8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

Current Report

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of report (Date of earliest event reported): May 23, 2016

LAM RESEARCH CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	0-12933	94-2634797
(State or Other Jurisdiction of Incorporation)	(Commission File Number)	(IRS Employer Identification Number)

4650 Cushing Parkway

Fremont, California 94538

(Address of principal executive offices including zip code)

(510) 572-0200

(Registrant’s telephone number, including area code)

Not Applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

TABLE OF CONTENTS

	Page
ITEM 8.01. OTHER EVENTS		1
ITEM 9.01. FINANCIAL STATEMENTS AND EXHIBITS		2
SIGNATURES		3
EXHIBIT INDEX		4

i

Item 8.01. Other Events

As previously announced, on October 20, 2015, Lam Research Corporation, a Delaware corporation (the “Company”), Topeka Merger Sub 1, Inc., a Delaware corporation (“Merger Sub 1”), and Topeka Merger Sub 2, Inc., a Delaware corporation (“Merger Sub 2”), entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with KLA-Tencor Corporation, a Delaware corporation (“KLA-Tencor”) providing for the merger of Merger Sub 1 or its permitted assignee with and into KLA-Tencor, and the subsequent merger of KLA-Tencor with and into Merger Sub 2 or its permitted assignee (this two-step merger referred to as the “KLA-Tencor Merger”), following which KLA-Tencor will cease to be a publicly held corporation and Merger Sub 2 or its permitted assignee will survive as the Company’s wholly owned subsidiary, subject to the terms and conditions set forth in the Merger Agreement. The KLA-Tencor Merger is more fully described in the Company’s Current Report on Form 8-K filed on October 21, 2015.

The Company is filing this Current Report on Form 8-K to provide certain financial information with respect to KLA-Tencor in connection the KLA-Tencor Merger. The following audited consolidated financial statements of KLA-Tencor are filed as Exhibit 99.1 to this Current Report on Form 8-K and are incorporated herein by reference:

• Report of Independent Registered Public Accounting Firm;

• Consolidated Balance Sheets as of June 30, 2015 and June 30, 2014;

• Consolidated Statements of Operations for each of the three years in the period ended June 30, 2015;

• Consolidated Statements of Comprehensive Income for each of the three years in the period ended June 30, 2015;

• Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended June 30, 2015;

• Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 2015;

• Notes to Consolidated Financial Statements; and

• Schedule II to Consolidated Financial Statements.

Attached hereto as Exhibit 23.1 is the consent of PricewaterhouseCoopers LLP, the independent registered public accounting firm of KLA-Tencor, related to the above-referenced audited consolidated financial statements of KLA-Tencor filed as Exhibit 99.1 to this Current Report on Form 8-K.

The following unaudited condensed consolidated financial statements of KLA-Tencor are filed as Exhibit 99.2 to this Current Report on Form 8-K and are incorporated herein by reference:

• Condensed Consolidated Balance Sheets as of March 31, 2016 and June 30, 2015;

• Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended March 31, 2016 and 2015;

• Condensed Consolidated Statements of Comprehensive Income for the Three Months and Nine Months Ended March 31, 2016 and 2015;

• Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2016 and 2015; and

• Notes to Consolidated Financial Statements.

The following unaudited pro forma condensed combined financial statements combining the historical consolidated financial position and results of operations of the Company and its subsidiaries and KLA-Tencor and its subsidiaries, as an acquisition by the Company, are filed as Exhibit 99.3 to this Current Report on Form 8-K and are incorporated herein by reference:

• Unaudited Pro Forma Condensed Combined Balance Sheet as of March 27, 2016;

• Unaudited Pro Forma Condensed Combined Statement of Operations for the nine months ended March 27, 2016;

• Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended June 28, 2015; and

• Notes to the Unaudited Pro Forma Condensed Combined Financial Statements.

1

In addition, the Company is filing this Current Report on Form 8-K to provide the computation of its ratio of earnings to fixed charges for the nine months ended March 27, 2016 and for the years ended June 28, 2015, June 29, 2014, June 30, 2013, June 24, 2012 and June 26, 2011, which is attached as Exhibit 12.1 hereto and incorporated by reference herein. The Company’s unaudited pro forma computation of ratio of earnings to fixed charges for the nine months ended March 27, 2016 and for the fiscal year ended June 30, 2015, giving effect to the KLA-Tencor Merger and related financing transactions, is filed as Exhibit 12.2 to this Current Report on Form 8-K and is incorporated herein by reference.

Item 9.01. Financial Statements and Exhibits

(d) Exhibits

12.1	Computation of Ratio of Earnings to Fixed Charges for the nine months ended March 27, 2016 and for the years ended June 28, 2015, June 29, 2014, June 30, 2013, June 24, 2012 and June 26, 2011
12.2	Unaudited Pro Forma Computation of Ratio of Earnings to Fixed Charges
23.1	Consent of PricewaterhouseCoopers LLP
99.1	KLA-Tencor Corporation Audited Consolidated Financial Statements as of June 30, 2015 and 2014 and for each of the three years in the period ended June 30, 2015
99.2	KLA-Tencor Corporation Unaudited Condensed Consolidated Financial Statements as of March 31, 2016 and June 30, 2015 and for the three months and nine months ended March 31, 2016 and 2015
99.3	Unaudited Pro Forma Condensed Combined Financial Statements

2

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: May 23, 2016

LAM RESEARCH CORPORATION
By:	/s/ Douglas R. Bettinger
	Douglas R. Bettinger Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

3

EXHIBIT INDEX

12.1	Computation of Ratio of Earnings to Fixed Charges for the nine months ended March 27, 2016 and for the years ended June 28, 2015, June 29, 2014, June 30, 2013, June 24, 2012 and June 26, 2011
12.2	Unaudited Pro Forma Computation of Ratio of Earnings to Fixed Charges
23.1	Consent of PricewaterhouseCoopers LLP
99.1	KLA-Tencor Corporation Audited Consolidated Financial Statements as of June 30, 2015 and 2014 and for each of the three years in the period ended June 30, 2015
99.2	KLA-Tencor Corporation Unaudited Condensed Consolidated Financial Statements as of March 31, 2016 and June 30, 2015 and for the three months and nine months ended March 31, 2016 and 2015
99.3	Unaudited Pro Forma Condensed Combined Financial Statements

4

EX-12.1

Exhibit 12.1

Lam Research Corporation

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

(in thousands, except ratios)

	Nine Months Ended March 27, 2016		Fiscal Years Ended
			June 28, 2015		June 29, 2014		June 30, 2013		June 24, 2012			June 26, 2011
Ratio of earnings to fixed charges1		10.0		11.0		12.6		2.1		6.2			72.4
Income before income taxes	$	678,125	$	740,850	$	723,363	$	66,658	$	204,418		$	800,876
Less: Income (loss) from equity investees		—		—		683		1,171		(246	)		—
Add: Interest expense		74,124		73,682		61,692		60,408		38,962			5,380
Interest component of rental expense		874		647		760		759		638			5,839
Adjusted Earnings	$	753,123	$	815,179	$	785,132	$	126,654	$	244,264		$	812,095

¹  For purposes of computing our ratio of earnings to fixed charges, earnings consist of earnings (loss) before income taxes and cumulative effect of accounting change plus interest expensed; and fixed charges consist of interest expensed, interest capitalized and amortized premiums, discounts and capitalized expenses related to indebtedness.

EX-12.2

Exhibit 12.2

Lam Research Corporation

PRO FORMA COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

(in thousands, except ratios)

	March 27, 2016		June 28, 2015
Ratio of earnings to fixed charges (1)		3.9		1.9
Income before income taxes		702,128		285,629
Less: Income (loss) from equity investees		—		—
Add: Interest expense		243,291		304,457
Interest component of rental expense		1,277		1,186
Adjusted Earnings		946,696		591,272

(1) For purposes of computing our pro forma ratio of earnings to fixed charges, earnings consist of earnings (loss) before income taxes and cumulative effect of accounting change, giving effect to both the anticipated merger between Lam Research Corporation and KLA-Tencor Corporation and the proposed debt transaction related financings, plus interest expensed; and fixed charges consist of interest expensed, interest capitalized and amortized premiums, discounts and capitalized expenses related to indebtedness.

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-202110), Form S-8 (No. 333-185641, No. 333-181878, No. 333-156335, No. 333-138545, No. 333-127936, No. 333-84638, No. 333-66833, No. 333-207844) and Form S-4 (No. 333-179267, No. 333-30545, No. 333-208356) of Lam Research Corporation of our report dated August 7, 2015 relating to the financial statements and financial statement schedule of KLA-Tencor Corporation, which appears in this Current Report on Form 8-K of Lam Research Corporation.

/s/ PricewaterhouseCoopers LLC

San Jose, California

May 23, 2016

EX-99.1

Exhibit 99.1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Board of Directors and Stockholders of KLA-Tencor Corporation

In our opinion, the consolidated financial statements listed in the accompanying index appearing under Item 8.01 present fairly, in all material respects, the financial position of KLA-Tencor Corporation and its subsidiaries at June 30, 2015 and June 30, 2014, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2015 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index appearing under Item 8.01 present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

San Jose, California

August 7, 2015

KLA-TENCOR CORPORATION

Consolidated Balance Sheets

	As of June 30,
(In thousands, except par value)	2015			2014
ASSETS
Current assets:
Cash and cash equivalents	$	838,025		$	630,861
Marketable securities		1,549,086			2,521,776
Accounts receivable, net		585,494			492,863
Inventories		617,904			656,457
Deferred income taxes		236,253			215,676
Other current assets		77,814			68,462
Total current assets		3,904,576			4,586,095
Land, property and equipment, net		314,591			330,263
Goodwill		335,263			335,355
Purchased intangibles, net		11,895			27,697
Other non-current assets		259,687			256,436
Total assets	$	4,826,012		$	5,535,846
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	103,342		$	103,422
Deferred system profit		148,691			147,923
Unearned revenue		71,335			59,176
Current portion of long-term debt		16,981			—
Other current liabilities		661,414			585,090
Total current liabilities		1,001,763			895,611
Non-current liabilities:
Long-term debt		3,173,435			745,101
Unearned revenue		47,145			57,500
Other non-current liabilities		182,230			168,288
Total liabilities		4,404,573			1,866,500
Commitments and contingencies (Notes 13 and 14)
Stockholders’ equity:
Preferred stock, $0.001 par value, 1,000 shares authorized, none outstanding		—			—
Common stock, $0.001 par value, 500,000 shares authorized, 259,007 and 257,542 shares issued, 157,851 and 165,448 shares outstanding, as of June 30, 2015 and June 30, 2014, respectively		158			165
Capital in excess of par value		474,216			1,220,339
Retained earnings (accumulated deficit)		(12,362	)		2,479,113
Accumulated other comprehensive income (loss)		(40,573	)		(30,271	)
Total stockholders’ equity		421,439			3,669,346
Total liabilities and stockholders’ equity	$	4,826,012		$	5,535,846

See accompanying notes to consolidated financial statements.

2

KLA-TENCOR CORPORATION

Consolidated Statements of Operations

	Year ended June 30,
(In thousands, except per share amounts)	2015			2014			2013
Revenues:
Product	$	2,125,396		$	2,286,437		$	2,247,147
Service		688,653			642,971			595,634
Total revenues		2,814,049			2,929,408			2,842,781
Costs and expenses:
Costs of revenues		1,215,229			1,232,962			1,237,452
Engineering, research and development		530,616			539,469			487,832
Selling, general and administrative		406,864			384,907			387,812
Loss on extinguishment of debt and other, net		131,669			—			—
Interest expense		106,009			53,812			54,176
Other expense (income), net		(10,469	)		(16,203	)		(15,112	)
Income before income taxes		434,131			734,461			690,621
Provision for income taxes		67,973			151,706			147,472
Net income	$	366,158		$	582,755		$	543,149
Net income per share:
Basic	$	2.26		$	3.51		$	3.27
Diluted	$	2.24		$	3.47		$	3.21
Cash dividends declared per share (including a special cash dividend of $16.50 per share declared during the three months ended December 31, 2014)	$	18.50		$	1.80		$	1.60
Weighted-average number of shares:
Basic		162,282			166,016			166,089
Diluted		163,701			168,118			169,260

See accompanying notes to consolidated financial statements.

3

KLA-TENCOR CORPORATION

Consolidated Statements of Comprehensive Income

	Year ended June 30,
(In thousands)	2015			2014			2013
Net income	$	366,158		$	582,755		$	543,149
Other comprehensive income (loss):
Currency translation adjustments:
Change in currency translation adjustments		(20,740	)		6,428			(11,298	)
Change in income tax benefit or expense		8,086			(1,232	)		(750	)
Net change related to currency translation adjustments		(12,654	)		5,196			(12,048	)
Cash flow hedges:
Change in net unrealized gains or losses		13,745			1,641			4,929
Reclassification adjustments for net gains or losses included in net income		(6,615	)		(4,145	)		(1,483	)
Change in income tax benefit or expense		(2,565	)		898			(1,233	)
Net change related to cash flow hedges		4,565			(1,606	)		2,213
Net change related to unrecognized losses and transition obligations in connection with defined benefit plans		(147	)		(617	)		(2,255	)
Available-for-sale securities:
Change in net unrealized gains or losses		(1,069	)		7,212			(2,953	)
Reclassification adjustments for net gains or losses included in net income		(2,119	)		(2,084	)		(2,287	)
Change in income tax benefit or expense		1,122			(1,726	)		1,827
Net change related to available-for-sale securities		(2,066	)		3,402			(3,413	)
Other comprehensive income (loss)		(10,302	)		6,375			(15,503	)
Total comprehensive income	$	355,856		$	589,130		$	527,646

See accompanying notes to consolidated financial statements.

4

KLA-TENCOR CORPORATION

Consolidated Statements of Stockholders’ Equity

	Common Stock and Capital in Excess of Par Value						Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
(In thousands, except per share amounts)	Shares			Amount
Balances as of June 30, 2012		166,710		$	1,089,480		$	2,247,258		$	(21,143	)	$	3,315,595
Net income		—			—			543,149			—			543,149
Other comprehensive loss		—			—			—			(15,503	)		(15,503	)
Net issuance under employee stock plans		4,099			96,989			—			—			96,989
Repurchase of common stock		(5,374	)		(107,973	)		(165,281	)		—			(273,254	)
Cash dividends declared ($1.60 per share)		—			—			(265,893	)		—			(265,893	)
Stock-based compensation expense		—			70,084			—			—			70,084
Tax benefit for equity awards		—			10,985			—			—			10,985
Balances as of June 30, 2013		165,435			1,159,565			2,359,233			(36,646	)		3,482,152
Net income		—			—			582,755			—			582,755
Other comprehensive income		—			—			—			6,375			6,375
Net issuance under employee stock plans		3,848			60,320			—			—			60,320
Repurchase of common stock		(3,835	)		(76,839	)		(164,004	)		—			(240,843	)
Cash dividends declared ($1.80 per share)		—			—			(298,871	)		—			(298,871	)
Stock-based compensation expense		—			60,940			—			—			60,940
Tax benefit for equity awards		—			16,518			—			—			16,518
Balances as of June 30, 2014		165,448			1,220,504			2,479,113			(30,271	)		3,669,346
Net income		—			—			366,158			—			366,158
Other comprehensive loss		—			—			—			(10,302	)		(10,302	)
Net issuance under employee stock plans		1,658			16,186			—			—			16,186
Repurchase of common stock		(9,255	)		(26,891	)		(581,965	)		—			(608,856	)
Cash dividends declared ($18.50 per share including a special cash dividend of $16.50 per share declared during the three months ended December 31, 2014)		—			(807,391	)		(2,275,668	)		—			(3,083,059	)
Stock-based compensation expense		—			55,302			—			—			55,302
Tax benefit for equity awards		—			16,664			—			—			16,664
Balances as of June 30, 2015		157,851		$	474,374		$	(12,362	)	$	(40,573	)	$	421,439

See accompanying notes to consolidated financial statements.

5

KLA-TENCOR CORPORATION

Consolidated Statements of Cash Flows

	Year Ended June 30,
(In thousands)	2015			2014			2013
Cash flows from operating activities:
Net income	$	366,158		$	582,755		$	543,149
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		80,536			83,072			87,534
Asset impairment charges		2,126			1,374			1,327
Loss on extinguishment of debt and other, net		131,669			—			—
Net gain on sale of assets		—			—			(1,160	)
Non-cash stock-based compensation expense		55,302			60,940			70,084
Deferred income taxes		(24,245	)		17,176			4,532
Excess tax benefit from equity awards		(15,403	)		(20,554	)		(14,198	)
Net gain on sale of marketable securities and other investments		(2,119	)		(5,920	)		(2,287	)
Changes in assets and liabilities, net of impact of acquisition of business:
Decrease (increase) in accounts receivable, net		(118,520	)		32,591			159,245
Decrease (increase) in inventories		27,500			(26,173	)		14,787
Decrease (increase) in other assets		11,135			(26,265	)		6,035
Increase (decrease) in accounts payable		848			(12,333	)		(22,812	)
Increase (decrease) in deferred system profit		768			(10,042	)		10,748
Increase in other liabilities		90,151			102,265			56,204
Net cash provided by operating activities		605,906			778,886			913,188
Cash flows from investing activities:
Acquisition of non-marketable securities		—			(1,345	)		—
Acquisition of business		—			(18,000	)		—
Capital expenditures, net		(45,791	)		(67,502	)		(74,573	)
Proceeds from sale of assets		—			3,836			1,838
Purchase of available-for-sale securities		(1,731,551	)		(1,834,223	)		(1,588,093	)
Proceeds from sale of available-for-sale securities		1,993,396			987,512			1,117,511
Proceeds from maturity of available-for-sale securities		699,108			251,876			300,209
Purchase of trading securities		(60,808	)		(64,053	)		(40,850	)
Proceeds from sale of trading securities		63,867			65,790			42,511
Net cash provided by (used in) investing activities		918,221			(676,109	)		(241,447	)
Cash flows from financing activities:
Proceeds from issuance of debt, net of issuance costs		3,224,906			—			—
Repayment of debt		(916,117	)		—			—
Issuance of common stock		47,008			112,221			126,121
Tax withholding payments related to vested and released restricted stock units		(30,229	)		(51,948	)		(29,682	)
Common stock repurchases		(602,888	)		(240,843	)		(273,254	)
Payment of dividends to stockholders		(3,041,055	)		(298,871	)		(265,893	)
Excess tax benefit from equity awards		15,403			20,554			14,198
Net cash used in financing activities		(1,302,972	)		(458,887	)		(428,510	)
Effect of exchange rate changes on cash and cash equivalents		(13,991	)		1,581			(9,135	)
Net increase (decrease) in cash and cash equivalents		207,164			(354,529	)		234,096
Cash and cash equivalents at beginning of period		630,861			985,390			751,294
Cash and cash equivalents at end of period	$	838,025		$	630,861		$	985,390
Supplemental cash flow disclosures:
Income taxes paid, net	$	69,681		$	117,348		$	120,342
Interest paid	$	92,982		$	52,474		$	53,693
Non-cash activities:
Purchase of land, property and equipment—investing activities	$	1,843		$	3,457		$	6,839
Dividends payable—financing activities	$	42,002		$	—		$	—

See accompanying notes to consolidated financial statements.

6

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements

NOTE 1— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Operations and Principles of Consolidation. KLA-Tencor Corporation (“KLA-Tencor” or the “Company”) is a leading supplier of process control and yield management solutions for the semiconductor and related nanoelectronics industries. Headquartered in Milpitas, California, KLA-Tencor has subsidiaries both in the United States and in key markets throughout the world.

The Consolidated Financial Statements include the accounts of KLA-Tencor and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

Management Estimates. The preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions in applying the Company’s accounting policies that affect the reported amounts of assets and liabilities (and related disclosure of contingent assets and liabilities) at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Cash Equivalents and Marketable Securities. All highly liquid debt instruments with original or remaining maturities of less than three months at the date of purchase are considered to be cash equivalents. Marketable securities are generally classified as available-for-sale for use in current operations, if required, and are reported at fair value, with unrealized gains and losses, net of tax, presented as a separate component of stockholders’ equity under the caption “Accumulated other comprehensive income (loss).” All realized gains and losses and unrealized losses resulting from declines in fair value that are other than temporary are recorded in earnings in the period of occurrence. The specific identification method is used to determine the realized gains and losses on investments. For all investments in debt and equity securities, the Company assesses whether the impairment is other than temporary. If the fair value of a debt security is less than its amortized cost basis, an impairment is considered other than temporary if (i) the Company has the intent to sell the security or it is more likely than not that the Company will be required to sell the security before recovery of its entire amortized cost basis, or (ii) the Company does not expect to recover the entire amortized cost of the security. If an impairment is considered other than temporary based on condition (i), the entire difference between the amortized cost and the fair value of the security is recognized in earnings. If an impairment is considered other than temporary based on condition (ii), the amount representing credit losses, defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security, will be recognized in earnings, and the amount relating to all other factors will be recognized in other comprehensive income (loss). The Company evaluates both qualitative and quantitative factors such as duration and severity of the unrealized losses, credit ratings, default and loss rates of the underlying collateral, structure and credit enhancements to determine if a credit loss may exist.

Non-Marketable Equity Securities and Other Investments. KLA-Tencor acquires certain equity investments for the promotion of business and strategic objectives, and, to the extent these investments continue to have strategic value, the Company typically does not attempt to reduce or eliminate the inherent market risks. Non-marketable equity securities and other investments are recorded at historical cost. Non-marketable equity securities and other investments are included in “Other non-current assets” on the balance sheet. Non-marketable equity securities are subject to a periodic impairment review; however, there are no open-market valuations, and the impairment analysis requires significant judgment. This analysis includes assessment of the investee’s financial condition, the business outlook for its products and technology, its projected results and cash flow, the likelihood of obtaining subsequent rounds of financing and the impact of any relevant contractual equity preferences held by the Company or others.

Variable Interest Entities. KLA-Tencor uses a qualitative approach in assessing the consolidation requirement for variable interest entities. The approach focuses on identifying which enterprise has the power to direct the activities that most significantly impact the variable interest entity’s economic performance and which enterprise has the obligation to absorb losses or the right to receive benefits from the variable interest entity. In the event that the Company is the primary beneficiary of a variable interest entity, the assets, liabilities, and results of operations of the variable interest entity will be included in the Company’s Consolidated Financial Statements. The Company has concluded that none of the Company’s equity investments require consolidation as per the Company’s most recent qualitative assessment.

7

Inventories. Inventories are stated at the lower of cost (on a first-in, first-out basis) or market. Demonstration units are stated at their manufacturing cost and written down to their net realizable value. The Company reviews and sets standard costs semi-annually at current manufacturing costs in order to approximate actual costs. The Company’s manufacturing overhead standards for product costs are calculated assuming full absorption of forecasted spending over projected volumes, adjusted for excess capacity. Abnormal inventory costs such as costs of idle facilities, excess freight and handling costs, and spoilage are recognized as current period charges. The Company writes down product inventory based on forecasted demand and technological obsolescence and service spare parts inventory based on forecasted usage. These factors are impacted by market and economic conditions, technology changes, new product introductions and changes in strategic direction and require estimates that may include uncertain elements. Actual demand may differ from forecasted demand, and such differences may have a material effect on recorded inventory values.

Allowance for Doubtful Accounts. A majority of the Company’s trade receivables are derived from sales to large multinational semiconductor manufacturers throughout the world. In order to monitor potential credit losses, the Company performs ongoing credit evaluations of its customers’ financial condition. An allowance for doubtful accounts is maintained for probable credit losses based upon the Company’s assessment of the expected collectibility of the accounts receivable. The allowance for doubtful accounts is reviewed on a quarterly basis to assess the adequacy of the allowance.

Property and Equipment. Property and equipment are recorded at cost, net of accumulated depreciation. Depreciation of property and equipment is based on the straight-line method over the estimated useful lives of the assets. The following table sets forth the estimated useful life for various asset categories:

Asset Category	Period
Buildings	30 to 35 years
Leasehold improvements	Shorter of 10 to 15 years or lease term
Machinery and equipment	2 to 5 years
Office furniture and fixtures	5 to 7 years

Construction-in-process assets are not depreciated until the assets are placed in service. Depreciation expense for the fiscal years ended June 30, 2015, 2014 and 2013 was $55.8 million, $51.1 million and $49.3 million, respectively.

Business Combinations. KLA-Tencor allocates the fair value of the purchase consideration of the Company’s acquisitions to the tangible assets, liabilities, and intangible assets acquired, including in-process research and development (“IPR&D”), based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When a project underlying reported IPR&D is completed, the corresponding amount of IPR&D is reclassified as an amortizable purchased intangible asset and is amortized over the asset’s estimated useful life. Acquisition-related expenses and restructuring costs are recognized separately from the business combination and are expensed as incurred.

Goodwill and Intangible Assets. KLA-Tencor assesses goodwill for impairment annually as well as whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Long-lived intangible assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. See Note 6, “Goodwill and Purchased Intangible Assets” for a detailed description.

Impairment of Long-Lived Assets. KLA-Tencor evaluates the carrying value of its long-lived assets whenever events or changes in circumstances indicate that the carrying value of the asset may be impaired. An impairment loss is recognized when estimated future cash flows expected to result from the use of the asset, including disposition, are less than the carrying value of the asset. Such an impairment charge would be measured as the excess of the carrying value of the asset over its fair value.

Concentration of Credit Risk. Financial instruments that potentially subject KLA-Tencor to significant concentrations of credit risk consist primarily of cash equivalents, short-term marketable securities, trade accounts receivable and derivative financial instruments used in hedging activities. The Company invests in a variety of financial instruments, such as, but not limited to, certificates of deposit, corporate debt and municipal securities, United States Treasury and Government agency securities, and equity securities and, by policy, limits the amount of credit exposure with any one financial institution or commercial issuer. The Company has not experienced any material credit losses on its investments.

8

A majority of the Company’s trade receivables are derived from sales to large multinational semiconductor manufacturers located throughout the world, with a majority located in Asia. In recent years, the Company’s customer base has become increasingly concentrated due to corporate consolidation, acquisitions and business closures, and to the extent that these customers experience liquidity issues in the future, the Company may be required to incur additional bad debt expense with respect to trade receivables. The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral to secure accounts receivable. The Company maintains an allowance for potential credit losses based upon expected collectibility risk of all accounts receivable. In addition, the Company may utilize letters of credit or non-recourse factoring to mitigate credit risk when considered appropriate.

The Company is exposed to credit loss in the event of non-performance by counterparties on the foreign exchange contracts that the Company uses in hedging activities and in certain factoring transactions. These counterparties are large international financial institutions, and to date no such counterparty has failed to meet its financial obligations to the Company under such contracts.

The following customers each accounted for more than 10% of total revenues for the indicated periods:

Year ended June 30,
2015	2014	2013
Intel Corporation	Intel Corporation	Intel Corporation
Samsung Electronics Co., Ltd.	Samsung Electronics Co., Ltd.	Taiwan Semiconductor Manufacturing Company Limited
Taiwan Semiconductor Manufacturing Company Limited	Taiwan Semiconductor Manufacturing Company Limited

The following customers each accounted for more than 10% of net accounts receivable as of the dates indicated below:

As of June 30,
2015	2014
Taiwan Semiconductor Manufacturing Company Limited	Intel Corporation
	Taiwan Semiconductor Manufacturing Company Limited

Foreign Currency. The functional currencies of KLA-Tencor’s foreign subsidiaries are the local currencies, except as described below. Accordingly, all assets and liabilities of these foreign operations are translated to U.S. dollars at current period end exchange rates, and revenues and expenses are translated to U.S. dollars using average exchange rates in effect during the period. The gains and losses from foreign currency translation of these subsidiaries’ financial statements are recorded directly into a separate component of stockholders’ equity under the caption “Accumulated other comprehensive income (loss).”

The Company’s manufacturing subsidiaries in Singapore, Israel, Germany and China use the U.S. dollar as their functional currency. Accordingly, monetary assets and liabilities in non-functional currency of these subsidiaries are remeasured using exchange rates in effect at the end of the period. Revenues and costs in local currency are remeasured using average exchange rates for the period, except for costs related to those balance sheet items that are remeasured using historical exchange rates. The resulting remeasurement gains and losses are included in the Consolidated Statements of Operations as incurred.

Derivative Financial Instruments. KLA-Tencor uses financial instruments, such as forward exchange contracts and currency options, to hedge a portion of, but not all, existing and forecasted foreign currency denominated transactions. The purpose of the Company’s foreign currency program is to manage the effect of exchange rate fluctuations on certain foreign currency denominated revenues, costs and eventual cash flows. The effect of exchange rate changes on forward exchange contracts is expected to offset the effect of exchange rate changes on the underlying hedged items. The Company believes these financial instruments do not subject the Company to speculative risk that would otherwise result from changes in currency exchange rates.

