Lam Research Corporation
LAM RESEARCH CORP (Form: 10-Q, Received: 01/30/2018 17:20:42)
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 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 January 25, 2018 , the Registrant had 162,952,484  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 24,
2017
 
December 25,
2016
 
December 24,
2017
 
December 25,
2016
Revenue
$
2,580,815

 
$
1,882,299

 
$
5,058,955

 
$
3,514,718

Cost of goods sold
1,375,248

 
1,035,502

 
2,704,045

 
1,951,724

Gross margin
1,205,567

 
846,797

 
2,354,910

 
1,562,994

Research and development
281,311

 
246,804

 
556,389

 
482,044

Selling, general, and administrative
186,885

 
160,165

 
367,928

 
325,175

Total operating expenses
468,196

 
406,969

 
924,317

 
807,219

Operating income
737,371

 
439,828

 
1,430,593

 
755,775

Other expense, net
(3,152
)
 
(55,023
)
 
(8,654
)
 
(78,177
)
Income before income taxes
734,219

 
384,805

 
1,421,939

 
677,598

Income tax expense
(744,174
)
 
(52,014
)
 
(841,204
)
 
(80,972
)
Net (loss) income
$
(9,955
)
 
$
332,791

 
$
580,735

 
$
596,626

Net (loss) income per share:
 
 
 
 
 
 
 
Basic
$
(0.06
)
 
$
2.05

 
$
3.59

 
$
3.69

Diluted
$
(0.06
)
 
$
1.81

 
$
3.16

 
$
3.28

Number of shares used in per share calculations:
 
 
 
 
 
 
 
Basic
161,135

 
162,659

 
161,638

 
161,633

Diluted
161,135

 
183,543

 
183,958

 
181,780

Cash dividend declared per common share
$
0.50

 
$
0.45

 
$
0.95

 
$
0.75


3



Table of Contents


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

 
 
Three Months Ended
 
Six Months Ended
December 24,
2017
 
December 25,
2016
 
December 24,
2017
 
December 25,
2016
Net (loss) income
$
(9,955
)
 
$
332,791

 
$
580,735

 
$
596,626

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustment
5,239

 
(14,428
)
 
13,108

 
(9,927
)
Cash flow hedges:
 
 
 
 
 
 
 
Net unrealized gains during the period
6,930

 
15,225

 
9,992

 
12,804

Net (gains) losses reclassified into earnings
(5,459
)
 
(502
)
 
(3,271
)
 
11,448

 
1,471

 
14,723

 
6,721

 
24,252

Available-for-sale investments:
 
 
 
 
 
 
 
Net unrealized losses during the period
(18,339
)
 
(13,585
)
 
(20,066
)
 
(16,308
)
Net losses (gains) reclassified into earnings
84

 
91

 
(39
)
 
994

 
(18,255
)
 
(13,494
)
 
(20,105
)
 
(15,314
)
Defined benefit plans, net change in unrealized component
172

 
122

 
(2,184
)
 
245

Other comprehensive loss, net of tax
(11,373
)
 
(13,077
)
 
(2,460
)
 
(744
)
Comprehensive (loss) income
$
(21,328
)
 
$
319,714

 
$
578,275

 
$
595,882


See Notes to Condensed Consolidated Financial Statements


4

Table of Contents


LAM RESEARCH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
 
 
December 24,
2017
 
June 25,
2017
(unaudited)
 
(1)
ASSETS
 
 
 
Cash and cash equivalents
$
1,745,173

 
$
2,377,534

Investments
3,954,526

 
3,663,628

Accounts receivable, less allowance for doubtful accounts of $5,262 as of December 24, 2017, and $5,103  as of June 25, 2017
2,279,044

