

The Company has operating leases regarding certain improved properties in Fremont and Livermore, California (the “Operating Leases”). The Company was required to maintain cash collateral in an aggregate of approximately $132.8 million in separate interest-bearing accounts, and marketable securities collateral in an aggregate of approximately $45.5 million, as security for the Company’s obligations. These amounts are recorded with other restricted cash and investments in the Company’s Consolidated Balance Sheet as of September 27, 2015.

During the term of the Operating Leases and when the terms of the Operating Leases expire, the property subject to those Operating Leases may be remarketed. The Company has guaranteed to the lessor that each property will have a certain minimum residual value. The aggregate guarantee made by the Company under the Operating Leases is generally no more than approximately $191.2 million; however, under certain default circumstances, the guarantee with regard to an Operating Lease may be 100% of the lessor’s aggregate investment in the applicable property, which in no case will exceed $220 million, in the aggregate.

Other Guarantees

The Company has issued certain indemnifications to its lessors for taxes and general liability under some of its agreements. The Company has entered into certain insurance contracts that are intended to limit its exposure to such indemnifications. As of September 27, 2015, 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.

 

17


Table of Contents

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 September 27, 2015, the maximum potential amount of future payments that it could be required to make under these arrangements and letters of credit was $15.3 million. The Company does 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  
     September 27,
2015
     September 28,
2014
 
     (in thousands)  

Balance at beginning of period

   $ 93,209       $ 69,385   

Warranties issued during the period

     34,203         24,536   

Settlements made during the period

     (28,458      (24,068

Changes in liability for pre-existing warranties

     14         599   
  

 

 

    

 

 

 

Balance at end of period

   $ 98,968       $ 70,452   
  

 

 

    

 

 

 

Legal proceedings

While the Company is not currently a party to any legal proceedings that it believes material, the Company is either a defendant or plaintiff in various actions that have arisen from time to time in the normal course of business, including intellectual property claims. The Company accrues for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued, the Company believes that the amount of any such additional loss would be immaterial to the Company’s business, financial condition, and results of operations.

NOTE 13 — STOCK REPURCHASE PROGRAM

On April 29, 2014, the Board of Directors authorized the repurchase of up to $850 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 28, 2015

            $ 316,587   

Quarter ended September 27, 2015

     1,205       $ 87,493       $ 72.61       $ 229,094   

In addition to shares repurchased under the Board-authorized repurchase program shown above, during the three months ended September 27, 2015, the Company acquired 208,624 shares at a total cost of $15.3 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 plan.

 

18


Table of Contents

NOTE 14 — 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 28, 2015

   $ (35,125   $ (2,859   $ (3,761   $ (16,051   $ (57,796

Other comprehensive income (loss) before reclassifications

     (7,707     (544     2,748        95        (5,408

(Gains) losses reclassified from accumulated other comprehensive income (loss) to net income

     (115     341  (1)       20  (2)       —          246   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

   $ (7,822   $ (203   $ 2,768      $ 95      $ (5,162
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 27, 2015

   $ (42,947   $ (3,062   $ (993   $ (15,956   $ (62,958
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Amount of after tax gain reclassified from AOCI into net income located in revenue: $1,225 gain; cost of goods sold: $1,312 loss; selling, general and administrative expenses: $195 loss; and other income and expense: $59 Loss
(2) Amount of after tax gain reclassified from accumulated other comprehensive income into net income located in other expense, net

NOTE 15 – BUSINESS COMBINATIONS

On October 20, 2015, the Company entered into an Agreement and Plan of Merger and Reorganization with KLA-Tencor Corporation (“KLA-Tencor”), under which KLA-Tencor will ultimately become (assuming satisfaction or waiver of all conditions to closing) a direct or indirect wholly-owned subsidiary of Lam Research. Under the terms of the agreement, the Company will acquire KLA-Tencor for approximately $5.0 billion in aggregate cash consideration and approximately 80 million shares of Common Stock, valued at approximately $5.6 billion as of October 20, 2015. Following the merger, KLA-Tencor stockholders are expected to own approximately 32% of the combined company on a pro forma basis.

Each KLA-Tencor stockholder may elect to receive, for all shares of KLA-Tencor common stock they hold at the closing of the transaction, one of the following, determined on a per-share basis: (1) mixed consideration , consisting of both (i) 0.5 of a share of Common Stock and (ii) $32.00 in cash; (2) all-stock consideration, consisting of a number of shares of Common Stock equal to (i) 0.5 plus (ii) the quotient of $32.00 divided by the five-day volume weighted average price of Common Stock over a five trading day period ending shortly before the closing of the transaction (“the five day VWAP”); or (3) all-cash consideration, consisting of (i) $32.00 plus (ii) the product of 0.5 times the 5-day VWAP. KLA-Tencor stockholders who do not make an election will be deemed to have elected the mixed consideration. All-cash and all-stock elections will be subject to proration in accordance with the terms of the merger agreement. The stock component of the consideration is expected to represent a tax-free exchange. Completion of the transaction is subject to certain closing conditions, including but not limited to approval of the transaction by KLA-Tencor’s stockholders, approval of the issuance of Common Stock by the Company’s Stockholders, receipt of all required regulatory approvals, and other customary conditions.

The Company intends to fund the cash consideration from cash on hand from the combined companies and approximately $3.9 billion in debt financing, the Company has obtained a commitment for $4.2 billion of bridge financing from Goldman Sachs Bank USA and Goldman Sachs Lending Partners LLC. The Company intends to provide a direct, unconditional guarantee of KLA-Tencor’s senior notes, upon the closing, and plans to repay KLA-Tencor’s term loan from the proceeds of the new debt financing.

