Lam Research Corporation
LAM RESEARCH CORP (Form: 10-Q, Received: 10/23/2017 16:30:10)
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 24, 2017
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
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 19, 2017 , the Registrant had 161,946,248  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
September 24,
2017
 
September 25,
2016
Revenue
$
2,478,140

 
$
1,632,419

Cost of goods sold
1,328,797

 
916,222

Gross margin
1,149,343

 
716,197

Research and development
275,078

 
235,240

Selling, general, and administrative
181,043

 
165,010

Total operating expenses
456,121

 
400,250

Operating income
693,222

 
315,947

Other expense, net
(5,502
)
 
(23,154
)
Income before income taxes
687,720

 
292,793

Income tax expense
(97,030
)
 
(28,958
)
Net income
$
590,690

 
$
263,835

Net income per share:
 
 
 
Basic
$
3.64

 
$
1.64

Diluted
$
3.21

 
$
1.47

Number of shares used in per share calculations:
 
 
 
Basic
162,141

 
160,607

Diluted
183,880

 
180,017

Cash dividend declared per common share
$
0.45

 
$
0.30


3



Table of Contents


LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)

 
 
Three Months Ended
September 24,
2017
 
September 25,
2016
Net income
$
590,690

 
$
263,835

Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustment
7,869

 
4,501

Cash flow hedges:
 
 
 
Net unrealized gains (losses) during the period
3,062

 
(2,421
)
Net losses reclassified into earnings
2,188

 
11,950

 
5,250

 
9,529

Available-for-sale investments:
 
 
 
Net unrealized losses during the period
(1,727
)
 
(2,723
)
Net (gains) losses reclassified into earnings
(123
)
 
903

 
(1,850
)
 
(1,820
)
Defined benefit plans, net change in unrealized component
(2,356
)
 
123

Other comprehensive income, net of tax
8,913

 
12,333

Comprehensive income
$
599,603

 
$
276,168


See Notes to Condensed Consolidated Financial Statements


4

Table of Contents


LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
 
 
September 24,
2017
 
June 25,
2017
(unaudited)
 
(1)
ASSETS
 
 
 
Cash and cash equivalents
$
2,406,462

 
$
2,377,534

Investments
3,775,925

 
3,663,628

Accounts receivable, less allowance for doubtful accounts of $5,271 as of September 24, 2017, and $5,103  as of June 25, 2017
1,530,762

 
1,673,398

Inventories
1,328,297

 
1,232,916

Prepaid expenses and other current assets
187,334

 
195,022

Total current assets
9,228,780

 
9,142,498

Property and equipment, net
745,600

 
685,595

Restricted cash and investments
256,045

 
256,205

Goodwill
1,484,030

 
1,385,673

Intangible assets, net
420,359

 
410,995

Other assets
263,812

 
241,799

Total assets
$
12,398,626

 
$
12,122,765

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Trade accounts payable
$
471,805

 
$
464,643

Accrued expenses and other current liabilities
1,078,998

 
969,361

Deferred profit
597,921

 
607,672

Current portion of convertible notes and capital leases
639,907

 
908,439

Total current liabilities
2,788,631

 
2,950,115

Senior notes, convertible notes, and capital leases, less current portion
1,793,477

 
1,784,974

Income taxes payable
129,611

 
120,178

Other long-term liabilities
278,733

 
280,186

Total liabilities
4,990,452

 
5,135,453

Commitments and contingencies

 

Temporary equity, convertible notes
136,996

 
169,861

Stockholders’ equity:
 
 
 
Preferred stock, at par value of $0.001 per share; authorized - 5,000 shares, none outstanding

 

Common stock, at par value of $0.001 per share; authorized, 400,000 shares; issued and outstanding, 162,144 shares at September 24, 2017, and 161,723 shares at June 25, 2017
162

 
162

Additional paid-in capital
5,891,549

 
5,845,485

Treasury stock, at cost; 107,360 shares at September 24, 2017, and 105,569 shares at June 25, 2017
(5,375,920
)
 
(5,216,187
)
Accumulated other comprehensive loss
(52,787
)
 
(61,700
)
Retained earnings
6,808,174

 
6,249,691

Total stockholders’ equity
7,271,178

 
6,817,451

Total liabilities and stockholders’ equity
$
12,398,626

 
$
12,122,765

(1) Derived from audited financial statements


See Notes to Condensed Consolidated Financial Statements


5

Table of Contents


LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three Months Ended
September 24,
2017
 
September 25,
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
590,690

 
$
263,835

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
79,142

 
74,562

Deferred income taxes
43,204

 
7,633

Equity-based compensation expense
41,783

 
38,595

Amortization of note discounts and issuance costs
4,588

 
6,830

Other, net
6,569

 
16,807

Changes in operating assets and liabilities
92,330

 
64,962

Net cash provided by operating activities
858,306

 
473,224

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Capital expenditures and intangible assets
(60,064
)
 
(41,979
)
Business acquisition, net of cash acquired
(115,613
)
 

Purchases of available-for-sale securities
(1,425,407
)
 
(38,149
)
Sales and maturities of available-for-sale securities
1,307,633

 
469,899

Transfers of restricted cash and investments
160

 
(5,219
)
Other, net
(10,600
)
 
(7,800
)
Net cash (used for) provided by investing activities
(303,891
)
 
376,752

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Principal payments on long-term debt and capital lease obligations and payments for debt issuance costs
(301,727
)
 
(371
)
Treasury stock purchases
(155,385
)
 
(1,854
)
Dividends paid
(72,738
)
 
(48,052
)
Reissuance of treasury stock related to employee stock purchase plan

 
19,320

Proceeds from issuance of common stock
1,042

 
1,459

Other, net
4

 
(10
)
Net cash used for financing activities
(528,804
)
 
(29,508
)
Effect of exchange rate changes on cash and cash equivalents
3,317

 
1,911

Net increase in cash and cash equivalents
28,928

 
822,379

Cash and cash equivalents at beginning of period
2,377,534

 
5,039,322

Cash and cash equivalents at end of period
$
2,406,462

 
$
5,861,701

Schedule of non-cash transactions:


 


Accrued payables for stock repurchases
4,350

 