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All of the Company’s derivative financial instruments are recorded at fair value based upon quoted market prices for comparable instruments adjusted for risk of counterparty non-performance. For derivative instruments designated and qualifying as cash flow hedges of forecasted foreign currency denominated transactions expected to occur within twelve months, the effective portion of the gain or loss on these hedges is reported as a component of “Accumulated other comprehensive income (loss)” in stockholders’ equity, and is reclassified into earnings when the hedged transaction affects earnings. If the transaction being hedged fails to occur, or if a portion of any derivative is (or becomes) ineffective, the gain or loss on the associated financial instrument is recorded immediately in earnings. For derivative instruments used to hedge existing foreign currency denominated assets or liabilities, the gains or losses on these hedges are recorded immediately in earnings to offset the changes in the fair value of the assets or liabilities being hedged.

Warranty. The Company provides standard warranty coverage on its systems for 40 hours per week for 12 months, providing labor and parts necessary to repair the systems during the warranty period. The Company accounts for the estimated warranty cost as a charge to costs of revenues when revenue is recognized. The estimated warranty cost is based on historical product performance and field expenses. Utilizing actual service records, the Company calculates the average service hours and parts expense per system and applies the actual labor and overhead rates to determine the estimated warranty charge. The Company updates these estimated charges on a regular basis. The actual product performance and/or field expense profiles may differ, and in those cases the Company adjusts its warranty accruals accordingly (see Note 13, “Commitments and Contingencies”).

Revenue Recognition. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectibility is reasonably assured. The Company derives revenue from three sources-sales of systems, spare parts and services. In general, the Company recognizes revenue for systems when the system has been installed, is operating according to predetermined specifications and is accepted by the customer. When the Company has demonstrated a history of successful installation and acceptance, the Company recognizes revenue upon delivery and customer acceptance. Under certain circumstances, however, the Company recognizes revenue prior to acceptance from the customer, as follows:

• When the customer fab has previously accepted the same tool, with the same specifications, and when the Company can objectively demonstrate that the tool meets all of the required acceptance criteria.

• When system sales to independent distributors have no installation requirement, contain no acceptance agreement, and 100% payment is due based upon shipment.

• When the installation of the system is deemed perfunctory.

• When the customer withholds acceptance due to issues unrelated to product performance, in which case revenue is recognized when the system is performing as intended and meets predetermined specifications.

In circumstances in which the Company recognizes revenue prior to installation, the portion of revenue associated with installation is deferred based on estimated fair value, and that revenue is recognized upon completion of the installation.

In many instances, products are sold in stand-alone arrangements. Services are sold separately through renewals of annual maintenance contracts. The Company has multiple element revenue arrangements in cases where certain elements of a sales arrangement are not delivered and accepted in one reporting period. To determine the relative fair value of each element in a revenue arrangement, the Company allocates arrangement consideration based on the selling price hierarchy. For substantially all of the arrangements with multiple deliverables pertaining to products and services, the Company uses vendor-specific objective evidence (“VSOE”) or third-party evidence (“TPE”) to allocate the selling price to each deliverable. The Company determines TPE based on historical prices charged for products and services when sold on a stand-alone basis. When the Company is unable to establish relative selling price using VSOE or TPE, the Company uses estimated selling price (“ESP”) in its allocation of arrangement consideration. The objective of ESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. ESP could potentially be used for new or customized products. The Company regularly reviews relative selling prices and maintains internal controls over the establishment and updates of these estimates.

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In a multiple element revenue arrangement, the Company defers revenue recognition associated with the relative fair value of each undelivered element until that element is delivered to the customer. To be considered a separate element, the product or service in question must represent a separate unit of accounting, which means that such product or service must fulfill the following criteria: (a) the delivered item(s) has value to the customer on a stand-alone basis; and (b) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. If the arrangement does not meet all the above criteria, the entire amount of the sales contract is deferred until all elements are accepted by the customer.

Trade-in rights are occasionally granted to customers to trade in tools in connection with subsequent purchases. The Company estimates the value of the trade-in right and reduces the revenue recognized on the initial sale. This amount is recognized at the earlier of the exercise of the trade-in right or the expiration of the trade-in right.

Spare parts revenue is recognized when the product has been shipped, risk of loss has passed to the customer and collection of the resulting receivable is probable.

Service and maintenance contract revenue is recognized ratably over the term of the maintenance contract. Revenue from services performed in the absence of a maintenance contract, including consulting and training revenue, is recognized when the related services are performed and collectibility is reasonably assured.

The Company sells stand-alone software that is subject to the software revenue recognition guidance. The Company periodically reviews selling prices to determine whether VSOE exists, and in situations where the Company is unable to establish VSOE for undelivered elements, such as post-contract service, revenue is recognized ratably over the term of the service contract.

The Company also defers the fair value of non-standard warranty bundled with equipment sales as unearned revenue. Non-standard warranty includes services incremental to the standard 40-hour per week coverage for 12 months. Non-standard warranty is recognized ratably as revenue when the applicable warranty term period commences.

The deferred system profit balance equals the amount of deferred system revenue that was invoiced and due on shipment, less applicable product and warranty costs. Deferred system revenue represents the value of products that have been shipped and billed to customers which have not met the Company’s revenue recognition criteria. Deferred system profit does not include the profit associated with product shipments to certain customers in Japan, to whom title does not transfer until customer acceptance. Shipments to such customers in Japan are classified as inventory at cost until the time of acceptance.

Research and Development Costs. Research and development costs are expensed as incurred.

Strategic Development Agreements. Gross engineering, research and development expenses were partially offset by $1.9 million, $8.2 million and $12.4 million in external funding received under certain strategic development programs, primarily from government grants, in the fiscal years ended June 30, 2015, 2014 and 2013, respectively.

Shipping and Handling Costs. Shipping and handling costs are included as a component of cost of sales.

Accounting for Stock-Based Compensation Plans. The Company accounts for stock-based awards granted to employees for services based on the fair value of those awards. The fair value of stock-based awards is measured at the grant date and is recognized as expense over the employee’s requisite service period. The fair value for restricted stock units granted without “dividend equivalent” rights is determined using the closing price of the Company’s common stock on the grant date, adjusted to exclude the present value of dividends which are not accrued on the restricted stock units. The fair value for restricted stock units granted with “dividend equivalent” rights is determined using the closing price of the Company’s common stock on the grant date. The award holder is not entitled to received payments under dividend equivalent rights unless the associated restricted stock unit award vests (i.e., the award holder is entitled to receive credits, payable in cash or shares of the Company’s common stock, equal to the cash dividends that would have been received on the shares of common stock underlying the restricted stock units had the shares been issued and outstanding on the dividend record date, but such dividend equivalents are only paid subject to the recipient satisfying the vesting requirements of the underlying award). The fair value is determined using a Black-Scholes valuation model for purchase rights under the Employee Stock Purchase Plan.

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The Black-Scholes option-pricing model requires the input of assumptions, including the option’s expected term and the expected price volatility of the underlying stock. The expected stock price volatility assumption is based on the market-based historical implied volatility from traded options of the Company’s common stock. The Company has elected not to include the indirect tax effects of stock-based compensation deductions when calculating the windfall benefits and therefore recognizes the full effect of these deductions in the income statement in the period in which the taxable event occurs.

Accounting for Cash-Based Long-Term Incentive Compensation. Cash-based long-term incentive (“Cash LTI”) awards issued to employees under the Company’s Cash LTI program vest in four equal installments, with 25% of the aggregate amount of the Cash LTI award vesting on each yearly anniversary of the grant date over a four-year period. In order to receive payments under a Cash LTI award, participants must remain employed by the Company as of the applicable award vesting date. Compensation expense related to the Cash LTI awards is recognized over the vesting term, which is adjusted for the impact of estimated forfeitures.

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Accounting for Non-qualified Deferred Compensation Plan. The Company has a non-qualified deferred compensation plan (known as “Executive Deferred Savings Plan”) under which certain executives and non-employee directors may defer a portion of their compensation. Participants are credited with returns based on their allocation of their account balances among measurement funds. The Company controls the investment of these funds, and the participants remain general creditors of the Company. The Company invests these funds in certain mutual funds and such investments are classified as trading securities on the consolidated balance sheets. Distributions from the Executive Deferred Savings Plan commence following a participant’s retirement or termination of employment or on a specified date allowed per the Executive Deferred Savings Plan provisions, except in cases where such distributions are required to be delayed in order to avoid a prohibited distribution under Internal Revenue Code Section 409A. Participants can generally elect the distributions to be paid in lump sum or quarterly cash payments over a scheduled period for up to 15 years and are allowed to make subsequent changes to their existing elections as permissible under the Executive Deferred Savings Plan provisions. The liability associated with the Executive Deferred Savings Plan is included as a component of other current liabilities on the consolidated balance sheet. Changes in the Executive Deferred Savings Plan liability is recorded in selling, general and administrative expense in the consolidated statements of operations. The changes in the liability included in selling, general and administrative expense were $10.4 million, $24.4 million and $14.2 million for the fiscal years ended June 30, 2015, 2014 and 2013 respectively. The Company also has a deferred compensation asset that corresponds to the liability under the Executive Deferred Savings Plan and it is included as a component of other non-current assets on the consolidated balance sheet. Changes in the Executive Deferred Savings Plan assets are recorded as gains (losses), net in selling, general and administrative expense in the consolidated statements of operations. The amount of gains (losses), net included in selling, general and administrative expense were $10.4 million, $24.8 million and $14.1 million for the fiscal years ended June 30, 2015, 2014 and 2013, respectively.

Advertising Expenses. Advertising costs are expensed as incurred.

Income Taxes. The Company accounts for income taxes in accordance with the authoritative guidance, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. The guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that certain deferred tax asset will not be realized. The Company has determined that a valuation allowance is necessary against certain deferred tax assets, but it anticipates that its future taxable income will be sufficient to recover the remainder of its deferred tax assets. However, should there be a change in the Company’s ability to recover its deferred tax assets that are not subject to a valuation allowance, the Company could be required to record an additional valuation allowance against such deferred tax assets. This would result in an increase to the Company’s tax provision in the period in which the Company determines that the recovery is not probable.

The Company applies a two-step approach, based on authoritative guidance, to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained in audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. The Company reevaluates these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Any change in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision.

Earnings Per Share. Basic earnings per share (“EPS”) is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is calculated by using the weighted-average number of common shares outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the dilutive potential shares of common stock had been issued. The dilutive effect of outstanding options and restricted stock units is reflected in diluted earnings per share by application of the treasury stock method. The dilutive securities are excluded from the computation of diluted net loss per share when a net loss is recorded for the period as their effect would be anti-dilutive.

13

Contingencies and Litigation. The Company is subject to the possibility of losses from various contingencies. Considerable judgment is necessary to estimate the probability and amount of any loss from such contingencies. An accrual is made when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated. The Company accrues a liability and recognizes as expense the estimated costs expected to be incurred over the next twelve months to defend or settle asserted and unasserted claims existing as of the balance sheet date. See Note 13, “Commitments and Contingencies” and Note 14, “Litigation and Other Legal Matters” for a detailed description.

Reclassifications. Certain reclassifications have been made to prior year financial statements to conform to the current year presentation. The reclassifications had no effect on the Consolidated Statements of Operations, Comprehensive Income, Stockholder’s Equity and Cash Flows.

Recent Accounting Pronouncements

Recently Adopted

In July 2013, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update that provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. Under this accounting standard update, in most circumstances, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the Company’s financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. This accounting standard update became effective for the Company’s interim period ended September 30, 2014, and the adoption did not have a material impact on the Company’s consolidated financial statements.

In June 2014, the FASB issued an accounting standard update regarding stock-based compensation that clarifies the accounting treatment when terms of an award provide that a performance target could be achieved after the requisite service period ends. The update requires that a performance target that affects vesting that could be achieved after the requisite service period ends be treated as a performance condition. The update is effective for the Company beginning in the first quarter of the Company’s fiscal year ending June 30, 2017, with early adoption permitted. The Company early adopted this accounting standard update in the third quarter of the fiscal year ended June 30, 2015 and the adoption did not have a material impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued accounting standards update regarding simplification of the presentation of debt issuance costs, which requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The update is effective for the Company beginning in the first quarter of the fiscal year ending June 30, 2017. Earlier adoption is permitted for financial statements that have not been previously issued and the Company is required to apply the guidance on a retrospective basis with additional disclosure requirements upon transition. The Company early adopted this accounting standard update in the fourth quarter of our fiscal year ended June 30, 2015 and the adoption did not have a material impact on its consolidated financial statements.

Updates Not Yet Effective

In May 2014, the FASB issued an accounting standard update regarding revenue from customer contracts to transfer goods and services or non-financial assets unless the contracts are covered by other standards (for example, insurance or lease contracts). Under the new guidance, an entity should recognize revenue in connection with the transfer of promised goods or services to customers in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The updates are effective for the Company beginning in the first quarter of the fiscal year ending June 30, 2018. In July 2015, the FASB announced a deferral of the effective date by one year, with early adoption on the original effective date permitted. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.

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In April 2015, the FASB issued an accounting standard update for customer’s cloud based fees. The guidance changes what a customer must consider in determining whether a cloud computing arrangement contains a software license. If the arrangement contains a software license, the customer would account for the fees related to the software license element in accordance with guidance related to internal use software; if the arrangement does not contain a software license, the customer would account for the arrangement as a service contract. The update is effective for the Company beginning in the first quarter of the Company’s fiscal year ending June 30, 2017, with early adoption permitted. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.

In July 2015, the FASB issued an accounting standard update for the subsequent measurement of inventory. The amended guidance requires entities to measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The requirement would replace the current lower of cost or market evaluation and the accounting guidance is unchanged for inventory measured using last-in, first-out (“LIFO”) or the retail inventory method. The update is effective for the Company beginning in the first quarter of the Company’s fiscal year ending June 30, 2018, with early adoption permitted to be applied prospectively. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.

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NOTE 2 — FAIR VALUE MEASUREMENTS

The Company’s financial assets and liabilities are measured and recorded at fair value, except for certain equity investments in privately-held companies. These equity investments are generally accounted for under the cost method of accounting and are periodically assessed for other-than-temporary impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred. The Company’s non-financial assets, such as goodwill, intangible assets, and land, property and equipment, are recorded at cost and are assessed for impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred.

Fair Value of Financial Instruments. KLA-Tencor has evaluated the estimated fair value of financial instruments using available market information and valuations as provided by third-party sources. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts. The fair value of the Company’s cash equivalents, accounts receivable, accounts payable and other current liabilities approximate their carrying amounts due to the relatively short maturity of these items.

Fair Value Hierarchy. The authoritative guidance for fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Level 1	Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
Level 2	Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
Level 3	Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

The Company’s financial instruments were classified within Level 1 or Level 2 of the fair value hierarchy as of June 30, 2015, because they were valued using quoted market prices, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. As of June 30, 2015, the types of instruments valued based on quoted market prices in active markets included money market funds, U.S. Treasury securities, certain sovereign securities and certain U.S. Government agency securities. Such instruments are generally classified within Level 1 of the fair value hierarchy.

As of June 30, 2015, the types of instruments valued based on other observable inputs included corporate debt securities, municipal securities and certain U.S. Government agency securities and sovereign securities. The market inputs used to value these instruments generally consist of market yields, reported trades and broker/dealer quotes. Such instruments are generally classified within Level 2 of the fair value hierarchy.

The principal market in which the Company executes its foreign currency contracts is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants usually are large financial institutions. The Company’s foreign currency contracts’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy.

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Financial assets (excluding cash held in operating accounts and time deposits) and liabilities measured at fair value on a recurring basis as of the date indicated below were presented on the Company’s Consolidated Balance Sheet as follows:

As of June 30, 2015 (In thousands)	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Assets
Cash equivalents:
U.S. Government agency securities	$	7,500		$	7,500	$	—
Corporate debt securities		13,099			—		13,099
Money market and other		611,385			611,385		—
Marketable securities:
U.S. Treasury securities		275,555			275,555		—
U.S. Government agency securities		564,768			556,019		8,749
Municipal securities		31,816			—		31,816
Corporate debt securities		612,862			—		612,862
Sovereign securities		57,093			8,976		48,117
Total cash equivalents and marketable securities(1)		2,174,078			1,459,435		714,643
Other current assets:
Derivative assets		3,064			—		3,064
Other non-current assets:
Executive Deferred Savings Plan		165,655			91,203		74,452
Total financial assets(1)	$	2,342,797		$	1,550,638	$	792,159
Liabilities
Other current liabilities:
Derivative liabilities	$	(3,106	)	$	—	$	(3,106	)
Total financial liabilities	$	(3,106	)	$	—	$	(3,106	)

(1) Excludes cash of $183.1 million held in operating accounts and time deposits of $29.9 million as of June 30, 2015.

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Financial assets (excluding cash held in operating accounts and time deposits) and liabilities measured at fair value on a recurring basis as of the date indicated below were presented on the Company’s Consolidated Balance Sheet as follows:

As of June 30, 2014 (In thousands)	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Assets
Cash equivalents:
U.S. Government agency securities	$	28,000		$	8,000	$	20,000
Municipal securities		2,891			—		2,891
Corporate debt securities		68,992			—		68,992
Money market and other		397,517			397,517		—
Marketable securities:
U.S. Treasury securities		384,400			365,401		18,999
U.S. Government agency securities		839,843			811,841		28,002
Municipal securities		93,325			—		93,325
Corporate debt securities		1,155,176			—		1,155,176
Sovereign securities		42,264			9,253		33,011
Total cash equivalents and marketable securities(1)		3,012,408			1,592,012		1,420,396
Other current assets:
Derivative assets		666			—		666
Other non-current assets:
Executive Deferred Savings Plan		159,995			105,311		54,684
Total financial assets(1)	$	3,173,069		$	1,697,323	$	1,475,746
Liabilities
Other current liabilities:
Derivative liabilities	$	(898	)	$	—	$	(898	)
Total financial liabilities	$	(898	)	$	—	$	(898	)

(1) Excludes cash of $106.7 million held in operating accounts and time deposits of $33.5 million as of June 30, 2014.

There were no transfers in and out of Level 1 and Level 2 fair value measurements during the fiscal year ended June 30, 2015 or 2014. The Company did not have any assets or liabilities measured at fair value on a recurring basis within Level 3 fair value measurements as of June 30, 2015 or 2014.

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NOTE 3 — FINANCIAL STATEMENT COMPONENTS

Consolidated Balance Sheets

	As of June 30,
(In thousands)	2015			2014
Accounts receivable, net:
Accounts receivable, gross	$	607,157		$	514,690
Allowance for doubtful accounts		(21,663	)		(21,827	)
	$	585,494		$	492,863
Inventories:
Customer service parts	$	209,726		$	203,194
Raw materials		194,218			221,612
Work-in-process		156,820			171,249
Finished goods		57,140			60,402
	$	617,904		$	656,457
Other current assets:
Prepaid expenses(1)	$	37,006		$	34,743
Income tax related receivables		32,850			27,452
Other current assets		7,958			6,267
	$	77,814		$	68,462
Land, property and equipment, net:
Land	$	40,397		$	41,848
Buildings and leasehold improvements		316,566			302,537
Machinery and equipment		510,642			491,167
Office furniture and fixtures		21,411			20,945
Construction-in-process		3,152			8,945
		892,168			865,442
Less: accumulated depreciation and amortization		(577,577	)		(535,179	)
	$	314,591		$	330,263
Other non-current assets:
Executive Deferred Savings Plan	$	165,655		$	159,996
Deferred tax assets—long-term		78,648			75,138
Other non-current assets(1)		15,384			21,302
	$	259,687		$	256,436
Other current liabilities:
Warranty	$	36,413		$	37,746
Executive Deferred Savings Plan		167,886			160,527
Compensation and benefits		196,682			203,990
Income taxes payable		15,582			15,283
Interest payable		19,395			8,769
Customer credits and advances		93,212			79,373
Other accrued expenses		132,244			79,402
	$	661,414		$	585,090
Other non-current liabilities:
Pension liabilities	$	55,696		$	59,908
Income taxes payable		69,018			59,575
Other non-current liabilities		57,516			48,805
	$	182,230		$	168,288

(1) Other current assets and other non-current assets balances as of June 30, 2014 on the consolidated balance sheet were adjusted to exclude the debt issuance costs as a result of early adoption of the accounting standards update regarding simplification of the presentation of debt issuance costs, which requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. See Note 7, “Debt” for additional details.

19

Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) (“OCI”) as of the dates indicated below were as follows:

(In thousands)	Currency Translation Adjustments			Unrealized Gains (Losses) on Available-for-Sale Securities		Unrealized Gains (Losses) on Cash Flow Hedges			Unrealized Gains (Losses) on Defined Benefit Plans			Total
Balance as of June 30, 2015	$	(29,925	)	$	734	$	4,553		$	(15,935	)	$	(40,573	)
Balance as of June 30, 2014	$	(17,271	)	$	2,800	$	(12	)	$	(15,788	)	$	(30,271	)

The effects on net income of amounts reclassified from accumulated OCI to the Consolidated Statements of Operations for the indicated periods were as follows (in thousands):

	Location in the Consolidated Statements of Operations	Twelve months ended June 30,			Twelve months ended June 30,
Accumulated OCI Components		2015			2014
Unrealized gains (losses) on cash flow hedges from foreign exchange and interest rate contracts	Revenues	$	7,615		$	3,851
	Costs of revenues		(1,503	)		294
	Interest expense		503			—
	Net gains reclassified from accumulated OCI	$	6,615		$	4,145
Unrealized gains on available-for-sale securities	Other expense (income), net	$	2,119		$	2,084

The amounts reclassified out of accumulated OCI related to the Company’s defined pension plans, which were recognized as a component of net periodic cost for the fiscal years ended June 30, 2015 and 2014 were $1.3 million and $1.3 million, respectively. For additional details, refer to Note 11, “Employee Benefit Plans.”

Consolidated Statements of Operations

	Year ended June 30,
(In thousands)	2015			2014			2013
Other expense (income), net:
Interest income	$	(12,545	)	$	(13,555	)	$	(14,976	)
Foreign exchange losses, net		1,764			514			1,002
Net realized gains on sale of investments		(2,119	)		(2,084	)		(2,287	)
Other		2,431			(1,078	)		1,149
	$	(10,469	)	$	(16,203	)	$	(15,112	)

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NOTE 4 — MARKETABLE SECURITIES

The amortized cost and fair value of marketable securities as of the dates indicated below were as follows:

As of June 30, 2015 (In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury securities	$	274,965	$	605	$	(15	)	$	275,555
U.S. Government agency securities		571,843		551		(126	)		572,268
Municipal securities		31,819		7		(10	)		31,816
Corporate debt securities		625,965		511		(515	)		625,961
Money market and other		611,385		—		—			611,385
Sovereign securities		57,091		33		(31	)		57,093
Subtotal		2,173,068		1,707		(697	)		2,174,078
Add: Time deposits(1)		29,941		—		—			29,941
Less: Cash equivalents		654,933		—		—			654,933
Marketable securities	$	1,548,076	$	1,707	$	(697	)	$	1,549,086
As of June 30, 2014 (In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury securities	$	384,165	$	287	$	(52	)	$	384,400
U.S. Government agency securities		867,309		651		(117	)		867,843
Municipal securities		96,198		93		(75	)		96,216
Corporate debt securities		1,220,794		3,526		(152	)		1,224,168
Money market and other		397,517		—		—			397,517
Sovereign securities		42,227		46		(9	)		42,264
Subtotal		3,008,210		4,603		(405	)		3,012,408
Add: Time deposits(1)		33,509		—		—			33,509
Less: Cash equivalents		524,149		—		(8	)		524,141
Marketable securities	$	2,517,570	$	4,603	$	(397	)	$	2,521,776

(1) Time deposits excluded from fair value measurements.

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KLA-Tencor’s investment portfolio consists of both corporate and government securities that have a maximum maturity of three years. The longer the duration of these securities, the more susceptible they are to changes in market interest rates and bond yields. As yields increase, those securities with a lower yield-at-cost show a mark-to-market unrealized loss. All unrealized losses are due to changes in market interest rates, bond yields and/or credit ratings. The Company believes that it has the ability to realize the full value of all of these investments upon maturity. The following table summarizes the fair value and gross unrealized losses of the Company’s investments that were in an unrealized loss position as of the date indicated below:

As of June 30, 2015 (In thousands)	Fair Value		Gross Unrealized Losses(1)
U.S. Treasury securities	$	34,508	$	(15	)
U.S. Government agency securities		133,933		(126	)
Municipal securities		9,776		(10	)
Corporate debt securities		286,355		(515	)
Sovereign securities		26,729		(31	)
Total	$	491,301	$	(697	)

(1) As of June 30, 2015, the amount of total gross unrealized losses related to investments that had been in a continuous loss position for 12 months or more was immaterial.

The contractual maturities of securities classified as available-for-sale, regardless of their classification on the Company’s Consolidated Balance Sheet, as of the date indicated below were as follows:

As of June 30, 2015 (In thousands)	Amortized Cost		Fair Value
Due within one year	$	496,916	$	497,121
Due after one year through three years		1,051,160		1,051,965
	$	1,548,076	$	1,549,086

Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Realized gains on available for sale securities for the fiscal years ended June 30, 2015, 2014 and 2013 were $2.4 million, $2.2 million and $2.5 million, respectively. Realized losses on available for sale securities for the fiscal year ended June 30, 2015, 2014 and 2013 were $0.3 million, $0.1 million and $0.2 million, respectively.

NOTE 5 – BUSINESS COMBINATION

On March 28, 2014, the Company acquired certain assets and liabilities of a privately-held company that developed and sold software to mask manufacturers, semiconductor fabs and mask inspection and review equipment manufacturers, for a total purchase consideration of $18.0 million in cash.

The following table represents the purchase price allocation and summarizes the aggregate fair values of the net assets acquired on the closing date of the acquisition:

(In thousands)	Purchase Price Allocation
Intangibles	$	9,400
Goodwill		8,730
Liabilities assumed		(130	)
Cash consideration paid	$	18,000

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired. The $8.7 million of goodwill was assigned to the Defect Inspection reporting unit.

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NOTE 6 — GOODWILL AND PURCHASED INTANGIBLE ASSETS

Goodwill

The following table presents goodwill balances and the movements during the fiscal years ended June 30, 2015 and 2014:

(In thousands)
As of June 30, 2013	$	326,635
Acquisition		8,730
Adjustments		(10	)
As of June 30, 2014		335,355
Adjustments		(92	)
As of June 30, 2015	$	335,263

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in prior business combinations. The Company has four reporting units: Defect Inspection, Metrology, Service and Other. As of June 30, 2015, substantially all of the goodwill balance resided within the Defect Inspection reporting unit.

The changes in the gross goodwill balance during the fiscal year ended June 30, 2015 resulted from foreign currency translation adjustments. The changes in the gross goodwill balance during the fiscal year ended June 30, 2014 resulted from the acquisition of certain assets and liabilities of a privately-held company and foreign currency translation adjustments.

The Company performed a qualitative assessment of the goodwill by reporting unit as of November 30, 2014 and concluded that it was more likely than not that the fair value of each of the reporting units exceeded its carrying amount. In assessing the qualitative factors, the Company considered the impact of key factors including change in industry and competitive environment, market capitalization, stock price, earnings multiples, budgeted-to-actual revenue performance from prior year, gross margin and cash flow from operating activities. As such, it was not necessary to perform the two-step quantitative goodwill impairment test at that time. In addition, there have been no significant events or circumstances affecting the valuation of goodwill subsequent to the qualitative assessment performed in the second quarter of the fiscal year ended June 30, 2015. The next annual assessment of the goodwill by reporting unit will be performed in the second quarter of the fiscal year ending June 30, 2016.

Purchased Intangible Assets

The components of purchased intangible assets as of the dates indicated below were as follows:

(In thousands)			As of June 30, 2015						As of June 30, 2014
Category	Range of Useful Lives		Gross Carrying Amount		Accumulated Amortization and Impairment		Net Amount		Gross Carrying Amount		Accumulated Amortization and Impairment		Net Amount
Existing technology		4-7 years	$	141,659	$	134,664	$	6,995	$	141,659	$	126,567	$	15,092
Patents		6-13 years		57,648		56,998		650		57,648		54,398		3,250
Trade name/Trademark		4-10 years		19,893		18,899		994		19,893		17,427		2,466
Customer relationships		6-7 years		54,980		51,724		3,256		54,980		48,915		6,065
Other		0-1 year		17,299		17,299		—		17,299		16,475		824
Total			$	291,479	$	279,584	$	11,895	$	291,479	$	263,782	$	27,697

Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.