 

19


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

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

With the exception of historical facts, the statements contained in this discussion are forward-looking statements, which are subject to the safe harbor provisions created by the Private Securities Litigation Reform Act of 1995. Certain, but not all, of the forward-looking statements in this report are specifically identified as forward-looking, by use of phrases and words such as “believe,” “anticipate,” “expect,” “may,” “should,” “could” and other future-oriented terms. The identification of certain statements as “forward-looking” is not intended to mean that other statements not specifically identified are not forward-looking. Forward-looking statements include, but are not limited to, statements that relate to: our ability to close the acquisition of KLA-Tencor; 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 and end user requirements, and our ability to satisfy those requirements; our ability to address critical steps in the fabrication process; our ability to develop technologies and productivity solutions that benefit our customers, and to facilitate our customers’ ability to meet more stringent performance or design standards; customer capital spending and their demand for our products; the reliability of indicators of change in customer spending and demand; the effect of variability in our customers’ business plans on demand for our equipment and services; changes in demand for our products and in our market share resulting from, among other things, increases in our customers’ proportion of capital expenditures (with respect to certain technology inflections); our ability to defend our market share and to gain new market share; factors that affect our tax rates; anticipated growth in the industry and the total market for wafer-fabrication equipment and our growth relative to such growth; levels of research and development expenditures; outsourced activities; the estimates we make, and the accruals we record, in order to implement our critical accounting policies (including but not limited to the adequacy of prior tax payments, future tax liabilities and the adequacy of our accruals relating to them); our access to capital markets; our intention to pay quarterly dividends and the amounts thereof, if any; our ability and intention to repurchase our shares; our ability to manage and grow our cash position; and the sufficiency of our financial resources to support future business activities (including but not limited to operations, investments, debt service requirements and capital expenditures). Such statements are based on current expectations and are subject to risks, uncertainties, and changes in condition, significance, value, and effect, including without limitation those discussed below under the heading “Risk Factors” within Part II Item 1A and elsewhere in this report and other documents we file from time to time with the Securities and Exchange Commission (“SEC”), such as our annual report on Form 10-K for the year ended June 28, 2015 (our “2015 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.

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

For a full understanding of our financial position and results of operations for the three months ended September 27, 2015, 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 2015 Form 10-K.

EXECUTIVE SUMMARY

Lam Research has been an innovative supplier of wafer fabrication equipment and services to the semiconductor industry for more than 35 years. Our customers include semiconductor manufacturers that make memory, microprocessors, and other logic integrated circuits for a wide range of electronics; including cell phones, computers, tablets, storage devices, and networking equipment.

Our market-leading products are designed to help our customers build the smaller, faster, and more powerful devices that are necessary to power the capabilities required by end users. The process of integrated circuits fabrication consists of a complex series of process and preparation steps, and our product offerings in deposition, etch, and clean address a number of the most critical steps in the fabrication process. We leverage our expertise in semiconductor processing to develop technology and/or 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 characterized by rapid changes in demand. This cyclicality has been mitigated in recent years by market demands and consolidation among our customers. With a reduced number of customers, variability in their business plans may lead to changes in demand for Lam’s equipment and services. 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.

 

20


Table of Contents

Demand for our products has been strong throughout calendar year 2015 as semiconductor device manufacturers made capacity and technology investments. Technology inflections in our industry, including FinFET transistors, 3D NAND, multiple patterning and advanced packaging have led to an increase in the deposition and etch market sizes. The capacity and technology spending of our customers have contributed to increased revenue in the 2015 calendar year as compared to the 2014 calendar year. We believe that, over the longer term, demand for our products should increase as the proportion of customers’ capital expenditures rises in these technology inflection areas, and we continue to gain market share.

In October, as further described in Note 15 to our Consolidated Financial Statements, we announced that we had entered into an agreement to acquire KLA-Tencor Corporation.

The following summarizes certain key financial information for the periods indicated below:

 

     Three Months Ended  
     September 27,
2015
    June 28,
2015
    September 28,
2014
 
     (in thousands, except per share data and
percentages)
 

Revenue

   $ 1,600,043      $ 1,481,370      $ 1,152,368   

Gross margin

   $ 722,363      $ 641,538      $ 505,539   

Gross margin as a percent of total revenue

     45.1     43.3     43.9

Total operating expenses

   $ 386,935      $ 450,503      $ 337,241   

Net income

   $ 288,679      $ 131,271      $ 141,081   

Diluted net income per share

   $ 1.66      $ 0.74      $ 0.80   

In the September 2015 quarter, revenue increased compared to the quarter ended June 28, 2015 (the “June 2015 quarter”), primarily as a result of strong memory customers’ spending. Gross margin as a percent of revenue in the September 2015 quarter increased as compared to the June 2015 quarter due to changes in customer concentration and new product mix. The June 2015 quarter also included a $10 million impairment charge of a long lived asset. Operating expenses in the September 2015 quarter decreased compared to the June 2015 quarter related to a $79 million goodwill impairment charge for our single-wafer clean reporting unit in the June 2015 quarter. We also incurred restructuring charges for the clean reporting unit in the September 2015 quarter of $7 million.

Our cash and cash equivalents, investments, and restricted cash and investments balances increased to approximately $4.5 billion as of September 27, 2015 as compared to $4.2 billion as of June 28, 2015. Cash generated by operations was approximately $449 million during the September 2015 quarter. We used cash during the September 2015 quarter to repurchase $98 million of our shares, purchase $49 million of capital expenditures, and pay $48 million of dividends to our stockholders. Employee headcount increased as of September 27, 2015 as compared to June 28, 2015 by approximately 100 people to approximately 7,300 people.

RESULTS OF OPERATIONS

Shipments

 

     Three Months Ended  
     September 27,
2015
    June 28,
2015
    September 28,
2014
 

Shipments (in millions)

   $ 1,579      $ 1,616      $ 1,111   

Taiwan

     26     24     21

Japan

     17     20     11

Korea

     13     23     16

China

     25     12     8

United States

     8     13     25

Southeast Asia

     8     4     11

Europe

     3     4     8

Shipments for the September 2015 quarter were consistent with the June 2015 quarter level and increased 42% compared to the September 2014 quarter, reflecting changes in customer demand for semiconductor equipment. The memory market was strong in the September 2015 quarter, as compared to prior quarters, driven by the industry’s technology inflections.

