Lam Research Corporation
LAM RESEARCH CORP (Form: 10-Q, Received: 02/03/2016 16:20:44)
Table of Contents


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
   ___________________________________________________________
FORM 10-Q
  ___________________________________________________________
  (Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 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 January 29, 2016 , the Registrant had 158,893,928 shares of common stock outstanding.
 


Table of Contents



LAM RESEARCH CORPORATION
TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.



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
 
Six Months Ended
December 27,
2015
 
December 28,
2014
 
December 27,
2015
 
December 28,
2014
Revenue
$
1,425,534

 
$
1,232,241

 
$
3,025,577

 
$
2,384,609

Cost of goods sold
799,024

 
695,584

 
1,676,704

 
1,342,413

Gross margin
626,510

 
536,657

 
1,348,873

 
1,042,196

Research and development
220,754

 
196,768

 
454,963

 
385,702

Selling, general and administrative
166,922

 
151,148

 
319,648

 
299,455

Total operating expenses
387,676

 
347,916

 
774,611

 
685,157

Operating income
238,834

 
188,741

 
574,262

 
357,039

Other expense, net
(29,935
)
 
(9,799
)
 
(57,056
)
 
(15,447
)
Income before income taxes
208,899

 
178,942

 
517,206

 
341,592

Income tax benefit (expense)
14,081

 
(2,002
)
 
(5,547
)
 
(23,571
)
Net income
$
222,980

 
$
176,940

 
$
511,659

 
$
318,021

Net income per share:
 
 
 
 
 
 
 
Basic
$
1.41

 
$
1.11

 
$
3.23

 
$
1.98

Diluted
$
1.28

 
$
1.00

 
$
2.94

 
$
1.80

Number of shares used in per share calculations:
 
 
 
 
 
 
 
Basic
158,424

 
159,248

 
158,388

 
160,467

Diluted
174,242

 
177,046

 
174,308

 
177,082

Cash dividend declared per common share
$
0.30

 
$
0.18

 
$
0.60

 
$
0.36


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
 
Six Months Ended
December 27,
2015
 
December 28,
2014
 
December 27,
2015
 
December 28,
2014
Net income
$
222,980

 
$
176,940

 
$
511,659

 
$
318,021

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(1,022
)
 
(8,843
)
 
(8,844
)
 
(17,802
)
Cash flow hedges:
 
 
 
 
 
 
 
Net unrealized gains during the period
3,703

 
7,604

 
3,159

 
7,902

Net gains reclassified into earnings
(3,220
)
 
(2,622
)
 
(2,879
)
 
(2,724
)
 
483

 
4,982

 
280

 
5,178

Available-for-sale investments:
 
 
 
 
 
 
 
Net unrealized losses during the period
(5,133
)
 
(2,981
)
 
(2,385
)
 
(4,740
)
Net (gains) losses reclassified into earnings
(244
)
 
113

 
(224
)
 
492

 
(5,377
)
 
(2,868
)
 
(2,609
)
 
(4,248
)
Defined benefit plans, net change in unrealized component
93

 
70

 
188

 
136

Other comprehensive loss, net of tax
(5,823
)
 
(6,659
)
 
(10,985
)
 
(16,736
)
Comprehensive income
$
217,157

 
$
170,281

 
$
500,674

 
$
301,285


See Notes to Condensed Consolidated Financial Statements


2

Table of Contents


LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
 
 
December 27,
2015
 
June 28,
2015
(unaudited)
 
(1)
ASSETS
 
 
 
Cash and cash equivalents
$
1,967,873

 
$
1,501,539

Investments
2,507,607

 
2,574,947

Accounts receivable, less allowance for doubtful accounts of $4,904 as of December 27, 2015 and $4,890 as of June 28, 2015
1,089,850

 
1,093,582

Inventories
879,821

 
943,346

Prepaid expenses and other current assets
225,046

 
157,435

Total current assets
6,670,197

 
6,270,849

Property and equipment, net
643,746

 
621,418

Restricted cash and investments
207,568

 
170,969

Goodwill
1,387,082

 
1,387,509

Intangible assets, net
652,131

 
728,140

Other assets
189,697

 
185,763

Total assets
$
9,750,421

 
$
9,364,648

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Trade accounts payable
$
230,974

