LONG-TERM DEBT AND OTHER BORROWINGS

Convertible Senior Notes

In May 2011, the Company issued and sold $450 million in aggregate principal amount of 0.50% Convertible Senior Notes due May 2016 (the “2016 Notes”) at par. At the same time, the Company issued and sold $450 million in aggregate principal amount of 1.25% Convertible Senior Notes due May 2018 (the “2018 Notes”) at par. The Company pays cash interest at an annual rate of 0.50% and 1.25%, respectively, on the 2016 Notes and the 2018 Notes, on a semi-annual basis on May 15 and November 15 of each year.

In June 2012, with the acquisition of Novellus, the Company assumed $700 million in aggregate principal amount of 2.625% Convertible Senior Notes due May 2041 (the “2041 Notes,” and collectively with the 2016 Notes and the 2018 Notes, the “Convertible Notes”). The Company pays cash interest at an annual rate of 2.625%, on a semi-annual basis on May 15 and November 15 of each year on the 2041 Notes. The 2041 Notes also have a contingent interest payment provision that may require the Company to pay additional interest, up to 0.60% per year, based on certain thresholds, beginning with the semi-annual interest payment on May 15, 2021, and upon the occurrence of certain events, as outlined in the indenture governing the 2041 Notes.

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

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

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

As of March 27, 2016 the 2016 Notes are within 90 days of their contractual maturity and as such are convertible at the option of the bondholders. A portion of the 2016 Note's equity component, representing the unamortized debt discount was classified in temporary equity on the Company's Condensed Consolidated Balance Sheets.

During the three months ended March 27, 2016, 10 of the Convertible Notes, with a par value of $10,000, were settled at the note holders' option. During the nine months ended March 27, 2016, 93 of the Convertible Notes, with a total par value of $93,000, were settled at the note holders’ option. In conjunction with the conversions in the three and nine months ended March 27, 2016, 106 shares and 370 shares of common stock were issued, respectively. Additionally, during the period ended March 27, 2016, the Company received notice of note holders' intention to convert six additional Convertible Notes, the Company expects those conversions to settle in the period ended June 26, 2016.

As of March 27, 2016 and June 28, 2015, the Convertible Notes consisted of the following:



	March 27, 2016									June 28, 2015
	2016 Notes			2018 Notes			2041 Notes			2016 Notes		2018 Notes		2041 Notes
	(in thousands, except years, percentages, conversion rate, and conversion price)
Carrying value, long-term	$	—		$	414,038		$	—		$	—	$	—	$	—
Carrying value, current portion	447,882			—			523,217			435,493		402,320		520,313
Unamortized discount	2,105			35,916			176,684			14,507		47,680		179,622
Principal amount	$	449,987		$	449,954		$	699,901		$	450,000	$	450,000	$	699,935

Carrying amount of permanent equity component, net of tax	$	74,123		$	104,886		$	151,380		$	61,723	$	57,215	$	148,487
Carrying amount of temporary equity component, net of tax	$	2,105		$	—		$	176,684		$	14,507	$	47,679	$	179,622
Remaining amortization period (years)	0.1			2.1			25.1
Effective interest rate on liability component	4.29		%	5.27		%	4.28		%
Fair Value of Notes (Level 2)	$	569,796		$	630,476		$	1,623,000
Conversion rate (shares of common stock per $1,000 principal amount of notes)	16.2764			16.2764			29.2100
Conversion price (per share of common stock)	$	61.44		$	61.44		$	34.23
If-converted value in excess of par value	$	127,743		$	127,734		$	912,730
Estimated share dilution using average quarterly stock price $72.41 per share	1,110			1,110			10,778

Convertible Note Hedges and Warrants

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

In conjunction with the convertible note hedge, counterparties agreed to sell to the Company shares of Common Stock equal to the number of shares issuable upon conversion of the 2016 Notes and 2018 Notes in full. The convertible note hedge transactions will be settled in net shares and will terminate upon the earlier of the maturity date or the first day none of the respective notes remain outstanding due to conversion or otherwise. Settlement of the convertible note hedge in net shares, based on the number of shares issued upon conversion of the 2016 and 2018 Notes, on the expiration date would result in the Company receiving net shares equivalent to the number of shares issuable by the Company upon conversion of the 2016 Notes and 2018 Notes. The Company exercised the convertible note hedge in the nine months ended March 27, 2016, to offset the impact of the 2016 note and 2018 note conversions during the period and received 79 shares of Common Stock. The exercise price is adjusted for certain corporate events, including dividends on the Company’s Common Stock.

The following table presents the details of the warrants and convertible note hedge arrangements as of March 27, 2016:



	2016 Notes		2018 Notes
	(shares in thousands)
Warrants:
Underlying shares	7,324		7,324
Estimated share dilution using average quarterly stock price $72.41 per share	289		—
Exercise price	$	69.55	$	74.19
Expiration date range	August 15 - October 21, 2016		August 15 - October 23, 2018
Convertible Note Hedge:
Number of shares available from counterparties	7,324		7,324
Exercise price	$	61.44	$	61.44

Senior Notes

On March 12, 2015, the Company completed a public offering of $500 million aggregate principal amount of the Company’s Senior Notes due March, 2020 (the “2020 Notes”) and $500 million aggregate principal amount of the Company’s Senior Notes due March, 2025 (the “2025 Notes” and, together with the 2020 Notes, the “Senior Notes”). The Company pays interest at an annual rate of 2.75% and 3.80%, respectively, on the 2020 Notes and 2025 Notes, on a semi-annual basis on March 15 and September 15 of each year. During the three months ended March 27, 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.