 

21


Table of Contents

The percentages of system shipments to each of the markets we serve were as follows for the periods presented:

 

     Three Months Ended  
     September 27,
2015
    June 28,
2015
    September 28,
2014
 

Memory

     72     60     44

Foundry

     18     26     45

Logic/integrated device manufacturing

     10     14     11

Revenue

 

     Three Months Ended  
     September 27,
2015
    June 28,
2015
    September 28,
2014
 

Revenue (in millions)

   $ 1,600      $ 1,481     $ 1,152   

 

Taiwan

     28     19     18

Japan

     18     14 %     10

Korea

     17     28     19

China

     16     17 %     9

United States

     9     14     28

Southeast Asia

     8     4 %     9

Europe

     4     4     7

Revenue for the September 2015 quarter increased 8% compared to the June 2015 quarter, and increased 39% as compared to the September 2014 quarter, reflecting an increase in investments by our customers. Our deferred revenue balance remained stable at $517 million as of September 27, 2015 compared to $518 million as of June 28, 2015. Our deferred revenue balance does not include system shipments to Japanese customers, for which title does not transfer until customer acceptance. Shipments to Japanese customers are classified as inventory at cost until the time of acceptance. The estimated future revenue value from shipments to Japanese customers was approximately $147 million as of September 27, 2015 and $164 million as of June 28, 2015.

Gross Margin

 

     Three Months Ended  
     September 27,
2015
    June 28,
2015
    September 28,
2014
 
     (in thousands, except percentages)  

Gross margin

   $ 722,363      $ 641,538      $ 505,539   

Percent of total revenue

     45.1     43.3     43.9

The improvement in gross margin as a percentage of revenue during the September 2015 quarter as compared to the June 2015 quarter was due to changes in customer concentration and a favorable product mix. The June 2015 quarter also included a $10 million impairment charge of a long lived asset.

Gross margin as a percentage of revenue during the September 2015 quarter increased when compared to the September 2014 quarter primarily due to improved factory efficiency and field absorption, as well as a favorable product mix.

Research and Development

 

     Three Months Ended  
     September 27,
2015
    June 28,
2015
    September 28,
2014
 
     (in thousands, except percentages)  

Research & development (“R&D”)

   $ 234,209      $ 221,675      $ 188,934   

Percent of total revenue

     14.6     15.0     16.4

We continued to make significant R&D investments focused on leading-edge deposition, plasma etch, single-wafer clean and other semiconductor manufacturing requirements. The increased R&D spending from the June 2015 quarter to the September 2015 quarter reflects the continued spending on technologies for the industry inflection points. The increased spending in the September 2015 quarter was primarily due to a $12 million increase in supplies and a $4 million charge related to the clean reporting unit restructuring activities.

 

22


Table of Contents

The increase in R&D expenses during the September 2015 quarter compared to the same period in the prior year was mainly due to a $16 million increase in employee compensation from higher headcount, reflecting an increase in our product development efforts, a $14 million increase in supplies, a $4 million increase in facility and information technology related spending to support R&D, and a $4 million restructuring charge for the clean reporting unit.

Selling, General and Administrative

 

     Three Months Ended  
     September 27,
2015
    June 28,
2015
    September 28,
2014
 
     (in thousands, except percentages)  

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

   $ 152,726      $ 149,384      $ 148,307   

Percent of total revenue

     9.5     10.1     12.9

The increase in SG&A expenses during the September 2015 quarter compared to the June 2015 quarter and to the September 2014 quarter was mainly due to a $3 million clean reporting unit restructuring charge.

Other Expense, Net

Other expense, net consisted of the following:

 

     Three Months Ended  
     September 27,
2015
     June 28,
2015
     September 28,
2014
 
     (in thousands)  

Interest income

   $ 5,760       $ 6,856       $ 3,288   

Interest expense

     (24,661      (24,554      (15,704

Gains (losses) on deferred compensation plan related assets, net

     (5,164      1,246         2,416   

Foreign exchange gains (losses), net

     (698      (7      906   

Other, net

     (2,358      (3,895      3,446   
  

 

 

    

 

 

    

 

 

 
   $ (27,121    $ (20,354    $ (5,648
  

 

 

    

 

 

    

 

 

 

Interest income decreased in the September 2015 quarter, as compared to the June 2015 quarter, as a result of lower yield. Interest income increased in the September 2015 quarter, as compared to the September 2014 quarter, primarily as a result of higher cash and investment balances.

Interest expense increased in the September 2015 quarter, as compared to the September 2014 quarter, primarily due to the $1 billion Senior Note issuance in the March 2015 quarter.

We recognized losses on assets that are related to obligations under our deferred compensation plan in the September 2015 quarter, as compared to gains in the June 2015 and September 2014 quarters, due to changes in the market value of securities in the portfolio.

Foreign exchange losses in the September 2015 quarter were related to volatility in the foreign currency market and its impact on un-hedged portions of the balance sheet exposures.

Other, net in the September 2015 quarter decreased as compared to the June 2015 quarter primarily due to a settlement of matters relating to certain investment transactions in June 2015 quarter. Other, net was higher during the September 2014 quarter primarily due to a net gain associated with the disposition of Peter Wolters.

 

23


Table of Contents

Income Tax Expense

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

 

     Three Months Ended  
     September 27,
2015
    June 28,
2015
    September 28,
2014
 
     (in thousands, except percentages)  

 

Income tax expense

   $ 19,628      $ 39,411      $ 21,569   

Effective tax rate

     6.4     23.1     13.3

The decrease in the effective tax rate for the September 2015 quarter compared to the June 2015 and September 2014 quarters was primarily due to estimated higher income in lower tax jurisdictions along with the tax benefit of the Altera court ruling. Please refer to Note 5 to the Condensed Consolidated Financial Statements for the discussion of the Altera court ruling.

