Long Term Debt and Other Borrowings

As of June 25, 2017, and June 26, 2016, the Company’s outstanding debt consisted of the following:



	June 25, 2017						June 26, 2016
	Amount (in thousands)				Effective Interest Rate		Amount (in thousands)				Effective Interest Rate
Fixed-rate 1.25% Convertible Notes Due May 15, 2018 (“2018 Notes”)	447,436			⁽¹⁾	5.27	%	449,954			⁽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 3.45% Senior Notes Due June 15, 2023 (“2023 Notes”)	—				—	%	600,000				3.60	%
Fixed-rate 3.80% Senior Notes Due March 15, 2025 (“2025 Notes”)	500,000				3.87	%	500,000				3.87	%
Fixed-rate 3.90% Senior Notes Due June 15, 2026 (“2026 Notes”)	—				—	%	1,000,000				4.01	%
Fixed-rate 2.625% Convertible Notes Due May 15, 2041 (“2041 Notes”)	631,074			⁽¹⁾	4.28	%	699,895			⁽²⁾	4.28	%
Total debt outstanding, at par	2,878,510						4,549,849
Unamortized discount	(178,589		)				(232,727		)
Fair value adjustment - interest rate contracts	(10,102		)				8,552
Unamortized bond issuance costs	(3,161		)				(7,213		)	⁽³⁾
Total debt outstanding, at carrying value	$	2,686,658					$	4,318,461
Reported as:
Current portion of long-term debt	$	907,827		⁽⁴⁾			$	940,537		⁽⁴⁾
Long-term debt	1,778,831						3,377,924
Total debt outstanding, at carrying value	$	2,686,658					$	4,318,461

______________________________

(1) As of June 25, 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 26, 2016, these notes were convertible at the option of the bond holder, as a result of the condition described in (4) below.

(3)The Company adopted ASU 2015-3, regarding the simplification of the presentation of bond issuance costs, which requires that bond issuance costs related to a recognized liability be presented on the balance sheet as a direct reduction from the carrying amount of that debt liability, consistent with debt discounts. The Company applied the accounting standard update on a retrospective basis by reclassifying the presentation of bond issuance costs totaling $1.76 million which was originally included in prepaid assets and other current assets against current portion of convertible notes and capital leases, and $5.45 million which was originally included in other assets against senior notes, convertible notes and capital leases, less current portion on the Consolidated Balance Sheets for June 26, 2016. There is no impact to the Company’s Consolidated Statements of Operation, Stockholders’ Equity, or Cash Flows for the fiscal year ended June 26, 2016.

(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 convertible notes were classified in current liabilities and a portion of the equity component, representing the unamortized discount, was classified in temporary equity on the Company’s Consolidated Balance Sheets.

The Company’s contractual cash obligations relating to its outstanding debt as of June 25, 2017, were as follows:



Payments Due by Fiscal Year:	Long-Term Debt
	(in thousands)
2018 ⁽¹⁾	$	1,078,510
2019	—
2020	500,000
2021	800,000
2022	—
Thereafter	500,000
Total	$	2,878,510

(1) As noted above, the conversion period for the 2041 Notes is open as of June 25, 2017. As there is the potential for conversion at the option of the holder, the principal balance of the 2041 Notes has been included in the one-year payment period.

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, 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 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. Conversions in the fiscal year ended June 25, 2017, were $71.3 million principal value of Convertible Notes. During the quarter ended June 25, 2017 and in the subsequent period through August 10, 2017, the Company received notice of conversion for an additional $301.7 million principal value of Convertible Notes, which will settle in the quarter ending September 24, 2017.

Selected additional information regarding the Convertible Notes outstanding as of June 25, 2017, and June 26, 2016, is as follows:



	June 25, 2017				June 26, 2016
	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	$	89,604	$	156,374		$	72,992	$	152,397
Carrying amount of temporary equity component, net of tax	$	15,186	$	154,675		$	31,894	$	175,658
Remaining amortization period (years)	0.8		23.8			1.9		24.9
Fair value of notes (Level 2)	$	1,125,561	$	2,809,857
Conversion rate (shares of common stock per $1,000 principal amount of notes)	16.5702		29.7371
Conversion price (per share of common stock)	$	60.35	$	33.63
If-converted value in excess of par value	$	677,876	$	2,217,277
Estimated share dilution using average quarterly stock price of $145.28 per share	4,334		14,423

Convertible Note Hedges and Warrants

Concurrent with the issuance of the 2018 Notes and $450 million of notes that matured in May of 2016 (the “2016 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. During the year ended June 25, 2017, warrants associated with the 2016 Notes were exercised resulting in the issuance of approximately 2.0 million shares of the Company’s Common Stock. As of June 25, 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.