 
$
300,203

Accrued expenses and other current liabilities
757,260

 
649,438

Deferred profit
261,049

 
322,070

Current portion of convertible notes and capital leases
973,697

 
1,359,650

Total current liabilities
2,222,980

 
2,631,361

Senior notes, convertible notes, and capital leases, less current portion
1,404,683

 
1,001,382

Income taxes payable
257,502

 
202,930

Other long-term liabilities
135,303

 
184,023

Total liabilities
4,020,468

 
4,019,696

Commitments and contingencies

 

Temporary equity, convertible notes
177,662

 
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, 158,568 shares at December 27, 2015 and 158,531 shares at June 28, 2015
159

 
159

Additional paid-in capital
5,516,129

 
5,366,773

Treasury stock, at cost, 101,159 shares at December 27, 2015 and 99,562 shares at June 28, 2015
(4,408,777
)
 
(4,302,847
)
Accumulated other comprehensive loss
(68,781
)
 
(57,796
)
Retained earnings
4,513,561

 
4,096,855

Total stockholders’ equity
5,552,291

 
5,103,144

Total liabilities and stockholders’ equity
$
9,750,421

 
$
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)
 
 
Six Months Ended
December 27,
2015
 
December 28,
2014
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
511,659

 
$
318,021

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
142,388

 
137,421

Deferred income taxes
2,613

 
6,506

Equity-based compensation expense
68,344

 
62,672

Income tax benefit on equity-based compensation plans
5,713

 
11,002

Excess tax benefit on equity-based compensation plans
(5,753
)
 
(11,003
)
Amortization of note discounts and issuance costs
33,480

 
18,299

Gain on sale of business

 
(7,431
)
Other, net
20,603

 
7,133

Changes in operating assets and liabilities
(35,505
)
 
(240,220
)
Net cash provided by operating activities
743,542

 
302,400

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Capital expenditures and intangible assets
(77,597
)
 
(103,234
)
Business acquisitions, net of cash acquired

 
(1,137
)
Purchases of available-for-sale securities
(808,292
)
 
(1,063,863
)
Sales and maturities of available-for-sale securities
819,291

 
751,918

Repayment of notes receivable
8,082

 
3,978

Proceeds from sale of business

 
41,212

Other, net
(6,246
)
 
122

Net cash used for investing activities
(64,762
)
 
(371,004
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Principal payments on long-term debt and capital lease obligations and payments for debt issuance costs
(28,470
)
 
(781
)
Excess tax benefit on equity-based compensation plans
5,753

 
11,003

Treasury stock purchases
(111,183
)
 
(373,958
)
Dividends paid
(95,555
)
 
(58,621
)
Re-issuance of treasury stock related to employee stock purchase plan
19,245

 
16,919

Proceeds from issuance of common stock
1,550

 
8,832

Other, net
(322
)
 

Net cash used for financing activities
(208,982
)
 
(396,606
)
Effect of exchange rate changes on cash and cash equivalents
(3,464
)
 
(6,192
)
Net increase (decrease) in cash and cash equivalents
466,334

 
(471,402
)
Cash and cash equivalents at beginning of period
1,501,539

 
1,452,677

Cash and cash equivalents at end of period
$
1,967,873

 
$
981,275


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 December 27, 2015 (the “December 2015 quarter”) and December 28, 2014 (the “December 2014 quarter”) included 13 weeks.
NOTE 2 — RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB released Accounting Standards Update (“ASU”) 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 ASU 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.
In September 2015, the FASB released ASU 2015-16, “Business Combinations - Simplifying the Accounting for Measurement-Period Adjustments”, which eliminates the requirement to restate prior period financial statements for measurement period adjustments. Instead, the cumulative impact of measurement period adjustments, including the impact on prior periods, is required to be recognized in the reporting period in which the adjustment is identified. The standard update will be effective for the Company beginning in its first quarter of fiscal year 2017. Early adoption is permitted; the Company is evaluating the timing of its adoption of the standard.
In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes.” This ASU amends existing guidance to require that deferred income tax assets and liabilities be classified as non-current in a classified balance sheet, and eliminates the prior guidance which required an entity to separate deferred tax assets and liabilities into a current amount and a non-current amount in a classified balance sheet. The amendments in this ASU are effective for the Company beginning in its first quarter of fiscal year 2018. Earlier application is permitted as of the beginning of an interim or annual period. Additionally, the new guidance may be applied either prospectively to all deferred tax assets and liabilities or