Accrued payables for capital expenditures
34,531

 
11,631

Dividends payable
73,127

 
48,397

Transfers of inventory to property and equipment, net
11,852

 
13,419


See Notes to Condensed Consolidated Financial Statements


6

Table of Contents


LAM RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 24, 2017
(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 25, 2017 , which are included in the Company’s Annual Report on Form 10-K as of and for the year ended June 25, 2017 (the “2017 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 content on any website referred to in this Form 10-Q is not a part of or incorporated by reference in this Form 10-Q unless expressly noted.
The condensed 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 24, 2018 and includes 52  weeks. The quarters ended September 24, 2017 (the “September 2017 quarter”) and September 25, 2016 (the “September 2016 quarter”) included 13 weeks.
NOTE 2 — RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted
In November 2015, the Financial Accounting Standards Board (“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 Company adopted this standard prospectively in the first quarter of fiscal year 2018. The implementation resulted in a net reduction of prepaid expense and other current assets of $49.7 million , accrued expense and other current liabilities of $5.3 million , and other long-term liabilities of $39.4 million ; and an increase in other assets of $5.0 million in the Company’s Condensed Consolidated Balance Sheet, and had no impact on cash provided by or used in operations for any period presented.
In March 2016, the FASB released ASU 2016-9, “Compensation Stock Compensation.” Key changes in the amendment include:
entities will be required to recognize all excess tax benefits or deficiencies as an income tax benefit or expense in the income statement, eliminating additional paid in capital (“APIC”) pools;
entities will no longer be required to delay recognition of excess tax benefits until they are realized;
entities will be required to classify the excess tax benefits as an operating activity in the statement of cash flows;
entities will be allowed to elect an accounting policy to either estimate the number of forfeitures, or account for forfeitures as they occur;
entities can withhold up to the maximum individual statutory tax rate without classifying the awards as a liability; and
the cash paid to satisfy the statutory income tax withholding obligations shall be classified as a financing activity in the statement of cash flows.
The Company adopted this standard in the first quarter of fiscal year 2018. As a result of the adoption, the Company recorded a $40.9 million cumulative-effect adjustment to retained earnings for the recognition of previously unrecognized excess tax benefits for all years prior to the adoption. As required by the standard update, the amendment was applied prospectively to recognize excess tax benefits or deficiencies in the income statement in the period of occurrence. Additionally, the Company has elected to apply the change in cash flow classification on a prospective basis. The Company has elected to continue to estimate the number of forfeitures expected to occur to determine the amount of compensation cost to be recognized each

7





period. The Company has elected to adopt the effects of the standard update with regard to the income tax withholdings obligations on a prospective basis, such withholdings in the period ended September 24, 2017 were not material.
Updates Not Yet Effective
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 FASB issued subsequent amendments to the initial guidance in August 2015, March 2016, April 2016, May 2016 and December 2016 within ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20, respectively. 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 these standards starting in the first quarter of fiscal year 2019 using either of two methods: (1) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within the standard; or (2) 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. The Company is continuing its evaluation of the impact that the new standard will have on its Condensed Consolidated Financial Statements and disclosures, business processes, systems, and controls. While the Company’s evaluation of the impact of the standard on its financial statements with respect to its spare parts and service revenue has not been completed, the Company believes that the timing of revenue recognition for certain of its systems will generally be earlier than under existing revenue recognition guidance. The Company continues to evaluate the impact to its revenues related to its pending adoption of these standards and its preliminary assessments are subject to change.
In January 2016, the 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 Condensed Consolidated Financial Statements.
In January 2016, the FASB released ASU 2016-2, “Leases.” The amendment requires an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. The amendment offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. The Company is required to adopt this standard starting in the first quarter of fiscal year 2020. Early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption on its Condensed Consolidated Financial Statements.
In June 2016, the FASB released ASU 2016-13, “Financial Instruments Credit Losses.” The amendment revises the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in more timely recognition of losses on financial instruments, including but not limited to, available for sale debt securities and accounts receivable. The Company is required to adopt this standard starting in the first quarter of fiscal year 2021. Early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption on its Condensed Consolidated Financial Statements.
In August 2016, the FASB released ASU 2016-15, “Statement of Cash Flows Classification of Certain Cash Receipts and Cash Payments.” The amendment provides and clarifies guidance on the classification of certain cash receipts and cash payments in the statement of cash flows to eliminate diversity in practice. The Company is required to adopt the standard update in the first quarter of fiscal year 2019, with a retrospective transition method required. Early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption on its Condensed Consolidated Financial Statements.
In October 2016, the FASB released ASU 2016-16, “Income Tax Intra-Entity Transfers of Assets Other than Inventory.” This standard update improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Early adoption is permitted. The Company is required to adopt the standard in the first quarter of fiscal year 2019.

8





The Company is currently in the process of evaluating the impact of adoption on its Condensed Consolidated Financial Statements.
In November 2016, the FASB released ASU 2016-18, “Statement of Cash Flows Restricted Cash.” This standard update requires that restricted cash and restricted cash equivalents be included in cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown in the statement of cash flows. The Company is required to adopt this standard in the first quarter of fiscal year 2019, with a retrospective transition method required. Early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption on its Condensed Consolidated Financial Statements.
In August 2017, the FASB released ASU 2017-12, “Targeted Improvements to Accounting for Hedging Activities.” The new guidance is intended to: (1) more closely align hedge accounting with an entity’s risk management strategies, (2) simplify the application of hedge accounting by eliminating the requirement to separately measure and report hedge ineffectiveness, and (3) increase transparency around the scope and results of hedging programs. The Company is required to adopt the standard in the first quarter of fiscal year 2020. Early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption on its Condensed Consolidated Financial Statements.
NOTE 3 — EQUITY-BASED COMPENSATION PLANS
The Lam Research Corporation 2015 Stock Incentive Plan, as amended (the “2015 Plan”), provides for the grant of non-qualified equity-based awards of the Company’s Common Stock to eligible employees and non-employee directors, including stock options, restricted stock units (“RSUs”), and market-based performance RSUs (“market-based PRSUs”). 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, RSU, and market-based PRSU awards typically vest over a period of three years . The Company also has an employee stock purchase plan that allows employees to purchase its Common Stock at a discount through payroll deductions.
The Company recognized the following equity-based compensation expense and related income tax benefit in the Condensed Consolidated Statements of Operations:
 
Three Months Ended
 
September 24,
2017
 
September 25,
2016
 
(in thousands)
Equity-based compensation expense
$
41,783

 
$
38,595

Income tax benefit recognized related to equity-based compensation expense
$
13,387

 
$
10,905

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. In the first quarter of fiscal year 2018, the Company adopted ASU 2016-9, “Compensation Stock Compensation,” as discussed further in Note 2.