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 7 of the Notes to Consolidated Financial Statements in our 2015 Form 10-K.

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 base our estimates and assumptions on historical experience and on various other assumptions we believe to be applicable and evaluate them on an ongoing basis to ensure they remain reasonable under current conditions. Actual results could differ significantly from those estimates, which could have a material impact on our business, results of operations, and financial condition.

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 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 or are otherwise released from our 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 using their relative selling prices, based on our best estimate of selling price. Our sales arrangements do not include a general right of return. The maximum revenue recognized 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, deferred revenue and deferred costs are recorded in deferred profit on our Consolidated Balance Sheet.

Inventory Valuation: Inventories are stated at the lower of cost or market using standard costs that approximate actual costs on a first-in, first-out basis. 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 at the physical transfer of the products to the freight carriers. Transfer of title for shipments to Japanese customers occurs at the time of customer acceptance.

 

24


Table of Contents

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 requirement is written down to its estimated market value if less than cost. Estimates of market value include, but are not limited to, management’s forecasts related to our future manufacturing schedules, customer demand, technological and/or market obsolescence, general semiconductor market conditions, and possible alternative uses. If future customer demand or market conditions are less favorable than our projections, additional inventory write-downs may be required and would be reflected in cost of goods sold in the period in which we make the revision.

Warranty: Typically, the sale of semiconductor capital equipment includes providing parts and service warranties to customers as part of the overall price of the system. We provide standard warranties for our systems. 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. All actual or estimated parts and labor costs incurred in subsequent periods are charged to those established reserves on a system-by-system basis.

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: We recognize the fair value of equity-based compensation expense. We determine the fair value of our restricted stock units (“RSUs”), excluding market-based performance RSUs, based upon the fair market value of our common stock at the date of grant, discounted for dividends. We estimate the fair value of our market-based performance RSUs using a Monte Carlo simulation model at the date of the grant. We estimate the fair value of our stock options and ESPP awards using a Black-Scholes option valuation model. This model requires the input of 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 award 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 equity-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 equity-based compensation on the research tax credit through the income statement rather than through paid-in-capital. We have also elected to net deferred tax assets and the associated valuation allowance related to net operating loss and tax credit carryforwards for the accumulated stock award tax benefits for income tax footnote disclosure purposes. We will track these stock award attributes separately and will only recognize these attributes through paid-in-capital.

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

We 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.

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 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 our 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.

 

25


Table of Contents

We review goodwill at least annually for impairment. If certain events or indicators of impairment occur between annual impairment tests, we will perform an impairment test at that date. In testing for a potential impairment of goodwill, we: (1) allocate goodwill to the 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. Prior to this allocation of the assets to the reporting units, we 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. In our goodwill impairment process we first assess qualitative factors to determine whether it is necessary to perform a quantitative analysis. We do not calculate the fair value of a reporting unit unless we determine, based on a qualitative assessment, that it is more likely than not that the reporting unit’s fair value is less than its carrying amount. Our most recent annual goodwill impairment analysis, which was performed as of the first day of our fourth quarter of fiscal year 2015, March 30, 2015, resulted in the recognition of a $79.4 million goodwill impairment charge on our single-wafer clean systems reporting unit. We did not record any goodwill impairment in the three months ended September 27, 2015 or September 28, 2014.

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 an income approach. 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, 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 it is 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. Changes in judgment on these assumptions and estimates could result in a goodwill impairment charge.

As a result, several factors could result in an 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 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 common stock price and resulting market capitalization, and to the extent we determine that the decline is sustained and indicates a reduction in the fair value of our reporting units below their carrying value. Further, the value assigned to intangible assets, other than goodwill, is based on estimates and judgments regarding expectations such as the success and life cycle of products and technology acquired. If actual product acceptance differs significantly from the estimates, we may be required to record an impairment charge to write down the asset to its realizable value.

Recent Accounting Pronouncements

In May 2014, the FASB released Accounting Standards Update 2014-9 “Revenue from Contracts with Customers” to supersede nearly all existing revenue recognition guidance under GAAP. The core principle of the standard is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The new standard defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. We are required to adopt this standard starting in the first quarter of fiscal year 2019 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within the standard; or (ii) retrospective with the cumulative effect of initially applying the standard recognized at the date of initial application and providing certain additional disclosures as defined per the standard. We have not yet selected a transition method, and are in the process of determining the impact that the new standard will have on our Consolidated Financial Statements.

In April 2015, the FASB released Accounting Standards Update 2015-3 “Interest — Imputation of Interest.” The amendment requires that debt issuance costs related to recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. We are required to adopt this standard starting in the first quarter of fiscal year 2017; we do not anticipate that adoption will have a material impact on our Consolidated Financial Statements.

 

26


Table of Contents

LIQUIDITY AND CAPITAL RESOURCES

As of September 27, 2015, we had $4.5 billion in gross cash and cash equivalents, investments, and restricted cash and investments (together comprising total cash and investments) compared to $4.2 billion as of June 28, 2015. Approximately $2.5 billion and $2.2 billion of our total cash and investments as of September 27, 2015 and June 28, 2015, respectively, was held outside the United States in our foreign subsidiaries, the majority of which is held in U.S. Dollars and, 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 $449.0 million during the three months ended September 27, 2015 consisted of (in millions):

 

Net income

   $ 288.7   

Non-cash charges:

  

Depreciation and amortization

     70.6   

Equity-based compensation

     35.8   

Deferred income taxes

     (6.0

Amortization of note discounts and issuance costs

     9.8   

Changes in operating asset and liability accounts

     39.7   

Other

     10.4   
  

 

 

 
   $ 449.0   
  

 

 

 

Changes in operating asset and liability accounts, net of foreign exchange impact, included the following uses of cash: increases in prepaid expense and other assets of $18.7 million and decrease in trade accounts payable of $45.9 million. The uses of cash are offset by sources of cash resulting from decreases in accounts receivable of $4.1 million and inventories of $27.4 million; as well as increases in accrued expenses and other liabilities of $69.9 million and deferred profit of $2.9 million.