5





retrospectively to all periods presented. The Company is still in the process of evaluating the timing and impact of adopting the guidance.
In January 2016, FASB released ASU 2016-1, “Financial Instruments - Overall - Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendment changes the accounting for and financial statement presentation of equity investments, other than those accounted for under the equity method of accounting or those that result in consolidation of the investee. The amendment provides clarity on the measurement methodology to be used for the required disclosure of fair value of financial instruments measured at amortized cost on the balance sheet and clarifies that an entity should evaluate the need for a valuation allowance on deferred tax assets related to available-for-sale securities in combination with the entity's other deferred tax assets, among other changes. The Company is required to adopt this standard starting in the first quarter of fiscal year 2019 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. The Company also has an employee stock purchase plan that allows employees to purchase its Common Stock at a discount through payroll deductions.

The Company recognized the following equity-based compensation expense and related income tax benefit in the Condensed Consolidated Statements of Operations:
 
Three Months Ended
 
Six Months Ended
 
December 27,
2015
 
December 28,
2014
 
December 27,
2015
 
December 28,
2014
 
(in thousands)
Equity-based compensation expense
$
32,570

 
$
30,632

 
$
68,344

 
$
62,672

Income tax benefit related to equity-based compensation expense
$
12,651

 
$
6,116

 
$
18,748

 
$
10,840

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 2015 Stock Incentive Plan, 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

 
$

 
151,462

 
$
71.46

Exercised
(70,291
)
 
$
22.03

 
N/A

 
N/A

Canceled

 
$

 
(46,193
)
 
$
65.08

Vested restricted stock
N/A

 
N/A

 
(1,247,240
)
 
$
46.19

December 27, 2015
765,541

 
$
38.86

 
3,812,117

 
$
65.08

As of December 27, 2015 , there was $2.0 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 1.8 years .

6





As of December 27, 2015 , there was $146.5 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 1.8 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 six months ended December 27, 2015 and December 28, 2014 :  
 
Six Months Ended
December 27,
2015
 
December 28,
2014
Expected term (years)
0.67

 
0.68

Expected stock price volatility
31.86
%
 
29.07
%
Risk-free interest rate
0.19
%
 
0.07
%
Dividend Yield
0.94
%
 
0.29
%
There were no ESPP purchases during the quarter ended December 27, 2015 . As of December 27, 2015 , there was $11.7 million of unrecognized compensation expense related to the 1999 ESPP, which is expected to be recognized over a remaining period of approximately eight months.
NOTE 4 — OTHER EXPENSE, NET
The significant components of other expense, net, are as follows:
 
Three Months Ended
 
Six Months Ended
 
December 27,
2015
 
December 28,
2014
 
December 27,
2015
 
December 28,
2014
 
(in thousands)
Interest income
$
6,729

 
$
4,024

 
$
12,489

 
$
7,312

Interest expense
(38,577
)
 
(15,797
)
 
(63,238
)
 
(31,501
)
Gains (losses) on deferred compensation plan related assets, net
1,983

 
2,593

 
(3,181
)
 
5,009

Foreign exchange gains (losses), net
512

 
(130
)
 
(186
)
 
776

Other, net
(582
)
 
(489
)
 
(2,940
)
 
2,957

 
$
(29,935
)
 
$
(9,799
)
 
$
(57,056
)
 
$
(15,447
)
Interest expense in the three and six months ended December 27, 2015 increased, as compared to the three and six months ended December 28, 2014, primarily due to interest expense associated with the $1 billion Senior Note issuance in the March 2015 and the amortization of bridge loan financing issuance costs of approximately $13.6 million (see Note 11 and Note 12 for additional information regarding the Senior Note and bridge loan financing).
NOTE 5 — INCOME TAX EXPENSE
The Company recorded an income tax (benefit) expense of $(14.1) million and $5.5 million for the three and six months ended December 27, 2015 , which yielded an effective tax rate of approximately (6.7)% and 1.1% , respectively. The difference between the U.S. federal statutory tax rate of 35% and the Company’s effective tax rate for the three months ended December 27, 2015 is primarily due to estimated higher income in lower tax jurisdictions, extension of the U.S. federal research and development tax credit for part of fiscal year 2015 and all of fiscal year 2016, recognition of previously unrecognized tax benefits due to lapse of statutes of limitation and the tax effect of KLA-Tencor acquisition related expenses, offset by the tax effect of nondeductible stock based compensation and unrecognized tax benefits due to uncertain tax positions. The difference between the U.S. federal statutory tax rate of 35% and the Company’s effective tax rate for the six months ended December 27, 2015 is primarily due to estimated higher income in lower tax jurisdictions, the recognition of a discrete tax