9





NOTE 4 — OTHER EXPENSE, NET
The significant components of other expense, net, are as follows:
 
Three Months Ended
 
September 24,
2017
 
September 25,
2016
 
(in thousands)
Interest income
$
20,209

 
$
12,763

Interest expense
(23,905
)
 
(41,429
)
Gains on deferred compensation plan related assets, net
3,453

 
6,172

Foreign exchange (losses) gains, net
(3,000
)
 
1,219

Other, net
(2,259
)
 
(1,879
)
 
$
(5,502
)
 
$
(23,154
)
Interest income in the three months ended September 24, 2017 , increased compared to the three months ended September 25, 2016 , due to longer portfolio duration and higher yield. Interest expense decreased in the September 2017 quarter, compared to the September 2016 quarter, due to the termination of the Term Loan Agreement and mandatory redemption of the Senior Notes due 2023 and 2026 during the December 2016 quarter.
NOTE 5 — INCOME TAX EXPENSE
The Company recorded an income tax expense of $97.0 million for the three months ended September 24, 2017 , which yielded an effective tax rate of approximately 14.1% .
The difference between the U.S. federal statutory tax rate of 35% and the Company’s effective tax rate for the three months months ended September 24, 2017 , is primarily due to income in lower tax jurisdictions.
The Company is in various stages of examination in connection with all of its tax audits worldwide, and it is difficult to determine when these examinations will be settled. It is reasonably possible that over the next 12-month period the Company may experience an increase or decrease in its unrecognized tax benefits as a result of tax examinations or lapses of statute of limitation. The estimated reduction in unrecognized tax benefits may range from $15 million to $50 million .
NOTE 6 — NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the treasury stock method, for dilutive stock options, restricted stock units, 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
 
September 24,
2017
 
September 25,
2016
 
(in thousands, except per share data)
Numerator:
 
 
 
Net income
$
590,690

 
$
263,835

Denominator:
 
 
 
Basic average shares outstanding
162,141

 
160,607

Effect of potential dilutive securities:
 
 
 
Employee stock plans
2,514

 
2,142

Convertible notes
15,151

 
15,220

Warrants
4,074

 
2,048

Diluted average shares outstanding
183,880

 
180,017

Net income per share - basic
$
3.64

 
$
1.64

Net income per share - diluted
$
3.21

 
$
1.47



10





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 24,
2017
 
September 25,
2016
 
(in thousands)
Number of options and RSUs excluded
7

 
196

Diluted shares outstanding do not include any effect resulting from note hedges associated with the Company’s 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 Condensed 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 foreign currency related 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 to the Condensed Consolidated Financial Statements for additional information regarding the fair value of the Company’s Senior Notes and Convertible Notes.

11





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 24, 2017 , and June 25, 2017 :
 
September 24, 2017
 
 
 
 
 
 
 
 
(Reported Within)
Cost
 
Unrealized
Gain
 
Unrealized
(Loss)
 
Fair Value
 
Cash and
Cash
Equivalents
 
Investments
 
Restricted
Cash &
Investments
 
Other
Assets
(in thousands)
Cash
$
543,990

 
$

 
$

 
$
543,990

 
$
537,972

 
$

 
$
6,018

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Time deposit
693,205

 

 

 
693,205

 
443,178

 

 
250,027

 

Money market funds
1,395,032

 

 

 
1,395,032

 
1,395,032

 

 

 

U.S. Treasury and agencies
821,441

 
265

 
(2,569
)
 
819,137

 
15,648

 
803,489

 

 

Mutual funds
53,131

 
3,125

 
(70
)
 
56,186

 

 

 

 
56,186

Level 1 Total
2,962,809

 
3,390

 
(2,639
)
 
2,963,560

 
1,853,858

 
803,489

 
250,027

 
56,186

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal notes and bonds
165,029

 
322

 
(21
)
 
165,330

 

 
165,330

 

 

U.S. Treasury and agencies
12,798

 

 
(102
)
 
12,696

 

 
12,696

 

 

Government-sponsored enterprises
55,845

 

 
(322
)
 
55,523

 

 
55,523

 

 

Foreign government bonds
67,040

 
90

 
(128
)
 
67,002

 

 
67,002

 

 

Corporate notes and bonds
2,532,374

 
4,020

 
(2,376
)
 
2,534,018

 
14,632

 
2,519,386

 

 

Mortgage backed securities — residential
46,614

 
63

 
(116
)
 
46,561

 

 
46,561

 

 

Mortgage backed securities — commercial
106,173

 
40

 
(275
)
 
105,938

 

 
105,938

 

 

Level 2 Total
2,985,873

 
4,535

 
(3,340
)
 
2,987,068

 
14,632

 
2,972,436

 

 

Total
$
6,492,672

 
$
7,925

 
$
(5,979
)
 
$
6,494,618

 
$
2,406,462

 
$
3,775,925

 
$
256,045

 
$
56,186

 
 
June 25, 2017
 
 
 
 
 
 
 
 
(Reported Within)
Cost
 
Unrealized
Gain
 
Unrealized
(Loss)
 
Fair Value
 
Cash and
Cash
Equivalents
 
Investments
 
Restricted
Cash &
Investments
 
Other
Assets
(in thousands)
Cash
$
551,308

 
$

 
$

 
$
551,308

 
$
545,130

 
$

 
$
6,178

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Time deposit
640,666

 

 

 
640,666

 
390,639

 

 
250,027

 

Money market funds
1,423,417

 

 

 
1,423,417

 
1,423,417

 

 

 

U.S. Treasury and agencies
783,848

 
684

 
(2,111
)
 
782,421

 
8,297

 
774,124

 

 

Mutual funds
53,247

 
3,007

 

 
56,254

 

 

 

 
56,254

Level 1 Total
2,901,178

 
3,691

 
(2,111
)
 
2,902,758

 
1,822,353

 
774,124

 
250,027

 
56,254

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal notes and bonds
194,575

 
308

 
(7
)
 
194,876

 

 
194,876

 

 

U.S. Treasury and agencies
12,795

 

 
(167
)
 
12,628

 

 
12,628

 

 

Government-sponsored enterprises
24,502

 

 
(6
)
 
24,496

 

 
24,496

 

 

Foreign government bonds
62,917

 
219

 
(114
)
 
63,022

 

 
63,022

 

 

Corporate notes and bonds
2,433,622

 
4,654

 
(1,840
)
 
2,436,436

 
10,051

 
2,426,385

 

 

Mortgage backed securities — residential
102,760

 
87

 
(489
)
 
102,358

 

 
102,358

 

 

Mortgage backed securities — commercial
65,828

 
9

 
(98
)
 
65,739

 

 
65,739

 

 