As of March 27, 2016 and June 28, 2015 the Senior Notes consisted of the following:



	March 27, 2016				June 28, 2015
	2020 Notes		2025 Notes		2020 Notes		2025 Notes
	(in thousands, except years)
Carrying value, long-term	$	497,498	$	495,491	$	497,053	$	496,907
Unamortized discount	2,502		2,915		2,947		3,093
Fair value adjustment - interest rate contract	—		1,594		—		—
Principal amount	$	500,000	$	500,000	$	500,000	$	500,000
Remaining amortization period (years)	4.0		9.0
Fair Value of Notes (Level 2)	$	504,180	$	485,625

Interest Cost

The following table presents the amount of interest cost recognized relating to both the contractual interest coupon and amortization of the debt discount, issuance costs, and effective portion of interest rate contracts with respect to the Senior Notes and the Convertible Notes during the three and nine ended March 27, 2016 and March 29, 2015.



	Three Months Ended				Nine Months Ended
	March 27, 2016		March 29, 2015		March 27, 2016		March 29, 2015
	(in thousands)
Contractual interest coupon	$	14,749	$	8,200	$	44,269	$	21,324
Amortization of interest discount	8,979		8,749		27,359		25,868
Amortization of issuance costs	13,124		603		28,224		1,784
Amortization of interest rate contracts	96		19		285		19
Total interest cost recognized	$	36,948	$	17,571	$	100,137	$	48,995

Term Loan Agreement

On November 10, 2015, the Company entered into an unsecured term loan agreement with a syndicate of lenders (the "Term Loan Agreement"). The Term Loan Agreement provides for a $900 million senior unsecured term loan facility composed of two tranches; (i) a $375 million tranche of 3-year senior unsecured loans (the "3-Year Tranche") maturing on November 10, 2018; and (ii) a $525 million tranche of 5-year senior unsecured loans (the "5-Year Tranche") maturing on November 10, 2020.

Interest on amounts borrowed under the Term Loan Agreement is, at the Company’s option, based on (i) a base rate, defined as the greatest of (a) prime rate, (b) Federal Funds rate plus 0.50%, or (c) one-month LIBOR plus 1.00%, plus a spread of 0.00% to 0.75% for the 3-Year Tranche or 0.125% to 1.000% for the 5-Year Tranche or (ii) LIBOR plus 1.000% and a spread of 1.000% to 1.750% for the 3-Year Tranche or 1.125% to 2.000% for the 5-Year Tranche, 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 accrued and unpaid interest is due and payable in equal quarterly amounts as set forth in the Term Loan Agreement, with any remaining balance due and accrued and unpaid interest due at maturity. Additionally, the Company will pay the lenders a quarterly commitment fee that varies based on the Company’s rating described above. The Term Loan Agreement also contains financial covenants that require the Company to maintain (i) a consolidated debt to capitalization ratio of no more than 0.50 to 1.00 (the “Capitalization Covenant”), provided that, until and including the earlier of (x) the end of the first two consecutive full fiscal quarters following the Term Loan Agreement's closing date that the Company is in compliance with the Capitalization Covenant and (y) December 31, 2017, if the Company is not in compliance with the Capitalization Covenant, the Company will be deemed not to have violated the Capitalization Covenant so long as the Company’s consolidated debt to adjusted EBITDA ratio is less than or equal to 4.50 to 1.00 for the period of four fiscal quarters then ended, and (ii) liquidity of no less than $1.0 billion, in each case determined in accordance with the Term Loan Agreement. The funding of the loans under the Term Loan Agreement will be on the closing date of the acquisition of KLA-Tencor subject to several conditions.

Revolving Credit Facility

On November 10, 2015, the Company entered into an Amendment and Restatement Agreement (the “Restated Credit Agreement”), which amends and restates the Company's unsecured Credit Agreement, dated March 12, 2014. The Restated Credit Agreement provides for an increase to the Company's revolving unsecured credit facility, from $300 million to $750 million with a syndicate of lenders. It includes an option, subject to certain requirements, for the Company to request an increase in the facility of up to an additional $250 million, for a potential total commitment of $1 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 (i) a base rate, defined as the greatest of (a) prime rate, (b) Federal Funds rate plus 0.5%, or (c) one-month LIBOR plus 1.0%, plus a spread of 0.0% to 0.5%, or (ii) LIBOR plus a spread of 0.9% to 1.5%, in each case as the applicable spread is determined based on the rating of the Company’s non-credit enhanced, senior unsecured long-term debt. Principal and any accrued and unpaid interest is due and payable upon maturity. Additionally, the Company will pay the lenders a quarterly commitment fee that varies based on the Company’s 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 Term Loan Agreement. As of March 27, 2016, the Company had no borrowings outstanding under the credit facility and was in compliance with all financial covenants.