7





benefit of the Altera court case, extension of the U.S. federal research and development tax credit for part of fiscal year 2015 and all of fiscal year 2016, recognition of previously unrecognized tax benefits due to lapse of statutes of limitation and the tax effect of KLA-Tencor acquisition related expenses, 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 is including the impact of the Altera court ruling in its income tax expense calculations. 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, convertible notes, and warrants. Dilutive shares outstanding include the effect of the convertible notes. Refer to Note 11 for additional information regarding the Company's convertible notes. The following table reconciles the numerators and denominators of the basic and diluted computations for net income per share.  
 
Three Months Ended
 
Six Months Ended
 
December 27,
2015
 
December 28,
2014
 
December 27,
2015
 
December 28,
2014
 
(in thousands, except per share data)
Numerator:
 
 
 
 
 
 
 
Net income
$
222,980

 
$
176,940

 
$
511,659

 
$
318,021

Denominator:
 
 
 
 
 
 
 
Basic average shares outstanding
158,424

 
159,248

 
158,388

 
160,467

Effect of potential dilutive securities:
 
 
 
 
 
 
 
Employee stock plans
2,034

 
3,304

 
2,289

 
3,432

Convertible notes
13,363

 
13,744

 
13,242

 
12,805

Warrants
421

 
750

 
389

 
378

Diluted average shares outstanding
174,242

 
177,046

 
174,308

 
177,082

Net income per share - basic
$
1.41

 
$
1.11

 
$
3.23

 
$
1.98

Net income per share - diluted
$
1.28

 
$
1.00

 
$
2.94

 
$
1.80


For purposes of computing diluted net income per share, weighted-average common shares do not include potentially dilutive securities that are anti-dilutive under the treasury stock method. The following potentially dilutive securities were excluded:
 
Three Months Ended
 
Six Months Ended
 
December 27,
2015
 
December 28,
2014
 
December 27,
2015
 
December 28,
2014
 
(in thousands)
Number of options and RSUs excluded
79

 

 
85

 

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

8





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.


9





The following tables set 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 December 27, 2015 and June 28, 2015 :  
 
December 27, 2015
 
 
 
 
 
 
 
 
(Reported Within)
Cost
 
Unrealized
Gain
 
Unrealized
(Loss)
 
Fair Value
 
Cash and
Cash
Equivalents
 
Investments
 
Restricted
Cash &
Investments
 
Other
Assets
(in thousands)
Cash
$
389,483

 
$

 
$

 
$
389,483

 
$
384,789

 
$

 
$
4,694

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Time Deposit
175,259

 

 

 
175,259

 
42,438

 

 
132,822

 

Money Market Funds
1,540,647

 

 

 
1,540,647

 
1,540,646

 

 

 

U.S. Treasury and Agencies
345,105

 
2

 
(1,941
)
 
343,166

 

 
273,114

 
70,052

 

Mutual Funds
33,995

 
2,733

 
(573
)
 
36,155

 

 

 

 
36,155

Level 1 Total
$
2,095,006

 
$
2,735

 
$
(2,514
)
 
$
2,095,227

 
$
1,583,084

 
$
273,114

 
$
202,874

 
$
36,155

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal Notes and Bonds
643,087

 
408

 
(317
)
 
643,178

 

 
643,178

 

 

U.S. Treasury and Agencies
8,028

 

 
(110
)
 
7,918

 

 
7,918

 

 

Government-Sponsored Enterprises
47,944

 

 
(270
)
 
47,674

 

 
47,674

 

 

Foreign Government Bonds
46,394

 
1

 
(229
)
 
46,166

 

 
46,166

 

 

Corporate Notes and Bonds
1,343,415

 
328

 
(5,401
)
 
1,338,342

 

 
1,338,342

 

 

Mortgage Backed Securities — Residential
35,611

 
65

 
(371
)
 
35,305

 

 
35,305

 

 

Mortgage Backed Securities — Commercial
116,662

 
7

 
(759
)
 
115,910

 

 
115,910

 

 

Level 2 Total
$
2,241,141

 
$
809

 
$
(7,457
)
 
$
2,234,493

 
$

 
$
2,234,493

 
$

 
$

Total
$
4,725,630

 
$
3,544

 
$
(9,971
)
 