23

For the fiscal years ended June 30, 2015, 2014 and 2013, amortization expense for other intangible assets was $15.8 million, $16.2 million and $20.8 million, respectively. Based on the intangible assets recorded as of June 30, 2015, and assuming no subsequent additions to, or impairment of, the underlying assets, the remaining estimated annual amortization expense is expected to be as follows:

Fiscal year ending June 30:	Amortization (In thousands)
2016	$	7,564
2017		2,806
2018		1,525
Total	$	11,895

NOTE 7 — DEBT

The following table summarizes the debt of the Company as of June 30, 2015 and June 30, 2014:

	As of June 30, 2015						As of June 30, 2014
	Amount (in thousands)			Effective Interest Rate			Amount (in thousands)			Effective Interest Rate
Fixed-rate 6.900% Senior notes due on May 1, 2018	$	—					$	750,000			7.001	%
Fixed-rate 2.375% Senior notes due on November 1, 2017		250,000			2.396	%		—
Fixed-rate 3.375% Senior notes due on November 1, 2019		250,000			3.377	%		—
Fixed-rate 4.125% Senior notes due on November 1, 2021		500,000			4.128	%		—
Fixed-rate 4.650% Senior notes due on November 1, 2024(1)		1,250,000			4.682	%		—
Fixed-rate 5.650% Senior notes due on November 1, 2034		250,000			5.670	%		—
Term loans		711,250						—
Total debt		3,211,250						750,000
Unamortized discount		(3,723	)					(2,081	)
Unamortized debt issuance costs(2)		(17,111	)					(2,818	)
Total debt	$	3,190,416					$	745,101
Reported as:
Current portion of long-term debt	$	16,981					$	—
Long-term debt		3,173,435						745,101
Total debt	$	3,190,416					$	745,101

(1) The effective interest rate disclosed above for this series of Senior Notes excludes the impact of the treasury rate lock hedge discussed below. The effective interest rate including the impact of the treasury rate lock hedge was 4.626%.

(2) The Company early adopted the accounting standard update regarding simplification of the presentation of debt issuance costs, which requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Accordingly, the Company applied the accounting standard update on a retrospective basis by reclassifying the presentation of the debt issuance costs totaling $2.8 million which was originally included in other current and other non-current assets against the long-term debt on the Consolidated Balance Sheet as of June 30, 2014. The change in the classification of the debt issuance costs reduced total assets and total liabilities by $2.8 million as of June 30, 2014. There is no impact to the Company’s Consolidated Statements of Operations, Comprehensive Income, Stockholder’s Equity and Cash Flows for the fiscal year ended June 30, 2014.

24

As of June 30, 2015, future principal payments for long-term debt, including the current portion, are summarized as follows.

Fiscal year ending June 30,	Amount (In thousands)
2016	$	17,500
2017		46,875
2018		315,625
2019		75,000
2020		756,250
Thereafter		2,000,000
Total payments	$	3,211,250

Debt Issuance—Senior Notes:

In November 2014, the Company issued $2.50 billion aggregate principal amount of senior, unsecured long-term notes (collectively referred to as “Senior Notes”). The Company issued the Senior Notes as part of the leveraged recapitalization plan under which the proceeds from the Senior Notes in conjunction with the proceeds from the term loans (described below) and cash on hand were used (x) to fund a special cash dividend of $16.50 per share, aggregating to approximately $2.76 billion, (y) to redeem $750 million of 2018 Senior Notes, including associated redemption premiums, accrued interest and other fees and expenses and (z) for other general corporate purposes, including repurchases of shares pursuant to the Company’s stock repurchase program. The interest rate specified for each series of the Senior Notes will be subject to adjustments from time to time if Moody’s Investor Service, Inc. (“Moody’s”) or Standard & Poor’s Ratings Services (“S&P”) or, under certain circumstances, a substitute rating agency selected by us as a replacement for Moody’s or S&P, as the case may be (a “Substitute Rating Agency”), downgrades (or subsequently upgrades) its rating assigned to the respective series of Senior Notes such that the adjusted rating is below investment grade. If the adjusted rating of any series of Senior Notes from Moody’s (or, if applicable, any Substitute Rating Agency) is decreased to Ba1, Ba2, Ba3 or B1 or below, the stated interest rate on such series of Senior Notes as noted above will increase by 25 bps, 50 bps, 75 bps or 100 bps, respectively (“bps” refers to Basis Points and 1% is equal to 100 bps). If the rating of any series of Senior Notes from S&P (or, if applicable, any Substitute Rating Agency) with respect to such series of Senior Notes is decreased to BB+, BB, BB- or B+ or below, the stated interest rate on such series of Senior Notes as noted above will increase by 25 bps, 50 bps, 75 bps or 100 bps, respectively. The interest rates on any series of Senior Notes will permanently cease to be subject to any adjustment (notwithstanding any subsequent decrease in the ratings by any of Moody’s, S&P and, if applicable, any Substitute Rating Agency) if such series of Senior Notes becomes rated “Baa1” (or its equivalent) or higher by Moody’s (or, if applicable, any Substitute Rating Agency) and “BBB+” (or its equivalent) or higher by S&P (or, if applicable, any Substitute Rating Agency), or one of those ratings if rated by only one of Moody’s, S&P and, if applicable, any Substitute Rating Agency, in each case with a stable or positive outlook. In October 2014, the Company entered into a series of forward contracts to lock the 10-year treasury rate (“benchmark rate”) on a portion of the Senior Notes with a notional amount of $1.00 billion in aggregate. For additional details, refer to Note 16, “Derivative Instruments and Hedging Activities.”

The original discount on the Senior Notes amounted to $4.0 million and is being amortized over the life of the debt. Interest is payable semi-annually on May 1 and November 1 of each year. The debt indenture (the “Indenture”) includes covenants that limit the Company’s ability to grant liens on its facilities and enter into sale and leaseback transactions, subject to certain allowances under which certain sale and leaseback transactions are not restricted. As of June 30, 2015, the Company was in compliance with all of its covenants under the Indenture associated with the Senior Notes.

In certain circumstances involving a change of control followed by a downgrade of the rating of a series of Senior Notes by at least two of Moody’s, S&P and Fitch Inc., unless the Company has exercised its right to redeem the Senior Notes of such series, the Company will be required to make an offer to repurchase all or, at the holder’s option, any part, of each holder’s Senior Notes of that series pursuant to the offer described below (the “Change of Control Offer”). In the Change of Control Offer, the Company will be required to offer payment in cash equal to 101% of the aggregate principal amount of Senior Notes repurchased plus accrued and unpaid interest, if any, on the Senior Notes repurchased, up to, but not including, the date of repurchase.

25

Based on the trading prices of the Senior Notes on the applicable dates, the fair value of the Senior Notes as of June 30, 2015 and June 30, 2014 was $2.52 billion and $893.7 million, respectively. While the Senior Notes are recorded at cost, the fair value of the long-term debt was determined based on quoted prices in markets that are not active; accordingly, the long-term debt is categorized as Level 2 for purposes of the fair value measurement hierarchy.

Debt Issuance—Credit Facility (Term Loans and Unfunded Revolving Credit Facility):

In November 2014, the Company entered into $750 million of five-year senior unsecured prepayable term loans and a $500 million unfunded revolving credit facility (collectively, the “Credit Facility”) under the Credit Agreement (the “Credit Agreement”). The interest under the Credit Facility will be payable on the borrowed amounts at the London Interbank Offered Rate (“LIBOR”) plus a spread, which is currently 125 bps, and this spread is subject to adjustment in conjunction with the Company’s credit rating downgrades or upgrades. The spread ranges from 100 bps to 175 bps based on the then effective credit rating. The Company is also obligated to pay an annual commitment fee of 15 bps on the daily undrawn balance of the revolving credit facility, which is also subject to an adjustment in conjunction with the Company’s credit rating downgrades or upgrades by Moody’s and S&P. The annual commitment fee ranges from 10 bps to 25 bps on the daily undrawn balance of the revolving credit facility, depending upon the then effective credit rating. Principal payments with respect to the term loans will be made on the last day of each calendar quarter, and any unpaid principal balance of the term loans, including accrued interest, shall be payable on November 14, 2019 (the “Maturity Date”). The Company may prepay the term loans and unfunded revolving credit facility at any time without a prepayment penalty. During the fourth quarter of fiscal year ended June 30, 2015, the Company prepaid additional principal of $20.0 million in addition to the scheduled quarterly payments for the term loans.

Future principal payments for the Company’s term loans (without giving effect for any prepayments made) as of June 30, 2015, are as follows:

Fiscal Quarters Ending	Quarterly Payment (in thousands)
June 30, 2015 through December 31, 2016	$	9,375
March 31, 2017 through December 31, 2017	$	14,063
March 31, 2018 through September 30, 2019	$	18,750
December 31, 2019	$	487,500

The Credit Facility requires the Company to maintain an interest expense coverage ratio as described in the Credit Agreement, on a quarterly basis, covering the trailing four consecutive fiscal quarters of no less than 3.50 to 1.00. In addition, the Company is required to maintain the maximum leverage ratio as described in the Credit Agreement, on a quarterly basis, covering the trailing four consecutive fiscal quarters for the fiscal quarters as described below.

Fiscal Quarters Ending	Maximum Leverage Ratio
June 30, 2015	4.25:1.00
September 30, 2015 and December 31, 2015	4.00:1.00
March 31, 2016 through September 30, 2016	3.75:1.00
December 31, 2016 and March 31, 2017	3.50:1.00
Thereafter	3.00:1.00

The Company was in compliance with the financial covenants under the Credit Agreement as of June 30, 2015 and had no outstanding borrowings under the unfunded revolving credit facility.

Debt Redemption:

In December 2014, the Company redeemed the $750 million aggregate principal amount of the 2018 Senior Notes. The redemption resulted in a pre-tax net loss on extinguishment of debt of $131.7 million for the three months ended December 31, 2014 after an offset of a $1.2 million gain upon the termination of the non-designated forward contract entered by the Company in November 2014. The objective of entering into the non-designated forward contract was to lock the treasury rate used to determine the redemption amount of the 2018 Senior Notes. The notional amount of the non-designated forward contract was $750 million. Refer to Note 16, “Derivative Instruments and Hedging Activities.”

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NOTE 8 — EQUITY AND LONG-TERM INCENTIVE COMPENSATION PLANS

Equity Incentive Program

As of June 30, 2015, the Company had two plans under which the Company was able to issue equity incentive awards, such as restricted stock units and stock options, to its employees, consultants and members of its Board of Directors: the 2004 Equity Incentive Plan (the “2004 Plan”) and the 1998 Director Plan (the “Outside Director Plan”).

2004 Plan:

The 2004 Plan provides for the grant of options to purchase shares of the Company’s common stock, stock appreciation rights, restricted stock units, performance shares, performance units and deferred stock units to the Company’s employees, consultants and members of its Board of Directors. As of June 30, 2015, 6.1 million shares were available for issuance under the 2004 Plan.

Any 2004 Plan awards of restricted stock units, performance shares, performance units or deferred stock units with a per share or unit purchase price lower than 100% of fair market value on the grant date are counted against the total number of shares issuable under the 2004 Plan as follows, based on the grant date of the applicable award: (a) for any such awards granted before November 6, 2013, the awards counted against the 2004 Plan share reserve as 1.8 shares for every one share subject thereto; and (b) for any such awards granted on or after November 6, 2013, the awards count against the 2004 Plan share reserve as 2.0 shares for every one share subject thereto.

In addition, in November 2013, the Company’s stockholders also approved amendments to the 2004 Plan that included, among other things, giving the plan administrator the ability to grant “dividend equivalent” rights in connection with awards of restricted stock units, performance shares, performance units and deferred stock units before they are fully vested. It allows the plan administrator, at its discretion, to grant a right to receive dividends on the aforementioned awards which may be settled in cash or Company stock at the discretion of the plan administrator subject to meeting the vesting requirement of the underlying awards.

Outside Director Plan

The Outside Director Plan only permits the issuance of stock options to the non-employee members of the Board of Directors. As of June 30, 2015, 1.7 million shares were available for grant under the Outside Director Plan.

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Equity Incentive Plans—General Information

The following table summarizes the combined activity under the Company’s equity incentive plans for the indicated periods:

(In thousands)	Available For Grant
Balances as of June 30, 2012		7,969
Restricted stock units granted(1)(3)		(1,899	)
Restricted stock units canceled(1)		466
Options canceled/expired/forfeited		207
Plan shares expired(2)		(47	)
Balances as of June 30, 2013		6,696
Plan shares increased		2,900
Restricted stock units granted(1)(3)		(1,268	)
Restricted stock units canceled(1)		468
Options canceled/expired/forfeited		59
Plan shares expired(2)		(51	)
Balances as of June 30, 2014		8,804
Restricted stock units granted(1)(3)		(1,191	)
Restricted stock units canceled(1)		196
Options granted/canceled/expired/forfeited		11
Plan shares expired(2)		(10	)
Balances as of June 30, 2015(4)		7,810

(1) The number of restricted stock units provided in this row reflects the application of the award multiplier as described above (1.8x or 2.0x depending on the grant date of the applicable award).

(2) Represents the portion of shares listed as “Options canceled/expired/forfeited” above that were issued under the Company’s equity incentive plans other than the 2004 Plan and the Outside Director Plan. Because the Company is only currently authorized to issue equity awards under the 2004 Plan and the Outside Director Plan, any equity awards that are canceled, expired or forfeited under any other Company equity incentive plan do not result in additional shares being available to the Company for future grant.

(3) Includes restricted stock units granted to senior management during the applicable fiscal year with performance-based vesting criteria (in addition to service-based vesting criteria for any of such restricted stock units that are deemed to have been earned). As of June 30, 2015, it had not yet been determined the extent to which (if at all) the performance-based vesting criteria of such restricted stock units had been satisfied. Therefore, this line item includes all such performance-based restricted stock units granted during such fiscal year, reported at the maximum possible number of shares that may ultimately be issuable under such restricted stock units if all applicable performance-based criteria are achieved at their maximum levels and all applicable service-based criteria are fully satisfied (i.e., 0.6 million shares for the fiscal year ended June 30, 2013, 0.6 million shares for the fiscal year ended June 30, 2014 and 0.6 million shares for the fiscal year ended June 30, 2015, which, in each case reflects the application of the 1.8x or 2.0x multiplier described above). The Company has granted only restricted stock units under its equity incentive program since October 2007, except the number of shares subject to outstanding options under the 2004 Plan was adjusted during the three months ended December 31, 2014 due to a proportionate and equitable adjustment under the 2004 Plan provisions as discussed below. For the preceding several years until October 31, 2007, stock options were granted at the market price of the Company’s common stock on the date of grant generally with vesting period terms ranging from one to five years. Restricted stock units may be granted with varying criteria such as service-based and/or performance-based vesting.

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(4) During the fiscal year ended June 30, 2015, the Company adjusted the number of shares subject to outstanding options under the 2004 Plan by an aggregate of 4,245 shares pursuant to a proportionate and equitable adjustment for the effect of the special cash dividend, as required by the 2004 Plan. The total number of outstanding options under the 2004 Plan as well as the associated exercise prices were adjusted to ensure the aggregate intrinsic value remained the same after considering the effect of the special cash dividend. As the adjustment was required by the 2004 Plan, under the authoritative guidance, the adjustment to the outstanding awards did not result in any incremental compensation expense. Additionally, the adjustment did not have an impact on the shares available for future issuance under the 2004 Plan.

The fair value of stock-based awards is measured at the grant date and is recognized as an expense over the employee’s requisite service period. For restricted stock units granted without “dividend equivalent” rights, fair value is calculated using the closing price of the Company’s common stock on the grant date, adjusted to exclude the present value of dividends which are not accrued on those restricted stock units. In November 2013, the Company’s stockholders approved amendments to the 2004 Plan that included, among other things, giving the plan administrator the ability to grant “dividend equivalent” rights in connection with awards of restricted stock units, performance shares, performance units and deferred stock units before they are fully vested as discussed above. The fair value for restricted stock units granted with “dividend equivalent” rights is determined using the closing price of the Company’s common stock on the grant date. As of June 30, 2015, the Company accrued $42.0 million of dividends payable, substantially all of which is related to the special cash dividend for the unvested restricted stock units outstanding as of the dividend record date as well as restricted stock units granted with dividend equivalent rights during the fiscal year ended June 30, 2015, which entitle the holders of such equity awards to the same dividend value per share as holders of common stock subject to meeting the vesting requirements of the underlying equity awards. The fair value for purchase rights under the Company’s Employee Stock Purchase Plan is determined using a Black-Scholes valuation model.

The following table shows pre-tax stock-based compensation expense for the indicated periods:

	Year ended June 30,
(In thousands)	2015		2014		2013
Stock-based compensation expense by:
Costs of revenues	$	7,242	$	9,101	$	11,433
Engineering, research and development		12,259		16,397		19,346
Selling, general and administrative		35,801		35,442		39,305
Total stock-based compensation expense	$	55,302	$	60,940	$	70,084

The following table shows stock-based compensation capitalized as inventory as of the dates indicated below:

(In thousands)	As of June 30,
	2015		2014
Inventory	$	3,242	$	8,278

Stock Options

The following table summarizes the activity and weighted-average exercise price for stock options under all plans during the fiscal year ended June 30, 2015:

Stock Options	Shares (In thousands)			Weighted-Average Exercise Price
Outstanding stock options as of June 30, 2014		141		$	40.70
Granted		4		$	32.11
Exercised		(134	)	$	39.32
Canceled/expired/forfeited		(11	)	$	39.97
Outstanding stock options as of June 30, 2015 (all outstanding and all vested and exercisable)		—		$	—

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The Company has not issued any stock options since October 2007. However, during the three months ended December 31, 2014, the Company adjusted the number of shares subject to outstanding options under the 2004 Plan by an aggregate of 4,245 shares pursuant to a proportionate and equitable adjustment for the effect of the special cash dividend, as required by the 2004 Plan. The total number of outstanding options under the 2004 Plan as well as the associated exercise prices were adjusted to ensure the aggregate intrinsic value remained the same after considering the effect of the special cash dividend. As the adjustment was required by the 2004 Plan, the adjustment to the outstanding awards did not result in any incremental compensation expense due to modification of such awards, under the authoritative guidance. Additionally, the adjustment did not have an impact on the shares available for future issuance under the 2004 Plan.

The following table shows the total intrinsic value of options exercised, total cash received from employees and non-employee Board members as a result of stock option exercises and tax benefits realized by the Company in connection with these stock option exercises for the indicated periods:

(In thousands)	Year ended June 30,
	2015		2014		2013
Total intrinsic value of options exercised	$	4,549	$	18,022	$	15,884
Total cash received from employees and non-employee Board members as a result of stock option exercises	$	5,892	$	72,700	$	89,935
Tax benefits realized by the Company in connection with these exercises	$	1,989	$	5,708	$	5,223

The Company generally settles employee stock option exercises with newly issued common shares, except in certain tax jurisdictions where settling such exercises with treasury shares provides the Company or one of its subsidiaries with a tax benefit.

Restricted Stock Units

The following table shows the applicable number of restricted stock units and weighted-average grant date fair value for restricted stock units granted, vested and released, withheld for taxes, and forfeited during the fiscal year ended June 30, 2015 and restricted stock units outstanding as of June 30, 2015 and 2014:

Restricted Stock Units	Shares (In thousands) (1)			Weighted-Average Grant Date Fair Value
Outstanding restricted stock units as of June 30, 2014(2)		3,356		$	38.95
Granted(2)		596		$	74.48
Vested and released		(765	)	$	32.50
Withheld for taxes		(405	)	$	32.50
Forfeited		(108	)	$	38.90
Outstanding restricted stock units as of June 30, 2015(2)		2,674		$	49.36

(1) Share numbers reflect actual shares subject to awarded restricted stock units. As described above, under the terms of the 2004 Plan, the number of shares subject to each award reflected in this number is multiplied by either 1.8x or 2.0x (depending on the grant date of the award) to calculate the impact of the award on the share reserve under the 2004 Plan.

(2) Includes restricted stock units granted to senior management during the applicable fiscal year with performance-based vesting criteria (in addition to service-based vesting criteria for any of such restricted stock units that are deemed to have been earned). As of June 30, 2015, it had not yet been determined the extent to which (if at all) the performance-based vesting criteria of such restricted stock units had been satisfied. Therefore, this line item includes all such performance-based restricted stock units, reported at the maximum possible number of shares (i.e., 0.3 million shares for the fiscal year ended June 30, 2013, 0.3 million shares for the fiscal year ended June 30, 2014 and 0.3 million shares for the fiscal year ended June 30, 2015) that may ultimately be issuable under such restricted stock units if all applicable performance-based criteria are achieved at their maximum and all applicable service-based criteria are fully satisfied.

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The restricted stock units granted by the Company since the beginning of the fiscal year ended June 30, 2013 generally vest (a) with respect to awards with only service-based vesting criteria, in four equal installments on the first, second, third and fourth anniversaries of the grant date and (b) with respect to awards with both performance-based and service-based vesting criteria, in two equal installments on the third and fourth anniversaries of the grant date, in each case subject to the recipient remaining employed by the Company as of the applicable vesting date. The restricted stock units granted by the Company from the beginning of the fiscal year ended June 30, 2007 through the fiscal year ended June 30, 2012 generally vest in two equal installments on the second and fourth anniversaries of the grant date, subject to the recipient remaining employed by the Company as of the applicable vesting date.

The following table shows the weighted-average grant date fair value per unit for the restricted stock units granted and tax benefits realized by the Company in connection with vested and released restricted stock units for the indicated periods:

(In thousands, except for weighted-average grant date fair value)	Year ended June 30,
	2015		2014		2013
Weighted-average grant date fair value per unit	$	74.48	$	53.28	$	47.71
Tax benefits realized by the Company in connection with vested and released restricted stock units	$	26,250	$	44,298	$	29,204

As of June 30, 2015, the unrecognized stock-based compensation expense balance related to restricted stock units was $60.3 million, excluding the impact of estimated forfeitures, and will be recognized over a weighted-average remaining contractual term and an estimated weighted-average amortization period of 1.0 year. The intrinsic value of outstanding restricted stock units as of June 30, 2015 was $150.3 million.

Cash-Based Long-Term Incentive Compensation

Starting in the fiscal year ended June 30, 2013, the Company adopted a cash-based long-term incentive (“Cash LTI”) program for many of its employees as part of the Company’s employee compensation program. During the fiscal year ended June 30, 2015, the Company approved Cash LTI awards of $67.7 million under the Company’s Cash Long-Term Incentive Plan (“Cash LTI Plan”). Cash LTI awards issued to employees under the Cash LTI Plan will vest in four equal installments, with 25% of the aggregate amount of the Cash LTI award vesting on each yearly anniversary of the grant date over a four-year period. In order to receive payments under a Cash LTI award, participants must remain employed by the Company as of the applicable award vesting date. Executives and non-employee Board members are not participating in this program. During the fiscal years ended June 30, 2015 and 2014, the Company recognized $39.6 million and $26.2 million, respectively, in compensation expense under the Cash LTI Plan. As of June 30, 2015, the unrecognized compensation balance (excluding the impact of estimated forfeitures) related to the Cash LTI Plan was $94.5 million.

Employee Stock Purchase Plan

KLA-Tencor’s Employee Stock Purchase Plan (“ESPP”) provides that eligible employees may contribute up to 10% of their eligible earnings toward the semi-annual purchase of KLA-Tencor’s common stock. The ESPP is qualified under Section 423 of the Internal Revenue Code. The employee’s purchase price is derived from a formula based on the closing price of the common stock on the first day of the offering period versus the closing price on the date of purchase (or, if not a trading day, on the immediately preceding trading day).

The offering period (or length of the look-back period) under the ESPP has a duration of six months, and the purchase price with respect to each offering period beginning on or after such date is, until otherwise amended, equal to 85% of the lesser of (i) the fair market value of the Company’s common stock at the commencement of the applicable six-month offering period or (ii) the fair market value of the Company’s common stock on the purchase date. The Company estimates the fair value of purchase rights under the ESPP using a Black-Scholes valuation model.

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The fair value of each purchase right under the ESPP was estimated on the date of grant using the Black-Scholes option valuation model and the straight-line attribution approach with the following weighted-average assumptions:

	Year ended June 30,
	2015		2014		2013
Stock purchase plan:
Expected stock price volatility		24.5%		27.5%		28.8%
Risk-free interest rate		0.1%		0.1%		0.1%
Dividend yield		2.8%		2.9%		3.2%
Expected life (in years)		0.50		0.50		0.50

The following table shows total cash received from employees for the issuance of shares under the ESPP, the number of shares purchased by employees through the ESPP, the tax benefits realized by the Company in connection with the disqualifying dispositions of shares purchased under the ESPP and the weighted-average fair value per share for the indicated periods:

(In thousands, except for weighted-average fair value per share)	Year ended June 30,
	2015		2014		2013
Total cash received from employees for the issuance of shares under the ESPP	$	41,116	$	39,675	$	36,186
Number of shares purchased by employees through the ESPP		759		796		877
Tax benefits realized by the Company in connection with the disqualifying dispositions of shares purchased under the ESPP	$	1,741	$	2,221	$	1,452
Weighted-average fair value per share based on Black-Scholes model	$	14.55	$	12.31	$	10.46

The ESPP shares are replenished annually on the first day of each fiscal year by virtue of an evergreen provision. The provision allows for share replenishment equal to the lesser of 2.0 million shares or the number of shares which KLA-Tencor estimates will be required to be issued under the ESPP during the forthcoming fiscal year. In August 2014, the Company added 2.0 million additional shares to the ESPP pursuant to the plan’s share replenishment provision with respect to the fiscal year ended June 30, 2015. As of June 30, 2015, a total of 2.1 million shares were reserved and available for issuance under the ESPP.

Quarterly cash dividends

On May 7, 2015, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.50 per share on the outstanding shares of the Company’s common stock, which was paid on June 1, 2015 to the stockholders of record as of the close of business on May 18, 2015. Under the authoritative guidance, a dividend when declared is recognized as a reduction of retained earnings, to the extent available, with any excess recognized as a reduction of additional paid-in-capital. The total amount of regular quarterly cash dividends paid by the Company during the fiscal years ended June 30, 2015 and 2014 was $324.8 million and $298.9 million, respectively. The amount of accrued dividends for quarterly cash dividends for unvested restricted stock units with dividend equivalent rights was $0.9 million as of June 30, 2015. The Company had no accrued dividends for the quarterly cash dividends in the fiscal year ended June 30, 2014.

On July 14, 2015, the Company announced that its Board of Directors had authorized a further increase in the level of the Company’s quarterly cash dividend from $0.50 to $0.52 per share. Refer to Note 19, “Subsequent Events” for additional information on dividend increase announced subsequent to June 30, 2015.

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Special cash dividend

On November 19, 2014, the Company’s Board of Directors declared a special cash dividend of $16.50 per share, which was paid on December 9, 2014 to the stockholders of record as of the close of business on December 1, 2014. Additionally, in connection with the special cash dividend, the Company’s Board of Directors and the Compensation Committee of the Board of Directors approved a proportionate and equitable adjustment to outstanding equity awards (restricted stock units and stock options), as required under the 2004 Plan, subject to the vesting requirements of the underlying awards. As the adjustment was required by the 2004 Plan, the adjustment to the outstanding awards did not result in any incremental compensation expense due to modification of such awards, under the authoritative guidance. Under the authoritative guidance, the dividend when declared is recognized as a reduction of retained earnings, to the extent available, with any excess recognized as a reduction of additional paid-in-capital. The special cash dividend reduced the retained earnings by $2.1 billion as of the special cash dividend declaration date, reducing the retained earnings amount to zero and the excess amount of the special cash dividend of $646.5 million was charged against additional paid-in capital. The declaration and payment of the special cash dividend are part of the Company’s leveraged recapitalization transaction under which the special cash dividend was financed through a combination of existing cash and proceeds from the debt financing disclosed in Note 7, “Debt” that was completed during the three months ended December 31, 2014. The total amount of the special cash dividend accrued by the Company during the three months ended December 31, 2014 was approximately $2.76 billion, substantially all of which was paid out during the three months ended December 31, 2014. As of June 30, 2015, the Company accrued a total of $41.1 million of dividends payable for the special cash dividend with respect to outstanding unvested restricted stock units, which will be paid when such underlying unvested restricted stock units vest. Other than the special cash dividend declared during the three months ended December 31, 2014, the Company historically has not declared any special cash dividends.

NOTE 9 — STOCK REPURCHASE PROGRAM

The Company’s Board of Directors has authorized a program for the Company to repurchase shares of the Company’s common stock. The intent of this program is to offset the dilution from KLA-Tencor’s equity incentive plans and employee stock purchase plan, as well as to return excess cash to the Company’s stockholders. Subject to market conditions, applicable legal requirements and other factors, the repurchases will be made from time to time in the open market in compliance with applicable securities laws, including the Securities Exchange Act of 1934 and the rules promulgated thereunder such as Rule 10b-18. On July 7, 2014, the Company’s Board of Directors authorized KLA-Tencor to repurchase up to 13.0 million additional shares of the Company’s common stock. On October 23, 2014, as part of the leveraged recapitalization transaction announcement, the Board of Directors authorized an increase to the existing stock repurchase program of 3.6 million additional shares of the Company’s common stock. As of June 30, 2015, an aggregate of approximately 9.4 million shares were available for repurchase under the Company’s repurchase program.

Share repurchases for the indicated periods (based on the trade date of the applicable repurchase) were as follows:

(In thousands)	Year ended June 30,
	2015		2014
Number of shares of common stock repurchased		9,255		3,835
Total cost of repurchases	$	608,856	$	240,843

As of June 30, 2015, the Company had repurchased 105,542 shares for $6.0 million, which repurchases had not settled prior to June 30, 2015 and were recorded as a component of other current liabilities.