Level 2 Total
2,896,999

 
5,277

 
(2,721
)
 
2,899,555

 
10,051

 
2,889,504

 

 

Total
$
6,349,485

 
$
8,968

 
$
(4,832
)
 
$
6,353,621

 
$
2,377,534

 
$
3,663,628

 
$
256,205

 
$
56,254

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

12





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 24, 2017 or September 25, 2016 . Additionally, gross realized gains/(losses) from sales of investments were approximately $0.8 million and $(1.0) million , respectively, in the three months ended September 24, 2017 , and $2.6 million and $(0.2) million , respectively, in the three months ended September 25, 2016 .
The following is an analysis of the Company’s cash, cash equivalents, investments, and restricted cash and investments in unrealized loss positions:
 
September 24, 2017
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)
  U.S. Treasury and agencies
$
660,429

 
$
(2,671
)
 
$

 
$

 
$
660,429

 
$
(2,671
)
Municipal notes and bonds
18,653

 
(21
)
 

 

 
18,653

 
(21
)
Mutual funds
3,122

 
(70
)
 

 

 
3,122

 
(70
)
  Government-sponsored enterprises
55,297

 
(322
)
 

 

 
55,297

 
(322
)
  Foreign government bonds
33,729

 
(128
)
 

 

 
33,729

 
(128
)
  Corporate notes and bonds
1,282,655

 
(2,376
)
 

 

 
1,282,655

 
(2,376
)
Mortgage backed securities — residential
30,210

 
(93
)
 
2,006

 
(23
)
 
32,216

 
(116
)
Mortgage backed securities — commercial
98,303

 
(261
)
 
2,634

 
(14
)
 
100,937

 
(275
)
 
$
2,182,398

 
$
(5,942
)
 
$
4,640

 
$
(37
)
 
$
2,187,038

 
$
(5,979
)

The amortized cost and fair value of cash equivalents, investments, and restricted investments with contractual maturities are as follows as of September 24, 2017 :
 
Cost
 
Estimated
Fair
Value
(in thousands)
Due in one year or less
$
2,764,552

 
$
2,764,415

Due after one year through five years
2,987,295

 
2,986,525

Due in more than five years
143,704

 
143,502

 
$
5,895,551

 
$
5,894,442

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 twelve months from the date of purchase nonetheless are classified as short-term on the accompanying Condensed Consolidated Balance Sheets.
Derivative Instruments and Hedging
The Company carries derivative financial instruments (“derivatives”) on its Condensed Consolidated Balance Sheets at their fair values. The Company enters into foreign currency forward contracts and foreign currency options with financial institutions with the primary objective of reducing volatility of earnings and cash flows related to foreign currency exchange rate fluctuations. In addition, the Company enters into interest rate swap arrangements to manage interest rate risk. The counterparties to these derivatives 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.

13





Cash Flow Hedges
The Company’s financial position is routinely subjected to market risk associated with foreign currency exchange rate fluctuations on non-U.S. dollar transactions or cash flows, primarily from Japanese yen-denominated revenues and euro- denominated 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 hedge 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, the Company has entered into interest rate swap agreements to hedge against the variability of cash flows due to changes in certain benchmark interest rates on fixed rate debt. These instruments are designated as cash flow hedges at inception and are settled in conjunction with the issuance of debt. The effective portion of the contracts’ gains or losses is included in accumulated other comprehensive (loss) and is amortized 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 to both 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 24, 2017 or September 25, 2016 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 September 24, 2017 , the Company had gains of $6.3 million accumulated in other comprehensive income, net of tax, related to foreign exchange cash flow hedges which it expects to reclassify from other comprehensive income into earnings over the next 12 months . Additionally, the Company had a net loss of $1.9 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 7.5 years .
Fair Value Hedges
The Company has interest rate contracts whereby the Company receives fixed rates and pays variable rates based on certain benchmark interest rates, resulting in a net increase or decrease to interest expense, a component of other expense, net in our Condensed Consolidated Statement of Operations. These interest rate contracts are designated as fair value hedges and hedge against changes in the fair value of our debt portfolio. The Company concluded that these interest rate contracts meet the criteria necessary to qualify for the short-cut method of hedge accounting, and as such an assumption is made that the change in the fair value of the hedged debt, due to changes in the benchmark rate, exactly offsets the change in the fair value of the interest rate swap. Therefore, the derivative is considered to be effective at achieving offsetting changes in the fair value of the hedged liability, and no ineffectiveness is recognized.
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 cash, third-party accounts receivable, accounts payable, 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).

14





As of September 24, 2017 , the Company had the following outstanding foreign currency contracts that were entered into under its cash flow and balance sheet hedge programs:
 
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
$

 
$
393,345

 
$

 
$
282,311

Euro
31,917

 

 
31,246

 

Korean won
13,536

 

 

 
84,122

Taiwan dollar

 

 
12,658

 

Swiss franc

 

 
9,375

 

Chinese renminbi

 

 
7,137

 
 
Singapore dollar

 

 
4,469

 

 
$
45,453

 
$
393,345

 
$
64,885

 
$
366,433

Foreign currency option contracts
 
 
 
 
 
 
 
 
Buy Put
 
Sell Put
 
Buy Put (1)
 
Sell Put
Japanese yen
$
36,036

 
$

 
$
8,929

 
$
8,929

( 1) Contracts were entered into and designated as cash flow hedges under ASC 815 at contract inception as part of the Company’s cash flow hedge program. The contracts were subsequently de-designated; changes in fair market value subsequent to de-designation effect current earnings.

The fair value of derivative instruments in the Company’s Condensed Consolidated Balance Sheets as of September 24, 2017 , and June 25, 2017 were as follows:
 
September 24, 2017
 
June 25, 2017
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
 
$
9,598

 
Accrued expenses and other current liabilities
 
$
368

 
Prepaid expense
and other assets
 
$
8,061

 
Accrued expenses and other current liabilities
 
$
2,916

Interest rate contracts, short-term
Prepaid expense and other assets
 
316

 

 


 

 


 
Accrued expenses and other current liabilities
 
2,833

Interest rate contracts, long-term

 


 
Other long-term liabilities
 
13,077

 

 


 
Other long-term liabilities
 
7,269

  Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
Prepaid expense
and other assets
 
109

 
Accrued expenses and other current liabilities
 
461

 
Prepaid expense
and other assets
 
213

 
Accrued expenses and other current liabilities
 
342

Total Derivatives
 
 
$
10,023

 
 
 
$
13,906

 
 
 
$
8,274

 
 