 
1,673,398

Inventories
1,507,435

 
1,232,916

Prepaid expenses and other current assets
179,944

 
195,022

Total current assets
9,666,122

 
9,142,498

Property and equipment, net
807,340

 
685,595

Restricted cash and investments
255,984

 
256,205

Goodwill
1,485,230

 
1,385,673

Intangible assets, net
380,929

 
410,995

Other assets
316,660

 
241,799

Total assets
$
12,912,265

 
$
12,122,765

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Trade accounts payable
$
421,788

 
$
464,643

Accrued expenses and other current liabilities
1,339,612

 
969,361

Deferred profit
748,635

 
607,672

Current portion of convertible notes, and capital leases; and commercial paper
1,401,660

 
908,439

Total current liabilities
3,911,695

 
2,950,115

Long-term debt and capital leases, less current portion
1,789,958

 
1,784,974

Income taxes payable
818,880

 
120,178

Other long-term liabilities
118,177

 
280,186

Total liabilities
6,638,710

 
5,135,453

Commitments and contingencies

 

Temporary equity, convertible notes
130,424

 
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, 159,451 shares at December 24, 2017, and 161,723 shares at June 25, 2017
159

 
162

Additional paid-in capital
5,959,945

 
5,845,485

Treasury stock, at cost; 110,754 shares at December 24, 2017, and 105,569 shares at June 25, 2017
(6,470,434
)
 
(5,216,187
)
Accumulated other comprehensive loss
(64,160
)
 
(61,700
)
Retained earnings
6,717,621

 
6,249,691

Total stockholders’ equity
6,143,131

 
6,817,451

Total liabilities and stockholders’ equity
$
12,912,265

 
$
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)
 
Six Months Ended
December 24,
2017
 
December 25,
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
580,735

 
$
596,626

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
159,040

 
151,627

Deferred income taxes
(228,274
)
 
42,248

Equity-based compensation expense
83,907

 
70,850

Loss on extinguishment of debt

 
36,325

Amortization of note discounts and issuance costs
9,127

 
13,032

Other, net
5,461

 
15,515

Changes in operating assets and liabilities
277,014

 
(48,901
)
Net cash provided by operating activities
887,010

 
877,322

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Capital expenditures and intangible assets
(144,757
)
 
(78,492
)
Business acquisition, net of cash acquired
(115,697
)
 

Purchases of available-for-sale securities
(2,251,486
)
 
(2,370,910
)
Sales and maturities of available-for-sale securities
1,928,011

 
811,732

Transfers of restricted cash and investments
221

 
(4,754
)
Other, net
(14,996
)
 
(8,041
)
Net cash used for investing activities
(598,704
)
 
(1,650,465
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Principal payments on long-term debt and capital lease obligations and payments for debt issuance costs
(349,249
)
 
(1,616,641
)
Net proceeds from commercial paper
798,947

 

Proceeds from borrowings on revolving credit facility
750,000

 

Repayments of borrowings on revolving credit facility
(750,000
)
 

Treasury stock purchases
(1,266,835
)
 
(69,522
)
Dividends paid
(145,865
)
 
(96,449
)
Reissuance of treasury stock related to employee stock purchase plan
34,057

 
19,320

Proceeds from issuance of common stock
4,115

 
4,580

Other, net
4

 
(54
)
Net cash used for financing activities
(924,826
)
 
(1,758,766
)
Effect of exchange rate changes on cash and cash equivalents
4,159

 
(3,453
)
Net decrease in cash and cash equivalents
(632,361
)
 
(2,535,362
)
Cash and cash equivalents at beginning of period
2,377,534

 
5,039,322

Cash and cash equivalents at end of period
$
1,745,173

 
$
2,503,960

Schedule of non-cash transactions:


 


Accrued payables for stock repurchases

 
8,382

Accrued payables for capital expenditures
29,031

 
24,216

Dividends payable
79,743

 
73,338

Transfers of inventory to property and equipment, net
29,977

 
23,828


See Notes to Condensed Consolidated Financial Statements


6

Table of Contents


LAM RESEARCH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 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 December 24, 2017 (the “December 2017 quarter”) and December 25, 2016 (the “December 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 $40.1 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. Accordingly, the provision for income taxes in the three and six months ended December 24, 2017 included excess tax benefits of $11.0 million and $13.0 million , respectively, that decreased the income tax provision. 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

7





expected to occur to determine the amount of compensation cost to be recognized each 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 during the three and six months ended December 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 using a modified-retrospective approach on the earliest period presented. 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 using a modified-retrospective approach. 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.