Cash Flows from Investing Activities

Net cash used for investing activities during the three months ended September 27, 2015 was $79.2 million, primarily consisting of net purchases of available-for-sale securities of $28.2 million and capital expenditures of $49.5 million.

Cash Flows from Financing Activities

Net cash used for financing activities during the three months ended September was $123.2 million, primarily consisting of $98.4 million in treasury stock repurchases and $47.7 million of dividends paid, partially offset by $19.6 million of stock issuance and treasury stock reissuances associated with our employee stock-based compensation plans.

Liquidity

Given that the semiconductor equipment industry is highly competitive and has experienced rapid changes in demand historically, 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 as of September 27, 2015, are expected to be sufficient to support our anticipated levels of operations, investments, debt service requirements, capital expenditures, capital redistributions, and dividends, through at least the next 12 months. However, uncertainty in the global economy and the semiconductor industry, as well as disruptions in credit markets, have in the past, and could in the future, impact customer demand for our products, as well as our ability to manage normal commercial relationships with our customers, suppliers, and creditors.

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

 

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

For financial market risks related to changes in interest rates, marketable equity security prices, and foreign currency exchange rates, refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk”, in our 2015 Form 10-K. Other than noted below, our exposure related to market risk has not changed materially since June 28, 2015. All of the potential changes noted below are based on sensitivity analyses performed on our financial position as of September 27, 2015. Actual results may differ materially.

 

27


Table of Contents

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 September 27, 2015 were as follows:

 

     Valuation of Securities
Given an Interest Rate
Decrease of X Basis Points
     Fair Value as of
September 27, 2015
     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)  

Time Deposit

   $ 174,931       $ 174,931       $ 174,931       $ 174,933       $ 174,931       $ 174,931       $ 174,931   

Municipal Notes and Bonds

     672,455         672,147         670,992         668,043         664,552         661,062         657,572   

U.S. Treasury & Agencies

     350,183         349,915         347,332         343,471         339,522         335,573         331,625   

Government-Sponsored Enterprises

     45,764         45,508         45,009         44,405         43,802         43,198         42,595   

Foreign Government Bonds

     46,585         46,417         46,026         45,564         45,102         44,640         44,178   

Bank and Corporate Notes

     1,409,270         1,401,432         1,390,892         1,379,938         1,368,948         1,357,960         1,346,972   

Mortgage Backed Securities - Residential

     31,934         31,833         31,709         31,566         31,414         31,263         31,111   

Mortgage Backed Securities - Commercial

     122,722         122,243         121,716         121,186         120,656         120,125         119,595   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,853,844       $ 2,844,426       $ 2,828,607       $ 2,809,106       $ 2,788,927       $ 2,768,752       $ 2,748,579   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We mitigate default risk by investing in high credit quality securities and by positioning our portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to achieve portfolio liquidity and maintain a prudent amount of diversification.

 

ITEM 4. Controls and Procedures

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

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

Disclosure Controls and Procedures

As required by Exchange Act Rule 13a-15(b), as of September 27, 2015, 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.

 

28


Table of Contents

Changes in Internal Control over Financial Reporting

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

Effectiveness of Controls

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

PART II. OTHER INFORMATION

 

ITEM 1. Legal Proceedings

While the Company is not currently a party to any legal proceedings that it believes material, 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 Capital Equipment Industry is Subject to Variability and, as a Result, We Face Risks Related to Our Strategic Resource Allocation Decisions

The semiconductor capital equipment industry has historically been characterized by rapid changes in demand. The industry environment has moved toward an environment more characterized by variability across segments and customers accentuated by consolidation within the industry. Variability in our customers’ business plans may lead to changes in demand for our equipment and services which could negatively impact our results. 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. The changes in demand may require 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. With the consolidation of customers within the industry the semiconductor capital equipment market may experience rapid changes in demand driven both by changes in the market generally and the plans and requirements of particular customers. 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;

 

29


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

 

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

 

    valuation allowances on deferred tax assets;

 

    restructuring charges;

 

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

 

    a decline in the value of our investments;

 

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

 

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

 

    challenges maintaining reliable and uninterrupted sources of supply.

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

Our Quarterly Revenues and Operating Results Are Variable

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;

 

    consolidation of the customer base may result in the investment decisions of one customer or market having a significant effect on demand for our products or services;

 

    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;

 

    our customers’ reuse of existing and installed products, to the extent that such reuse decreases their need to purchase new products or services;

 

    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;

 

30


Table of Contents
    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 or man-made 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

 

    convertibility and the dilutive impact of our Convertible Notes and related warrants on our earnings per share.

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 units, 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. During the 2015 fiscal year, our goodwill and long-lived asset impairment assessments resulted in an impairment charge of $79.4 million associated with the single-wafer clean reporting unit and $9.8 million related to an intangible asset.

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 results and cash flows may vary significantly from actual results. Additionally, if our analysis indicates potential impairment to goodwill in one or more of our business units, we may be required to record additional charges to earnings in our financial statements, which could negatively affect our results of operations.

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 issuance of our 2020 and 2025 Senior Notes, 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. Furthermore, in March 2014, we entered into an unsecured credit agreement providing us with the ability to borrow up to $300 million (and, under certain circumstances, to increase such availability to $500 million). We may, in the future, decide to borrow amounts under this facility, or to enter into additional debt arrangements, including as described below in “Following the merger, our substantial leverage and debt service obligations could adversely affect our business”.

In addition, we have entered, and in the future may enter, into derivative instrument arrangements to hedge against the variability of cash flows due to changes in the benchmark interest rate of fixed rate debt. We could be exposed to losses in the event of nonperformance by the counterparties to our derivative instruments.