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NOTE 10 — NET INCOME PER SHARE

Basic net income per share is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share is calculated by using the weighted-average number of common shares outstanding during the period, increased to include the number of additional shares of common stock that would have been outstanding if the shares of common stock underlying the Company’s outstanding dilutive stock options and restricted stock units had been issued. The dilutive effect of outstanding options and restricted stock units is reflected in diluted net income per share by application of the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that is to be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares.

The following table sets forth the computation of basic and diluted net income per share:

(In thousands, except per share amounts)	Year ended June 30,
	2015		2014		2013
Numerator:
Net income	$	366,158	$	582,755	$	543,149
Denominator:
Weighted-average shares-basic, excluding unvested restricted stock units		162,282		166,016		166,089
Effect of dilutive options and restricted stock units		1,419		2,102		3,171
Weighted-average shares-diluted		163,701		168,118		169,260
Basic net income per share	$	2.26	$	3.51	$	3.27
Diluted net income per share	$	2.24	$	3.47	$	3.21
Anti-dilutive securities excluded from the computation of diluted net income per share		36		—		1,366

NOTE 11 — EMPLOYEE BENEFIT PLANS

KLA-Tencor has a profit sharing program for eligible employees, which distributes, on a quarterly basis, a percentage of the Company’s pre-tax profits. In addition, the Company has an employee savings plan that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Since April 1, 2011, the employer match amount was 50% of the first $8,000 of an eligible employee’s contribution (i.e., a maximum of $4,000) during each fiscal year.

The total expenses under the profit sharing and 401(k) programs aggregated $14.2 million, $15.4 million and $13.1 million in the fiscal years ended June 30, 2015, 2014 and 2013, respectively. The Company has no defined benefit plans in the United States. In addition to the profit sharing plan and the United States 401(k), several of the Company’s foreign subsidiaries have retirement plans for their full-time employees, several of which are defined benefit plans. Consistent with the requirements of local law, the Company deposits funds for certain of these plans with insurance companies, with third-party trustees or into government-managed accounts and/or accrues for the unfunded portion of the obligation. The assumptions used in calculating the obligation for the foreign plans depend on the local economic environment.

The Company applies authoritative guidance that requires an employer to recognize the funded status of each of its defined pension and post-retirement benefit plans as a net asset or liability on its balance sheets. Additionally, the authoritative guidance requires an employer to measure the funded status of each of its plans as of the date of its year-end statement of financial position. The benefit obligations and related assets under the Company’s plans have been measured as of June 30, 2015 and 2014.

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Summary data relating to the Company’s foreign defined benefit pension plans, including key weighted-average assumptions used, is provided in the following tables:

	Year ended June 30,
(In thousands)	2015			2014
Change in projected benefit obligation:
Projected benefit obligation as of the beginning of the fiscal year	$	77,035		$	71,276
Service cost		3,905			4,054
Interest cost		1,562			1,401
Contributions by plan participants		81			102
Actuarial loss		3,702			1,927
Benefit payments		(3,982	)		(1,910	)
Foreign currency exchange rate changes and others, net		(6,375	)		185
Projected benefit obligation as of the end of the fiscal year	$	75,928		$	77,035
	Year ended June 30,
(In thousands)	2015			2014
Change in fair value of plan assets:
Fair value of plan assets as of the beginning of the fiscal year	$	15,163		$	13,317
Actual return on plan assets		334			274
Employer contributions		3,568			3,229
Benefit and expense payments		(3,982	)		(1,910	)
Foreign currency exchange rate changes and others, net		1,955			253
Fair value of plan assets as of the end of the fiscal year	$	17,038		$	15,163

	As of June 30,
(In thousands)	2015		2014
Underfunded status	$	58,890	$	61,872
	As of June 30,
(In thousands)	2015		2014
Plans with accumulated benefit obligations in excess of plan assets:
Accumulated benefit obligation	$	46,419	$	47,122
Projected benefit obligation	$	75,928	$	77,035
Plan assets at fair value	$	17,038	$	15,163

	Year ended June 30,
	2015		2014		2013
Weighted-average assumptions:
Discount rate		1.3%-2.0%		1.5%-3.5%		1.5%-3.5%
Expected rate of return on assets		1.8%-2.5%		1.8%-3.8%		1.8%-4.0%
Rate of compensation increases		3.0%-5.5%		3.0%-5.5%		3.0%-5.0%

The assumptions for expected rate of return on assets were developed by considering the historical returns and expectations of future returns relevant to the country in which each plan is in effect and the investments applicable to the corresponding plan. The discount rate for each plan was derived by reference to appropriate benchmark yields on high quality corporate bonds, allowing for the approximate duration of both plan obligations and the relevant benchmark index.

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The following table presents losses recognized in accumulated other comprehensive income (loss) before tax related to the Company’s foreign defined benefit pension plans:

	Year ended June 30,
(In thousands)	2015		2014
Unrecognized transition obligation	$	515	$	772
Unrecognized prior service cost		180		225
Unrealized net loss		24,119		23,645
Amount of losses recognized	$	24,814	$	24,642

Losses in accumulated other comprehensive income (loss) related to the Company’s foreign defined benefit pension plans expected to be recognized as components of net periodic benefit cost over the fiscal year ending June 30, 2016 are as follows:

(In thousands)	Year ending June 30, 2016
Unrecognized transition obligation	$	255
Unrecognized prior service cost		42
Unrealized net loss		824
Amount of losses expected to be recognized	$	1,121

The components of the Company’s net periodic cost relating to its foreign subsidiaries’ defined pension plans are as follows:

	Year ended June 30,
(In thousands)	2015			2014			2013
Components of net periodic pension cost:
Service cost	$	3,905		$	4,054		$	3,399
Interest cost		1,562			1,401			1,320
Return on plan assets		(450	)		(321	)		(315	)
Amortization of transitional obligation		259			262			372
Amortization of prior service cost		46			52			58
Amortization of net loss		1,014			1,021			633
Adjustment		(177	)		—			(1,436	)
Net periodic pension cost	$	6,159		$	6,469		$	4,031

Fair Value of Plan Assets

Fair value is 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. The three levels of inputs used to measure fair value of plan assets are described in Note 2, “Fair Value Measurements.”

The foreign plans’ investments are managed by third-party trustees consistent with the regulations or market practice of the country where the assets are invested. The Company is not actively involved in the investment strategy, nor does it have control over the target allocation of these investments. These investments made up 100% of total foreign plan assets in the fiscal years ended June 30, 2015 and 2014.

The expected aggregate employer contribution for the foreign plans during the fiscal year ending June 30, 2016 is $1.7 million.

The total benefits to be paid from the foreign pension plans are not expected to exceed $2.5 million in any year through the fiscal year ending June 30, 2025.

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Foreign plan assets measured at fair value on a recurring basis consisted of the following investment categories as of June 30, 2015 and 2014, respectively:

As of June 30, 2015 (In thousands)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Cash and cash equivalents	$	10,954	$	10,954	$	—
Bonds, equity securities and other investments		6,084		—		6,084
Total assets measured at fair value	$	17,038	$	10,954	$	6,084
As of June 30, 2014 (In thousands)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Cash and cash equivalents	$	11,061	$	11,061	$	—
Bonds, equity securities and other investments		4,102		—		4,102
Total assets measured at fair value	$	15,163	$	11,061	$	4,102

Concentration of Risk

The Company manages a variety of risks, including market, credit and liquidity risks, across its plan assets through its investment managers. The Company defines a concentration of risk as an undiversified exposure to one of the above-mentioned risks that increases the exposure of the loss of plan assets unnecessarily. The Company monitors exposure to such risks in the foreign plans by monitoring the magnitude of the risk in each plan and diversifying the Company’s exposure to such risks across a variety of instruments, markets and counterparties. As of June 30, 2015, the Company did not have concentrations of plan asset investment risk in any single entity, manager, counterparty, sector, industry or country.

NOTE 12 — INCOME TAXES

The components of income before income taxes are as follows:

	Year ended June 30,
(In thousands)	2015		2014		2013
Domestic income before income taxes	$	157,251	$	434,336	$	420,862
Foreign income before income taxes		276,880		300,125		269,759
Total income before income taxes	$	434,131	$	734,461	$	690,621

The provision for income taxes is comprised of the following:

	Year ended June 30,
(In thousands)	2015			2014			2013
Current:
Federal	$	63,123		$	98,937		$	118,888
State		3,655			8,580			4,404
Foreign		25,438			27,867			25,112
		92,216			135,384			148,404
Deferred:
Federal		(22,390	)		22,904			(2,552	)
State		409			(334	)		(1,036	)
Foreign		(2,262	)		(6,248	)		2,656
		(24,243	)		16,322			(932	)
Provision for income taxes	$	67,973		$	151,706		$	147,472

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For the fiscal year ended June 30, 2015, actual current tax liabilities were lower than reflected in the table above by $16.7 million primarily due to a benefit for a deduction related to employee stock activity, which was recorded as an increase to capital in excess of par value.

For the fiscal year ended June 30, 2014, actual current tax liabilities were lower than reflected in the table above by $16.5 million primarily due to a benefit for a deduction related to employee stock activity, which was recorded as an increase to capital in excess of par value.

For the fiscal year ended June 30, 2013, actual current tax liabilities were lower than reflected in the table above by $6.9 million primarily due to a benefit for a deduction related to employee stock activity, which was recorded as an increase to capital in excess of par value.

The significant components of deferred income tax assets and liabilities are as follows:

	As of June 30,
(In thousands)	2015			2014
Deferred tax assets:
Tax credits and net operating losses	$	108,615		$	95,492
Employee benefits accrual		99,472			97,308
Stock-based compensation		18,722			17,676
Capitalized R&D expenses		47			12,051
Inventory reserves		92,649			83,783
Non-deductible reserves		47,176			41,469
Depreciation and amortization		13,267			2,572
Unearned revenue		16,150			13,937
Other		28,784			29,483
Gross deferred tax assets		424,882			393,771
Valuation allowance		(91,350	)		(76,328	)
Net deferred tax assets	$	333,532		$	317,443
Deferred tax liabilities:
Unremitted earnings of foreign subsidiaries not permanently reinvested	$	(12,775	)	$	(17,334	)
Deferred profit		(7,372	)		(16,358	)
Unrealized gain on investments		(2,673	)		(1,168	)
Total deferred tax liabilities		(22,820	)		(34,860	)
Total net deferred tax assets	$	310,712		$	282,583

As of June 30, 2015, the Company had U.S. federal, state and foreign net operating loss (“NOL”) carry-forwards of approximately $25.7 million, $90.8 million and $50.2 million, respectively. The U.S. federal NOL carry-forwards will expire at various dates beginning in 2023 through 2027. The utilization of NOLs created by acquired companies is subject to annual limitations under Section 382 of the Internal Revenue Code. However, it is not expected that such annual limitation will significantly impair the realization of these NOLs. The state NOLs will begin to expire in 2017. State credits of $123.7 million will be carried over indefinitely. The foreign NOL carry-forwards will begin to expire in 2016.

The net deferred tax asset valuation allowance was $91.4 million and $76.3 million as of June 30, 2015 and June 30, 2014, respectively. The change was primarily due to an increase in the valuation allowance related to state credit carry-forwards generated in the fiscal year ended June 30, 2015. The valuation allowance is based on the Company’s assessment that it is more likely than not that certain deferred tax assets will not be realized in the foreseeable future. Of the valuation allowance as of June 30, 2015, $76.9 million relates to state credit carry-forwards. The remainder of the valuation allowance relates primarily to foreign NOL carry-forwards.

As of June 30, 2015, U.S. income taxes were not provided for on a cumulative total of approximately $1.7 billion of undistributed earnings for certain non-U.S. subsidiaries. If these undistributed earnings were repatriated to the United States, they would generate foreign tax credits to reduce the federal tax liability associated with the foreign dividend. Assuming full utilization of the foreign tax credits, the potential deferred tax liability associated with undistributed earnings would be approximately $573.9 million.

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KLA-Tencor benefits from tax holidays in Israel and Singapore where it manufactures certain of its products. These tax holidays are on approved investments and are scheduled to expire at varying times. One tax holiday expired this year and the remaining tax holidays will expire beginning in 2019 through 2021. The impact on the tax holiday that expired this year was approximately $3.1 million in tax savings for the fiscal year ended June 30, 2015. The Company was in compliance with all the terms and conditions of the tax holidays as of June 30, 2015. The net impact of these tax holidays was to decrease the Company’s tax expense by approximately $20.4 million, $25.8 million and $25.8 million in the fiscal years ended June 30, 2015, 2014 and 2013, respectively. The benefits of the tax holidays on diluted net income per share were $0.13, $0.15 and $0.15 for the fiscal years ended June 30, 2015, 2014 and 2013, respectively.

The reconciliation of the United States federal statutory income tax rate to KLA-Tencor’s effective income tax rate is as follows:

	Year ended June 30,
	2015			2014			2013
Federal statutory rate		35.0	%		35.0	%		35.0	%
State income taxes, net of federal benefit		0.7	%		0.7	%		0.3	%
Effect of foreign operations taxed at various rates		(15.3	)%		(11.5	)%		(9.6	)%
Research and development tax credit		(3.7	)%		(1.5	)%		(3.1	)%
Net change in tax reserves		1.5	%		0.3	%		1.7	%
Domestic manufacturing benefit		(2.1	)%		(1.4	)%		(1.6	)%
Effect of stock-based compensation		0.8	%		0.4	%		(0.3	)%
Other		(1.2	)%		(1.3	)%		(1.0	)%
Effective income tax rate		15.7	%		20.7	%		21.4	%

A reconciliation of gross unrecognized tax benefits is as follows:

	Year ended June 30,
(In thousands)	2015			2014			2013
Unrecognized tax benefits at the beginning of the year	$	59,575		$	59,494		$	50,839
Increases for tax positions taken in prior years		1,245			551			2,701
Decreases for tax positions taken in prior years		(7	)		(764	)		(905	)
Increases for tax positions taken in current year		11,634			11,585			12,709
Decreases for settlements with taxing authorities		—			(3,601	)		(3,907	)
Decreases for lapsing of statutes of limitations		(3,429	)		(7,690	)		(1,943	)
Unrecognized tax benefits at the end of the year	$	69,018		$	59,575		$	59,494

The amount of unrecognized tax benefits that would impact the effective tax rate was $69.0 million, $59.6 million and $59.5 million as of June 30, 2015, 2014 and 2013 respectively. The amount of interest and penalties recognized during the years ended June 30, 2015, 2014, and 2013 was $1.2 million, $0.7 million, and $1.4 million, respectively. KLA-Tencor’s policy is to include interest and penalties related to unrecognized tax benefits within other expense (income), net. The amount of interest and penalties accrued as of June 30, 2015 and 2014 was approximately $7.9 million and $6.7 million, respectively.

The Company is subject to federal income tax examinations for all years beginning from the fiscal year ended June 30, 2011 and is under United States federal income tax examination for the fiscal year ended June 30, 2013. The Company is subject to state income tax examinations for all years beginning from the fiscal year ended June 30, 2011. The Company is also subject to examinations in other major foreign jurisdictions, including Singapore, for all years beginning from the fiscal year ended June 30, 2011. The Company believes that adequate amounts have been reserved for any adjustments that may ultimately result from any future examinations of these years.

It is possible that certain examinations may be concluded in the next twelve months. The Company believes it is possible that it may recognize up to $27.3 million of its existing unrecognized tax benefits within the next 12 months as a result of the lapse of statutes of limitations and the resolution of examinations with various tax authorities.

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NOTE 13 — COMMITMENTS AND CONTINGENCIES

Factoring. KLA-Tencor has agreements (referred to as “factoring agreements”) with financial institutions to sell certain of its trade receivables and promissory notes from customers without recourse. The Company does not believe it is at risk for any material losses as a result of these agreements. In addition, the Company periodically sells certain letters of credit (“LCs”), without recourse, received from customers in payment for goods.

The following table shows total receivables sold under factoring agreements and proceeds from sales of LCs for the indicated periods:

	Year ended June 30,
(In thousands)	2015		2014
Receivables sold under factoring agreements	$	137,285	$	116,292
Proceeds from sales of LCs	$	6,920	$	8,323

Factoring and LC fees for the sale of certain trade receivables were recorded in other expense (income), net and were not material for the periods presented.

Facilities. KLA-Tencor leases certain of its facilities under arrangements that are accounted for as operating leases. Rent expense was $9.1 million, $8.7 million and $9.2 million for the fiscal years ended June 30, 2015, 2014 and 2013, respectively.

The following is a schedule of expected operating lease payments:

Fiscal year ending June 30,	Amount (In thousands)
2016	$	8,008
2017		5,818
2018		3,964
2019		1,815
2020		1,220
2021 and thereafter		556
Total minimum lease payments	$	21,381

Purchase Commitments. KLA-Tencor maintains commitments to purchase inventory from its suppliers as well as goods and services in the ordinary course of business. The Company’s liability under these purchase commitments is generally restricted to a forecasted time-horizon as mutually agreed upon between the parties. This forecasted time-horizon can vary among different suppliers. The Company’s estimate of its significant purchase commitments is approximately $298.7 million as of June 30, 2015 which are primarily due within the next 12 months. Actual expenditures will vary based upon the volume of the transactions and length of contractual service provided. In addition, the amounts paid under these arrangements may be less in the event that the arrangements are renegotiated or canceled. Certain agreements provide for potential cancellation penalties.

Cash Long-Term Incentive Plan. As of June 30, 2015, the Company had committed $125.0 million to future payment obligations under its Cash LTI Plan. The calculation of compensation expense related to the Cash LTI Plan includes estimated forfeiture rate assumptions. Cash LTI awards issued to employees under the Cash LTI Plan vest in four equal installments, with 25% of the aggregate amount of the Cash LTI award vesting on each yearly anniversary of the grant date over a four-year period. In order to receive payments under a Cash LTI award, participants must remain employed by the Company as of the applicable award vesting date.

Warranties, Guarantees and Contingencies. KLA-Tencor provides standard warranty coverage on its systems for 40 hours per week for 12 months, providing labor and parts necessary to repair the systems during the warranty period. The Company accounts for the estimated warranty cost as a charge to costs of revenues when revenue is recognized. The estimated warranty cost is based on historical product performance and field expenses. Utilizing actual service records, the Company calculates the average service hours and parts expense per system and applies the actual labor and overhead rates to determine the estimated warranty charge. The Company updates these estimated charges on a regular basis. The actual product performance and/or field expense profiles may differ, and in those cases the Company adjusts its warranty accruals accordingly.

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The following table provides the changes in the product warranty accrual for the indicated periods:

	Year ended June 30,
(In thousands)	2015			2014
Beginning balance	$	37,746		$	42,603
Accruals for warranties issued during the period		39,368			45,540
Changes in liability related to pre-existing warranties		(572	)		(8,462	)
Settlements made during the period		(40,129	)		(41,935	)
Ending balance	$	36,413		$	37,746

The Company maintains guarantee arrangements available through various financial institutions for up to $22.5 million, of which $19.0 million had been issued as of June 30, 2015, primarily to fund guarantees to customs authorities for value-added tax (“VAT”) and other operating requirements of the Company’s subsidiaries in Europe and Asia.

KLA-Tencor is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in connection with contracts and license agreements or the sale of assets, under which the Company customarily agrees to hold the other party harmless against losses arising from, or provides customers with other remedies to protect against, bodily injury or damage to personal property caused by the Company’s products, non-compliance with the Company’s product performance specifications, infringement by the Company’s products of third-party intellectual property rights and a breach of warranties, representations and covenants related to matters such as title to assets sold, validity of certain intellectual property rights, non-infringement of third-party rights, and certain income tax-related matters. In each of these circumstances, payment by the Company is typically subject to the other party making a claim to and cooperating with the Company pursuant to the procedures specified in the particular contract.

This usually allows the Company to challenge the other party’s claims or, in case of breach of intellectual property representations or covenants, to control the defense or settlement of any third-party claims brought against the other party. Further, the Company’s obligations under these agreements may be limited in terms of amounts, activity (typically at the Company’s option to replace or correct the products or terminate the agreement with a refund to the other party), and duration. In some instances, the Company may have recourse against third parties and/or insurance covering certain payments made by the Company.

Subject to certain limitations, the Company is obligated to indemnify its current and former directors, officers and employees with respect to certain litigation matters and investigations that arise in connection with their service to the Company. These obligations arise under the terms of the Company’s certificate of incorporation, its bylaws, applicable contracts, and Delaware and California law. The obligation to indemnify generally means that the Company is required to pay or reimburse the individuals’ reasonable legal expenses and possibly damages and other liabilities incurred in connection with these matters.

In addition, the Company may in limited circumstances enter into agreements that contain customer-specific commitments on pricing, tool reliability, spare parts stocking levels, response time and other commitments. Furthermore, the Company may give these customers limited audit or inspection rights to enable them to confirm that the Company is complying with these commitments. If a customer elects to exercise its audit or inspection rights, the Company may be required to expend significant resources to support the audit or inspection, as well as to defend or settle any dispute with a customer that could potentially arise out of such audit or inspection. To date, the Company has made no significant accruals in its consolidated financial statements for this contingency. While the Company has not in the past incurred significant expenses for resolving disputes regarding these types of commitments, the Company cannot make any assurance that it will not incur any such liabilities in the future.

It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have not had a material effect on its business, financial condition, results of operations or cash flows.

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NOTE 14 — LITIGATION AND OTHER LEGAL MATTERS

The Company is named from time to time as a party to lawsuits and other types of legal proceedings and claims in the normal course of its business. Actions filed against the Company include commercial, intellectual property, customer, and labor and employment related claims, including complaints of alleged wrongful termination and potential class action lawsuits regarding alleged violations of federal and state wage and hour and other laws. In general, legal proceedings and claims, regardless of their merit, and associated internal investigations (especially those relating to intellectual property or confidential information disputes) are often expensive to prosecute, defend or conduct and may divert management’s attention and other company resources. Moreover, the results of legal proceedings are difficult to predict, and the costs incurred in litigation can be substantial, regardless of outcome. The Company believes the amounts provided in its consolidated financial statements are adequate in light of the probable and estimated liabilities. However, because such matters are subject to many uncertainties, the ultimate outcomes are not predictable, and there can be no assurances that the actual amounts required to satisfy alleged liabilities from the matters described above will not exceed the amounts reflected in the Company’s consolidated financial statements or will not have a material adverse effect on its results of operations, financial condition or cash flows.

NOTE 15 — RESTRUCTURING CHARGES

The Company has in recent years undertaken a number of cost reduction activities, including workforce reductions, in an effort to lower its ongoing expense run rate. The program in the United States is accounted for in accordance with the authoritative guidance related to compensation for non-retirement post-employment benefits, whereas the programs in the Company’s international locations are accounted for in accordance with the authoritative guidance for contingencies.

In April 2015, we announced a plan to reduce our global employee workforce to streamline our organization and business processes in response to changing customer requirement in our industry. The goals of this reduction are to enable continued innovation, direct our resources toward our best opportunities and lower our ongoing expense run rate. During the fiscal year ended June 30, 2015, we recorded a $31.6 million net restructuring charge, of which $8.0 million was recorded to costs of revenues, $11.1 million to engineering, research and development expense and $12.5 million to selling, general and administrative expense. Net restructuring charge amounting to $22.4 million was recorded during the fourth quarter of fiscal year ended June 30, 2015, substantial majority of which is related to our global workforce reduction plan.

The following table shows the activity primarily related to accrual for severance and benefits for the fiscal years ended June 30, 2015 and 2014:

	Year ended June 30,
(In thousands)	2015			2014
Beginning balance	$	2,329		$	3,947
Restructuring costs		31,569			6,662
Adjustments		1,177			(459	)
Cash payments		(10,188	)		(7,821	)
Ending balance	$	24,887		$	2,329

The accrual for severance and benefits as of June 30, 2015 is expected to be paid out by the end of our fiscal quarter ending December 31, 2015.

The Company expects to incur additional charges, including additional severance costs and other related costs, in connection with the completion of its global workforce reduction during the first two quarters of fiscal year 2016.

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NOTE 16 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The authoritative guidance requires companies to recognize all derivative instruments and hedging activities, including foreign currency exchange contracts, as either assets or liabilities at fair value on the balance sheet. Changes in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of any hedges, are recognized in other expense (income), net in the consolidated statements of operations. In accordance with the guidance, the Company designates foreign currency forward exchange and option contracts as cash flow hedges of certain forecasted foreign currency denominated sales and purchase transactions.

KLA-Tencor’s foreign subsidiaries operate and sell KLA-Tencor’s products in various global markets. As a result, KLA-Tencor is exposed to risks relating to changes in foreign currency exchange rates. KLA-Tencor utilizes foreign currency forward exchange contracts and option contracts to hedge against future movements in foreign exchange rates that affect certain existing and forecasted foreign currency denominated sales and purchase transactions, such as the Japanese yen, the euro, the New Taiwan dollar and the Israeli new shekel. The Company routinely hedges its exposures to certain foreign currencies with various financial institutions in an effort to minimize the impact of certain currency exchange rate fluctuations. These currency forward exchange contracts and options, designated as cash flow hedges, generally have maturities of less than 18 months. Cash flow hedges are evaluated for effectiveness monthly, based on changes in total fair value of the derivatives. If a financial counterparty to any of the Company’s hedging arrangements experiences financial difficulties or is otherwise unable to honor the terms of the foreign currency hedge, the Company may experience material losses.

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gains or losses on the derivative is reported as a component of accumulated other comprehensive income (loss) (“OCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Changes in the fair value of currency forward exchange and option contracts due to changes in time value are excluded from the assessment of effectiveness. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

For derivative instruments that are not designated as accounting hedges, gains and losses are recognized in other expense (income), net. The Company uses foreign currency forward contracts to hedge certain foreign currency denominated assets or liabilities. The gains and losses on these derivatives are largely offset by the changes in the fair value of the assets or liabilities being hedged.

In October 2014, in anticipation of the issuance of the Senior Notes, the Company entered into a series of forward contracts (“Rate Lock Agreements”) to lock the benchmark rate on a portion of the Senior Notes. The objective of the Rate Lock Agreements was to hedge the risk associated with the variability in interest rates due to the changes in the benchmark rate leading up to the closing of the intended financing, on the notional amount being hedged. The Rate Lock Agreements had a notional amount of $1 billion in aggregate which matured in the second quarter of the fiscal year ended June 30, 2015. The Company designated each of the Rate Lock Agreements as a qualifying hedging instrument and accounted for as a cash flow hedge, under which the effective portion of the gain or loss on the close out of the Rate Lock Agreements was initially recognized in accumulated other comprehensive income (loss) as a reduction of total stockholders’ equity and subsequently amortized into earnings as a component of interest expense over the term of the underlying debt. The ineffective portion, if any, was recognized in earnings immediately. The Rate Lock Agreements were terminated on the date of pricing of the $1.25 billion of 4.650% Senior Notes due in 2024 and the Company recorded the fair value of a $7.5 million receivable as a gain within accumulated other comprehensive income (loss) as of December 31, 2014. For the fiscal year ended June 30, 2015, the Company recognized $0.5 million for the amortization of the gain recognized in accumulated other comprehensive income (loss), which amount reduced the interest expense. The Company did not record any ineffectiveness for the fiscal year ended June 30, 2015. The cash proceeds of $7.5 million from the settlement of the Rate Lock Agreements were included in the cash flows from operating activities in the consolidated statements of cash flows for the fiscal year ended June 30, 2015 because the designated hedged item was classified as interest expense in the cash flows from operating activities in the consolidated statements of cash flows.

43

In addition, in November 2014, the Company entered into a non-designated forward contract to lock the treasury rate used to determine the redemption amount of the 2018 Senior Notes that occurred during the three months ended December 31, 2014. The objective of the forward contract was to hedge the risk associated with the variability of the redemption amount due to changes in interest rates through the redemption of the existing 2018 Senior Notes. The forward contract had a notional amount of $750 million. The forward contract was terminated in December 2014 and the resulting fair value of $1.2 million receivable was included in the loss on extinguishment of debt and other, net line in the consolidated statements of operations, partially offsetting the loss on redemption of the debt during the three months December 31, 2014. The cash proceeds from the forward contract were included in the cash flows from financing activities in the consolidated statements of cash flows for the fiscal year ended June 30, 2015, partially offsetting the cash outflows for the redemption of the 2018 Senior Notes.