8





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 using a modified-retrospective approach through a cumulative-effect adjustment directly to retained earnings. 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, using a modified-retrospective approach for any cash flow or net investment hedges that exist on the date of adoption. The presentation and disclosure requirements as defined per the standard are to be applied prospectively. 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 (including expense related to the employee stock purchase plan) and related income tax benefit in the Condensed Consolidated Statements of Operations:
 
Three Months Ended
 
Six Months Ended
 
December 24,
2017
 
December 25,
2016
 
December 24,
2017
 
December 25,
2016
 
(in thousands)
Equity-based compensation expense
$
42,124

 
$
32,255

 
$
83,907

 
$
70,850

Income tax benefit recognized related to equity-based compensation expense
$
18,089

 
$
8,815

 
$
31,477

 
$
19,721

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.
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. Typically, each offering period lasts up to twelve months and comprises two  interim purchase dates.
During the three and six months ended December 24, 2017 , a total of 412,469 shares of the Company’s Common Stock were sold to employees under the 1999 ESPP.

9





Purchase rights under the 1999 ESPP were valued using the Black-Scholes option valuation model and the following weighted-average assumptions for the three and six months ended  December 24, 2017  and  December 25, 2016 :
 
Three and Six Months Ended
 
December 24,
2017
 
December 25,
2016
Expected stock price volatility
29.13
%
 
33.02
%
Risk-free interest rate
0.82
%
 
0.43
%
Expected term (years)
0.77

 
0.77

Dividend yield
0.89
%
 
1.14
%
NOTE 4 — OTHER EXPENSE, NET
The significant components of other expense, net, are as follows:
 
Three Months Ended
 
Six Months Ended
 
December 24,
2017
 
December 25,
2016
 
December 24,
2017
 
December 25,
2016
 
(in thousands)
Interest income
$
20,578

 
$
10,945

 
$
40,787

 
$
23,708

Interest expense
(23,317
)
 
(26,641
)
 
(47,222
)
 
(68,070
)
Gains on deferred compensation plan related assets, net
6,074

 
1,666

 
9,527

 
7,838

Loss on extinguishment of debt

 
(36,325
)
 

 
(36,325
)
Foreign exchange (losses) gains, net
1,196

 
1,011

 
(1,804
)
 
2,230

Other, net
(7,683
)
 
(5,679
)
 
(9,942
)
 
(7,558
)
 
$
(3,152
)
 
$
(55,023
)
 
$
(8,654
)
 