Our maintenance of higher levels of indebtedness could have adverse consequences including:

 

    increased risk associated with any inability 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

 

    impaired 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 Convertible Notes and resulting exercise of the related warrants may cause dilution to our stockholders and to our earnings per share. The number of shares of our Common Stock into which the Convertible Notes are convertible for and the related warrants are exercisable for may be adjusted from time to time, including increases in such rates as a result of dividends that we pay to our stockholders. Upon conversion of any Convertible Notes, we will deliver cash in the amount of the principal amount of the

 

31


Table of Contents

Convertible Notes and, with respect to any excess conversion value greater than the principal amount of the Convertible Notes, shares of our Common Stock, which would result in dilution to our stockholders. 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 Convertible Notes, if the price of our Common Stock exceeds the conversion price, GAAP require 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 Convertible Notes as a more attractive means of equity participation in our company and also by hedging activity that may develop involving our Common Stock by holders of the Convertible Notes.

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

We may be unable to respond to changes in business and economic conditions, engage in transactions that might otherwise be beneficial to us, or obtain additional financing, because our debt agreements contain, and any of our other future similar agreements such as any we may enter into in connection with our proposed acquisition of KLA-Tencor may contain, covenant restrictions that limit our ability to, among other things:

 

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

 

    create liens;

 

    enter into transactions with our affiliates;

 

    sell certain assets; and

 

    merge or consolidate with any person.

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

We Have a Limited Number of Key Customers

Sales to a limited number of large customers constitute a significant portion of our overall revenue, shipments, cash flows, collections, and profitability. For the three months ended September 27, 2015 and the years ended June 29, 2015, and June 28, 2014, three customers accounted for 48%, 51%, and 52% of total revenue, respectively. 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; 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 Creating New Products and Processes and Enhancing Existing 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 or existing products have reliability, quality, design, or safety 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 products successfully, or products that we introduce may fail in the marketplace. For over 25 years the primary driver of technology advancement in the semiconductor industry has been to shrink the lithography that prints the circuit design on semiconductor chips. That driver could be approaching its technological limit, leading semiconductor manufacturers to investigate more complex changes in multiple technologies in an effort to continue technology development. In the face of uncertainty on which technology solutions will become successful, we will need to focus our efforts on developing the technology changes that are ultimately successful in supporting our customer requirements. Our failure to develop and offer the correct technology solutions in a timely manner with productive and cost-effective products could adversely affect our business in a material way. Our failure to commercialize new products in a timely manner could result in loss of market share, unanticipated costs, and inventory obsolescence, which would adversely affect our financial results.

In order to develop new products and processes and enhance existing 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

 

32


Table of Contents

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 system, 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 customers or customers within certain markets;

 

    an improved version of products being offered by a competitor in the markets 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. This may impact our ability to maintain or expand our business with certain customers. Such product concentration may also subject us to additional risks associated with technology changes. Our business is affected by our customers’ use of our products in certain steps in their wafer fabrication processes. Should technologies change so that the manufacture of semiconductors requires fewer steps using our products, this could have a larger impact on our business than it would on the business of our less concentrated competitors.

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

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

Similarly, our customers may partner 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.

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 be unable to meet our requirements or expectation due to their independent business decisions, or 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, or fail to secure or protect intellectual property rights, and such failure could have an adverse impact on our business. In some cases, the

 

33


Table of Contents

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 or man-made disasters, terrorist activities, 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, especially if customers are more focused on tool re-use than in the past. 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 and with increased consolidation efforts in our industry we may face increasing competitive pressures. 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, including those that are created and financially backed by foreign governments, have substantially greater financial resources and more extensive engineering, manufacturing, marketing, and customer service and support resources than we do and therefore have the potential to offer customers a more comprehensive array of products and to therefore achieve additional relative success in the semiconductor equipment industry. These competitors may deeply discount or give away products similar to those that we sell, challenging or even exceeding our ability to make similar accommodations and threatening our ability to sell those products. We also face competition from our own customers, who in some instances have established affiliated entities that manufacture equipment similar to ours. For these reasons, we may fail to continue to compete successfully worldwide.

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

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

Non-U.S. sales accounted for approximately 91%, 83%, and 86% of total revenue for the three months ended September 27, 2015 and fiscal years 2015, and 2014, respectively. 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;

 

    tariffs and other barriers;

 

    global or national economic and political conditions;

 

    changes in currency controls;

 

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

 

34


Table of Contents
    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 trade restrictions and sanctions, anti-bribery, anti-corruption, environmental, and 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, and effectively manage 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. In addition, there are risks that the Chinese government may, among other things: insist on the use of local suppliers; compel companies that do business in China to partner with local companies to design and supply equipment on a local basis, requiring the transfer of intellectual property rights and/or local manufacturing; and provide special incentives to government-backed local customers to buy from local competitors, even if their products are inferior to ours; all of which could adversely impact our revenues and margins.

We are exposed to potentially adverse 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 and Korean won. 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 and Korean won-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, payment of dividends or the repayment of our notes, can usually only be made with on-shore cash balances. Since the majority of our cash is generated outside of the United States, this may impact certain business decisions and adversely affect business outcomes.

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

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

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

We maintain and rely upon certain critical information systems for the effective operation of our business. These information systems include telecommunications, the internet, our corporate intranet, various computer hardware and software applications, network communications, and e-mail. These information systems may be owned and maintained by us, our outsourced providers or third

 

35


Table of Contents

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

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 domestic and international governmental regulations related to the handling, discharge, and disposal of toxic, volatile, or otherwise hazardous chemicals. Failure to comply with present or future environmental 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, acquire significant additional equipment, incur substantial other expenses to comply with environmental regulations, or take other actions. Any failure to comply with regulations governing the use, handling, sale, transport or disposal of hazardous substances could subject us to future liabilities that may adversely affect our operating results, financial condition and ability to operate our business.

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 as with our proposed acquisition of KLA-Tencor, 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;

 

36


Table of Contents
    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

 

    convertibility and dilutive impacts of our Convertible 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 price of and markets for semiconductors. These and other factors have and may again adversely affect the price of our Common Stock, regardless of our actual operating performance. In the past, following volatile periods in the price of their stock, many companies became the object of securities class action litigation. If we are sued in a securities class action, we could incur substantial costs, and it could divert management’s attention and resources and have an unfavorable impact on our financial performance and the price for our Common Stock.