Derivatives in Cash Flow Hedging Relationships: Foreign Exchange and Interest Rate Contracts

The locations and amounts of designated and non-designated derivative instruments’ gains and losses reported in the consolidated financial statements for the indicated periods were as follows:

		Year ended June 30,
(In thousands)	Location in Financial Statements	2015			2014
Derivatives Designated as Hedging Instruments
Gains in accumulated OCI on derivatives (effective portion)	Accumulated OCI	$	13,745		$	1,641
Gains reclassified from accumulated OCI into income (effective portion):	Revenues	$	7,615		$	3,851
	Costs of revenues		(1,503	)		294
	Interest expense		503			—
	Net gains reclassified from accumulated OCI into income (effective portion)	$	6,615		$	4,145
Gains recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)	Other expense (income), net	$	243		$	18
Derivatives Not Designated as Hedging Instruments
Gains recognized in income	Other expense (income), net	$	13,976		$	2,856
	Loss on extinguishment of debt and other, net	$	1,180		$	—

The U.S. dollar equivalent of all outstanding notional amounts of hedge contracts, with maximum maturity of 16 months, as of the dates indicated below was as follows:

(In thousands)	As of June 30, 2015		As of June 30, 2014
Cash flow hedge contracts
Purchase	$	32,775	$	6,066
Sell	$	88,800	$	33,999
Other foreign currency hedge contracts
Purchase	$	64,012	$	108,901
Sell	$	123,091	$	106,322

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The locations and fair value amounts of the Company’s derivative instruments reported in its Consolidated Balance Sheets as of the dates indicated below were as follows:

	Asset Derivatives					Liability Derivatives
	Balance Sheet Location	As of June 30, 2015		As of June 30, 2014		Balance Sheet Location	As of June 30, 2015		As of June 30, 2014
(In thousands)		Fair Value					Fair Value
Derivatives designated as hedging instruments
Foreign exchange contracts	Other current assets	$	1,722	$	120	Other current liabilities	$	1,920	$	100
Total derivatives designated as hedging instruments			1,722		120			1,920		100
Derivatives not designated as hedging instruments
Foreign exchange contracts	Other current assets		1,342		546	Other current liabilities		1,186		798
Total derivatives not designated as hedging instruments			1,342		546			1,186		798
Total derivatives		$	3,064	$	666		$	3,106	$	898

The following table provides the balances and changes in accumulated OCI, before taxes, related to derivative instruments for the indicated periods:

	Year ended June 30,
(In thousands)	2015			2014
Beginning balance	$	(20	)	$	2,484
Amount reclassified to income		(6,615	)		(4,145	)
Net change in unrealized gains or losses		13,745			1,641
Ending balance	$	7,110		$	(20	)

Offsetting of Derivative Assets and Liabilities

KLA-Tencor presents derivatives at gross fair values in the Consolidated Balance Sheets. The Company has entered into arrangements with each of its counterparties, which reduce credit risk by permitting net settlement of transactions with the same counterparty under certain conditions. As of June 30, 2015 and 2014, information related to the offsetting arrangements was as follows (in thousands):

As of June 30, 2015									Gross Amounts of Derivatives Not Offset in the Consolidated Balance Sheets
Description	Gross Amounts of Derivatives			Gross Amounts of Derivatives Offset in the Consolidated Balance Sheets		Net Amount of Derivatives Presented in the Consolidated Balance Sheets			Financial Instruments			Cash Collateral Received		Net Amount
Derivatives—Assets	$	3,064		$	—	$	3,064		$	(2,809	)	$	—	$	255
Derivatives—Liabilities	$	(3,106	)	$	—	$	(3,106	)	$	2,809		$	—	$	(297	)

As of June 30, 2014									Gross Amounts of Derivatives Not Offset in the Consolidated Balance Sheets
Description	Gross Amounts of Derivatives			Gross Amounts of Derivatives Offset in the Consolidated Balance Sheets		Net Amount of Derivatives Presented in the Consolidated Balance Sheets			Financial Instruments			Cash Collateral Received		Net Amount
Derivatives—Assets	$	666		$	—	$	666		$	(423	)	$	—	$	243
Derivatives—Liabilities	$	(898	)	$	—	$	(898	)	$	423		$	—	$	(475	)

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NOTE 17 — SEGMENT REPORTING AND GEOGRAPHIC INFORMATION

KLA-Tencor reports one reportable segment in accordance with the provisions of the authoritative guidance for segment reporting. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. KLA-Tencor’s chief operating decision maker is the Chief Executive Officer.

The Company is engaged primarily in designing, manufacturing and marketing process control and yield management solutions for the semiconductor and related nanoelectronics industries. All operating segments have been aggregated due to their inter-dependencies, commonality of long-term economic characteristics, products and services, the production processes, class of customer and distribution processes. The Company’s service products are an extension of the system product portfolio and provide customers with spare parts and fab management services (including system preventive maintenance and optimization services) to improve yield, increase production uptime and throughput, and lower the cost of ownership. Since the Company operates in one reportable segment, all financial segment information required by the authoritative guidance can be found in the consolidated financial statements.

The Company’s significant operations outside the United States include manufacturing facilities in Singapore, Israel, Germany and China and sales, marketing and service offices in Western Europe, Japan and the Asia Pacific regions. For geographical revenue reporting, revenues are attributed to the geographic location in which the customer is located. Long-lived assets consist of land, property and equipment, net and are attributed to the geographic region in which they are located.

The following is a summary of revenues by geographic region, based on ship-to location, for the indicated periods (as a percentage of total revenues):

	Year ended June 30,
(Dollar amounts in thousands)	2015				2014				2013
Revenues:
North America	$	815,914	29	%	$	705,159	24	%	$	846,125	30	%
Taiwan		691,482	25	%		741,470	25	%		936,445	33	%
Japan		426,963	15	%		334,653	11	%		310,204	11	%
Europe & Israel		194,670	7	%		306,779	11	%		211,121	7	%
Korea		405,320	14	%		371,139	13	%		292,724	10	%
Rest of Asia		279,700	10	%		470,208	16	%		246,162	9	%
Total	$	2,814,049	100	%	$	2,929,408	100	%	$	2,842,781	100	%

The following is a summary of revenues by major products for the indicated periods (as a percentage of total revenues):

	Year ended June 30,
(Dollar amounts in thousands)	2015				2014				2013
Revenues:
Defect inspection	$	1,541,422	55	%	$	1,685,114	58	%	$	1,594,128	56	%
Metrology		492,175	18	%		532,002	18	%		540,835	19	%
Service		688,653	24	%		642,971	22	%		595,634	21	%
Other		91,799	3	%		69,321	2	%		112,184	4	%
Total	$	2,814,049	100	%	$	2,929,408	100	%	$	2,842,781	100	%

In the fiscal year ended June 30, 2015, three customers accounted for approximately 15%, 12% and 11% of total revenues. In the fiscal year ended June 30, 2014, three customers accounted for approximately 18%, 14% and 11% of total revenues. In the fiscal year ended June 30, 2013, two customers accounted for approximately 23% and 13% of total revenues.

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Long-lived assets by geographic region as of the dates indicated below were as follows:

	As of June 30,
(In thousands)	2015		2014
Long-lived assets:
United States	$	207,779	$	219,280
Europe		16,536		19,527
Singapore		45,444		48,938
Israel		33,841		33,388
Rest of Asia		10,991		9,130
Total	$	314,591	$	330,263

NOTE 18 — RELATED PARTY TRANSACTIONS

During the fiscal years ended June 30, 2015, 2014 and 2013, the Company purchased from, or sold to, several entities, where one or more executive officers of the Company or members of the Company’s Board of Directors, or their immediate family members, also serves as an executive officer or board member, including Avago Technologies Ltd., Cisco Systems, Inc., Citrix System, Inc., Freescale Semiconductor, Inc., JDS Uniphase Corporation, NetApp, Inc. and SAP AG. The following table provides the transactions with these parties for the indicated periods (for the portion of the period during which they were considered related):

	Year ended June 30,
(In thousands)	2015		2014		2013
Total revenues	$	1,856	$	2,701	$	6,854
Total purchases	$	1,098	$	2,622	$	4,460

The Company had a receivable balance from these parties of $0.1 million and $1.8 million as of June 30, 2015 and 2014, respectively. Management believes that such transactions are at arm’s length and on similar terms as would have been obtained from unaffiliated third parties.

NOTE 19 — SUBSEQUENT EVENTS

On July 14, 2015, the Company announced that its Board of Directors had authorized a further increase in the level of the Company’s quarterly cash dividend from $0.50 to $0.52 per share. On August 6, 2015, the Company announced that its Board of Directors had declared a quarterly cash dividend of $0.52 per share to be paid on September 1, 2015 to stockholders of record as of the close of business on August 17, 2015.

47

NOTE 20 — QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the Company’s quarterly consolidated results of operations (unaudited) for the fiscal years ended June 30, 2015 and 2014.

(In thousands, except per share data)	First quarter ended September 30, 2014		Second quarter ended December 31, 2014		Third quarter ended March 31, 2015		Fourth quarter ended June 30, 2015
Total revenues	$	642,901	$	676,357	$	738,459	$	756,332
Gross margin	$	354,434	$	393,144	$	418,177	$	433,065
Net income	$	72,233	$	20,268	$	131,638	$	142,019
Net income per share:
Basic(1)	$	0.44	$	0.12	$	0.81	$	0.90
Diluted(1)	$	0.43	$	0.12	$	0.81	$	0.89

(In thousands, except per share data)	First quarter ended September 30, 2013		Second quarter ended December 31, 2013		Third quarter ended March 31, 2014		Fourth quarter ended June 30, 2014
Total revenues	$	658,337	$	705,129	$	831,599	$	734,343
Gross margin	$	380,680	$	419,315	$	488,773	$	407,678
Net income	$	111,197	$	139,246	$	203,581	$	128,731
Net income per share:
Basic(1)	$	0.67	$	0.84	$	1.22	$	0.78
Diluted(1)	$	0.66	$	0.83	$	1.21	$	0.77

(1) Basic and diluted earnings per share are computed independently for each of the quarters presented based on the weighted-average basic and fully diluted shares outstanding for each quarter. Therefore, the sum of quarterly basic and diluted per share information may not equal annual basic and diluted earnings per share.

The Company’s net income decreased to $20.3 million in the three months ended December 31, 2014, primarily as a result of a pre-tax net loss of $131.7 million pertaining to the net loss on extinguishment of debt and certain one-time expenses of $2.5 million associated with the leverage recapitalization.

48

SCHEDULE II

Valuation and Qualifying Accounts

(In thousands)	Balance at Beginning of Period		Charged to Expense		Deductions/ Adjustments			Balance at End of Period
Fiscal Year Ended June 30, 2013:
Allowance for Doubtful Accounts	$	22,327	$	—	$	(192	)	$	22,135
Allowance for Deferred Tax Assets	$	40,479	$	—	$	16,618		$	57,097
Fiscal Year Ended June 30, 2014:
Allowance for Doubtful Accounts	$	22,135	$	—	$	(308	)	$	21,827
Allowance for Deferred Tax Assets	$	57,097	$	—	$	19,231		$	76,328
Fiscal Year Ended June 30, 2015:
Allowance for Doubtful Accounts	$	21,827	$	—	$	(164	)	$	21,663
Allowance for Deferred Tax Assets	$	76,328	$	—	$	15,022		$	91,350

49

EX-99.2

Exhibit 99.2

KLA-TENCOR CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands)	March 31, 2016			June 30, 2015
ASSETS
Current assets:
Cash and cash equivalents	$	925,974		$	838,025
Marketable securities		1,315,336			1,549,086
Accounts receivable, net		624,818			585,494
Inventories		721,493			617,904
Deferred income taxes		216,438			236,253
Other current assets		102,414			77,814
Total current assets		3,906,473			3,904,576
Land, property and equipment, net		287,874			314,591
Goodwill		335,205			335,263
Purchased intangibles, net		5,625			11,895
Other non-current assets		246,925			259,687
Total assets	$	4,782,102		$	4,826,012
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	126,322		$	103,342
Deferred system profit		193,219			148,691
Unearned revenue		51,820			71,335
Current portion of long-term debt		—			16,981
Other current liabilities		626,331			661,414
Total current liabilities		997,692			1,001,763
Non-current liabilities:
Long-term debt		3,097,306			3,173,435
Unearned revenue		51,065			47,145
Other non-current liabilities		159,467			182,230
Total liabilities		4,305,530			4,404,573
Commitments and contingencies (Note 11 and Note 12)
Stockholders’ equity:
Common stock and capital in excess of par value		424,474			474,374
Retained earnings (accumulated deficit)		95,121			(12,362	)
Accumulated other comprehensive income (loss)		(43,023	)		(40,573	)
Total stockholders’ equity		476,572			421,439
Total liabilities and stockholders’ equity	$	4,782,102		$	4,826,012

See accompanying notes to condensed consolidated financial statements (unaudited).

KLA-TENCOR CORPORATION

Condensed Consolidated Statements of Operations

(Unaudited)

	Three months ended March 31,						Nine months ended March 31,
(In thousands, except per share amounts)	2016			2015			2016			2015
Revenues:
Product	$	530,623		$	565,181		$	1,519,142		$	1,545,663
Service		181,810			173,278			546,180			512,054
Total revenues		712,433			738,459			2,065,322			2,057,717
Costs and expenses:
Costs of revenues		274,599			320,282			825,823			891,962
Engineering, research and development		115,589			124,583			353,804			401,777
Selling, general and administrative		87,407			98,608			275,602			305,125
Loss on extinguishment of debt and other, net		—			—			—			131,669
Interest expense		30,895			30,508			91,998			75,330
Other expense (income), net		(5,988	)		(1,976	)		(11,610	)		(7,339	)
Income before income taxes		209,931			166,454			529,705			259,193
Provision for income taxes		34,154			34,816			96,824			35,054
Net income	$	175,777		$	131,638		$	432,881		$	224,139
Net income per share:
Basic	$	1.13		$	0.81		$	2.78		$	1.37
Diluted	$	1.12		$	0.81		$	2.76		$	1.36
Cash dividends declared per share (including a special cash dividend of $16.50 per share declared during the three months ended December 31, 2014)	$	0.52		$	0.50		$	1.56		$	18.00
Weighted-average number of shares:
Basic		155,690			161,559			155,921			163,494
Diluted		156,429			162,794			156,797			164,930

See accompanying notes to condensed consolidated financial statements (unaudited).

2

KLA-TENCOR CORPORATION

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

	Three months ended March 31,						Nine months ended March 31,
(In thousands)	2016			2015			2016			2015
Net income	$	175,777		$	131,638		$	432,881		$	224,139
Other comprehensive income (loss):
Currency translation adjustments:
Change in currency translation adjustments		5,265			(4,687	)		(3,003	)		(21,756	)
Change in income tax benefit or expense		(974	)		2,370			790			8,343
Net change related to currency translation adjustments		4,291			(2,317	)		(2,213	)		(13,413	)
Cash flow hedges:
Change in net unrealized gains or losses		(2,798	)		(1,309	)		(3,952	)		12,648
Reclassification adjustments for net gains or losses included in net income		1,107			(3,920	)		870			(5,732	)
Change in income tax benefit or expense		608			1,885			1,108			(2,492	)
Net change related to cash flow hedges		(1,083	)		(3,344	)		(1,974	)		4,424
Net change related to unrecognized losses and transition obligations in connection with defined benefit plans		(77	)		1,212			729			2,525
Available-for-sale securities:
Change in net unrealized gains or losses		5,536			3,277			1,302			153
Reclassification adjustments for gains or losses included in net income		(36	)		(60	)		(79	)		(1,976	)
Change in income tax benefit or expense		(1,135	)		(822	)		(215	)		751
Net change related to available-for-sale securities		4,365			2,395			1,008			(1,072	)
Other comprehensive income (loss)		7,496			(2,054	)		(2,450	)		(7,536	)
Total comprehensive income	$	183,273		$	129,584		$	430,431		$	216,603

See accompanying notes to condensed consolidated financial statements (unaudited).

3

KLA-TENCOR CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Nine months ended March 31,
(In thousands)	2016			2015
Cash flows from operating activities:
Net income	$	432,881		$	224,139
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		52,044			60,570
Asset impairment charges		1,396			1,698
Loss on extinguishment of debt and other, net		—			131,669
Non-cash stock-based compensation expense		32,758			43,098
Excess tax benefit from equity awards		(12,176	)		(15,186	)
Net gain on sales of marketable securities and other investments		(4,105	)		(1,976	)
Changes in assets and liabilities:
Increase in accounts receivable, net		(29,692	)		(162,234	)
Decrease (increase) in inventories		(93,976	)		11,002
Decrease (increase) in other assets		4,659			(62,492	)
Increase in accounts payable		22,956			700
Increase (decrease) in deferred system profit		44,528			(1,569	)
Increase (decrease) in other liabilities		(45,670	)		59,008
Net cash provided by operating activities		405,603			288,427
Cash flows from investing activities:
Capital expenditures, net		(24,233	)		(36,554	)
Proceeds from sale of assets		4,026			—
Purchases of available-for-sale securities		(873,987	)		(1,433,856	)
Proceeds from sale of available-for-sale securities		632,207			1,664,898
Proceeds from maturity of available-for-sale securities		472,437			564,283
Purchases of trading securities		(48,248	)		(48,949	)
Proceeds from sale of trading securities		51,738			50,558
Net cash provided by investing activities		213,940			760,380
Cash flows from financing activities:
Proceeds from issuance of debt, net of issuance costs		—			3,224,906
Repayment of debt		(95,000	)		(886,742	)
Issuance of common stock		21,910			29,578
Tax withholding payments related to vested and released restricted stock units		(23,723	)		(29,790	)
Common stock repurchases		(181,711	)		(435,030	)
Payment of dividends to stockholders		(265,163	)		(2,961,402	)
Excess tax benefit from equity awards		12,176			15,186
Net cash used in financing activities		(531,511	)		(1,043,294	)
Effect of exchange rate changes on cash and cash equivalents		(83	)		(14,482	)
Net increase (decrease) in cash and cash equivalents		87,949			(8,969	)
Cash and cash equivalents at beginning of period		838,025			630,861
Cash and cash equivalents at end of period	$	925,974		$	621,892
Supplemental cash flow disclosures:
Income taxes paid, net	$	81,779		$	65,830
Interest paid	$	63,342		$	37,569
Non-cash activities:
Purchase of land, property and equipment—investing activities	$	2,311		$	2,255
Unsettled common stock repurchase—financing activities	$	—		$	12,862
Dividends payable—financing activities	$	18,827		$	41,412

See accompanying notes to condensed consolidated financial statements (unaudited).

4

KLA-TENCOR CORPORATION

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business. KLA-Tencor Corporation (“KLA-Tencor” or the “Company”) is a leading supplier of process control and yield management solutions for the semiconductor and related nanoelectronics industries. KLA-Tencor’s broad portfolio of wafer inspection and patterning products, and related service, software and other offerings primarily supports integrated circuit, which is referred to as an “IC” or “chip,” manufacturers throughout the entire semiconductor fabrication process, from research and development to final volume production. KLA-Tencor provides leading-edge equipment, software and support that enable IC manufacturers to identify, resolve and manage significant advanced technology manufacturing process challenges and obtain higher finished product yields at lower overall cost. In addition to serving the semiconductor industry, KLA-Tencor also provides a range of technology solutions to a number of other high technology industries, including the LED and data storage industries, as well as general materials research.

On October 20, 2015, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Lam Research Corporation (“Lam Research”), under which KLA-Tencor will, subject to the satisfaction or waiver of the conditions therein, ultimately become a direct or indirect wholly-owned subsidiary of Lam Research.

In accordance with the Merger Agreement, at the effective time of the Merger, each of the Company’s stockholders may elect to receive, for all shares of the Company’s common stock held at the closing of the transaction, and on a per share basis, one of the following: (i) mixed consideration, consisting of both 0.5 of a share of Lam Research common stock and $32.00 in cash; (ii) all-stock consideration, consisting of a number of shares of Lam Research common stock equal to 0.5 plus $32.00 divided by the volume weighted average price of Lam Research common stock over a five trading day period ending shortly before the closing of the transaction (“the five day VWAP”); or (iii) all-cash consideration, consisting of $32.00 plus 0.5 times the five-day VWAP. If no election was made by the Company’s stockholders, they will be deemed to have elected the mixed consideration. All-cash and all-stock elections will be subject to proration in accordance with the terms of the Merger Agreement.

The completion of the transaction is subject to customary closing conditions, including receipt of required regulatory approvals. On February 19, 2016, the Merger Agreement was adopted by KLA-Tencor’s stockholders and Lam Research’s stockholders approved the issuance of Lam Research’s common stock in the merger.

The Merger Agreement contains certain termination rights for both the Company and Lam Research, including if a governmental body prohibits the Mergers or if the Mergers are not consummated by July 20, 2016, subject to certain extension rights. Upon termination of the Merger Agreement under specified circumstances, the Company or Lam Research will be required to pay the other party a termination fee of $290.0 million.

For additional details on the transaction, refer to the copy of the Merger Agreement attached as an Exhibit to the Form 8-K filed with the U.S. Securities and Exchange Commission (“SEC”) on October 21, 2015.

Basis of Presentation. The condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the SEC. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited interim financial statements reflect all adjustments (consisting only of normal, recurring adjustments) necessary for a fair statement of the financial position, results of operations, comprehensive income, and cash flows for the periods indicated. These financial statements and notes, however, should be read in conjunction with Item 8, “Financial Statements and Supplementary Data” included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015, filed with the SEC on August 7, 2015.

The condensed consolidated financial statements include the accounts of KLA-Tencor and its majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

The results of operations for the three and nine months ended March 31, 2016 are not necessarily indicative of the results that may be expected for any other interim period or for the full fiscal year ending June 30, 2016.

Certain reclassifications have been made to the prior year’s Condensed Consolidated Balance Sheet and notes to conform to the current year presentation. The reclassifications had no effect on the prior year’s Condensed Consolidated Statements of Operations, Comprehensive Income and Cash Flows.

5

Management Estimates. The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions in applying the Company’s accounting policies that affect the reported amounts of assets and liabilities (and related disclosure of contingent assets and liabilities) at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Revenue Recognition. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the selling price is fixed or determinable, and collectibility is reasonably assured. The Company derives revenue from three sources—sales of systems, spare parts and services. In general, the Company recognizes revenue for systems when the system has been installed, is operating according to predetermined specifications and is accepted by the customer. When the Company has demonstrated a history of successful installation and acceptance, the Company recognizes revenue upon delivery and customer acceptance. Under certain circumstances, however, the Company recognizes revenue prior to acceptance from the customer, as follows:

• When the customer fab has previously accepted the same tool, with the same specifications, and when the Company can objectively demonstrate that the tool meets all of the required acceptance criteria.

• When system sales to independent distributors have no installation requirement, contain no acceptance agreement, and 100% of the payment is due based upon shipment.

• When the installation of the system is deemed perfunctory.

• When the customer withholds acceptance due to issues unrelated to product performance, in which case revenue is recognized when the system is performing as intended and meets predetermined specifications.

In circumstances in which the Company recognizes revenue prior to installation, the portion of revenue associated with installation is deferred based on estimated fair value, and that revenue is recognized upon completion of the installation.

In many instances, products are sold in stand-alone arrangements. Services are sold separately through renewals of annual maintenance contracts. The Company has multiple element revenue arrangements in cases where certain elements of a sales arrangement are not delivered and accepted in one reporting period. To determine the relative fair value of each element in a revenue arrangement, the Company allocates arrangement consideration based on the selling price hierarchy. For substantially all of the arrangements with multiple deliverables pertaining to products and services, the Company uses vendor-specific objective evidence (“VSOE”) or third-party evidence (“TPE”) to allocate the selling price to each deliverable. The Company determines TPE based on historical prices charged for products and services when sold on a stand-alone basis. When the Company is unable to establish relative selling price using VSOE or TPE, the Company uses estimated selling price (“ESP”) in its allocation of arrangement consideration. The objective of ESP is to determine the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. ESP could potentially be used for new or customized products. The Company regularly reviews relative selling prices and maintains internal controls over the establishment and updates of these estimates.

In a multiple element revenue arrangement, the Company defers revenue recognition associated with the relative fair value of each undelivered element until that element is delivered to the customer. To be considered a separate element, the product or service in question must represent a separate unit of accounting, which means that such product or service must fulfill the following criteria: (a) the delivered item(s) has value to the customer on a stand-alone basis; and (b) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. If the arrangement does not meet all the above criteria, the entire amount of the sales contract is deferred until all elements are accepted by the customer.

Trade-in rights are occasionally granted to customers to trade in tools in connection with subsequent purchases. The Company estimates the value of the trade-in right and reduces the revenue recognized on the initial sale. This amount is recognized at the earlier of the exercise of the trade-in right or the expiration of the trade-in right.

Spare parts revenue is recognized when the product has been shipped, risk of loss has passed to the customer and collection of the resulting receivable is probable.

Service and maintenance contract revenue is recognized ratably over the term of the maintenance contract. Revenue from services performed in the absence of a maintenance contract, including consulting and training revenue, is recognized when the related services are performed and collectibility is reasonably assured.

The Company sells stand-alone software that is subject to software revenue recognition guidance. The Company periodically reviews selling prices to determine whether VSOE exists, and in situations where the Company is unable to establish VSOE for undelivered elements such as post-contract service, revenue is recognized ratably over the term of the service contract.

6

The Company also defers the fair value of non-standard warranty bundled with equipment sales as unearned revenue. Non-standard warranty includes services incremental to the standard 40-hour per week coverage for 12 months. Non-standard warranty is recognized ratably as revenue when the applicable warranty term period commences.

The deferred system profit balance equals the amount of deferred system revenue that was invoiced and due on shipment, less applicable product and warranty costs. Deferred system revenue represents the value of products that have been shipped and billed to customers which have not met the Company’s revenue recognition criteria. Deferred system profit does not include the profit associated with product shipments to certain customers in Japan, to whom title does not transfer until customer acceptance. Shipments to such customers in Japan are classified as sales of inventory at cost until the time of acceptance.

Recent Accounting Pronouncements.

Updates Not Yet Effective

In May 2014, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update regarding revenue from customer contracts to transfer goods and services or non-financial assets unless the contracts are covered by other standards (for example, insurance or lease contracts). Under the new guidance, an entity should recognize revenue in connection with the transfer of promised goods or services to customers in an amount that reflects the consideration that the entity expects to be entitled to receive in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The updates are effective for the Company beginning in the first quarter of the fiscal year ending June 30, 2018. In August 2015, the FASB deferred the effective date of the update by one year, with early adoption on the original effective date permitted. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is currently evaluating the impact of this accounting standard update on its condensed consolidated financial statements.

In April 2015, the FASB issued an accounting standard update for customer’s cloud based fees. The guidance changes what a customer must consider in determining whether a cloud computing arrangement contains a software license. If the arrangement contains a software license, the customer would account for the fees related to the software license element in accordance with guidance related to internal use software; if the arrangement does not contain a software license, the customer would account for the arrangement as a service contract. The update is effective for the Company beginning in the first quarter of the Company’s fiscal year ending June 30, 2017. Early adoption is permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact of this accounting standard update on its condensed consolidated financial statements.

In July 2015, the FASB issued an accounting standard update for the subsequent measurement of inventory. The amended guidance requires entities to measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The requirement would replace the current lower of cost or market evaluation and the accounting guidance is unchanged for inventory measured using last-in, first-out (“LIFO”) or the retail inventory method. The update is effective for the Company beginning in the first quarter of the Company’s fiscal year ending June 30, 2018 and should be applied prospectively with early adoption permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact of this accounting standard update on its condensed consolidated financial statements.

In November 2015, the FASB issued an accounting standard update for the presentation of deferred income taxes. Under this new guidance, deferred tax liabilities and assets should be classified as noncurrent in a classified balance sheet. The update is effective for the Company beginning in the first quarter of the Company’s fiscal year ending June 30, 2018 with early adoption permitted as of the beginning of an interim or annual reporting period. Additionally, this guidance may be applied either prospectively or retrospectively to all periods presented. The Company plans to early adopt this new guidance prospectively in the fourth quarter of the fiscal year ending June 30, 2016. As of March 31, 2016, the Company has approximately $218 million of net current deferred tax assets that will be classified as noncurrent upon adoption.

7

In January 2016, the FASB issued an accounting standard update that changes the accounting for financial instruments primarily related to equity investments (other than those accounted for under the equity method of accounting or those that result in consolidation of the investee), financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. The accounting standard update is effective for the Company beginning in the first quarter of fiscal 2019, and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its condensed consolidated financial statements.

In February 2016, the FASB issued an accounting standard update which amends the existing accounting standards for leases. Consistent with current guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification. Under the new guidance, a lessee will be required to recognize assets and liabilities for all leases with lease terms of more than 12 months. The update is effective for the Company beginning in the first quarter of its fiscal year ending June 30, 2020 using a modified retrospective transition method. Early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its condensed consolidated financial statements.

In March 2016, the FASB issued an accounting standard update to simplify certain aspects of share-based payment awards to employees, including the accounting for income taxes, an option to recognize gross stock-based compensation expense with actual forfeitures recognized as they occur and statutory tax withholding requirements, as well as certain classifications in the statement of cash flows. The update is effective for the Company beginning in the first quarter of its fiscal year ending June 30, 2018, with early adoption permitted and all of the guidance must be adopted in the same period. The Company is currently evaluating the impact of this accounting standard update on its condensed consolidated financial statements.

NOTE 2 – FAIR VALUE MEASUREMENTS

The Company’s financial assets and liabilities are measured and recorded at fair value, except for certain equity investments in privately-held companies. These equity investments are generally accounted for under the cost method of accounting and are periodically assessed for other-than-temporary impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred. The Company’s non-financial assets, such as goodwill, intangible assets, and land, property and equipment, are recorded at cost and are assessed for impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred.