The following table presents the details of the warrants and convertible note hedge arrangements as of June 25, 2017:



	2018 Notes
	(shares in thousands)
Warrants:
Underlying shares	7,457
Estimated share dilution using average quarterly stock price $145.28 per share	3,716
Exercise price	$	72.88
Expiration date range	August 15 - October 24, 2018
Convertible note hedge:
Number of shares available from counterparties	7,414
Exercise price	$	60.35

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 8 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”), $600 million aggregate principal amount of Senior Notes due June 2023 (the “2023 Notes”) and $1,000 million aggregate principal amount of Senior Notes due June 2026 (the “2026 Notes”). The Company pays interest at an annual rate of 2.80%, 3.45%, and 3.90% on the 2021 Notes, 2023 Notes and 2026 Notes, respectively, on a semi-annual basis on June 15 and December 15 of each year.

As a result of the October 5, 2016, termination of the Agreement and Plan of Merger and Reorganization with KLA-Tencor (see Note 19 for additional information), the 2023 Notes and the 2026 Notes were redeemed on October 13, 2016, under the special mandatory redemption terms of the indenture governing these Notes. The Company was required to redeem all of the 2023 Notes and the 2026 Notes then outstanding, at a special mandatory redemption price equal to 101% of the aggregate principal amount of such notes, plus accrued and unpaid interest of approximately $21.0 million from the date of initial issuance. In addition, in conjunction with the special mandatory redemption of the 2023 Notes and the 2026 Notes in the three months ended December 25, 2016, the Company recognized approximately $2.5 million of loan issuance costs to other expense, net. The 2021 Notes are not subject to special mandatory redemption.

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 June 25, 2017, is as follows:



	Remaining Amortization period	Fair Value of Notes (Level 2)
	(years)	(in thousands)
2020 Notes	2.7	$	508,035
2021 Notes	4.0	$	814,632
2025 Notes	7.7	$	516,750

Term Loan Agreement

On May 13, 2016, the Company entered into an Amended and Restated Term Loan Agreement (the “Amended and Restated Term Loan Agreement”), which amends and restates the Term Loan Agreement entered into on November 10, 2015, with a syndicate of lenders. The Amended and Restated Term Loan Agreement provides for a commitment of $1,530.0 million senior unsecured term loan facility composed of two tranches (the “Commitments”): (1) a $1,005.0 million tranche of three-year senior unsecured loans and (2) a $525.0 million tranche of five-year senior unsecured loans. The Commitments automatically terminated on October 5, 2016, upon termination of the Agreement and Plan of Merger and Reorganization with KLA-Tencor Corporation (see Note 19 for additional detail). In conjunction with the termination of the Commitments, the Company released approximately $3.7 million of loan issuance costs to loss on extinguishment of debt, a component of other expense, net in the year ended June 25, 2017.

Revolving Credit Facility

On November 10, 2015, we 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 June 25, 2017, the Company had no borrowings outstanding under the credit facility and was in compliance with all financial covenants.

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 fiscal years ended June 25, 2017, June 26, 2016, and June 28, 2015.



	Year Ended
	June 25, 2017			June 26, 2016		June 28, 2015
	(in thousands)
Contractual interest coupon	$	95,195		$	63,053	$	36,074
Amortization of interest discount	22,873			35,206		34,886
Amortization of issuance costs	2,414			35,315		2,435
Amortization of interest rate contract	(4,756		)	359		113
Total interest cost recognized	$	115,726		$	133,933	$	73,508

The increase in interest expense during the 12 months ended June 25, 2017, is primarily the result of the issuance of $2.4 billion of Senior Notes in June 2016, $1.6 billion of which was extinguished in October 2016. The decrease in amortization of issuance costs is primarily due to the termination of the bridge loan financing. The variation in amortization of interest rate contracts is primarily related to the interest rate contracts associated with the $1.6 billion senior notes extinguished in October 2016.

The increase in interest expense during the 12 months ended June 26, 2016, is primarily the result of the issuance of $1.0 billion Senior Notes in March 2015. The increase in amortization of issuance costs during the 12 months ended June 26, 2016, is primarily due the amortization of bridge loan financing issuance costs in connection with the KLA-Tencor merger of approximately $31.9 million.