 
$
13,360

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 24, 2017 , the potential effect of rights of offset associated with the above foreign exchange and interest rate contracts would be an offset to assets and liabilities by $5.1 million , resulting in a net

15





derivative asset of $4.9 million and net derivative liability of $8.8 million . As of June 25, 2017 , the potential effect of rights of offset associated with the above foreign exchange contracts would be an offset to both assets and liabilities by $5.9 million , resulting in a net derivative asset of $2.3 million and a net derivative liability of $7.4 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 24, 2017
 
Three Months Ended September 25, 2016
Effective Portion
 
Ineffective 
Portion
and Amount
Excluded from
Effectiveness
 
Effective Portion
 
Ineffective 
Portion
and Amount
Excluded from
Effectiveness
Derivatives Designated as Hedging Instruments
Location of 
Gain (Loss)
Recognized 
in or 
Reclassified
into Income
(Loss) Gain
Recognized
in AOCI
 
(Loss) Gain
Reclassified
from AOCI
into Income
 
Gain (Loss)
Recognized
in Income
 
(Loss) Gain
Recognized
in AOCI
 
(Loss) Gain
Reclassified
from AOCI
into Income
 
Gain (Loss)
Recognized
in Income
 
 
(in thousands)
Foreign Exchange Contracts
Revenue
$
(9
)
 
$
(3,806
)
 
$
2,547

 
$
(2,913
)
 
$
(13,605
)
 
$
705

Foreign Exchange Contracts
Cost of goods sold
2,443


824


(208
)
 
235

 
173

 
(67
)
Foreign Exchange Contracts
Selling, general, and
administrative
1,356


714


(117
)
 
(24
)
 
(9
)
 
(21
)
Foreign Exchange Contracts
Other expense, net




(17
)
 

 

 

Interest Rate Contracts
Other expense, net


(31
)


 

 
9

 

 
 
$
3,790

 
$
(2,299
)
 
$
2,205

 
$
(2,702
)
 
$
(13,432
)
 
$
617

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 24,
2017
 
September 25,
2016
Derivatives Not Designated as Hedging Instruments:
Location 
of Gain (Loss)
Recognized 
in Income
 
Gain
Recognized
in Income
 
Loss
Recognized
in Income
 
 
 
(in thousands)
Foreign Exchange Contracts
Other 
income
 
$
2,672

 
$
(383
)
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, Fitch Ratings, or Moody’s Investor Services. 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 and interest rate hedge contracts that are used to mitigate the effect of exchange rate and interest 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.

16





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 net realizable value. 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 24,
2017
 
June 25,
2017
(in thousands)
Raw materials
$
721,352

 
$
625,600

Work-in-process
200,271

 
213,066

Finished goods
406,674

 
394,250

 
$
1,328,297

 
$
1,232,916

NOTE 9 — GOODWILL AND INTANGIBLE ASSETS
Goodwill
The balance of goodwill is approximately $1.5 billion and $1.4 billion as of September 24, 2017 , and June 25, 2017 , respectively. As of September 24, 2017 , $61.1 million of the goodwill balance 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:
 
September 24, 2017
 
June 25, 2017
 
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net
(in thousands)
Customer relationships
$
630,257

 
$
(383,131
)
 
$
247,126

 
$
615,164

 
$
(366,439
)
 
$
248,725

Existing technology
669,603

 
(508,983
)
 
160,620

 
643,196

 
(487,056
)
 
156,140

Patents
36,553

 
(31,872
)
 
4,681

 
36,553

 
(31,238
)
 
5,315

Other intangible assets
43,814

 
(35,882
)
 
7,932

 
36,514

 
(35,699
)
 
815

Total intangible assets
$
1,380,227

 
$
(959,868
)
 
$
420,359

 
$
1,331,427

 
$
(920,432
)
 
$
410,995

The Company recognized $39.3 million and $38.7 million in intangible asset amortization expense during the three months ended September 24, 2017 , and September 25, 2016 , respectively. Refer to Note 15 - Business Combinations for additional information regarding intangible assets acquired during the three months ended September 24, 2017 .
The estimated future amortization expense of intangible assets, excluding those with indefinite lives, as of September 24, 2017 , was as follows:
Fiscal Year
Amount
 
(in thousands)
2018 (remaining 9 months)
$
121,147

2019
123,429

2020
58,296

2021
55,611

2022
51,801

Thereafter
10,075

 
$
420,359


17





NOTE 10 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
 
September 24,
2017
 
June 25,
2017
(in thousands)
Accrued compensation
$
510,583

 
$
447,363

Warranty reserves
168,337

 
161,981

Income and other taxes payable
145,022

 
95,127

Dividend payable
73,127

 
72,738

Other
181,929

 
192,152

 
$
1,078,998

 
$
969,361

 
 
 
 
NOTE 11 — LONG-TERM DEBT AND OTHER BORROWINGS
As of September 24, 2017 , and June 25, 2017 , the Company’s outstanding debt consisted of the following:
 
September 24, 2017
 
June 25, 2017
 
Amount
(in thousands)
 
Effective Interest Rate
 
Amount
(in thousands)
 
Effective Interest Rate
Fixed-rate 1.25% Convertible Notes Due May 15, 2018 ("2018 Notes")
$
238,367

(1)  
5.27
%
 
$
447,436

(2)  
5.27
%
Fixed-rate 2.75% Senior Notes Due March 15, 2020 ("2020 Notes")
500,000

 
2.88
%
 
500,000

 
2.88
%
Fixed-rate 2.80% Senior Notes Due June 15, 2021 ("2021 Notes")
800,000

 
2.95
%
 
800,000

 
2.95
%
Fixed-rate 3.80% Senior Notes Due March 15, 2025 ("2025 Notes")
500,000

 
3.87
%
 
500,000

 
3.87
%
Fixed-rate 2.625% Convertible Notes Due May 15, 2041 ("2041 Notes")
538,468

(1)  
4.28
%
 
631,074

(2)  
4.28
%
Total debt outstanding, at par
2,576,835

 
 
 
2,878,510

 
 
Unamortized discount
(145,241
)
 
 
 
(178,589
)
 
 
Fair value adjustment - interest rate contracts
(12,761
)
 
 
 
(10,102
)
 
 
Unamortized bond issuance costs
(2,798
)
 
 
 
(3,161
)
 
 
Total debt outstanding, at carrying value
$
2,416,035

 
 
 
$
2,686,658

 
 
Reported as:
 
 
 
 
 
 
 
Current portion of long-term debt
$
639,252

(3)  
 
 
$
907,827

(3)  
 