Fair Value of Financial Instruments. KLA-Tencor has evaluated the estimated fair value of financial instruments using available market information and valuations as provided by third-party sources. The use of different market assumptions and/or estimation methodologies could have a significant effect on the estimated fair value amounts. The fair value of the Company’s cash equivalents, accounts receivable, accounts payable and other current liabilities approximate their carrying amounts due to the relatively short maturity of these items.

Fair Value Hierarchy. The authoritative guidance for fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

Level 1 Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

Level 2 Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.

Level 3 Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

The Company’s financial instruments were classified within Level 1 or Level 2 of the fair value hierarchy as of March 31, 2016, because they were valued using quoted market prices, broker/dealer quotes or alternative pricing sources with reasonable levels of price transparency. As of March 31, 2016, the types of instruments valued based on quoted market prices in active markets included money market funds, U.S. Treasury securities, certain sovereign securities and certain U.S. Government agency securities. Such instruments are generally classified within Level 1 of the fair value hierarchy.

8

As of March 31, 2016, the types of instruments valued based on other observable inputs included corporate debt securities, municipal securities, certain U.S. Government agency securities and certain sovereign securities. The market inputs used to value these instruments generally consist of market yields, reported trades and broker/dealer quotes. Such instruments are generally classified within Level 2 of the fair value hierarchy.

The principal market in which the Company executes its foreign currency contracts is the institutional market in an over-the-counter environment with a relatively high level of price transparency. The market participants usually are large financial institutions. The Company’s foreign currency contracts’ valuation inputs are based on quoted prices and quoted pricing intervals from public data sources and do not involve management judgment. These contracts are typically classified within Level 2 of the fair value hierarchy.

Financial assets (excluding cash held in operating accounts and time deposits) and liabilities measured at fair value on a recurring basis, as of the date indicated below, were presented on the Company’s Condensed Consolidated Balance Sheet as follows:

As of March 31, 2016 (In thousands)	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Assets
Cash equivalents:
U.S. Treasury securities	$	136,492		$	136,492	$	—
U.S. Government agency securities		27,297			—		27,297
Money market and other		367,659			367,659		—
Sovereign securities		15,000			—		15,000
Marketable securities:
U.S. Treasury securities		252,318			252,318		—
U.S. Government agency securities		373,424			373,424		—
Municipal securities		5,445			—		5,445
Corporate debt securities		648,699			—		648,699
Sovereign securities		28,195			6,419		21,776
Total cash equivalents and marketable securities(1)		1,854,529			1,136,312		718,217
Other current assets:
Derivative assets		2,305			—		2,305
Other non-current assets:
Executive Deferred Savings Plan		158,313			94,842		63,471
Total financial assets(1)	$	2,015,147		$	1,231,154	$	783,993
Liabilities
Other current liabilities:
Derivative liabilities	$	(5,812	)	$	—	$	(5,812	)
Total financial liabilities	$	(5,812	)	$	—	$	(5,812	)

(1) Excludes cash of $322.2 million held in operating accounts and time deposits of $64.6 million as of March 31, 2016.

9

Financial assets (excluding cash held in operating accounts and time deposits) and liabilities measured at fair value on a recurring basis, as of the date indicated below, were presented on the Company’s Condensed Consolidated Balance Sheet as follows:

As of June 30, 2015 (In thousands)	Total			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Assets
Cash equivalents:
U.S. Government agency securities	$	7,500		$	7,500	$	—
Corporate debt securities		13,099			—		13,099
Money market and other		611,385			611,385		—
Marketable securities:
U.S. Treasury securities		275,555			275,555		—
U.S. Government agency securities		564,768			556,019		8,749
Municipal securities		31,816			—		31,816
Corporate debt securities		612,862			—		612,862
Sovereign securities		57,093			8,976		48,117
Total cash equivalents and marketable securities(1)		2,174,078			1,459,435		714,643
Other current assets:
Derivative assets		3,064			—		3,064
Other non-current assets:
Executive Deferred Savings Plan		165,655			91,203		74,452
Total financial assets(1)	$	2,342,797		$	1,550,638	$	792,159
Liabilities
Other current liabilities:
Derivative liabilities	$	(3,106	)	$	—	$	(3,106	)
Total financial liabilities	$	(3,106	)	$	—	$	(3,106	)

(1) Excludes cash of $183.1 million held in operating accounts and time deposits of $29.9 million as of June 30, 2015.

There were no transfers in and out of Level 1 and Level 2 fair value measurements during the three and nine months ended March 31, 2016. The Company did not have significant assets or liabilities measured at fair value on a recurring basis within Level 3 fair value measurements as of March 31, 2016 or June 30, 2015.

10

NOTE 3 – FINANCIAL STATEMENT COMPONENTS

Balance Sheet Components

(In thousands)	As of March 31, 2016			As of June 30, 2015
Accounts receivable, net:
Accounts receivable, gross	$	646,498		$	607,157
Allowance for doubtful accounts		(21,680	)		(21,663	)
	$	624,818		$	585,494
Inventories:
Customer service parts	$	230,768		$	209,726
Raw materials		209,281			194,218
Work-in-process		213,052			156,820
Finished goods		68,392			57,140
	$	721,493		$	617,904
Other current assets:
Prepaid expenses	$	39,542		$	37,006
Income tax related receivables		54,475			32,850
Other current assets		8,397			7,958
	$	102,414		$	77,814
Land, property and equipment, net:
Land	$	40,767		$	40,397
Buildings and leasehold improvements		319,398			316,566
Machinery and equipment		508,469			510,642
Office furniture and fixtures		21,811			21,411
Construction-in-process		4,057			3,152
		894,502			892,168
Less: accumulated depreciation and amortization		(606,628	)		(577,577	)
	$	287,874		$	314,591
Other non-current assets:
Executive Deferred Savings Plan(1)	$	158,313		$	165,655
Deferred tax assets – long-term		74,822			78,648
Other non-current assets		13,790			15,384
	$	246,925		$	259,687
Other current liabilities:
Warranty	$	32,596		$	36,413
Executive Deferred Savings Plan(1)		159,760			167,886
Compensation and benefits		180,274			196,682
Income taxes payable		19,915			15,582
Interest payable		46,209			19,395
Customer credits and advances		103,295			93,212
Other accrued expenses		84,282			132,244
	$	626,331		$	661,414
Other non-current liabilities:
Pension liabilities	$	56,834		$	55,696
Income taxes payable		61,504			69,018
Other non-current liabilities		41,129			57,516
	$	159,467		$	182,230

11

(1) KLA-Tencor has a non-qualified deferred compensation plan (known as “Executive Deferred Savings Plan”) under which certain executives and non-employee directors may defer a portion of their compensation. Participants are credited with returns based on their allocation of their account balances among measurement funds. The Company controls the investment of these funds, and the participants remain general creditors of the Company. The Company invests these funds in certain mutual funds and such investments are classified as trading securities on the condensed consolidated balance sheets. Distributions from the Executive Deferred Savings Plan commence following a participant’s retirement or termination of employment or on a specified date allowed per the Executive Deferred Savings Plan provisions, except in cases where such distributions are required to be delayed in order to avoid a prohibited distribution under Internal Revenue Code Section 409A. Participants can generally elect the distributions to be paid in lump sum or quarterly cash payments over a scheduled period for up to 15 years and are allowed to make subsequent changes to their existing elections as permissible under the Executive Deferred Savings Plan provisions. Changes in the Executive Deferred Savings Plan liability is recorded in selling, general and administrative expense in the condensed consolidated statements of operations. The expense (benefit) associated with changes in the liability included in selling, general and administrative expense were $(1.3) million and $6.3 million for the three months ended March 31, 2016 and 2015, respectively. The expense (benefit) associated with changes in the liability included in selling, general and administrative expense were $(4.6) million and $10.5 million for the nine months ended March 31, 2016 and 2015, respectively. Changes in the Executive Deferred Savings Plan assets are recorded as gains (losses), net in selling, general and administrative expense in the condensed consolidated statements of operations. The amount of gains (losses), net included in selling, general and administrative expense were ($1.0) million and $6.4 million for the three months ended March 31, 2016 and 2015, respectively. The amount of gains (losses), net included in selling, general and administrative expense were $(4.1) million and $10.7 million for the nine months ended March 31, 2016 and 2015, respectively.

Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) (“OCI”) as of the dates indicated below were as follows:

(In thousands)	Currency Translation Adjustments			Unrealized Gains (Losses) on Available-for-Sale Securities		Unrealized Gains (Losses) on Cash Flow Hedges		Unrealized Gains (Losses) on Defined Benefit Plans			Total
Balance as of March 31, 2016	$	(32,138	)	$	1,742	$	2,579	$	(15,206	)	$	(43,023	)
Balance as of June 30, 2015	$	(29,925	)	$	734	$	4,553	$	(15,935	)	$	(40,573	)

The effects on net income of amounts reclassified from accumulated OCI to the Condensed Consolidated Statement of Operations for the indicated period were as follows (in thousands):

	Location in the Condensed Consolidated	Three months ended March 31,						Nine months ended March 31,
Accumulated OCI Components	Statements of Operations	2016			2015			2016			2015
Unrealized gains (losses) on cash flow hedges from foreign exchange and interest rate contracts	Revenues	$	(930	)	$	4,306		$	79		$	6,508
	Costs of revenues		(366	)		(575	)		(1,516	)		(1,091	)
	Interest expense		189			189			567			315
	Net gains reclassified from accumulated OCI	$	(1,107	)	$	3,920		$	(870	)	$	5,732
Unrealized gains (losses) on available-for-sale securities	Other expense (income), net	$	36		$	60		$	79		$	1,976

The amounts reclassified out of accumulated OCI related to the Company’s defined benefit pension plans, which were recognized as a component of net periodic cost for the three and nine months ended March 31, 2016 were immaterial and $1.0 million, respectively. The amounts reclassified out of accumulated OCI related to the Company’s defined benefit pension plans, which were recognized as a component of net periodic cost for the three and nine months ended March 31, 2015 were $1.3 million and $2.8 million, respectively. For additional details, refer to Note 11, “Employee Benefit Plans” in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2015.

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NOTE 4 – MARKETABLE SECURITIES

The amortized cost and fair value of marketable securities as of the dates indicated below were as follows:

As of March 31, 2016 (In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury securities	$	388,085	$	731	$	(6	)	$	388,810
U.S. Government agency securities		400,255		509		(43	)		400,721
Municipal securities		5,443		2		—			5,445
Corporate debt securities		647,655		1,430		(386	)		648,699
Money market and other		367,659		—		—			367,659
Sovereign securities		43,200		4		(9	)		43,195
Subtotal		1,852,297		2,676		(444	)		1,854,529
Add: Time deposits(1)		64,605		—		—			64,605
Less: Cash equivalents		603,792		7		(1	)		603,798
Marketable securities	$	1,313,110	$	2,669	$	(443	)	$	1,315,336
As of June 30, 2015 (In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury securities	$	274,965	$	605	$	(15	)	$	275,555
U.S. Government agency securities		571,843		551		(126	)		572,268
Municipal securities		31,819		7		(10	)		31,816
Corporate debt securities		625,965		511		(515	)		625,961
Money market and other		611,385		—		—			611,385
Sovereign securities		57,091		33		(31	)		57,093
Subtotal		2,173,068		1,707		(697	)		2,174,078
Add: Time deposits(1)		29,941		—		—			29,941
Less: Cash equivalents		654,933		—		—			654,933
Marketable securities	$	1,548,076	$	1,707	$	(697	)	$	1,549,086

(1) Time deposits excluded from fair value measurements.

KLA-Tencor’s investment portfolio consists of both corporate and government securities that have a maximum maturity of three years. The longer the duration of these securities, the more susceptible they are to changes in market interest rates and bond yields. As yields increase, those securities with a lower yield-at-cost show a mark-to-market unrealized loss. All unrealized losses are due to changes in market interest rates, bond yields and/or credit ratings. The Company believes that it has the ability to realize the full value of all of these investments upon maturity. The following table summarizes the fair value and gross unrealized losses of the Company’s investments that were in an unrealized loss position as of the date indicated below:

As of March 31, 2016 (In thousands)	Fair Value		Gross Unrealized Losses(1)
U.S. Treasury securities	$	15,026	$	(6	)
U.S. Government agency securities		78,609		(42	)
Corporate debt securities		195,167		(386	)
Sovereign securities		20,176		(9	)
Total	$	308,978	$	(443	)

(1) As of March 31, 2016, the amount of total gross unrealized losses related to investments that had been in a continuous loss position for 12 months or more was immaterial.

13

The contractual maturities of securities classified as available-for-sale, regardless of their classification on the Company’s Condensed Consolidated Balance Sheet, as of the date indicated below were as follows:

As of March 31, 2016 (In thousands)	Amortized Cost		Fair Value
Due within one year	$	322,976	$	323,090
Due after one year through three years		990,134		992,246
	$	1,313,110	$	1,315,336

Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Realized gains on available-for-sale securities for the three months ended March 31, 2016 and 2015 were immaterial, respectively. Realized gains on available-for-sale securities for the nine months ended March 31, 2016 was immaterial and for the nine months ended March 31, 2015 was $2.3 million. Realized losses on available-for-sale securities for the three and nine months ended March 31, 2016 and 2015 were immaterial, respectively.

NOTE 5 – GOODWILL AND PURCHASED INTANGIBLE ASSETS

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in prior business combinations.

The Company has made certain organizational changes and consolidated its product divisions effective in the first quarter of fiscal year 2016, in response to changing customer requirements in the industry. As required by the authoritative guidance, when an entity reorganizes its reporting structure in a manner that changes the composition of one or more of its reporting units, goodwill is reassigned to the affected reporting units using a relative fair value allocation approach. The fair value of each reporting unit is compared to the fair value of the business immediately prior to the reorganization. The fair value for the Company’s reporting units was determined using a weighted combination of market-based and income-based approach. The Company has four reporting units as of March 31, 2016: Wafer Inspection, Patterning, Global Service and Support, and Others. The goodwill balances by reporting units as of March 31, 2016 were as follows:

(In thousands)	Wafer Inspection			Patterning			Others			Total
Balance as of June 30, 2015	$	332,783	(1)	$	2,480	(2)	$	—		$	335,263
Goodwill allocation		(51,671	)(3)		50,775	(3)		896	(3)		—
Goodwill adjustment		(58	)		—			—			(58	)
Balance as of March 31, 2016	$	281,054		$	53,255		$	896		$	335,205

(1) The balance as of June 30, 2015, reflects goodwill for the Defect Inspection reporting unit under the old reporting structure which was renamed as Wafer Inspection under the new reporting structure after certain components were allocated out.

(2) The balance as of June 30, 2015, reflects goodwill for the Metrology reporting unit under the old reporting structure which was renamed as Patterning under the new reporting structure after certain components were allocated in.

(3) The reorganization resulted in certain goodwill balances to be reallocated as noted above.

The changes in the gross goodwill balance during the nine months ended March 31, 2016 resulted from foreign currency translation adjustments.

The Company performed a qualitative assessment of the goodwill by reporting unit as of November 30, 2015 during the three months ended December 31, 2015 as part of its annual goodwill impairment assessment and concluded that it was more likely than not that the fair value of each of the reporting units exceeded its carrying amount. As of December 31, 2015, the Company’s assessment indicated that goodwill in the reporting units was not impaired. There have been no significant events or circumstances affecting the valuation of goodwill subsequent to the qualitative assessment performed in the second quarter of the fiscal year ending June 30, 2016. The next annual assessment of goodwill by reporting unit is scheduled to be performed in the second quarter of the fiscal year ending June 30, 2017.

14

Purchased Intangible Assets

The components of purchased intangible assets as of the dates indicated below were as follows:

(In thousands)			As of March 31, 2016						As of June 30, 2015
Category	Range of Useful Lives		Gross Carrying Amount		Accumulated Amortization and Impairment		Net Amount		Gross Carrying Amount		Accumulated Amortization and Impairment		Net Amount
Existing technology		4-7 years	$	141,659	$	137,660	$	3,999	$	141,659	$	134,664	$	6,995
Patents		6-13 years		57,648		57,648		—		57,648		56,998		650
Trade name/Trademark		4-10 years		19,893		19,585		308		19,893		18,899		994
Customer relationships		6-7 years		54,980		53,662		1,318		54,980		51,724		3,256
Total			$	274,180	$	268,555	$	5,625	$	274,180	$	262,285	$	11,895

Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable.

For the three months ended March 31, 2016 and 2015, amortization expense for intangible assets was $1.3 million and $4.0 million, respectively. For the nine months ended March 31, 2016 and 2015, amortization expense for intangible assets was $6.3 million and $12.1 million, respectively. Based on the intangible assets recorded as of March 31, 2016, and assuming no subsequent additions to, or impairment of, the underlying assets, the remaining estimated amortization expense is expected to be as follows:

Fiscal year ending June 30:	Amortization (In thousands)
2016 (remaining 3 months)	$	1,294
2017		2,806
2018		1,525
Total	$	5,625

NOTE 6 – DEBT

The following table summarizes the debt of the Company as of March 31, 2016 and June 30, 2015:

	As of March 31, 2016						As of June 30, 2015
	Amount (In thousands)			Effective Interest Rate			Amount (In thousands)			Effective Interest Rate
Fixed-rate 2.375% Senior notes due on November 1, 2017	$	250,000			2.396	%	$	250,000			2.396	%
Fixed-rate 3.375% Senior notes due on November 1, 2019		250,000			3.377	%		250,000			3.377	%
Fixed-rate 4.125% Senior notes due on November 1, 2021		500,000			4.128	%		500,000			4.128	%
Fixed-rate 4.650% Senior notes due on November 1, 2024(1)		1,250,000			4.682	%		1,250,000			4.682	%
Fixed-rate 5.650% Senior notes due on November 1, 2034		250,000			5.670	%		250,000			5.670	%
Term loans		616,250						711,250
Total debt		3,116,250						3,211,250
Unamortized discount		(3,415	)					(3,723	)
Unamortized debt issuance costs		(15,529	)					(17,111	)
Total debt	$	3,097,306					$	3,190,416
Reported as:
Current portion of long-term debt	$	—					$	16,981
Long-term debt		3,097,306						3,173,435
Total debt	$	3,097,306					$	3,190,416

(1) The effective interest rate disclosed above for this series of Senior Notes excludes the impact of the treasury rate lock hedge discussed below. The effective interest rate including the impact of the treasury rate lock hedge was 4.626%.

15

As of March 31, 2016, future principal payments for the long-term debt are summarized as follows. For fiscal years ending 2016 and 2017, there are no scheduled payments since the Company made $86.9 million of principal prepayments on the term loans as of March 31, 2016.

Fiscal year ending June 30:	Amount (In thousands)
2016 (remaining 3 months)	$	—
2017		—
2018		285,000
2019		75,000
2020		756,250
Thereafter		2,000,000
Total payments	$	3,116,250

Senior Notes:

In November 2014, the Company issued $2.50 billion aggregate principal amount of senior, unsecured long-term notes (collectively referred to as “Senior Notes”). The Company issued the Senior Notes as part of the leveraged recapitalization plan under which the proceeds from the Senior Notes in conjunction with the proceeds from the term loans (described below) and cash on hand were used (x) to fund a special cash dividend of $16.50 per share, aggregating to approximately $2.76 billion, (y) to redeem $750 million of 2018 Senior Notes, including associated redemption premiums, accrued interest and other fees and expenses and (z) for other general corporate purposes, including repurchases of shares pursuant to the Company’s stock repurchase program. The interest rate specified for each series of the Senior Notes will be subject to adjustments from time to time if Moody’s Investor Service, Inc. (“Moody’s”) or Standard & Poor’s Ratings Services (“S&P”) or, under certain circumstances, a substitute rating agency selected by us as a replacement for Moody’s or S&P, as the case may be (a “Substitute Rating Agency”), downgrades (or subsequently upgrades) its rating assigned to the respective series of Senior Notes such that the adjusted rating is below investment grade. If the adjusted rating of any series of Senior Notes from Moody’s (or, if applicable, any Substitute Rating Agency) is decreased to Ba1, Ba2, Ba3 or B1 or below, the stated interest rate on such series of Senior Notes as noted above will increase by 25 bps, 50 bps, 75 bps or 100 bps, respectively (“bps” refers to Basis Points and 1% is equal to 100 bps). If the rating of any series of Senior Notes from S&P (or, if applicable, any Substitute Rating Agency) with respect to such series of Senior Notes is decreased to BB+, BB, BB- or B+ or below, the stated interest rate on such series of Senior Notes as noted above will increase by 25 bps, 50 bps, 75 bps or 100 bps, respectively. The interest rates on any series of Senior Notes will permanently cease to be subject to any adjustment (notwithstanding any subsequent decrease in the ratings by any of Moody’s, S&P and, if applicable, any Substitute Rating Agency) if such series of Senior Notes becomes rated “Baa1” (or its equivalent) or higher by Moody’s (or, if applicable, any Substitute Rating Agency) and “BBB+” (or its equivalent) or higher by S&P (or, if applicable, any Substitute Rating Agency), or one of those ratings if rated by only one of Moody’s, S&P and, if applicable, any Substitute Rating Agency, in each case with a stable or positive outlook. In October 2014, the Company entered into a series of forward contracts to lock the 10-year treasury rate (“benchmark rate”) on a portion of the Senior Notes with a notional amount of $1.00 billion in aggregate. For additional details, refer to Note 14, “Derivative Instruments and Hedging Activities.”

The original discount on the Senior Notes amounted to $4.0 million and is being amortized over the life of the debt. Interest is payable semi-annually on May 1 and November 1 of each year. The debt indenture (the “Indenture”) includes covenants that limit the Company’s ability to grant liens on its facilities and enter into sale and leaseback transactions, subject to certain allowances under which certain sale and leaseback transactions are not restricted. As of March 31, 2016, the Company was in compliance with all of its covenants under the Indenture associated with the Senior Notes.

In certain circumstances involving a change of control followed by a downgrade of the rating of a series of Senior Notes by at least two of Moody’s, S&P and Fitch Inc., unless the Company has exercised its right to redeem the Senior Notes of such series, the Company will be required to make an offer to repurchase all or, at the holder’s option, any part, of each holder’s Senior Notes of that series pursuant to the offer described below (the “Change of Control Offer”). In the Change of Control Offer, the Company will be required to offer payment in cash equal to 101% of the aggregate principal amount of Senior Notes repurchased plus accrued and unpaid interest, if any, on the Senior Notes repurchased, up to, but not including, the date of repurchase.

Based on the trading prices of the Senior Notes on the applicable dates, the fair value of the Senior Notes as of March 31, 2016 and June 30, 2015 was approximately $2.56 billion and $2.52 billion, respectively. While the Senior Notes are recorded at cost, the fair value of the long-term debt was determined based on quoted prices in markets that are not active; accordingly, the long-term debt is categorized as Level 2 for purposes of the fair value measurement hierarchy.

16

Credit Facility (Term Loans and Unfunded Revolving Credit Facility):

In November 2014, the Company entered into $750 million of five-year senior unsecured prepayable term loans and a $500 million unfunded revolving credit facility (collectively, the “Credit Facility”) under the Credit Agreement (the “Credit Agreement”). The interest under the Credit Facility will be payable on the borrowed amounts at the London Interbank Offered Rate (“LIBOR”) plus a spread, which is currently 125 bps, and this spread is subject to adjustment in conjunction with the Company’s credit rating downgrades or upgrades. The spread ranges from 100 bps to 175 bps based on the then effective credit rating. The Company is also obligated to pay an annual commitment fee of 15 bps on the daily undrawn balance of the revolving credit facility, which is also subject to an adjustment in conjunction with the Company’s credit rating downgrades or upgrades by Moody’s and S&P. The annual commitment fee ranges from 10 bps to 25 bps on the daily undrawn balance of the revolving credit facility, depending upon the then effective credit rating. Principal payments with respect to the term loans will be made on the last day of each calendar quarter, and any unpaid principal balance of the term loans, including accrued interest, shall be payable on November 14, 2019 (the “Maturity Date”). The Company may prepay the term loans and unfunded revolving credit facility at any time without a prepayment penalty. During the third quarter of the fiscal year ending June 30, 2016, the Company prepaid additional principal of $35.0 million for the term loans.

Future principal payments for the Company’s term loans (without giving effect to $86.9 million of principal prepayments as of March 31, 2016 that shall be applied to the future scheduled quarterly payments) as of March 31, 2016, are as follows:

Fiscal Quarters Ending	Quarterly Payment (In thousands)
June 30, 2016 through December 31, 2016		$	9,375
March 31, 2017 through December 31, 2017		$	14,063
March 31, 2018 through September 30, 2019		$	18,750
December 31, 2019		$	487,500

The Credit Facility requires the Company to maintain an interest expense coverage ratio as described in the Credit Agreement, on a quarterly basis, covering the trailing four consecutive fiscal quarters of no less than 3.50 to 1.00. In addition, the Company is required to maintain the maximum leverage ratio as described in the Credit Agreement, on a quarterly basis, covering the trailing four consecutive fiscal quarters for the fiscal quarters as described below.

Fiscal Quarters Ending	Maximum Leverage Ratio
March 31, 2016 through September 30, 2016		3.75:1.00
December 31, 2016 and March 31, 2017		3.50:1.00
Thereafter		3.00:1.00

The Company was in compliance with the financial covenants under the Credit Agreement as of March 31, 2016 and had no outstanding borrowings under the unfunded revolving credit facility.

Debt Redemption:

In December 2014, the Company redeemed the $750 million aggregate principal amount of the 2018 Senior Notes. The redemption resulted in a pre-tax net loss on extinguishment of debt of $131.7 million for the three months ended December 31, 2014 after an offset of a $1.2 million gain upon the termination of the non-designated forward contract entered by the Company in November 2014. The objective of entering into the non-designated forward contract was to lock the treasury rate used to determine the redemption amount of the 2018 Senior Notes. The notional amount of the non-designated forward contract was $750 million. Refer to Note 14, “Derivative Instruments and Hedging Activities.”

NOTE 7 – EQUITY AND LONG-TERM INCENTIVE COMPENSATION PLANS

Equity Incentive Program

As of March 31, 2016, the Company had two plans under which the Company was able to issue equity incentive awards, such as restricted stock units and stock options, to its employees, consultants and members of its Board of Directors: the 2004 Equity Incentive Plan (the “2004 Plan”) and the 1998 Director Plan (the “Outside Director Plan”).

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2004 Plan:

The 2004 Plan provides for the grant of options to purchase shares of the Company’s common stock, stock appreciation rights, restricted stock units, performance shares, performance units and deferred stock units to the Company’s employees, consultants and members of its Board of Directors. As of March 31, 2016, 5.0 million shares were available for issuance under the 2004 Plan.

Any 2004 Plan awards of restricted stock units, performance shares, performance units or deferred stock units with a per share or unit purchase price lower than 100% of fair market value on the grant date are counted against the total number of shares issuable under the 2004 Plan as follows, based on the grant date of the applicable award: (a) for any such awards granted before November 6, 2013, the awards counted against the 2004 Plan share reserve as 1.8 shares for every one share subject thereto; and (b) for any such awards granted on or after November 6, 2013, the awards count against the 2004 Plan share reserve as 2.0 shares for every one share subject thereto.

In addition, in November 2013, the Company’s stockholders also approved amendments to the 2004 Plan that included, among other things, giving the plan administrator the ability to grant “dividend equivalent” rights in connection with awards of restricted stock units, performance shares, performance units and deferred stock units before they are fully vested. It allows the plan administrator, at its discretion, to grant a right to receive dividends on the aforementioned awards which may be settled in cash or Company stock at the discretion of the plan administrator subject to meeting the vesting requirement of the underlying awards.

Outside Director Plan

The Outside Director Plan only permits the issuance of stock options to the non-employee members of the Board of Directors. As of March 31, 2016, 1.7 million shares were available for grant under the Outside Director Plan.

Equity Incentive Plans—General Information

The following table summarizes the combined activity under the Company’s equity incentive plans for the indicated periods:

(In thousands)	Available For Grant
Balance as of June 30, 2015(1)(2)		7,810
Restricted stock units granted(2)(3)		(1,541	)
Restricted stock units canceled(2)		440
Balance as of March 31, 2016(1)(2)		6,709

(1) The Company has granted only restricted stock units under its equity incentive program since October 2007, except during the three months ended December 31, 2014, the Company adjusted the number of shares subject to outstanding options under the 2004 Plan by an aggregate of 4,245 shares pursuant to a proportionate and equitable adjustment for the effect of the special cash dividend, as required by the 2004 Plan. The total number of outstanding options under the 2004 Plan, as well as the associated exercise prices were adjusted to ensure the aggregate intrinsic value remained the same after considering the effect of the special cash dividend. As the adjustment was required by the 2004 Plan, under the authoritative guidance, the adjustment to the outstanding awards did not result in any incremental compensation expense. Additionally, the adjustment did not have an impact on the shares available for future issuance under the 2004 Plan.

(2) The number of restricted stock units provided in this row reflects the application of the award multiplier as described above (1.8x or 2.0x depending on the grant date of the applicable award).