$
4,719,203

 
$
1,967,873

 
$
2,507,607

 
$
207,568

 
$
36,155

 
 
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


10





The Company accounts for its investment portfolio at fair value. Realized gains (losses) for investment sales are specifically identified. Management assesses the fair value of investments in debt securities that are not actively traded through consideration of interest rates and their impact on the present value of the cash flows to be received from the investments. The Company also considers whether changes in the credit ratings of the issuer could impact the assessment of fair value. The Company did not recognize any losses on investments due to other-than-temporary impairments during the three and six months ended December 27, 2015 or December 28, 2014 . Additionally, gross realized gains and gross realized (losses) from sales of investments were approximately $0.6 million and $(1.4) million , respectively, in the three months ended December 27, 2015 and $0.4 million and $(0.4) million , respectively, in the three months ended December 28, 2014 . Gross realized gains and gross realized (losses) from sales of investments were approximately $0.8 million and $(2.0) million , respectively, in the six months ended December 27, 2015 and $0.9 million and $(1.0) million , respectively, in the six months ended December 28, 2014 .

The following is an analysis of the Company’s cash, cash equivalents, investments, and restricted cash and investments in unrealized loss positions:
 
December 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
$
256,272

 
$
(313
)
 
$
1,816

 
$
(4
)
 
$
258,088

 
$
(317
)
 
U.S. Treasury & Agencies
347,138

 
(2,051
)
 

 

 
347,138

 
(2,051
)
 
Mutual Funds
22,053

 
(573
)
 

 

 
22,053

 
(573
)
 
Government-Sponsored Enterprises
47,507

 
(270
)
 

 

 
47,507

 
(270
)
 
Foreign Government Bonds
39,895

 
(229
)
 

 

 
39,895

 
(229
)
 
Corporate Notes and Bonds
1,107,398

 
(5,252
)
 
39,808

 
(149
)
 
1,147,206

 
(5,401
)
Mortgage Backed Securities — Residential
23,303

 
(279
)
 
1,669

 
(92
)
 
24,972

 
(371
)
Mortgage Backed Securities — Commercial
93,913

 
(654
)
 
12,421

 
(105
)
 
106,334

 
(759
)
 
$
1,937,479

 
$
(9,621
)
 
$
55,714

 
$
(350
)
 
$
1,993,193

 
$
(9,971
)
The amortized cost and fair value of cash equivalents, investments and restricted investments with contractual maturities are as follows as of December 27, 2015 :
 
Cost
 
Estimated
Fair
Value
(in thousands)
Due in one year or less
$
2,260,834

 
$
2,260,815

Due after one year through five years
1,837,148

 
1,829,956

Due in more than five years
204,170

 
202,794

 
$
4,302,152

 
$
4,293,565

The Company 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 Condensed Consolidated Balance Sheets.

11





Derivative Instruments and Hedging
The Company carries derivative financial instruments (“derivatives”) on its Condensed 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 rates 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 and foreign currency options that generally expire within 12 months and no later than 24 months . These foreign currency forward contracts and foreign currency options 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.

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. Changes in the fair value of foreign exchange options due to changes in time value are included in the assessment of effectiveness. 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 or six months ended December 27, 2015 and December 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 associated with the forward contracts 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 December 27, 2015 , the Company had losses of $3.0 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 9.3 years. Additionally, the Company had gains of $0.4 million accumulated in other comprehensive income, net of tax, related to cash flow hedges which it expects to reclassify from other comprehensive income into earnings over the next 12 months.
Balance Sheet Hedges
The Company also enters into foreign currency forward contracts to hedge fluctuations associated with foreign currency denominated monetary assets and liabilities, primarily third party accounts receivables, accounts payables and intercompany receivables and payables. These forward contracts are not designated for hedge accounting treatment. Therefore, the change in

12





fair value of these derivatives is recorded as a component of other income (expense) and offsets the change in fair value of the foreign currency denominated assets and liabilities, which are also recorded in other income (expense).
As of December 27, 2015 , the Company had the following outstanding foreign currency 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
$

 
$
99,765

 
$

 
$
94,636

Swiss franc

 

 
4,881

 

Euro
20,065

 

 
15,276

 

Korean won
5,515

 

 
8,483

 

Singapore dollar

 

 
5,674

 

Taiwan dollar

 

 
24,410

 

 
$
25,580

 
$
99,765

 
$
58,724

 
$
94,636

 
 