$
(78,177
)
Interest income in the three and six months ended December 24, 2017 , increased compared to same period in 2016 due to higher yield. Interest expense decreased in the six months ended December 24, 2017 compared to the same period in 2016 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. Loss on extinguishment of debt realized in the three months ended December 25, 2016 is primarily a result of the mandatory redemption of the Senior Notes Due 2023 and 2026 as well as the termination of the Term Loan Agreement.
NOTE 5 — INCOME TAX EXPENSE
On December 22, 2017, the “Tax Cuts & Jobs Act” (hereafter referred to as “U.S. tax reform”) was signed into law and is effective for the Company’s quarter which ended December 24, 2017. U.S. tax reform reduces the U.S. federal statutory tax rate from 35% to 21% , mandates payment of a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. The impact on income taxes due to change in legislation is required under the authoritative guidance of Accounting Standards Codification (“ASC”) 740, Income Taxes, to be recognized in the period in which the law is enacted. In conjunction, the SEC issued Staff Accounting Bulletin (“SAB”) 118, which allows for the recording of provisional amounts related to U.S. tax reform and subsequent adjustments related to U.S. tax reform during a measurement period that is similar to the measurement period used when accounting for business combinations. As such, there is significant activity within the quarter which reflects the change in legislation. Most of that activity has provisionally been recorded in the Company’s Condensed Consolidated Financial Statements in the period ended December 24, 2017, as the Company has not yet completed the accounting for the tax effects of enactment. The Company has recorded what it believes to be a reasonable estimate and the provisional activity is subject to further adjustments under SAB 118. In addition, for significant items for which the Company could not make a reasonable estimate, no provisional activity was recorded. The activity will be recorded during the measurement period allowed under SAB 118 when a reasonable estimate can be made, or when the effect of the activity is known. The Company will continue to refine provisional balances and adjustments may be made under SAB 118 during the measurement period as a result of future changes in interpretation, information available, assumptions made by the Company and/or issuance of additional guidance; these adjustments could be material.

The Company recorded an income tax expense of $744.2 million and $841.2 million for the three and six months ended December 24, 2017 , which yielded an effective tax rate of approximately 101.4% and 59.2% , respectively.
As a result of U.S. tax reform, the Company revised its estimated annual effective tax rate to reflect the change in the U.S. federal statutory tax rate from 35% to 21% . As the Company has a fiscal year ending the last Sunday in June, it is subject to transitional tax rate rules. Therefore, a blended rate of 28.27% was computed as effective for the current fiscal year. The difference between the U.S. federal statutory tax rate of 28.27% and the Company’s effective tax rate for the three and six months ended December 24, 2017 , is primarily due to the impact of U.S. tax reform, outlined below, and income in lower tax jurisdictions.
Revaluation of the Company’s deferred tax balances to reflect the new U.S. federal statutory tax rate and computation of the one-time transition tax on accumulated unrepatriated foreign earnings, were recorded on a provisional basis in the three and six months ended December 24, 2017 and are therefore subject to potential measurement period adjustments under SAB 118. The Company revalued the deferred tax balances based on the tax rates at which the balance, or a portion of the balance, is expected

10





to reverse at in the future. Generally, this is 21% , but for certain activity which is expected to reverse at the Company’s current fiscal year blended rate. The Company has not yet completed the revaluation of the deferred tax balances due to estimates which are being used during interim periods until finalization of the balances can occur at the Company’s fiscal year end. The provisional amount recorded related to the revaluation of the Company’s deferred tax balance was $42.7 million , and an associated tax liability was remeasured at $54.0 million , which is the tax effect of when the balance is expected to reverse. The one-time transition tax is based on the Company’s total post-1986 earnings and profits (“E&P”) that was previously deferred from U.S. income taxes. The Company had previously accrued deferred taxes on a portion of this E&P. The Company has not yet completed the calculation of total post-1986 E&P and related income tax pools for its foreign subsidiaries. The Company recorded a provisional amount for the one-time transition tax of $991.3 million , which was offset by the release of the associated previously accrued deferred taxes of $287.8 million . The net increase to tax expense was $703.5 million . The one-time transition tax may be elected to be paid over a period of eight years. The Company intends to make this election.
Other significant items which are being evaluated by the Company but for which no estimate can currently be made and for which no provisional amounts were recorded in the Company’s Condensed Consolidated Financial Statements, include the impact of the “Global Intangible Low-Taxed Income” (“GILTI”) provision of U.S. tax reform. The GILTI provision imposes taxes on foreign earnings in excess of a deemed return on tangible assets. This tax is effective for the Company after the end of the current fiscal year. However, the Company is evaluating whether deferred taxes should be recorded in relation to the GILTI provisions or if the tax should be recorded in the period in which it occurs. Based on current interpretation, the Company may choose either method as an accounting policy election. The Company has not yet decided on the accounting policy related to GILTI and will only do so after completion of the GILTI analysis. The provisions related to GILTI are subject to adjustment during the measurement period under SAB 118.
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 limitations. The estimated reduction in unrecognized tax benefits may range up to $94 million .