(3) Includes restricted stock units granted to senior management during the nine months ended March 31, 2016 with performance-based vesting criteria (in addition to service-based vesting criteria for any of such restricted stock units that are deemed to have been earned). As of March 31, 2016, it had not yet been determined the extent to which (if at all) the performance-based vesting criteria of such restricted stock units had been satisfied. Therefore, this line item includes all such performance-based restricted stock units granted during the nine months ended March 31, 2016, reported at the maximum possible number of shares that may ultimately be issuable under such restricted stock units if all applicable performance-based criteria are achieved at their maximum levels and all applicable service-based criteria are fully satisfied.

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The fair value of stock-based awards is measured at the grant date and is recognized as an expense over the employee’s requisite service period. For restricted stock units granted without “dividend equivalent” rights, fair value is calculated using the closing price of the Company’s common stock on the grant date, adjusted to exclude the present value of dividends which are not accrued on those restricted stock units. In November 2013, the Company’s stockholders approved amendments to the 2004 Plan that included, among other things, giving the plan administrator the ability to grant “dividend equivalent” rights in connection with awards of restricted stock units, performance shares, performance units and deferred stock units before they are fully vested as discussed above. The fair value for restricted stock units granted with “dividend equivalent” rights is determined using the closing price of the Company’s common stock on the grant date. As of March 31, 2016, the Company accrued $18.8 million of dividends payable, substantially all of which is related to the special cash dividend for the unvested restricted stock units outstanding as of the dividend record date as well as restricted stock units granted with dividend equivalent rights during the nine months ended March 31, 2016, which entitle the holders of such equity awards to the same dividend value per share as holders of common stock subject to meeting the vesting requirements of the underlying equity awards. The fair value for purchase rights under the Company’s Employee Stock Purchase Plan is determined using a Black-Scholes valuation model.

The following table shows pre-tax stock-based compensation expense for the indicated periods:

	Three months ended March 31,				Nine months ended March 31,
(In thousands)	2016		2015		2016		2015
Stock-based compensation expense by:
Costs of revenues	$	864	$	1,642	$	3,594	$	5,842
Engineering, research and development		1,930		2,941		6,691		10,016
Selling, general and administrative		6,391		8,184		22,473		27,240
Total stock-based compensation expense	$	9,185	$	12,767	$	32,758	$	43,098

The following table shows stock-based compensation capitalized as inventory as of the dates indicated below:

(In thousands)	As of March 31, 2016		As of June 30, 2015
Inventory	$	2,764	$	3,242

Stock Options

The Company has not issued any stock options since October 2007. However, during the three months ended December 31, 2014, the Company adjusted the number of shares subject to outstanding options under the 2004 Plan by an aggregate of 4,245 shares pursuant to a proportionate and equitable adjustment for the effect of the special cash dividend, as required by the 2004 Plan. The total number of outstanding options under the 2004 Plan as well as the associated exercise prices were adjusted to ensure the aggregate intrinsic value remained the same after considering the effect of the special cash dividend. As the adjustment was required by the 2004 Plan, the adjustment to the outstanding awards did not result in any incremental compensation expense due to modification of such awards, under the authoritative guidance. Additionally, the adjustment did not have an impact on the shares available for future issuance under the 2004 Plan. As of March 31, 2016, the outstanding stock options are immaterial (all vested and exercisable).

The following table shows the total intrinsic value of options exercised, total cash received from employees and non-employee Board members as a result of stock option exercises and tax benefits realized by the Company in connection with these stock option exercises for the indicated periods:

	Three months ended March 31,				Nine months ended March 31,
(In thousands)	2016		2015		2016		2015
Total intrinsic value of options exercised	$	2	$	171	$	3	$	4,090
Total cash received from employees and non-employee Board members as a result of stock option exercises	$	2	$	175	$	3	$	5,392
Tax benefits realized by the Company in connection with these exercises	$	1	$	59	$	1	$	1,828

The Company generally settles employee stock option exercises with newly issued common shares, except in certain tax jurisdictions where settling such exercises with treasury shares provides the Company or one of its subsidiaries with a tax benefit.

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Restricted Stock Units

The following table shows the applicable number of restricted stock units and weighted-average grant date fair value for restricted stock units granted, vested and released, withheld for taxes, and forfeited during the nine months ended March 31, 2016 and restricted stock units outstanding as of March 31, 2016 and June 30, 2015:

Restricted Stock Units	Shares(1) (In thousands)			Weighted-Average Grant Date Fair Value
Outstanding restricted stock units as of June 30, 2015		2,674		$	49.36
Granted(2)		770		$	51.12
Vested and released		(849	)	$	39.21
Withheld for taxes		(466	)	$	39.21
Forfeited		(235	)	$	55.40
Outstanding restricted stock units as of March 31, 2016		1,894		$	56.38

(1) Share numbers reflect actual shares subject to awarded restricted stock units. As described above, under the terms of the 2004 Plan, the number of shares subject to each award reflected in this number is multiplied by either 1.8x or 2.0x (depending on the grant date of the award) to calculate the impact of the award on the share reserve under the 2004 Plan.

(2) Includes restricted stock units granted to senior management during the nine months ended March 31, 2016 with performance-based vesting criteria (in addition to service-based vesting criteria for any of such restricted stock units that are deemed to have been earned). As of March 31, 2016, it had not yet been determined the extent to which (if at all) the performance-based vesting criteria of such restricted stock units had been satisfied. Therefore, this line item includes all such performance-based restricted stock units, reported at the maximum possible number of shares (i.e., 0.3 million shares during the nine months ended March 31, 2016) that may ultimately be issuable under such restricted stock units if all applicable performance-based criteria are achieved at their maximum and all applicable service-based criteria are fully satisfied.

The restricted stock units granted by the Company since the beginning of the fiscal year ended June 30, 2013 generally vest (a) with respect to awards with only service-based vesting criteria, in four equal installments on the first, second, third and fourth anniversaries of the grant date and (b) with respect to awards with both performance-based and service-based vesting criteria, in two equal installments on the third and fourth anniversaries of the grant date, in each case subject to the recipient remaining employed by the Company as of the applicable vesting date. The restricted stock units granted by the Company from the beginning of the fiscal year ended June 30, 2007 through the fiscal year ended June 30, 2012 generally vest in two equal installments on the second and fourth anniversaries of the grant date, subject to the recipient remaining employed by the Company as of the applicable vesting date. The restricted stock units granted to the independent members of the board of directors vest on the first anniversary of the date of grant. However, in connection with the closing of the proposed merger with Lam Research, vesting of the restricted stock units held by the independent members of the board of directors who will not be serving as members of the Lam Research board of directors, will accelerate in whole or in part in accordance with the Company’s accelerated vesting policy approved by the Company’s stockholders at the February 2016 special meeting of stockholders.

The following table shows the weighted-average grant date fair value per unit for the restricted stock units granted and tax benefits realized by the Company in connection with vested and released restricted stock units for the indicated periods:

	Three months ended March 31,				Nine months ended March 31,
(In thousands, except for weighted-average grant date fair value)	2016		2015		2016		2015
Weighted-average grant date fair value per unit	$	—	$	63.16	$	51.12	$	74.48
Tax benefits realized by the Company in connection with vested and released restricted stock units	$	1,450	$	1,511	$	27,132	$	25,830

As of March 31, 2016, the unrecognized stock-based compensation expense balance related to restricted stock units was $63.0 million, excluding the impact of estimated forfeitures, and will be recognized over a weighted-average remaining contractual term and an estimated weighted-average amortization period of 1.5 years. The intrinsic value of outstanding restricted stock units as of March 31, 2016 was $137.9 million.

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Cash-Based Long-Term Incentive Compensation

Starting in the fiscal year ended June 30, 2013, the Company adopted a cash-based long-term incentive (“Cash LTI”) program for many of its employees as part of the Company’s employee compensation program. During the nine months ended March 31, 2016 and 2015, the Company approved Cash LTI awards of $47.8 million and $66.7 million, respectively under the Company’s Cash Long-Term Incentive Plan (“Cash LTI Plan”). Cash LTI awards issued to employees under the Cash LTI Plan will vest in four equal installments, with 25% of the aggregate amount of the Cash LTI award vesting on each anniversary of the grant date over a four-year period. In order to receive payments under a Cash LTI award, participants must remain employed by the Company as of the applicable award vesting date. Executives and non-employee Board members are not participating in this program. During the three months ended March 31, 2016 and 2015, the Company recognized $11.6 million and $10.5 million, respectively, in compensation expense under the Cash LTI Plan. During the nine months ended March 31, 2016 and 2015, the Company recognized $33.0 million and $29.0 million, respectively, in compensation expense under the Cash LTI Plan. As of March 31, 2016, the unrecognized compensation balance (excluding the impact of estimated forfeitures) related to the Cash LTI Plan was $100.5 million.

Employee Stock Purchase Plan

KLA-Tencor’s Employee Stock Purchase Plan (“ESPP”) provides that eligible employees may contribute up to 10% of their eligible earnings toward the semi-annual purchase of KLA-Tencor’s common stock. The ESPP is qualified under Section 423 of the Internal Revenue Code. The employee’s purchase price is derived from a formula based on the closing price of the common stock on the first day of the offering period versus the closing price on the date of purchase (or, if not a trading day, on the immediately preceding trading day).

The offering period (or length of the look-back period) under the ESPP has a duration of six months, and the purchase price with respect to each offering period beginning on or after such date is, until otherwise amended, equal to 85% of the lesser of (i) the fair market value of the Company’s common stock at the commencement of the applicable six-month offering period or (ii) the fair market value of the Company’s common stock on the purchase date. The Company estimates the fair value of purchase rights under the ESPP using a Black-Scholes valuation model. The proposed merger of KLA-Tencor and Lam Research could shorten the offering period at the time of the close of the merger. Refer to Note 1, “Description of Business and Basis of Presentation” for additional details regarding the merger.

The fair value of each purchase right under the ESPP was estimated on the date of grant using the Black-Scholes option valuation model and the straight-line attribution approach with the following weighted-average assumptions:

	Three months ended March 31,						Nine months ended March 31,
	2016			2015			2016			2015
Stock purchase plan:
Expected stock price volatility		26.8	%		25.5	%		25.4	%		24.5	%
Risk-free interest rate		0.2	%		0.1	%		0.2	%		0.1	%
Dividend yield		3.0	%		2.9	%		3.3	%		2.8	%
Expected life (in years)		0.5			0.5			0.5			0.5

The following table shows total cash received from employees for the issuance of shares under the ESPP, the number of shares purchased by employees through the ESPP, the tax benefits realized by the Company in connection with the disqualifying dispositions of shares purchased under the ESPP and the weighted-average fair value per share for the indicated periods:

(In thousands, except for weighted-average fair value per share)	Three months ended March 31,				Nine months ended March 31,
	2016		2015		2016		2015
Total cash received from employees for the issuance of shares under the ESPP	$	—	$	—	$	21,908	$	24,186
Number of shares purchased by employees through the ESPP		—		—		454		405
Tax benefits realized by the Company in connection with the disqualifying dispositions of shares purchased under the ESPP	$	1,203	$	411	$	1,922	$	1,600
Weighted-average fair value per share based on Black-Scholes model	$	14.29	$	14.40	$	12.44	$	14.55

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The ESPP shares are replenished annually on the first day of each fiscal year by virtue of an evergreen provision. The provision allows for share replenishment equal to the lesser of 2.0 million shares or the number of shares which KLA-Tencor estimates will be required to be issued under the ESPP during the forthcoming fiscal year. As of March 31, 2016, a total of 1.7 million shares were reserved and available for issuance under the ESPP.

Quarterly cash dividends

On February 4, 2016, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.52 per share on the outstanding shares of the Company’s common stock, which was paid on March 1, 2016 to the stockholders of record as of the close of business on February 16, 2016. Under the authoritative guidance, the dividend when declared is recognized as a reduction of retained earnings, to the extent available, with any shortfall recognized as a reduction of additional paid-in-capital. As of the declaration date during the three months ended March 31, 2016, the Company recorded the quarterly cash dividends as a reduction of retained earnings. The total amount of regular quarterly cash dividends paid by the Company during the three months ended March 31, 2016 and 2015 was $81.0 million and $80.8 million, respectively. The total amount of regular quarterly cash dividends paid by the Company during the nine months ended March 31, 2016 and 2015 was $243.5 million and $245.5 million, respectively. The amount of accrued dividends for quarterly cash dividends for unvested restricted stock units with dividend equivalent rights as of March 31, 2016 and 2015 was $1.9 million and $0.6 million, respectively.

Special cash dividend

On November 19, 2014, the Company’s Board of Directors declared a special cash dividend of $16.50 per share, which was paid on December 9, 2014 to the stockholders of record as of the close of business on December 1, 2014. Additionally, in connection with the special cash dividend, the Company’s Board of Directors and the Compensation Committee of the Board of Directors approved a proportionate and equitable adjustment to outstanding equity awards (restricted stock units and stock options), as required under the 2004 Plan, subject to the vesting requirements of the underlying awards. As the adjustment was required by the 2004 Plan, the adjustment to the outstanding awards did not result in any incremental compensation expense due to modification of such awards, under the authoritative guidance. Under the authoritative guidance, the dividend when declared is recognized as a reduction of retained earnings, to the extent available, with any shortfall recognized as a reduction of additional paid-in-capital. The special cash dividend reduced the retained earnings by $2.11 billion as of the special cash dividend declaration date, reducing the retained earnings amount to zero and the excess amount of the special cash dividend of $646.5 million was charged against additional paid-in capital. The declaration and payment of the special cash dividend are part of the Company’s leveraged recapitalization transaction under which the special cash dividend was financed through a combination of existing cash and proceeds from the debt financing disclosed in Note 6, “Debt” that was completed during the three months ended December 31, 2014. As of March 31, 2016, the Company accrued a total of $16.9 million of dividends payable for the special cash dividend with respect to outstanding unvested restricted stock units, which will be paid when such underlying unvested restricted stock units vest. During the three and nine months ended March 31, 2016, the total special cash dividends paid with respect to fully vested restricted stock units with dividend equivalent rights was $1.2 million and $21.7 million, respectively. The total amount of the special cash dividend accrued by the Company during the three months ended December 31, 2014 was approximately $2.76 billion, substantially all of which was paid out during the three months ended December 31, 2014, except for the aggregate special cash dividend of $43.0 million that was accrued for the unvested restricted stock units. Other than the special cash dividend declared during the three months ended December 31, 2014, the Company historically has not declared any special cash dividends. For additional details on accrued dividends, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Liquidity and Capital Resources,” in Part I, Item 2.

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NOTE 8 – STOCK REPURCHASE PROGRAM

The Company’s Board of Directors has authorized a program for the Company to repurchase shares of the Company’s common stock. The intent of this program is to offset the dilution from KLA-Tencor’s equity incentive plans and employee stock purchase plan, as well as to return excess cash to the Company’s stockholders. Subject to market conditions, applicable legal requirements and other factors, the repurchases were made in the open market in compliance with applicable securities laws, including the Securities Exchange Act of 1934 and the rules promulgated thereunder, such as Rule 10b-18. As of March 31, 2016, an aggregate of approximately 5.9 million shares were available for repurchase under the Company’s repurchase program. In connection with entering into the Merger Agreement with Lam Research, the Company suspended further repurchases under its repurchase program effective October 21, 2015.

Share repurchases for the indicated periods (based on the trade date of the applicable repurchase) were as follows:

	Three months ended March 31,				Nine months ended March 31,
(In thousands)	2016		2015		2016		2015
Number of shares of common stock repurchased		—		2,644		3,445		6,506
Total cost of repurchases	$	—		$168,943	$	175,743	$	447,892

As of March 31, 2015, the Company had repurchased 218,600 shares for $12.9 million, which repurchases had not settled prior to March 31, 2015. The amount was recorded as a component of other current liabilities for the period presented.

NOTE 9 – NET INCOME PER SHARE

Basic net income per share is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted net income per share is calculated by using the weighted-average number of common shares outstanding during the period, increased to include the number of additional shares of common stock that would have been outstanding if the shares of common stock underlying the Company’s outstanding dilutive restricted stock units and stock options had been issued. The dilutive effect of outstanding restricted stock units and options is reflected in diluted net income per share by application of the treasury stock method. Under the treasury stock method, the amount the employee must pay for exercising stock options, the amount of compensation cost for future service that the Company has not yet recognized, and the amount of tax benefits that is to be recorded in additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares.

The following table sets forth the computation of basic and diluted net income per share:

(In thousands, except per share amounts)	Three months ended March 31,				Nine months ended March 31,
	2016		2015		2016		2015
Numerator:
Net income	$	175,777	$	131,638	$	432,881	$	224,139
Denominator:
Weighted-average shares-basic, excluding unvested restricted stock units		155,690		161,559		155,921		163,494
Effect of dilutive options and restricted stock units		739		1,235		876		1,436
Weighted-average shares-diluted		156,429		162,794		156,797		164,930
Basic net income per share	$	1.13	$	0.81	$	2.78	$	1.37
Diluted net income per share	$	1.12	$	0.81	$	2.76	$	1.36
Anti-dilutive securities excluded from the computation of diluted net income per share		—		245		137		32

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NOTE 10 – INCOME TAXES

The following table provides details of income taxes:

	Three months ended March 31,						Nine months ended March 31,
(Dollar amounts in thousands)	2016			2015			2016			2015
Income before income taxes	$	209,931		$	166,454		$	529,705		$	259,193
Provision for income taxes	$	34,154		$	34,816		$	96,824		$	35,054
Effective tax rate		16.3	%		20.9	%		18.3	%		13.5	%

Tax expense was lower as a percentage of income before taxes during the three months ended March 31, 2016 compared to the three months ended March 31, 2015 primarily due to the impact of the following items:

• Tax expense was decreased by $8.6 million during the three months ended March 31, 2016 related to a decrease in the Company’s unrecognized tax benefits from the expiration of the statute of limitations;

• Tax expense was decreased by $3.6 million during the three months ended March 31, 2016 related to an increase in the proportion of the Company’s earnings generated in jurisdictions with tax rates lower than the U.S. statutory rate; partially offset by

• Tax expense was decreased by $2.1 million during the three months ended March 31, 2015 related to a non-taxable increase in the value of the assets held within the Company’s Executive Deferred Savings Plan.

Tax expense was higher as a percentage of income before taxes during the nine months ended March 31, 2016 compared to the nine months ended March 31, 2015 primarily due to the impact of the following items:

• Tax expense was decreased by $45.2 million during the nine months ended March 31, 2015 related to a pre-tax net loss of $131.7 million due to the redemption of the 2018 Senior Notes;

• Tax expense was decreased by $4.8 million during the nine months ended March 31, 2015 related to a non-taxable increase in the value of the assets held within the Company’s Executive Deferred Savings Plan; partially offset by

• Tax expense was decreased by $16.8 million during the nine months ended March 31, 2016 related to a decrease in the Company’s unrecognized tax benefits from the expiration of the statute of limitations; and

• Tax expense was decreased by $9.1 million during the nine months ended March 31, 2016 related to an increase in the proportion of the Company’s earnings generated in jurisdictions with tax rates lower than the U.S. statutory rate.

In the normal course of business, the Company is subject to examination by tax authorities throughout the world. The Company is subject to United States federal income tax examination for all years beginning from the fiscal year ended June 30, 2013 and is under United States federal income tax examination for the fiscal year ended June 30, 2013. The Company is subject to state income tax examinations for all years beginning from the fiscal year ended June 30, 2011. The Company is also subject to examinations in other major foreign jurisdictions, including Singapore, for all years beginning from the fiscal year ended June 30, 2011. It is possible that certain examinations may be concluded in the next twelve months. The Company believes that it may recognize up to $16.1 million of its existing unrecognized tax benefits within the next twelve months as a result of the lapse of statutes of limitations and the resolution of examinations with various tax authorities.

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NOTE 11 – LITIGATION AND OTHER LEGAL MATTERS

Litigation Related to Proposed Merger with Lam Research.

The California Class Actions. In connection with the October 21, 2015 announcement of the merger transaction, four purported KLA-Tencor stockholders filed putative class actions on behalf of all KLA-Tencor stockholders. Three actions were filed in the California Superior Court for Santa Clara County and are captioned, Hedgecock v. KLA-Tencor Corp., et al., Case No. 115CV287329, Karr v. KLA-Tencor Corporation, et al., Case No. 115CV287331, (both filed on October 28, 2015) and Spoleto Corp. v. Wallace, et al., Case No. 115CV289552 (filed on December 29, 2015) (collectively, the “California Class Actions”). Plaintiffs in the Hedgecock and Karr actions filed amended complaints on December 21, 2015. The California Class Actions all name KLA-Tencor, the members of the KLA-Tencor Board, Lam Research, Merger Sub 1, and Merger Sub 2 (together with Merger Sub 1 and Lam Research, the “Lam Group”) as defendants. The California Class Actions allege that the members of the KLA-Tencor Board breached their fiduciary duties by, among other things, causing KLA-Tencor to agree to a merger transaction with the Lam Group at an unfair price and pursuant to an unfair process, and by making disclosures concerning the transaction that are materially misleading. Plaintiffs allege that the Lam Group aided and abetted such breaches. Plaintiffs seek to enjoin or rescind KLA-Tencor’s transaction with the Lam Group, as applicable, as well as an award of damages and attorneys’ fees, in addition to other relief.

The Delaware Chancery Court Class Action. One putative class action was filed on November 10, 2015, in the Court of Chancery in the State of Delaware and is captioned, Rooney v. Wallace, et al., Case No. 11700. On December 23, 2015, plaintiff Rooney filed an amended complaint. The Rooney action was filed against the members of the KLA-Tencor Board and similar to the California Class Actions alleges that the members of the KLA-Tencor Board breached their fiduciary duties by, among other things, causing KLA-Tencor to agree to a merger transaction with Lam Research at an unfair price and pursuant to an unfair process, and by making disclosures concerning the transaction that are materially misleading. Plaintiff Rooney seeks to enjoin or rescind KLA-Tencor’s transaction with Lam Research, as applicable, as well as an award of attorneys’ fees, in addition to other relief. KLA-Tencor has made an accrual with respect to the Hedgecock, Spoleto and Rooney actions.

Agreement in Principle to Resolve Merger-Related Litigation. On or about December 29, 2015, plaintiffs in all four actions agreed to coordinate and proceed in the California Superior Court. On February 5, 2016, an agreement in principle was reached with the plaintiffs in the Rooney Action, Hedgecock Action, and Spoleto Action to settle those actions. Pursuant to the agreement in principle, as set forth in a signed memorandum of understanding, the parties agreed to resolve disputed legal claims and KLA-Tencor and Lam agreed to make certain supplemental disclosures regarding the proposed merger, as set forth in the Form 8-K filed by KLA-Tencor on February 5, 2016. None of the defendants in these actions has admitted wrongdoing of any kind, including that there were any inadequacies in any disclosure, any breach of any fiduciary duty, or aiding or abetting any of the foregoing. On February 17, 2016, the California Superior Court dismissed the Karr action pursuant to a stipulation by the parties.

The agreement in principle is expected to be further memorialized in a stipulation of settlement, which will be subject to customary terms and conditions, including court approval, and will include an agreement by the plaintiffs, on behalf of a class of KLA-Tencor stockholders, to provide a release of claims of KLA stockholders against KLA-Tencor, the Lam Group and their respective officers and directors. Following final approval of the settlement by the court, the Hedgecock, Spoleto, and Rooney actions will be dismissed. The settlement will not affect the merger consideration to be paid to stockholders of KLA-Tencor in connection with the acquisition of KLA-Tencor by Lam. The California Superior Court has set a hearing for preliminary approval of the settlement hearing for June 3, 2016. KLA-Tencor has made an accrual with respect to the Hedgecock, Spoleto and Rooney actions. KLA-Tencor has determined a potential loss in excess of the amount accrued is reasonably possible; however, based on its current knowledge, KLA-Tencor does not believe that the amount of such possible loss or a range of potential loss is reasonably estimable.

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Other Legal Matters.

The Company is named from time to time as a party to lawsuits and other types of legal proceedings and claims in the normal course of its business. Actions filed against the Company include commercial, intellectual property, customer, and labor and employment related claims, including complaints of alleged wrongful termination and potential class action lawsuits regarding alleged violations of federal and state wage and hour and other laws. In general, legal proceedings and claims, regardless of their merit, and associated internal investigations (especially those relating to intellectual property or confidential information disputes) are often expensive to prosecute, defend or conduct and may divert management’s attention and other company resources. Moreover, the results of legal proceedings are difficult to predict, and the costs incurred in litigation can be substantial, regardless of outcome. The Company believes the amounts provided in its condensed consolidated financial statements are adequate in light of the probable and estimated liabilities. However, because such matters are subject to many uncertainties, the ultimate outcomes are not predictable, and there can be no assurances that the actual amounts required to satisfy alleged liabilities from the matters described above will not exceed the amounts reflected in the Company’s condensed consolidated financial statements or will not have a material adverse effect on its results of operations, financial condition or cash flows.

For additional discussion of certain risks associated with legal proceedings, see Part II, Item 1A, “Risk Factors.”

NOTE 12 – COMMITMENTS AND CONTINGENCIES

Merger-related Commitment and Fees. KLA-Tencor has an agreement with a financial advisor in relation to the pending merger with Lam Research. KLA-Tencor has agreed to pay the third party a fee of approximately $59.0 million, $0.1 million of which was paid upon the execution of the engagement letter and $5.0 million of which was paid upon delivery of the fairness opinion, and the remaining portion of which will be paid upon, and subject to, consummation of the merger (provided that the final actual fee will be, in part, based on an average of the closing prices of Lam Research common stock over ten trading days approaching the closing of the merger). During the three months ended December 31, 2015, $5.1 million of the above fees were recorded in selling, general and administrative line of the condensed consolidated statements of operations. In addition, the Merger Agreement contains certain termination rights for KLA-Tencor and further provides that KLA-Tencor, as applicable, may be required to pay a termination fee of $290.0 million to Lam Research.

Factoring. KLA-Tencor has agreements (referred to as “factoring agreements”) with financial institutions to sell certain of its trade receivables and promissory notes from customers without recourse. The Company does not believe it is at risk for any material losses as a result of these agreements. In addition, the Company periodically sells certain letters of credit (“LCs”), without recourse, received from customers in payment for goods.

The following table shows total receivables sold under factoring agreements and proceeds from sales of LCs for the indicated periods:

	Three months ended March 31,				Nine months ended March 31,
(In thousands)	2016		2015		2016		2015
Receivables sold under factoring agreements	$	59,505	$	15,614	$	135,105	$	88,832
Proceeds from sales of LCs	$	14,200	$	—	$	18,262	$	6,920

Factoring and LC fees for the sale of certain trade receivables were recorded in other expense (income), net and were not material for the periods presented.

Facilities. KLA-Tencor leases certain of its facilities under arrangements that are accounted for as operating leases. Rent expense was $2.1 million and $2.2 million for the three months ended March 31, 2016 and 2015, respectively. Rent expense was $6.4 million and $6.8 million for the nine months ended March 31, 2016 and 2015, respectively.

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The following is a schedule of expected operating lease payments:

Fiscal year ending June 30,	Amount (In thousands)
2016 (remaining 3 months)	$	2,138
2017		7,175
2018		4,552
2019		2,021
2020		1,272
2021 and thereafter		561
Total minimum lease payments	$	17,719

Purchase Commitments. KLA-Tencor maintains commitments to purchase inventory from its suppliers as well as goods and services in the ordinary course of business. The Company’s liability under these purchase commitments is generally restricted to a forecasted time-horizon as mutually agreed upon between the parties. This forecasted time-horizon can vary among different suppliers. The Company’s estimate of its significant purchase commitments is approximately $302.9 million as of March 31, 2016 which are primarily due within the next 12 months. Actual expenditures will vary based upon the volume of the transactions and length of contractual service provided. In addition, the amounts paid under these arrangements may be less in the event that the arrangements are renegotiated or canceled. Certain agreements provide for potential cancellation penalties.

Cash Long-Term Incentive Plan. As of March 31, 2016, the Company had committed $123.5 million for future payment obligations under its Cash LTI Plan. The calculation of compensation expense related to the Cash LTI Plan includes estimated forfeiture rate assumptions. Cash LTI awards issued to employees under the Cash LTI Plan vest in four equal installments, with 25% of the aggregate amount of the Cash LTI award vesting on each yearly anniversary of the grant date over a four-year period. In order to receive payments under a Cash LTI award, participants must remain employed by the Company as of the applicable award vesting date.

Warranties, Guarantees and Contingencies. KLA-Tencor provides standard warranty coverage on its systems for 40 hours per week for 12 months, providing labor and parts necessary to repair the systems during the warranty period. The Company accounts for the estimated warranty cost as a charge to costs of revenues when revenue is recognized. The estimated warranty cost is based on historical product performance and field expenses. Utilizing actual service records, the Company calculates the average service hours and parts expense per system and applies the actual labor and overhead rates to determine the estimated warranty charge. The Company updates these estimated charges on a regular basis. The actual product performance and/or field expense profiles may differ, and in those cases the Company adjusts its warranty accruals accordingly.