 
 
 
 
 
 
Foreign Currency Option Contracts
 
 
 
 
 
 
 
 
Buy Contracts
 
Sell Contracts
 
Buy Contracts
 
Sell Contracts
Japanese yen
$

 
$
39,135

 
$

 
$


The fair value of derivative instruments in the Company’s Condensed Consolidated Balance Sheets as of December 27, 2015 and June 28, 2015 were as follows:
 
December 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
 
$
1,732

 
Accrued
liabilities
 
$
237

 
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
 
84

 
Accrued
liabilities
 
77

 
Prepaid expense
and other assets
 
8

 
Accrued
liabilities
 
960

Total derivatives
 
 
$
1,816

 
 
 
$
314

 
 
 
$
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 December 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 $0.3 million , resulting in a net derivative asset of $1.5 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.

13





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 December 27, 2015
 
Six Months Ended December 27, 2015
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)
Foreign Exchange Contracts
Revenue
$
4,256

 
$
(4,808
)
 
$
215

 
$
4,187
 
 
$
(6,186
)
$
247

Foreign Exchange Contracts
Cost of goods sold
(223
)
 
1,052

 
(14
)
 
(638
)
 
2,557
 
(36
)
Foreign Exchange Contracts
Selling, general, and
administrative
147

 
111

 
(12
)
 
(26
)
 
369
 
(19
)
Interest Rate Contracts
Other expense, net

 
(95
)
 

 
 
 
(189
)

 
 
$
4,180

 
$
(3,740
)
 
$
189

 
$
3,523
 
 
$
(3,449
)
 
$
192

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended December 28, 2014
 
Six Months Ended December 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
Gain (Loss)
Recognized
in AOCI
Gain (Loss)
Reclassified
from AOCI
into Income
Gain (Loss)
Recognized
in Income
 
Gain (Loss)
Recognized
in AOCI
Gain (Loss)
Reclassified
from AOCI
into Income
Gain (Loss)
Recognized
in Income
Derivatives Designated
as Hedging Instruments
 
(in thousands)
Foreign Exchange Contracts
Revenue
$
8,765

 
$
4,967

 
$
81

 
$
11,789
 
 
$
5,436

 
$
124

Foreign Exchange Contracts
Cost of goods sold
(1,264
)
 
(1,557
)
 
(19
)
 
(3,287
)
 
(1,833
)
 
(25
)
Foreign Exchange Contracts
Selling, general, and
administrative
(555
)
 
(604
)
 
(9
)
 
(1,421
)
 
(709
)
 
(11
)
Foreign Exchange Contracts
Other expense, net
2,071

 

 

 
2,071
 
 

 

 
 
$
9,017

 
$
2,806

 
$
53

 
$
9,152
 
 
$
2,894

 
$
88

The effect of derivative instruments not designated as cash flow hedges on the Company’s Condensed Consolidated Statements of Operations was as follows:
 
 
Three Months Ended
 
Six Months Ended
 
December 27,
2015
 
December 28,
2014
 
December 27, 2015
 
December 28, 2014
Derivatives Not Designated as Hedging Instruments:
Location 
of Gain
Recognized 
in Income
 
Gain 
Recognized
in Income
 
Gain 
Recognized
in Income
 
Gain 
Recognized
in Income
 
Gain 
Recognized
in Income
 
 
 
(in thousands)
Foreign Exchange Contracts
Other 
income
 
$
1,561

 
$
1,118

 
$
7,568

 
$
2,086


14





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.

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:
 
December 27,
2015
 
June 28,
2015
(in thousands)
Raw materials
$
546,892

 
$
566,645

Work-in-process
118,161

 
141,264

Finished goods
214,768

 
235,437

 
$
879,821

 
$
943,346

NOTE 9 — GOODWILL AND INTANGIBLE ASSETS
Goodwill
The balance of Goodwill is approximately $1.4 billion as of December 27, 2015 and June 28, 2015 . Of the $1.4 billion goodwill balance, $61.1 million is tax deductible and the remaining balance is not tax deductible due to purchase accounting and applicable foreign law.