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

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

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

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

 

37


Table of Contents

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, conflict minerals or other social responsibility legislation, and antitrust regulations, among others. Each of these laws, rules and regulations imposes costs on our business, including financial costs and potential diversion of our management’s attention associated with compliance, and may present risks to our business, including potential fines, restrictions on our actions, and reputational damage if we are unable to fully comply.

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 SG&A expenses and a diversion of management’s time and attention from revenue generating activities to compliance activities. If we are found by a court or regulatory agency not to be in compliance with the laws and regulations, our business, financial condition, and results of operations could be adversely affected.

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

Our Board of Directors has declared quarterly dividends since April 2014. Our intent to continue to pay quarterly dividends and to repurchase our shares is subject to capital availability and, in the case of dividends, periodic determinations by our Board of Directors that cash dividends are in the best interest of our stockholders and are in compliance with all laws and agreements applicable to the declaration and payment of cash dividends by us. Future dividends and share repurchases may also be affected by, among other factors: our views on potential future capital requirements for investments in acquisitions and the funding of our research and development; legal risks; stock repurchase programs; changes in federal and state income tax laws or corporate laws; contractual restrictions, such as financial or operating covenants in our debt arrangements; and changes to our business model. Our dividend payments and share repurchases may change from time to time, and we cannot provide assurance that we will continue to declare dividends or repurchase shares at all or in any particular amounts. A reduction or suspension in our dividend payments or share repurchase activity could have a negative effect on our stock price.

If We are Unable to Complete Our Contemplated Acquisition of KLA-Tencor Corporation, Our Expected Financial Results and the Market Value of our Common Stock Could Be Adversely Affected

On October 20, 2015, we entered into an Agreement and Plan of Merger and Reorganization (the “merger agreement”) with KLA-Tencor Corporation (“KLA-Tencor”) to acquire all of KLA-Tencor’s issued and outstanding stock through a merger of KLA-Tencor with our subsidiaries, Topeka Merger Sub 1, Inc. and Topeka Merger Sub 2, Inc. (the “merger”). Consummation of the merger is subject to customary conditions to closing, including the receipt of required regulatory approvals, the approval of the issuance of our common stock to KLA-Tencor’s stockholders in the merger by our stockholders, and the approval of the merger by KLA-Tencor’s stockholders. If any condition to the merger is not satisfied or waived, the merger will not be completed. We and KLA-Tencor also may terminate the merger agreement under certain circumstances. Any or all of the preceding could jeopardize our ability to consummate the merger on the already negotiated terms. To the extent the merger is not completed for any reason, we would have devoted substantial resources and management attention to the transaction without realizing the accompanying benefits expected by our management, and our financial condition and results of operations and the market value of our stock may be adversely affected. Additional risks and uncertainties associated with the merger include:

 

    various conditions to the closing of the merger may not be satisfied or waived;

 

    the failure to consummate the merger may result in negative publicity and a negative impression of us in the investment community;

 

    we and KLA-Tencor are subject to litigation related to the merger, and may be subject to additional proceedings in the future;

 

    required regulatory approvals from governmental entities may delay the merger or result in the imposition of conditions that could cause the abandonment of the merger;

 

    the merger agreement may be terminated in circumstances that would require us to pay KLA-Tencor a termination fee of up to $290 million;

 

    the merger agreement contains provisions that could discourage a potential acquirer of the Company;

 

    our ability to attract, recruit, retain and motivate current and prospective employees who may be uncertain about their future roles and relationships with us following the completion of the merger may be adversely affected;

 

38


Table of Contents
    the increase in our leverage and debt service obligations as a result of the assumption of KLA-Tencor’s debt and the incurrence of additional financing in connection with the merger may adversely affect the combined company’s financial condition, results of operations and earnings per share;

 

    the attention of our employees and management may be diverted due to activities related to the merger; and disruptions from the merger, whether completed or not, may harm our relationships with our employees, customers, distributors, suppliers or other business partners, and may result in a loss of or a substantial decrease in purchases by our customers.

Even if the KLA-Tencor Merger is Consummated, We May Not Realize the Anticipated Benefits of the Merger.

If the merger is consummated, achieving the anticipated benefits of the merger will depend upon many factors, such as customer acceptance, whether we and KLA-Tencor integrate our businesses in an effective and efficient manner, and our ability to service increased debt. If our customers do not support the combined company as anticipated, it could adversely affect anticipated revenues or operating performance. We may not be able to accomplish this integration process smoothly or successfully. The integration of certain operations following the merger will take time and will require the dedication of significant management resources, which may temporarily distract our management’s attention from the routine business of the combined company. Any delay or inability of our management to successfully integrate the operations of the two companies could compromise the combined entity’s potential to achieve the anticipated long-term strategic benefits of the merger and could have a material adverse effect on the business, financial condition and results of operations of the combined company and the market value of our stock after the merger. Following the merger, the combined company will have significantly increased its debt. The combined company’s ability to meet its debt obligations will depend upon its future performance, which will be affected by financial, business, economic and regulatory conditions, as well as the performance of the combined company.

There Can Be No Assurance that We Will be able to Secure the Financing We Intend to Use to Pay the Cash Portion of the Consideration for the Merger.

We intend to fund the cash consideration and other amounts payable under the terms of the merger agreement from a combination of cash on hand and debt financing, which may include some combination of replacement financing, such as borrowings under a new senior unsecured term loan facility and the issuance of debt securities, or, to the extent necessary, borrowings under a senior unsecured 364-day bridge loan facility in an aggregate principal amount of up to $4.2 billion (as contemplated by the bridge commitment letter entered into by the Company at the time of execution of the merger agreement). As of the date hereof, neither the Company nor any of its subsidiaries has entered into any definitive agreements for any debt financing in connection with the merger. The availability of any debt financing pursuant to the bridge commitment letter is, and other financing we might arrange will be, subject to certain conditions precedent. Therefore, no assurance can be given that the financing pursuant to the bridge facility or the replacement financing described above will be available.