11





NOTE 6 — NET (LOSS) INCOME PER SHARE
Basic net (loss) income per share is computed by dividing net (loss) income by the weighted-average number of common shares outstanding during the period. Diluted net (loss) 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 (loss) income per share. 
 
Three Months Ended
 
Six Months Ended
 
December 24,
2017
 
December 25,
2016
 
December 24,
2017
 
December 25,
2016
 
(in thousands, except per share data)
Numerator:
 
 
 
 
 
 
 
Net (loss) income
$
(9,955
)
 
$
332,791

 
$
580,735

 
$
596,626

Denominator:
 
 
 
 
 
 
 
Basic average shares outstanding
161,135

 
162,659

 
161,638

 
161,633

Effect of potential dilutive securities:
 
 
 
 
 
 
 
Employee stock plans

 
2,243

 
2,636

 
2,193

Convertible notes

 
16,640

 
15,287

 
15,930

Warrants

 
2,001

 
4,397

 
2,024

Diluted average shares outstanding
161,135

 
183,543

 
183,958

 
181,780

Net (loss) income per share - basic
$
(0.06
)
 
$
2.05

 
$
3.59

 
$
3.69

Net (loss) income per share - diluted
$
(0.06
)
 
$
1.81

 
$
3.16

 
$
3.28


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 24,
2017
 
December 25,
2016
 
December 24,
2017
 
December 25,
2016
 
(in thousands)
Options and RSUs
7

 

 
20

 
3

Employee stock plans
2,757

 

 

 

Convertible notes
15,423

 

 

 

Warrants
4,721

 

 

 

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.
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 December 24, 2017 , and June 25, 2017 :
 
December 24, 2017
 
 
 
 
 
 
 
 
(Reported Within)
Cost
 
Unrealized
Gain
 
Unrealized
(Loss)
 
Fair Value
 
Cash and
Cash
Equivalents
 
Investments
 
Restricted
Cash &
Investments
 
Other
Assets
(in thousands)
Cash
$
594,353

 
$

 
$

 
$
594,353

 
$
588,396

 
$

 
$
5,957

 
$

Level 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Time deposit
521,265

 

 

 
521,265

 
271,238

 

 
250,027

 

Money market funds
878,732

 

 

 
878,732

 
878,732

 

 

 

U.S. Treasury and agencies
835,112

 

 
(9,028
)
 
826,084

 
2,199

 
823,885

 

 

Mutual funds
58,307

 
3,844

 

 
62,151

 

 

 

 
62,151

Level 1 Total
2,293,416

 
3,844

 
(9,028
)
 
2,288,232

 
1,152,169

 
823,885

 
250,027

 
62,151

Level 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal notes and bonds
179,475

 
10

 
(649
)
 
178,836

 

 
178,836

 

 

Government-sponsored enterprises
47,925

 

 
(602
)
 
47,323

 

 
47,323

 

 

Foreign government bonds
61,006

 

 
(490
)
 
60,516

 

 
60,516

 

 

Corporate notes and bonds
2,686,080

 
849

 
(12,781
)
 
2,674,148

 
4,608

 
2,669,540

 

 

Mortgage backed securities — residential
53,506

 
24

 
(325
)
 
53,205

 

 
53,205

 

 

Mortgage backed securities — commercial
121,950

 

 
(729
)
 
121,221

 

 
121,221

 

 

Level 2 Total
3,149,942

 
883

 
(15,576
)
 
3,135,249

 
4,608

 
3,130,641

 

 

Total
$
6,037,711

 
$
4,727

 
$
(24,604
)
 
$
6,017,834

 
$
1,745,173

 
$
3,954,526

 
$
255,984

 
$
62,151

 