15





Intangible Assets
The following table provides the Company’s intangible assets as of December 27, 2015 :
 
Gross
 
Accumulated
Amortization
 
Net
(in thousands)
Customer relationships
$
615,414

 
$
(267,855
)
 
$
347,559

Existing technology
643,750

 
(357,344
)
 
286,406

Patents
36,053

 
(27,476
)
 
8,577

Other intangible assets
35,914

 
(35,425
)
 
489

Intangible assets subject to amortization
1,331,131

 
(688,100
)
 
643,031

Development rights
9,100

 
 
 
9,100

Intangible assets not subject to amortization
9,100

 
 
 
9,100

Total intangible assets
$
1,340,231

 
$
(688,100
)
 
$
652,131


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
1,328,876

 
(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 $39.3 million and $40.0 million in intangible asset amortization expense during the three months ended December 27, 2015 and December 28, 2014 , respectively. The Company recognized $78.3 million and $79.2 million in intangible asset amortization expense during the six months ended December 27, 2015 , and December 28, 2014 , respectively.
The estimated future amortization expense of intangible assets, excluding those with indefinite lives, as of December 27, 2015 was as follows:
Fiscal Year
Amount
 
(in thousands)
2016 (6 months)
$
77,954

2017
154,356

2018
153,152

2019
115,203

2020
50,054

Thereafter
92,312

 
 
 
$
643,031


16





NOTE 10 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
 
December 27,
2015
 
June 28,
2015
(in thousands)
Accrued compensation
$
375,937

 
$
314,516

Warranty reserves
97,334

 
93,209

Income and other taxes payable
68,072

 
39,275

Dividend payable
47,539

 
47,659

Other
168,378

 
154,779

 
$
757,260

 
$
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 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 December 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 Condensed Consolidated Balance Sheets. Upon closure of the conversion period, the 2041 Notes not converted will be reclassified back into non-current 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 non-current liabilities, and the temporary equity for the 2016 Notes and 2018 Notes was reclassified back into permanent equity. The 2016 Notes remain in current liabilities due to their scheduled maturity. During the period ending December 27, 2015 , 83 of the Convertible Notes, with a total par value of $83,000 , were settled at the note holders’ option. In conjunction with the conversion, 264 shares of common stock were issued. Additionally, during the period ended December 27, 2015 , the Company received notice of note holders' intention to convert 10 additional Convertible Notes, the Company expects those conversions to settle in the period ended March 27, 2016.

17





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

 
$
410,067

 
$

 
$

 
$

 
$

 
Carrying value, current portion
443,704

 

 
522,249

 
435,493

 
402,320

 
520,313

Unamortized discount
6,283

 
39,887

 
177,662

 
14,507

 
47,680

 
179,622

Principal amount
$
449,987

 
$
449,954

 
$
699,911

 
$
450,000

 
$
450,000

 
$
699,935

 
 
 
 
 
 
 
 
 
 
 
 
 
Carrying amount of permanent equity component, net of tax
$
76,228

 
$
104,886

 
$
150,415

 
$
61,723

 
$
57,215

 
$
148,487

Carrying amount of temporary equity component, net of tax
$

 
$

 
$
177,662

 
$
14,507

 
$
47,679

 
$
179,622

 
Remaining amortization period (years)
0.4

 
2.4

 
25.4

 
 
 
 
 
 
 
Effective interest rate on liability component
4.29
%
 
5.27
%
 
4.28
%
 
 
 
 
 
 
Fair Value of Notes (Level 2)
$
583,858

 
$
643,434

 
$
1,634,292

 
 
 
 
 
 
Conversion rate (shares of common stock per $1,000 principal amount of notes)
16.2107

 
16.2107

 
29.0921

 
 
 
 
 
 
Conversion price (per share of common stock)
$
61.69

 
$
61.69

 
$
34.37

 
 
 
 
 
 
If-converted value in excess of par value
$
136,426

 
$
136,416

 
$
936,978

 
 
 
 
 
 
Estimated share dilution using average quarterly stock price $74.11 per share
1,223

 
1,223

 
10,918

 
 
 
 
 
 
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 December 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 Company exercised the convertible note hedge in the three months ended December 27, 2015, to offset the impact of the 2016 note and 2018 note conversions during the period and received 79 shares of Common Stock. The exercise price is adjusted for certain corporate events, including dividends on the Company’s Common Stock.


18





The following table presents the details of the warrants and convertible note hedge arrangements as of December 27, 2015 :
 
2016 Notes
 
2018 Notes
(shares in thousands)
Warrants:
 
 
 
Underlying shares
7,295

 
7,295

Estimated share dilution using average quarterly stock price $74.11 per share
421

 

Exercise price
$
69.83