Our obligation to complete the merger is not subject to a financing contingency. In the event that the bridge facility or the replacement financing is not available, other financing may not be available on acceptable terms, in a timely manner, or at all. If we are unable to secure alternative financing, the merger may not be completed and we could be liable to KLA-Tencor for breach of the merger agreement in connection with our failure to consummate the merger.

Following the Merger, our Substantial Leverage and Debt Service Obligations Could Adversely Affect our Business.

After giving effect to the merger, we expect to have total external debt of approximately $8.6 billion. The degree to which we will be leveraged following the merger could have important consequences for our stockholders, including, but not limited to, potentially:

 

    increasing our vulnerability to, and reducing our flexibility to respond to, general adverse economic and industry conditions;

 

    requiring the dedication of a substantial portion of our cash flow from operations to the payment of principal of, and interest on, indebtedness, thereby reducing the availability of such cash flow to fund working capital, capital expenditures, acquisitions, joint ventures, product research, dividends, share repurchases and development or other corporate purposes;

 

    increasing our vulnerability to and limiting our flexibility in planning for, or reacting to, changes in our business and the competitive environment and the industry in which we operate;

 

    placing the combined company at a competitive disadvantage as compared to its competitors, to the extent that those competitors are not as highly leveraged;

 

    restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;

 

    exposing us to the risk of increased interest rates as borrowings under certain of our credit facilities are expected to be subject to variable rates of interest;

 

    making it more difficult for the combined company to repay, refinance, or satisfy its obligations with respect to its debt;

 

    causing our long-term and short-term debt ratings to be lower than the long-term and short-term debt ratings currently applicable to the Company and KLA-Tencor; and

 

    limiting our ability to borrow additional funds in the future and increasing the cost of any such borrowing.

 

39


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

Repurchases of Company Shares

On April 29, 2014, the Board of Directors authorized us to repurchase up to $850 million of common stock, which included the remaining value available under our prior authorization. These repurchases can be conducted on the open market or as private purchases and may include the use of derivative contracts with large financial institutions, in all cases subject to compliance with applicable law. Repurchases will be funded using our on-shore cash and on-shore cash generation. This repurchase program has no termination date and may be suspended or discontinued at any time.

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 Plans or
Programs
     Amount
Available
Under
Repurchase
Program
 
     (in thousands, except per share data)  

Amount available at June 28, 2015

            $ 316,587   

June 29, 2015 - July 26, 2015

     256       $ 78.94         250         296,890   

July 27, 2015 - August 23, 2015

     555       $ 73.39         362         270,239   

August 24, 2015 - September 27, 2015

     602       $ 69.39         593         229,094   
  

 

 

       

 

 

    

Total

     1,413       $ 72.69         1,205       $ 229,094   
  

 

 

       

 

 

    

 

(1) In addition to shares repurchased under the Board-authorized repurchase program shown above, the Company acquired 208,624 shares at a total cost of $15.3 million, during the three months ended September 27, 2015, which we withheld through net share settlements to cover minimum tax withholding obligations upon the vesting of restricted stock unit awards granted under our equity compensation plans. The shares retained by us through these net share settlements are not a part of the Board-authorized repurchase program but instead are authorized under our equity compensation plans.

 

ITEM 3. Defaults Upon Senior Securities

None.

 

ITEM 4. Mine Safety Disclosures

Not applicable.

 

ITEM 5. Other Information

None.

 

ITEM 6. Exhibits

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

 

40


Table of Contents

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: November 3, 2015    

LAM RESEARCH CORPORATION

(Registrant)

   

/s/    Douglas R. Bettinger        

    Douglas R. Bettinger
   

Executive Vice President, Chief Financial Officer (Principal Financial Officer and Principal Accounting

Officer)

 

41


Table of Contents

EXHIBIT INDEX

 

Exhibit
Number

  

Description

    2.1*    Agreement of Plan of Merger, dated October 20, 2015, by and among Lam Research Corporation, Topeka Merger Sub 1, Inc., Topeka Merger Sub 2, Inc., and KLA-Tencor Corporation.
  10.1**    Commitment Letter, Dated October 20, 2015, by and among Lam Research Corporation, Goldman Sachs Bank USA and Goldman Sachs Lending Partners LLC.
  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

 

* Exhibit 2.1 is incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on October 21, 2015. Certain exhibits and schedules have been omitted, and Lam agrees to furnish supplementally to the Commission a copy of any omitted exhibits or schedules upon request.
** Exhibit 10.1 is incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on October 21, 2015.

 

42

Exhibit 31.1

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

I, Martin B. Anstice, certify that:

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

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

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

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

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

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

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

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

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

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

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

November 3, 2015

 

/s/ Martin B. Anstice

Martin B. Anstice
President and Chief Executive Officer

Exhibit 31.2

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

I, Douglas R. Bettinger, certify that:

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

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

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

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

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

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

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

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

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

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

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

November 3, 2015

 

/s/ Douglas R. Bettinger

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

Exhibit 32.1

SECTION 1350 CERTIFICATION (PRINCIPAL EXECUTIVE OFFICER)

In connection with the Quarterly Report of Lam Research Corporation (the “Company”) on Form 10-Q for the fiscal period ending September 27, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Martin B. Anstice, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

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

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

November 3, 2015

 

/s/ Martin B. Anstice

Martin B. Anstice
President and Chief Executive Officer

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

Exhibit 32.2

SECTION 1350 CERTIFICATION (PRINCIPAL FINANCIAL OFFICER)

In connection with the Quarterly Report of Lam Research Corporation (the “Company”) on Form 10-Q for the fiscal period ending September 27, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Douglas R. Bettinger, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge, that:

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

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

November 3, 2015

 

/s/ Douglas R. Bettinger

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

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