12





 
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 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 24, 2017 or December 25, 2016 . Additionally, gross realized gains/(losses) from sales of investments were approximately $0.2 million and $(1.1) million , respectively, in the three months ended December 24, 2017 , and $0.1 million and $(0.4) million , respectively, in the three months ended December 25, 2016 . Gross realized gains/(losses) from sales of investments were approximately $1.0 million and $(2.1) million , respectively, in the six months ended December 24, 2017 and $2.7 million and $(0.6) million , respectively, in the six months ended December 25, 2016 .
The following is an analysis of the Company’s cash, cash equivalents, investments, and restricted cash and investment in unrealized loss positions:
 
December 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
$
659,453

 
$
(6,546
)
 
$
161,386

 
$
(2,482
)
 
$
820,839

 
$
(9,028
)
Municipal notes and bonds
168,189

 
(649
)
 

 

 
168,189

 
(649
)
  Government-sponsored enterprises
27,681

 
(163
)
 
19,533

 
(439
)
 
47,214

 
(602
)
  Foreign government bonds
51,879

 
(382
)
 
8,425

 
(108
)
 
60,304

 
(490
)
  Corporate notes and bonds
2,160,923

 
(11,215
)
 
152,403

 
(1,566
)
 
2,313,326

 
(12,781
)
Mortgage backed securities — residential
46,771

 
(309
)
 
1,789

 
(16
)
 
48,560

 
(325
)
Mortgage backed securities — commercial
115,554

 
(674
)
 
5,401

 
(55
)
 
120,955

 
(729
)
 
$
3,230,450

 
$
(19,938
)
 
$
348,937

 
$
(4,666
)
 
$
3,579,387

 
$
(24,604
)


13





The amortized cost and fair value of cash equivalents, investments, and restricted investments with contractual maturities are as follows as of December 24, 2017 :
 
Cost
 
Estimated
Fair
Value
(in thousands)
Due in one year or less
$
1,995,451

 
$
1,994,497

Due after one year through five years
3,217,096

 
3,195,218

Due in more than five years
172,504

 
171,615

 
$
5,385,051

 
$
5,361,330

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.
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 or six months ended December 24, 2017 and December 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

14





instruments would be recognized in earnings. Additionally, related amounts previously recorded in other comprehensive income would be reclassified to income immediately. As of December 24, 2017 , the Company had gains of $7.8 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, as of December 24, 2017 , 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 7.2 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).
As of December 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
$

 
$
512,577

 
$

 
$
141,737

Euro
69,649

 

 
33,044

 

Korean won
33,693

 

 

 
73,282

Taiwan dollar

 

 
20,047

 

Swiss franc

 

 
15,225

 

Chinese renminbi

 

 
7,529

 

Singapore dollar

 

 
7,410

 

British pound sterling

 

 
4,019

 

 
$
103,342

 
$
512,577

 
$
87,274

 
$
215,019

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

 
$

 
$

 
$



15





The fair value of derivative instruments in the Company’s Condensed Consolidated Balance Sheets as of December 24, 2017 , and June 25, 2017 were as follows:
 
December 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 contracts
Prepaid expense
and other assets
 
$
9,687

 
Accrued expenses and other current liabilities
 
$
331

 
Prepaid expense
and other assets
 
$
8,061

 
Accrued expenses and other current liabilities
 
$
2,916

Interest rate contracts, short-term

 


 
Accrued expenses and other current liabilities
 
4,662

 

 


 
Accrued expenses and other current liabilities
 
2,833

Interest rate contracts, long-term

 


 
Other long-term liabilities
 
14,520

 

 


 
Other long-term liabilities
 
7,269

  Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign exchange contracts
Prepaid expense
and other assets
 
51

 
Accrued expenses and other current liabilities
 
118

 
Prepaid expense
and other assets
 
213

 
Accrued expenses and other current liabilities
 
342

Total Derivatives
 
 
$
9,738

 
 