Long-term debt
1,776,783

 
 
 
1,778,831

 
 
Total debt outstanding, at carrying value
$
2,416,035

 
 
 
$
2,686,658

 
 
____________________________
(1) As of September 24, 2017 , these notes were convertible at the option of the bondholder, as a result of the condition described in (3) below. Upon closure of the conversion period, the 2041 Notes not converted will be reclassified back into noncurrent liabilities and the temporary equity will be reclassified into permanent equity.
(2) As of June 25, 2017 , these notes were convertible at the option of the bond holder, as a result of the condition described in (3) below.
(3) As of the report date, the market value of the Company’s Common Stock was greater than 130% of the convertible notes conversion price for 20 or more of the 30 consecutive trading days preceding the quarter-end. As a result, the 2041 Notes were classified in current liabilities and a portion of the equity component, associated with the convertible notes representing the unamortized discount, was classified in temporary equity on the Company’s Consolidated Balance Sheets.
Convertible Senior Notes
In May 2011, 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 1.25% , on a semi-annual basis on May 15 and November 15 of each year.
In June 2012, with the acquisition of Novellus Systems, Inc. (“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 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

18





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 table below, respectively. The equity component was initially valued equal to the principle value of the notes, less 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 a conversion feature, which equated to the initial debt discount.
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 table below. The principal value of Convertible Note conversions in the three months ended September 24, 2017 , was approximately $301.7 million .
Selected additional information regarding the Convertible Notes outstanding as of September 24, 2017 , and June 25, 2017 , is as follows:
 
September 24, 2017
 
June 25, 2017
2018 Notes
 
2041 Notes
 
2018 Notes
 
2041 Notes
(in thousands, except years, percentages, conversion rate, and conversion price)
Carrying amount of permanent equity component, net of tax
$
92,388

 
$
157,210

 
$
89,604

 
$
156,374

Carrying amount of temporary equity component, net of tax
$
5,816

 
$
131,180

 
$
15,186

 
$
154,675

Remaining amortization period (years)
0.6

 
23.6

 
0.8

 
23.8

Fair Value of Notes (Level 2)
$
697,829

 
$
2,805,294

 
 
 
 
Conversion rate (shares of common stock per $1,000 principal amount of notes)
16.6142

 
29.8160

 
 
 
 
Conversion price (per share of common stock)
$
60.19

 
$
33.54

 
 
 
 
If-converted value in excess of par value
$
461,533

 
$
2,298,926

 
 
 
 
Estimated share dilution using average quarterly stock price $159.71 per share
2,468

 
12,683

 
 
 
 
Convertible Note Hedges and Warrants
Concurrent with the issuance of the 2018 Notes the Company purchased a convertible note hedge and sold warrants. The warrants settlement is contractually defined as net share settlement. The exercise price is adjusted for certain corporate events, including dividends on the Company’s Common Stock. As of September 24, 2017 , the warrants associated with the 2018 Notes had not been exercised and remained outstanding.
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 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 2018 Notes, on the expiration date would result in the Company receiving net shares equivalent to the number of shares issuable by the Company upon conversion of the 2018 Notes. The exercise price is adjusted for certain corporate events, including dividends on the Company’s Common Stock. During the period ended September 24, 2017 the note hedge was partially settled, resulting in the receipt of approximately 2,092,000 shares.

19





The following table presents the details of the warrants and convertible note hedge arrangements as of September 24, 2017 :
 
2018 Notes
(shares in thousands)
Warrants:
 
Underlying shares
7,476

Estimated share dilution using average quarterly stock price $159.71 per share
4,074

Exercise price
$
72.69

Expiration date range
August 15 - October 24, 2018

Convertible Note Hedge:
 
  Number of shares available from counterparties
3,960

Exercise price
$
60.19

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”, together with the 2020 Notes, the “Senior Notes”). The Company pays interest at an annual rate of 2.75% and 3.80% , on the 2020 Notes and 2025 Notes, respectively, on a semi-annual basis on March 15 and September 15 of each year. During the year ended June 26, 2016, the Company entered into a series of interest rate contracts hedging the fair value of a portion of the 2025 Notes par value, whereby the Company receives a fixed rate and pays a variable rate based on a certain benchmark interest rate. Refer to Note 7 for additional information regarding these interest rate contracts.
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.
On June 7, 2016, The Company completed a public offering of $800 million aggregate principal amount of Senior Notes due June 2021 (the “2021 Notes”, together with the 2020 and 2025 Notes, the “Senior Notes”). The Company pays interest at an annual rate of 2.80% on the 2021 Notes on a semi-annual basis on June 15 and December 15 of each year.
The Company may redeem the 2021 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 to the 2021 Notes and accrued and unpaid interest before May 15, 2021. The Company may redeem the 2021 Notes at par, plus accrued and unpaid interest at any time on or after May 15, 2021. 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 2021 Notes at a price equal to 101% of the principal amount of the respective note, plus accrued and unpaid interest.
Selected additional information regarding the Senior Notes outstanding as of September 24, 2017 , is as follows: 
 
Remaining Amortization period
 
Fair Value of Notes (Level 2)
 
(years)
 
(in thousands)
2020 Notes
2.5
 
$
507,915

2021 Notes
3.7
 
$
810,384

2025 Notes
7.5
 
$
518,625



20





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 Convertible Notes, the Senior Notes, the term loan agreement and the revolving credit facility during the three months ended September 24, 2017 , and September 25, 2016 .
 
Three Months Ended
September 24,
2017
 
September 25,
2016
(in thousands)
Contractual interest coupon
$
17,956

 
$
34,712

Amortization of interest discount
4,104

 
5,914

Amortization of issuance costs
485

 
918

Effect of interest rate contracts, net
(349
)
 