 
$
19,631

 
 
 
$
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 December 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 $4.1 million , resulting in a net derivative asset of $5.6 million and net derivative liability of $15.5 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 December 24, 2017
 
Six Months Ended December 24, 2017
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
Gain (Loss)
Recognized
in AOCI
 
Gain (Loss)
Reclassified
from AOCI
into Income
 
Gain (Loss)
Recognized
in Income
 
Gain
Recognized
in AOCI
 
(Loss) Gain
Reclassified
from AOCI
into Income
 
Gain (Loss)
Recognized
in Income
 
 
(in thousands)
Foreign Exchange Contracts
Revenue
$
8,194

 
$
3,771

 
$
1,225

 
$
8,185

 
$
(35
)
 
$
3,772

Foreign Exchange Contracts
Cost of goods sold
(250
)
 
1,648

 
(139
)
 
2,193


2,472


(347
)
Foreign Exchange Contracts
Selling, general, and
administrative
(206
)
 
1,012

 
(49
)
 
1,150


1,726


(166
)
Foreign Exchange Contracts
Other expense, net

 

 
(35
)
 




(52
)
Interest Rate Contracts
Other expense, net

 
(31
)
 

 


(62
)


 
 
$
7,738

 
$
6,400

 
$
1,002

 
$
11,528

 
$
4,101

 
$
3,207


16





 
 
Three Months Ended December 25, 2016
 
Six Months Ended December 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
Gain (Loss)
Recognized
in AOCI
 
(Loss) Gain
Reclassified
from AOCI
into Income
 
Gain (Loss)
Recognized
in Income
 
Gain (Loss)
Recognized
in AOCI
 
(Loss) Gain
Reclassified
from AOCI
into Income
 
Gain (Loss)
Recognized
in Income
 
 
(in thousands)
Foreign Exchange Contracts
Revenue
$
18,138

 
$
(420
)
 
$
708

 
$
15,225

 
$
(14,025
)
 
$
1,413

Foreign Exchange Contracts
Cost of goods sold
(786
)
 
(180
)
 
(28
)
 
(551
)
 
(7
)
 
(95
)
Foreign Exchange Contracts
Selling, general, and
administrative
(348
)
 
(146
)
 
(15
)
 
(372
)
 
(155
)
 
(36
)
Foreign Exchange Contracts
Other expense, net

 

 
3

 

 

 
3

Interest Rate Contracts
Other expense, net

 
1,778

 

 

 
1,787

 

 
 
$
17,004

 
$
1,032

 
$
668

 
$
14,302

 
$
(12,400
)
 
$
1,285

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 24,
2017
 
December 25,
2016
 
December 24,
2017
 
December 25,
2016
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
$
2,612

 
$
4,343

 
$
5,284

 
$
3,960

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.
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:
 
December 24,
2017
 
June 25,
2017
(in thousands)
Raw materials
$
820,157

 
$
625,600

Work-in-process
263,910

 
213,066

Finished goods
423,368

 
394,250

 
$
1,507,435

 
$
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 December 24, 2017 , and June 25, 2017 , respectively. As of December 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:
 
December 24, 2017
 
June 25, 2017
 
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net
(in thousands)
Customer relationships
$
630,237

 
$
(400,189
)
 
$
230,048

 
$
615,164

 
$
(366,439
)
 
$
248,725

Existing technology
669,559

 
(531,632
)
 
137,927

 
643,196

 
(487,056
)
 
156,140

Patents
37,953

 
(32,507
)
 
5,446

 
36,553

 
(31,238
)
 
5,315

Other intangible assets
43,814

 
(36,306
)
 
7,508

 
36,514

 
(35,699
)
 
815

Total intangible assets
$
1,381,563

 
$
(1,000,634
)
 
$
380,929

 
$
1,331,427

 
$
(920,432
)
 