(1,058
)
Total interest cost recognized
$
22,196

 
$
40,486

Revolving Credit Facility
On November 10, 2015, the Company entered into an Amendment and Restatement Agreement (as amended on April 26, 2016, by Amendment No. 1 to the Amended and Restated Credit Agreement, and as further amended, restated, supplemented or otherwise modified from time to time, the “Amended and Restated Credit Agreement”), which amends and restates the Company’s prior unsecured Credit Agreement, dated March 12, 2014 (as amended by Amendment No. 1, dated March 5, 2015). The Amended and Restated Credit Agreement provides for an increase to our revolving unsecured credit facility, from $300.0 million to $750.0 million with a syndicate of lenders. It includes an expansion option, subject to certain requirements, for us to request an increase in the facility of up to an additional $250.0 million , for a potential total commitment of $1.0 billion . Proceeds from the credit facility can be used for general corporate purposes. The facility matures on November 10, 2020.
Interest on amounts borrowed under the credit facility is, at the Company’s option, based on (1) 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 (2) LIBOR multiplied by the statutory rate, 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 credit rating. The Restated Credit Agreement contains affirmative covenants, negative covenants, financial covenants and events of default that are substantially similar to those in the Amended and Restated Term Loan Agreement. As of September 24, 2017 , the Company had no borrowings outstanding under the credit facility and was in compliance with all financial covenants.
On October 13, 2017, the Company entered into Amendment No. 2 to Amended and Restated Credit Agreement (the “2nd Amendment”), among the Company, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent, which amends the Company’s Credit Agreement (as amended by the 2nd Amendment, the “Amended Credit Agreement”).
Among other things, the Amended Credit Agreement provides for a $500 million increase to the Company’s revolving credit facility, from $750 million under the Credit Agreement to $1.25 billion under the Amended Credit Agreement. The Amended Credit Agreement also modifies the date of maturity of the revolving credit facility from November 10, 2020 to October 13, 2022. The Amended Credit Agreement provides for an expansion option that will allow the Company, subject to certain requirements, to request an increase in the facility of up to an additional $600 million , for a potential total commitment of $1.85 billion . Other than as disclosed in this paragraph, the material terms of the Amended Credit Agreement are substantially the same as the Credit Agreement.
NOTE 12 — COMMITMENTS AND CONTINGENCIES
Operating Leases and Related Guarantees
The Company leases the majority 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.

21





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 $250.0 million in separate interest-bearing accounts as security for the Company’s obligations. These amounts are recorded with other restricted cash and investments in the Company’s Condensed Consolidated Balance Sheet as of September 24, 2017 .
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 $220.4 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 $250.0 million , in the aggregate.
Other Guarantees
The Company has issued certain indemnifications to its lessors for taxes and general liability under some of its agreements. The Company has entered into certain insurance contracts that are intended to limit its exposure to such indemnifications. As of September 24, 2017 , the Company had not recorded any liability in connection with these indemnifications, as it does not believe 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 that it is probable that any material amounts will be paid under these guarantees.
The Company provides guarantees and standby letters of credit to certain parties as required for certain transactions initiated during the ordinary course of business. As of September 24, 2017 , the maximum potential amount of future payments that it could be required to make under these arrangements and letters of credit was $20.6 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 24,
2017
 
September 25,
2016
(in thousands)
Balance at beginning of period
$
161,981

 
$
100,321

Warranties issued during the period
48,790

 
34,855

Settlements made during the period
(44,053
)
 
(32,228
)
Changes in liability for pre-existing warranties
1,619

 
278

Balance at end of period
$
168,337

 
$
103,226

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. Based on current information, the Company does not believe that a material loss from known matters is probable and therefore has not recorded an accrual for litigation or other contingencies related to existing legal proceedings.
NOTE 13 — STOCK REPURCHASE PROGRAM
In November 2016, the Board of Directors authorized the repurchase of up to $1.0 billion 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 are funded using the Company’s on-

22





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
(1)
 
Amount
Available Under
Repurchase
Program
 
(in thousands, except per share data)
Available balance as of June 25, 2017
 
 
 
 
 
 
$
282,141

Quarter ended September 24, 2017
1,779

 
$
157,938

 
$
158.40

 
$
124,203

(1) Average price paid per share excludes effect of accelerated share repurchases; see additional disclosure below regarding our accelerated share repurchase activity during the fiscal year.
In addition to the shares repurchased under the Board-authorized repurchase program shown above, during the three months ended September 24, 2017 , the Company acquired 11 thousand shares at a total cost of $1.8 million which the Company withheld through net 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.
On April 19, 2017, the Company entered into two separate accelerated share repurchase agreements (collectively, the “ASR”) with two financial institutions to repurchase a total of $500 million of Common Stock. The Company took an initial delivery of approximately 2,570,000 shares, which represented 70% of the prepayment amount divided by the Company’s closing stock price on April 19, 2017. The total number of shares to be received under the ASR was based upon the average daily volume weighted average price of our Common Stock during the repurchase period, less an agreed upon discount. Following the fiscal year end, the counterparties designated June 30, 2017 as the termination date, at which time the Company settled the ASR. Approximately 780,000 shares were received at final settlement, which resulted in a weighted-average share price of approximately $149.16 for the transaction period.
NOTE 14 — ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive income (loss) (“AOCI”), 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 25, 2017
$
(42,371
)
 
$
(811
)
 
$
1,106

 
$
(19,624
)
 
$
(61,700
)
Other comprehensive income (loss) before reclassifications
7,886

 
3,062

 
(1,727
)
 
(2,356
)
 
6,865

Losses (income) reclassified from accumulated other comprehensive income (loss) to net income
(17
)
(1)  
2,188

(2)  
(123
)
(1)  

 
2,048

Net current-period other comprehensive income (loss)
$
7,869

 
$
5,250

 
$
(1,850
)
 
$
(2,356
)
 
$
8,913

Balance as of September 24, 2017
$
(34,502
)
 
$
4,439

 
$
(744
)
 
$
(21,980
)
 
$
(52,787
)
 
(1)
Amount of after tax gain reclassified from accumulated other comprehensive income into net income located in other expense, net.
(2)
Amount of after tax gain reclassified from AOCI into net income located in revenue: $3,383 loss; cost of goods sold: $678 gain; selling, general, and administrative expenses: $537 gain; and other income and expense: $20 loss.

23





NOTE 15 – BUSINESS COMBINATIONS
On August 28, 2017, the Company completed the acquisition of the outstanding shares of Coventor, Inc. (“Coventor”), a privately-held company that is a provider of simulation and modeling solutions for semiconductor process technology, micro-electromechanical systems (MEMS), and the Internet of Things, for a total purchase consideration of $137.6 million .
The following table represents the preliminary purchase price allocation and summarizes the aggregate estimated fair value of the net assets acquired on the closing date of the acquisition:
 
Preliminary Purchase Price Allocation
 
(In thousands)
Intangible assets
$
48,500

Assets acquired (including cash of $8.7 million)
12,796

Goodwill
97,832

Liabilities assumed
(21,517
)
Fair value of net assets acquired
$
137,611


The preliminary fair values of net tangible and intangible assets acquired were based on preliminary valuations, and management’s estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition date). The primary area that remains open relates to the fair value of intangible assets, certain tangible assets and liabilities assumed and income taxes. The Company expects to continue to obtain information to assist us in determining the fair value of the net assets acquired during the measurement period.
The operating results of the acquired entity, from the date of acquisition, have been included in the Company’s Condensed Consolidated Financial Statements for the three months ended September 24, 2017 . Goodwill represents the excess of the purchase price over the net tangible and identifiable intangible assets acquired. None of the goodwill recognized is deductible for income tax purposes.
The identified intangible assets assumed in the acquisition of Coventor were recognized as follows based upon their fair values as of August 28, 2017:
 
Fair Value
 
Weighted-Average Estimated Useful Life
 
(In thousands)
 
(In years)
Existing technology
$
26,200

 
6.0
Customer relationships
15,000

 
6.0
Trade names and other intangible assets
7,300

 
6.4
Total identified intangible assets
$
48,500

 
6.0
Acquired existing technology represents the fair value of products that have reached technological feasibility and are a part of Coventor’s product offerings and customer relationships represent the fair values of the underlying relationships and agreements with Coventor’s customers.