$
410,995

The Company recognized $40.8 million and $38.6 million in intangible asset amortization expense during the three months ended December 24, 2017 , and December 25, 2016 , respectively. During the six months ended December 24, 2017 and December 25, 2016 , the company recognized $80.1 million and $77.3 million , respectively, in intangible asset amortization expense. Refer to Note 15 - Business Combinations for additional information regarding intangible assets acquired during the six months ended December 24, 2017 .
The estimated future amortization expense of intangible assets as of December 24, 2017 , was as follows:
Fiscal Year
Amount
 
(in thousands)
2018 (remaining 6 months)
$
80,490

2019
123,610

2020
58,478

2021
55,792

2022
52,001

Thereafter
10,558

 
$
380,929

NOTE 10 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
 
December 24,
2017
 
June 25,
2017
(in thousands)
Accrued compensation
$
556,110

 
$
447,363

Warranty reserves
179,680

 
161,981

Income and other taxes payable
310,810

 
95,127

Dividend payable
79,743

 
72,738

Other
213,269

 
192,152

 
$
1,339,612

 
$
969,361

 
 
 
 
NOTE 11 — LONG-TERM DEBT AND OTHER BORROWINGS
As of December 24, 2017 , and June 25, 2017 , the Company’s outstanding debt consisted of the following:
 
December 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")
$
206,124

(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")
526,136

(1)  
4.28
%
 
631,074

(2)  
4.28
%
Commercial paper
800,000

 
1.64
%
(3)  

 

Total debt outstanding, at par
3,332,260

 
 
 
2,878,510

 
 
Unamortized discount
(138,651
)
 
 
 
(178,589
)
 
 
Fair value adjustment - interest rate contracts
(19,182
)
 
 
 
(10,102
)
 
 
Unamortized bond issuance costs
(2,434
)
 
 
 
(3,161
)
 
 
Total debt outstanding, at carrying value
$
3,171,993

 
 
 
$
2,686,658

 
 
Reported as:
 
 
 
 
 
 
 
Current portion of long-term debt, and commercial paper
$
1,401,015

(4)  
 
 
$
907,827

(4)  
 
Long-term debt
1,770,978

 
 
 
1,778,831

 
 
Total debt outstanding, at carrying value
$
3,171,993

 
 
 
$
2,686,658

 
 
____________________________
(1) As of December 24, 2017 , these notes were convertible at the option of the bondholder, as a result of the condition described in (4) 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 (4) below.
(3) Represents the weighted average effective interest rate for all outstanding balances as of December 24, 2017 .
(4) 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,

17





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 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 and six months ended December 24, 2017 , was approximately $44.6 million and $346.3 million , respectively. During the quarter ended December 24, 2017 , and in the subsequent period through January 26, 2018, the Company received notice of conversion of an additional $227.8 million principal value of Convertible Notes, which will settle in the quarter ending March 25, 2018.
Selected additional information regarding the Convertible Notes outstanding as of December 24, 2017 , and June 25, 2017 , is as follows:
 
December 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
$
94,516

 
$
158,007

 
$
89,604

 
$
156,374

Carrying amount of temporary equity component, net of tax
$
3,037

 
$
127,387

 
$
15,186

 
$
154,675

Remaining amortization period (years)
0.3

 
23.3

 
0.8

 
23.8

Fair Value of Notes (Level 2)
$
642,049

 
$
2,943,299

 
 
 
 
Conversion rate (shares of common stock per $1,000 principal amount of notes)
16.6603

 
29.8987

 
 
 
 
Conversion price (per share of common stock)
$
60.02

 
$
33.45

 
 
 
 
If-converted value in excess of par value
$
434,986

 
$
2,410,644

 
 
 
 
Estimated share dilution using average quarterly stock price $195.72 per share
2,381

 
13,042

 
 
 
 
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 December 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 three and six months ended December 24, 2017 the note hedge was partially settled, resulting in the receipt of approximately 367,000 and 2,459,000 shares, respectively.

18





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