24





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,” “plan,” “aim,” “may,” “should,” “could,” “would,” “continue,” and other future-oriented terms. The identification of certain statements as “forward-looking” does not mean that other statements not specifically identified are not forward-looking. Forward-looking statements include but are not limited to statements that relate to: trends and opportunities 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, research and development expenditures, international sales, 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; customer capital spending and their demand for our products, and 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 expenditure (with respect to certain technology inflections); hedging transactions; our ability to defend our market share and to gain new market share; our ability to obtain and qualify alternative sources of supply; 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; the success of joint development and collaboration relationships with customers, suppliers, or others; outsourced activities; the role of component suppliers in our business; our leadership and competency, and their ability to facilitate innovation; our ability to continue to, including the underlying factors that, create sustainable differentiation; the resources invested to comply with evolving standards and the impact of such efforts; 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 25, 2017 (our “2017 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 24, 2017 , 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 2017 Form 10-K.
EXECUTIVE SUMMARY
Lam Research is a global supplier of innovative wafer fabrication equipment and services to the semiconductor industry. We have built a strong global presence with core competencies in areas like nanoscale applications enablement, chemistry, plasma and fluidics, advanced systems engineering and a broad range of operational disciplines. Our products and services are designed to help our customers build smaller, faster, and better performing devices that are used in a variety of electronic products, including mobile phones, personal computers, servers, wearables, automotive devices, storage devices, and networking equipment. Our vision is to realize full value from natural technology extensions of our company.


25



Table of Contents


Our customer base includes leading semiconductor memory, foundry, and integrated device manufacturers that make products such as non-volatile memory (“NVM”), DRAM memory, and logic devices. We aim to increase our strategic relevance with our customers by contributing more to their continued success. Our core technical competency is integrating hardware, process, materials, software, and process control enabling results on the wafer.
Semiconductor manufacturing, our customers’ business, involves the complete fabrication of multiple dies or integrated circuits on a wafer. This involves the repetition of a set of core processes and can require hundreds of individual steps. Fabricating these devices requires highly sophisticated process technologies to integrate an increasing array of new materials with precise control at the atomic scale. Along with meeting technical requirements, wafer processing equipment must deliver high productivity and be cost-effective.
Demand from cloud computing, Internet of Things, and other markets is driving the need for increasingly powerful and cost-efficient semiconductors. At the same time, there are growing technical challenges with traditional two-dimensional scaling. These trends are driving significant inflections in semiconductor manufacturing, such as the increasing importance of vertical scaling strategies like 3D architectures as well as multiple patterning to enable shrinks.
We believe we are in a strong position with our leadership and competency in deposition, etch, and single-wafer clean to facilitate some of the most significant innovations in semiconductor device manufacturing. Several factors create opportunity for sustainable differentiation for us: our focus on research and development, with a breadth of programs across sustaining engineering, product and process development, and concept and feasibility; our ability to effectively leverage cycles of learning from our broad installed base; and our collaborative focus with ecosystem partners.
During the most recent quarter, demand for our products remained stable with increased investments from our logic customers and continued investments from our memory customers. Technology inflections in our industry, including NVM, multiple patterning, FinFET and advanced packaging have led to an increase in the served addressable market for our products in deposition, etch, single-wafer clean, and customer service business. We believe that demand for our products and services should increase faster than overall spending on wafer fabrication equipment, as the proportion of customers’ capital expenditures rises in these technology inflection areas and we continue to gain market share.
We acquired the outstanding shares of Coventor, Inc., a privately-held company, on August 28, 2017, as further discussed in Note 15 of our Condensed Consolidated Financial Statements. The results of the acquired business are included in our Condensed Consolidated Financial Statements.
The following summarizes certain key financial information for the periods indicated below:
 
Three Months Ended
September 24, 2017
 
June 25,
2017
 
September 25, 2016
(in thousands, except per share data and percentages)
Revenue
$
2,478,140

 
$
2,344,907

 
$
1,632,419

Gross margin
$
1,149,343

 
$
1,068,961

 
$
716,197

Gross margin as a percent of total revenue
46.4
%
 
45.6
%
 
43.9
%
Total operating expenses
$
456,121

 
$
461,022

 
$
400,250

Net income
$
590,690

 
$
526,424

 
$
263,835

Diluted net income per share
$
3.21

 
$
2.82

 
$
1.47

In the September 2017 quarter, revenue increased compared to the June 2017 quarter as modest shipment declines were offset by timing of revenue recognition. Gross margin as a percentage of revenue in the September 2017 quarter increased as compared to the June 2017 quarter primarily due to favorable customer and product mix. Operating expenses in the September 2017 quarter decreased compared to the June 2017 quarter mainly due to lower spend associated with business process reengineering partially offset by acquisition-related costs.
Our cash and cash equivalents, investments, and restricted cash and investments balances increased slightly to $6.4 billion as of September 24, 2017 , in comparison to the same balance as of June 25, 2017 . Cash generated by operations was approximately $858 million during the September 2017 quarter. We used cash during the September 2017 quarter for approximately $302 million of principal payments on debt, primarily related to our convertible notes, $155 million of share repurchases, including net share settlement on employee stock-based compensation, $116 million for business acquisitions, $73 million of dividends paid to our stockholders, and $60 million of capital expenditures. Employee headcount as of September 24, 2017 , was approximately 9,800 .

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Table of Contents


RESULTS OF OPERATIONS
Shipments
 
Three Months Ended
September 24,
2017
 
June 25,
2017
 
September 25,
2016
Shipments (in millions)
$
2,382

 
$
2,543

 
$
1,708

Korea
38
%