The following table provides the changes in the product warranty accrual for the indicated periods:

	Three months ended March 31,						Nine months ended March 31,
(In thousands)	2016			2015			2016			2015
Beginning balance	$	36,148		$	34,410		$	36,413		$	37,746
Accruals for warranties issued during the period		8,956			11,289			28,728			28,480
Changes in liability related to pre-existing warranties		(5,304	)		76			(8,898	)		(690	)
Settlements made during the period		(7,204	)		(10,346	)		(23,647	)		(30,107	)
Ending balance	$	32,596		$	35,429		$	32,596		$	35,429

The Company maintains guarantee arrangements available through various financial institutions for up to $22.8 million, of which $19.6 million had been issued as of March 31, 2016, primarily to fund guarantees to customs authorities for value-added tax (“VAT”) and other operating requirements of the Company’s subsidiaries in Europe and Asia.

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KLA-Tencor is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in connection with contracts and license agreements or the sale of assets, under which the Company customarily agrees to hold the other party harmless against losses arising from, or provides customers with other remedies to protect against, bodily injury or damage to personal property caused by the Company’s products, non-compliance with the Company’s product performance specifications, infringement by the Company’s products of third-party intellectual property rights and a breach of warranties, representations and covenants related to matters such as title to assets sold, validity of certain intellectual property rights, non-infringement of third-party rights, and certain income tax-related matters. In each of these circumstances, payment by the Company is typically subject to the other party making a claim to and cooperating with the Company pursuant to the procedures specified in the particular contract.

This usually allows the Company to challenge the other party’s claims or, in case of breach of intellectual property representations or covenants, to control the defense or settlement of any third-party claims brought against the other party. Further, the Company’s obligations under these agreements may be limited in terms of amounts, activity (typically at the Company’s option to replace or correct the products or terminate the agreement with a refund to the other party), and duration. In some instances, the Company may have recourse against third parties and/or insurance covering certain payments made by the Company.

Subject to certain limitations, the Company is obligated to indemnify its current and former directors, officers and employees with respect to certain litigation matters and investigations that arise in connection with their service to the Company. These obligations arise under the terms of the Company’s certificate of incorporation, its bylaws, applicable contracts, and Delaware and California law. The obligation to indemnify generally means that the Company is required to pay or reimburse the individuals’ reasonable legal expenses and possibly damages and other liabilities incurred in connection with these matters.

In addition, the Company may in limited circumstances enter into agreements that contain customer-specific commitments on pricing, tool reliability, spare parts stocking levels, response time and other commitments. Furthermore, the Company may give these customers limited audit or inspection rights to enable them to confirm that the Company is complying with these commitments. If a customer elects to exercise its audit or inspection rights, the Company may be required to expend significant resources to support the audit or inspection, as well as to defend or settle any dispute with a customer that could potentially arise out of such audit or inspection. To date, the Company has made no significant accruals in its condensed consolidated financial statements for this contingency. While the Company has not in the past incurred significant expenses for resolving disputes regarding these types of commitments, the Company cannot make any assurance that it will not incur any such liabilities in the future.

It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the Company’s obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have not had a material effect on its business, financial condition, results of operations or cash flows.

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NOTE 13 — RESTRUCTURING CHARGES

The Company has in recent years undertaken a number of cost reduction activities, including workforce reductions, in an effort to lower its ongoing expense run rate. The program in the United States is accounted for in accordance with the authoritative guidance related to compensation for non-retirement post-employment benefits, whereas the programs in the Company’s international locations are accounted for in accordance with the authoritative guidance for contingencies.

During the fourth quarter of fiscal year 2015, the Company implemented a plan to reduce its global employee workforce to streamline the organization and business processes in response to changing customer requirements in the industry. The goals of this reduction were to enable continued innovation, direct the Company’s resources toward its best opportunities and lower its ongoing expense run rate. The Company substantially completed its global workforce reduction during the nine months ended March 31, 2016 and recorded a $0.1 million net restructuring charge for the three months ended March 31, 2016, which was primarily recorded to the costs of revenues line of the condensed consolidated statements of operations. The Company recorded an $8.6 million net restructuring charge for the nine months ended March 31, 2016, of which $3.4 million was recorded to costs of revenues, $1.5 million to engineering, research and development expense and $3.7 million to selling, general and administrative expense lines of the condensed consolidated statements of operations.

The following table shows the activity primarily related to the accrual for severance and benefits for the three and nine months ended March 31, 2016 and 2015:

	Three months ended March 31,						Nine months ended March 31,
(In thousands)	2016			2015			2016			2015
Beginning balance	$	3,009		$	5,330		$	24,887		$	2,329
Restructuring costs		125			1,921			8,583			9,201
Adjustments		38			(543	)		(152	)		(489	)
Cash payments		(2,514	)		(3,000	)		(32,660	)		(7,333	)
Ending balance	$	658		$	3,708		$	658		$	3,708

The remaining accrual for severance and benefits as of March 31, 2016 is expected to be paid out by the end of the Company’s fiscal year ending June 30, 2016.

NOTE 14 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The authoritative guidance requires companies to recognize all derivative instruments and hedging activities, including foreign currency exchange contracts, as either assets or liabilities at fair value on the balance sheet. Changes in the fair value of derivatives that do not qualify for hedge treatment, as well as the ineffective portion of any hedges, are recognized in other expense (income), net in the condensed consolidated statements of operations. In accordance with the guidance, the Company designates foreign currency forward exchange and option contracts as cash flow hedges of certain forecasted foreign currency denominated sales and purchase transactions.

KLA-Tencor’s foreign subsidiaries operate and sell KLA-Tencor’s products in various global markets. As a result, KLA-Tencor is exposed to risks relating to changes in foreign currency exchange rates. KLA-Tencor utilizes foreign currency forward exchange contracts and option contracts to hedge against future movements in foreign exchange rates that affect certain existing and forecasted foreign currency denominated sales and purchase transactions, such as the Japanese yen, the euro, the New Taiwan dollar and the Israeli new shekel. The Company routinely hedges its exposures to certain foreign currencies with various financial institutions in an effort to minimize the impact of certain currency exchange rate fluctuations. These currency forward exchange contracts and options, designated as cash flow hedges, generally have maturities of less than 18 months. Cash flow hedges are evaluated for effectiveness monthly, based on changes in total fair value of the derivatives. If a financial counterparty to any of the Company’s hedging arrangements experiences financial difficulties or is otherwise unable to honor the terms of the foreign currency hedge, the Company may experience material losses.

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gains or losses on the derivative is reported as a component of accumulated other comprehensive income (loss) (“OCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Changes in the fair value of currency forward exchange and option contracts due to changes in time value are excluded from the assessment of effectiveness. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

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For derivative instruments that are not designated as accounting hedges, gains and losses are recognized in other expense (income), net. The Company uses foreign currency forward contracts to hedge certain foreign currency denominated assets or liabilities. The gains and losses on these derivatives are largely offset by the changes in the fair value of the assets or liabilities being hedged.

In October 2014, in anticipation of the issuance of the Senior Notes, the Company entered into a series of forward contracts (“Rate Lock Agreements”) to lock the benchmark rate on a portion of the Senior Notes. The objective of the Rate Lock Agreements was to hedge the risk associated with the variability in interest rates due to the changes in the benchmark rate leading up to the closing of the intended financing, on the notional amount being hedged. The Rate Lock Agreements had a notional amount of $1.00 billion in aggregate which matured in the second quarter of the fiscal year ended June 30, 2015. The Company designated each of the Rate Lock Agreements as a qualifying hedging instrument and accounted for as a cash flow hedge, under which the effective portion of the gain or loss on the close out of the Rate Lock Agreements was initially recognized in accumulated other comprehensive income (loss) as a reduction of total stockholders’ equity and subsequently amortized into earnings as a component of interest expense over the term of the underlying debt. The ineffective portion, if any, was recognized in earnings immediately. The Rate Lock Agreements were terminated on the date of pricing of the $1.25 billion of 4.650% Senior Notes due in 2024 and the Company recorded the fair value of a $7.5 million as a gain within accumulated other comprehensive income (loss) as of December 31, 2014. For the three and nine months ended March 31, 2016, the Company recognized $0.2 million and $0.6 million, respectively, for the amortization of the gain recognized in accumulated other comprehensive income (loss), which amount reduced the interest expense. As of March 31, 2016, the unamortized portion of the fair value of the forward contracts for the rate lock agreements was $6.5 million. The cash proceeds of $7.5 million from the settlement of the Rate Lock Agreements were included in the cash flows from operating activities in the condensed consolidated statements of cash flows for the nine months ended March 31, 2015 because the designated hedged item was classified as interest expense in the cash flows from operating activities in the condensed consolidated statements of cash flows.

In addition, in November 2014, the Company entered into a non-designated forward contract to lock the treasury rate used to determine the redemption amount of the 2018 Senior Notes. The objective of the forward contract was to hedge the risk associated with the variability of the redemption amount due to changes in interest rates through the redemption of the existing 2018 Senior Notes. The forward contract had a notional amount of $750 million. The forward contract was terminated in December 2014 and the resulting fair value of $1.2 million was included in the loss on extinguishment of debt and other, net line in the condensed consolidated statements of operations, partially offsetting the loss on redemption of the debt during the three months ended December 31, 2014. The cash proceeds from the forward contract were included in the cash flows from financing activities in the condensed consolidated statements of cash flows for the nine months ended March 31, 2015, partially offsetting the cash outflows for the redemption of the 2018 Senior Notes.

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Derivatives in Cash Flow Hedging Relationships: Foreign Exchange and Interest Rate Contracts

The locations and amounts of designated and non-designated derivative instruments’ gains and losses reported in the condensed consolidated financial statements for the indicated periods were as follows:

		Three months ended March 31,						Nine months ended March 31,
(In thousands)	Location in Financial Statements	2016			2015			2016			2015
Derivatives Designated as Hedging Instruments
Gains (losses) in accumulated OCI on derivatives (effective portion)	Accumulated OCI	$	(2,798	)	$	(1,309	)	$	(3,952	)	$	12,648
Gains (losses) reclassified from accumulated OCI into income (effective portion):	Revenues	$	(930	)	$	4,306		$	79		$	6,508
	Costs of revenues		(366	)		(575	)		(1,516	)		(1,091	)
	Interest expense		189			189			567			315
	Net gains reclassified from accumulated OCI into income (effective portion)	$	(1,107	)	$	3,920		$	(870	)	$	5,732
Gains (losses) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)	Other expense (income), net	$	(396	)	$	187		$	(795	)	$	307
Derivatives Not Designated as Hedging Instruments
Gains (losses) recognized in income	Other expense (income), net	$	(7,350	)	$	(1,408	)	$	(12,985	)	$	9,704
	Loss on extinguishment of debt and other, net	$	—		$	—		$	—		$	1,180

The U.S. dollar equivalent of all outstanding notional amounts of hedge contracts, with maximum maturity of approximately 10 months, as of the dates indicated below was as follows:

(In thousands)	As of March 31, 2016		As of June 30, 2015
Cash flow hedge contracts
Purchase	$	11,322	$	32,775
Sell	$	86,312	$	88,800
Other foreign currency hedge contracts
Purchase	$	103,148	$	64,012
Sell	$	141,049	$	123,091

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The locations and fair value amounts of the Company’s derivative instruments reported in its Condensed Consolidated Balance Sheets as of the dates indicated below were as follows:

	Asset Derivatives					Liability Derivatives
	Balance Sheet Location	As of March 31, 2016		As of June 30, 2015		Balance Sheet Location	As of March 31, 2016		As of June 30, 2015
(In thousands)		Fair Value					Fair Value
Derivatives designated as hedging instruments
Foreign exchange contracts	Other current assets	$	412	$	1,722	Other current liabilities	$	2,242	$	1,920
Total derivatives designated as hedging instruments		$	412	$	1,722		$	2,242	$	1,920
Derivatives not designated as hedging instruments
Foreign exchange contracts	Other current assets	$	1,893	$	1,342	Other current liabilities	$	3,570	$	1,186
Total derivatives not designated as hedging instruments		$	1,893	$	1,342		$	3,570	$	1,186
Total derivatives		$	2,305	$	3,064		$	5,812	$	3,106

The following table provides the balances and changes in accumulated OCI, before taxes, related to derivative instruments for the indicated periods:

	Three months ended March 31,						Nine months ended March 31,
(In thousands)	2016			2015			2016			2015
Beginning balance	$	5,719		$	12,125		$	7,110		$	(20	)
Amount reclassified to income		1,107			(3,920	)		870			(5,732	)
Net change in unrealized gains or losses		(2,798	)		(1,309	)		(3,952	)		12,648
Ending balance	$	4,028		$	6,896		$	4,028		$	6,896

Offsetting of Derivative Assets and Liabilities

KLA-Tencor presents derivatives at gross fair values in the Condensed Consolidated Balance Sheets. The Company has entered into arrangements with each of its counterparties, which reduce credit risk by permitting net settlement of transactions with the same counterparty under certain conditions. As of March 31, 2016 and June 30, 2015, information related to the offsetting arrangements was as follows (in thousands):

As of March 31, 2016									Gross Amounts of Derivatives Not Offset in the Condensed Consolidated Balance Sheets
Description	Gross Amounts of Derivatives			Gross Amounts of Derivatives Offset in the Condensed Consolidated Balance Sheets		Net Amount of Derivatives Presented in the Condensed Consolidated Balance Sheets			Financial Instruments			Cash Collateral Received		Net Amount
Derivatives—Assets	$	2,305		$	—	$	2,305		$	(1,253	)	$	—	$	1,052
Derivatives—Liabilities	$	(5,812	)	$	—	$	(5,812	)	$	1,253		$	—	$	(4,559	)

As of June 30, 2015									Gross Amounts of Derivatives Not Offset in the Condensed Consolidated Balance Sheets
Description	Gross Amounts of Derivatives			Gross Amounts of Derivatives Offset in the Condensed Consolidated Balance Sheets		Net Amount of Derivatives Presented in the Condensed Consolidated Balance Sheets			Financial Instruments			Cash Collateral Received		Net Amount
Derivatives—Assets	$	3,064		$	—	$	3,064		$	(2,809	)	$	—	$	255
Derivatives—Liabilities	$	(3,106	)	$	—	$	(3,106	)	$	2,809		$	—	$	(297	)

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NOTE 15 – RELATED PARTY TRANSACTIONS

During the three and nine months ended March 31, 2016 and 2015, the Company purchased from, or sold to, several entities, where one or more executive officers of the Company or members of the Company’s Board of Directors, or their immediate family members, also serves as an executive officer or a board member, including Broadcom Limited (formerly known as Avago Technologies Ltd.), Cisco Systems, Inc., Citrix Systems, Inc. and NetApp, Inc. The following table provides the transactions with these parties for the indicated periods (for the portion of such period that they were considered related):

	Three months ended March 31,				Nine months ended March 31,
(In thousands)	2016		2015		2016		2015
Total revenues	$	6	$	721	$	8	$	1,419
Total purchases	$	53	$	159	$	639	$	957

The receivable balances from these parties as of March 31, 2016 and June 30, 2015 were immaterial, respectively. Management believes that such transactions are at arm’s length and on similar terms as would have been obtained from unaffiliated third parties.

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NOTE 16 – SEGMENT REPORTING AND GEOGRAPHIC INFORMATION

KLA-Tencor reports one reportable segment in accordance with the provisions of the authoritative guidance for segment reporting. Operating segments are defined as components of an enterprise about which separate financial information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. KLA-Tencor’s chief operating decision maker is its Chief Executive Officer. The Company is engaged primarily in designing, manufacturing, and marketing process control and yield management solutions for the semiconductor and related nanoelectronics industries.

The Company has made certain organizational changes and consolidated its product divisions effective in the first quarter of fiscal year 2016. As a result, the Company has four operating segments which primarily reflect how it is organized by product offerings: Wafer Inspection, Patterning, Global Service and Support, and Others. Accordingly, the Company has recast its financial information and disclosures for prior periods to be consistent with the current operating structure.

All operating segments have been aggregated due to their inter-dependencies, commonality of long-term economic characteristics, products and services, the production processes, class of customer and distribution processes. The Company’s service products are an extension of the system product portfolio and provide customers with spare parts and fab management services (including system preventive maintenance and optimization services) to improve yield, increase production uptime and throughput, and lower the cost of ownership. Since the Company operates in one reportable segment, all financial segment information required by the authoritative guidance can be found in the condensed consolidated financial statements.

The Company’s significant operations outside the United States include manufacturing facilities in Singapore, Israel, Germany and China and sales, marketing and service offices in Western Europe, Japan and the Asia Pacific regions. For geographical revenue reporting, revenues are attributed to the geographic location in which the customer is located. Long-lived assets consist of land, property and equipment, net and are attributed to the geographic region in which they are located.

The following is a summary of revenues by geographic region, based on ship-to location, for the indicated periods (as a percentage of total revenues):

	Three months ended March 31,								Nine months ended March 31,
(Dollar amounts in thousands)	2016				2015				2016				2015
Revenues:
North America	$	163,862	23	%	$	178,207	24	%	$	389,799	19	%	$	609,807	29	%
Taiwan		147,573	21	%		178,333	24	%		652,984	32	%		456,586	22	%
Japan		144,236	20	%		131,022	18	%		324,979	16	%		327,253	16	%
Korea		84,342	12	%		147,753	20	%		237,652	11	%		323,981	16	%
China		72,331	10	%		30,389	4	%		239,095	11	%		113,302	6	%
Europe & Israel		37,845	5	%		45,396	6	%		119,026	6	%		137,105	7	%
Rest of Asia		62,244	9	%		27,359	4	%		101,787	5	%		89,683	4	%
Total	$	712,433	100	%	$	738,459	100	%	$	2,065,322	100	%	$	2,057,717	100	%

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The following is a summary of revenues by major products for the indicated periods (as a percentage of total revenues):

	Three months ended March 31,								Nine months ended March 31,
(Dollar amounts in thousands)	2016				2015				2016				2015
Revenues:
Wafer Inspection	$	322,171	45	%	$	312,203	54	%	$	825,779	40	%	$	929,735	45	%
Patterning		164,945	23	%		209,947	19	%		569,579	28	%		494,154	24	%
Global Service and Support(1)		195,857	28	%		192,046	23	%		606,776	29	%		558,327	27	%
Other		29,460	4	%		24,263	4	%		63,188	3	%		75,501	4	%
Total	$	712,433	100	%	$	738,459	100	%	$	2,065,322	100	%	$	2,057,717	100	%

(1) The Global Service and Support revenues includes service revenues as presented in the condensed consolidated statements of operations as well as certain product revenues, primarily revenues from the Company’s K-T Certified business.

In the three months ended March 31, 2016, three customers accounted for approximately 13%, 12%, and 10% of total revenues. In the three months ended March 31, 2015, three customers accounted for approximately 18%, 15% and 14% of total revenues. In the nine months ended March 31, 2016, two customers accounted for approximately 17% and 11% of total revenues. In the nine months ended March 31, 2015, three customers accounted for approximately 15%, 14% and 11% of total revenues. Three customers and one customer on an individual basis accounted for greater than 10% of net accounts receivables as of March 31, 2016 and June 30, 2015, respectively.

Long-lived assets by geographic region as of the dates indicated below were as follows:

(In thousands)	As of March 31, 2016		As of June 30, 2015
Long-lived assets:
United States	$	188,249	$	207,779
Europe		15,107		16,536
Singapore		41,732		45,444
Israel		31,644		33,841
Rest of Asia		11,142		10,991
Total	$	287,874	$	314,591

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EX-99.3

Exhibit 99.3

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following sets forth certain unaudited pro forma condensed combined financial information giving effect to the planned merger of Lam Research and KLA-Tencor. The unaudited pro forma condensed combined financial information set forth below has been presented for informational purposes only. The pro forma information is not necessarily indicative of what the combined company’s financial position or results of operations actually would have been had the merger been completed as of the dates indicated. In addition, the unaudited pro forma condensed combined financial information does not purport to project the future financial position or operating results of the combined company. Certain terms used herein are defined under the caption “Helpful Definitions.”

The unaudited pro forma condensed combined balance sheet assumes that the merger took place on March 27, 2016 and combines Lam Research’s March 27, 2016 consolidated balance sheet with KLA-Tencor’s March 31, 2016 consolidated balance sheet.

The unaudited pro forma condensed combined statement of operations for the fiscal year ended June 28, 2015 assumes that the merger took place on June 30, 2014. Lam Research’s audited consolidated statement of operations for the fiscal year ended June 28, 2015 has been combined with KLA-Tencor’s audited consolidated statement of operations for the fiscal year ended June 30, 2015.

The unaudited pro forma condensed combined statement of operations for the nine months ended March 27, 2016 also assumes that the merger took place on June 30, 2014. Lam Research’s unaudited consolidated statement of operations for the nine months ended March 27, 2016 has been combined with KLA-Tencor’s unaudited consolidated statement of operation for the nine months ended March 31, 2016.

The historical consolidated financial information has been adjusted in the unaudited pro forma condensed combined financial statements to give effect to pro forma events that are (1) directly attributable to the merger; (2) factually supportable; and (3) with respect to the statements of operations, expected to have a continuing impact on the combined results. The unaudited pro forma condensed combined financial information should be read in conjunction with the accompanying notes to the unaudited pro forma condensed combined financial statements. In addition, the unaudited pro forma condensed combined financial information was based on and should be read in conjunction with the following historical consolidated financial statements and accompanying notes of Lam Research and KLA-Tencor for the applicable periods:

• Separate historical financial statements of Lam Research as of and for the year ended June 28, 2015 and the related notes included in Lam Research’s Annual report on Form 10-K for the year ended June 28, 2015;

• Separate historical financial statements of KLA-Tencor as of and for the year ended June 30, 2015 and the related notes included in Exhibit 99.1 to this Current Report on Form 8-K;

• Separate historical financial statements of Lam Research as of and for the nine months ended March 27, 2016 and the related notes included in Lam Research’s Quarterly Report on Form 10-Q for the period ended March 27, 2016; and

• Separate historical financial statements of KLA-Tencor as of and for the nine months ended March 31, 2016 and the related notes included in Exhibit 99.2 to this Current Report on Form 8-K.

The unaudited pro forma condensed combined financial information has been prepared using the acquisition method of accounting under existing GAAP standards, which are subject to change and interpretation. Lam Research has been treated as the acquiror in the merger for accounting purposes. The acquisition accounting is dependent upon certain valuations and other studies that have yet to commence or progress to a stage where there is sufficient information for a definitive measurement. Accordingly, the pro forma adjustments are preliminary and have been made solely for the purpose of providing unaudited pro forma condensed combined financial information. Differences between these preliminary estimates and the final acquisition accounting will occur and these differences could have a material impact on the accompanying unaudited pro forma condensed combined financial statements and the combined company’s future results of operations and financial position.

The unaudited pro forma combined financial information does not reflect any cost savings, operating synergies or revenue enhancements that the combined company may achieve as a result of the merger, the costs to combine the operations of Lam Research and KLA-Tencor or the costs necessary to achieve any of the foregoing cost savings, operating synergies and revenue enhancements.

Lam Research Corporation and KLA-Tencor Corporation

Unaudited Pro Forma Condensed Combined Statement of Operations

For the Year Ended June 28, 2015

(in thousands, except per share data)

	Historical						Pro Forma Adjustments				Pro Forma Combined
	Lam			KLA-Tencor
Revenue	$	5,259,312		$	2,814,049		$	(129,390	)	A, B	$	7,943,971
Cost of goods sold		2,974,976			1,215,229			255,963		A, B, C, D, E		4,446,168
Gross margin		2,284,336			1,598,820			(385,353	)			3,497,803
Research and development		825,242			530,616			6,139		C, D, E		1,361,997
Selling, general and administrative		591,611			406,864			358,454		C, D, E		1,356,929
Goodwill impairment		79,444			—			—				79,444
Total operating expenses		1,496,297			937,480			364,593				2,798,370
Operating income		788,039			661,340			(749,946	)			699,433
Interest expense		(73,682	)		(106,009	)		(139,406	)	F, G, H		(319,097	)
Other (expense) income, net		26,493			(121,200	)		—				(94,707	)
Income before income taxes		740,850			434,131			(889,352	)			285,629
Income tax (expense) benefit		(85,273	)		(67,973	)		235,572		J		82,326
Net income	$	655,577		$	366,158		($	653,780	)			367,955
Net income per share:
Basic	$	4.11		$	2.26					K	$	1.52
Diluted	$	3.70		$	2.24					K	$	1.41
Number of shares used in per share calculations:
Basic		159,629			162,282							241,463
Diluted		177,067			163,701							259,969

See the accompanying notes to the unaudited pro forma condensed combined financial statements, which are an integral part of these statements. The pro forma adjustments are explained in Note 6—Adjustments to Unaudited Pro Forma Condensed Combined Statements of Operations.

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Lam Research Corporation and KLA-Tencor Corporation

Unaudited Pro Forma Condensed Combined Statement of Operations

For the Nine Months Ended March 27, 2016

(in thousands, except per share data)

	Historic						Pro Forma Adjustments				Pro Forma Combined
	Lam			KLA-Tencor
Revenue	$	4,339,632		$	2,065,322		$	90,899		A, B	$	6,495,853
Cost of goods sold		2,419,494			825,823			269,289		A, B, C, D, E		3,514,606
Gross margin		1,920,138			1,239,499			(178,390	)			2,981,247
Research and development		676,457			353,804			(1,725	)	C, D, E		1,028,536
Selling, general and administrative		478,666			275,602			236,712		C, D, E , I		990,980
Total operating expenses		1,155,123			629,406			234,987				2,019,516
Operating income		765,015			610,093			(413,377	)			961,731
Interest expense		(74,124	)		(91,998	)		(92,325	)	F, G, H		(258,447	)
Other (expense) income, net		(12,766	)		11,610			—				(1,156	)
Income before income taxes		678,125			529,705			(505,702	)			702,128
Income tax (expense) benefit		(23,015	)		(96,824	)		112,532		J		(7,307	)
Net income	$	655,110		$	432,881		$	(393,170	)		$	694,821
Net income per share:
Basic	$	4.13		$	2.78					K	$	2.93
Diluted	$	3.76		$	2.76					K	$	2.73
Number of shares used in per share calculations:
Basic		158,605			155,921							237,259
Diluted		174,329			156,797							254,051

See the accompanying notes to the unaudited pro forma condensed combined financial statements, which are an integral part of these statements. The pro forma adjustments are explained in Note 6—Adjustments to Unaudited Pro Forma Condensed Combined Statements of Operations.

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Lam Research Corporation and KLA-Tencor Corporation

Unaudited Pro Forma Condensed Combined Balance Sheet

March 27, 2016

(in thousands)

	Historical						Pro Forma Adjustments				Pro Forma Combined
	Lam			KLA-Tencor
ASSETS
Current assets:
Cash and cash equivalents	$	2,232,021		$	925,974		$	(1,427,161	)	A	$	1,730,834
Short-term investments		2,306,718			1,315,336			—				3,622,054
Accounts receivable, net		1,236,617			624,818			(881	)	R		1,860,554
Inventories		934,932			721,493			648,000		B		2,304,425
Prepaid expenses and other current assets		231,277			318,852			(193,794	)	C, D		356,335
Total current assets		6,941,565			3,906,473			(973,836	)			9,874,202
Property and equipment, net		664,424			287,874			157,980		E		1,110,278
Restricted cash and investments		227,838			—			—				227,838
Goodwill		1,386,559			335,205			5,233,382		F		6,955,146
Intangible assets, net		612,779			5,625			5,804,375		G		6,422,779
Other assets		191,097			246,925			(49,485	)	C, D		388,537
Total assets	$	10,024,262		$	4,782,102		$	10,172,416			$	24,978,780
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	373,164		$	126,322		$	—			$	499,486
Accrued expenses and other current liabilities		655,945			626,331			(36,686	)	M, Q, S		1,245,590
Deferred profit		334,095			245,039			(75,582	)	H, R, S		500,552
Current portion of long-term debt		978,982			—			369,500		I		1,348,482
Total current liabilities		2,342,186			997,692			254,232				3,594,110
Long-term liabilities:
Long-term debt		1,407,250			3,097,306			3,361,374		I, L, N, O		7,865,930
Income taxes payable		266,681			61,504			—				328,185
Other long-term liabilities		137,017			149,028			1,361,054		D, H		1,647,099
Total liabilities		4,153,134			4,305,530			4,976,660				13,435,324
Temporary equity, convertible notes		178,789			—			—				178,789
Stockholders’ equity:
Common stock		159			156			5,694,431		J, K		5,694,746
Additional paid-in capital		5,559,205			424,318			(369,077	)	P, Q		5,614,446
Treasury stock, at cost		(4,420,356	)		—			—				(4,420,356	)
Accumulated other comprehensive loss		(55,890	)		(43,023	)		43,023		J		(55,890	)
Retained earnings (accumulated deficit)		4,609,221			95,121			(172,621	)	D, J, M		4,531,721
Total Stockholders’ equity		5,692,339			476,572			5,195,756				11,364,667
Total liabilities and Stockholders’ equity	$	10,024,262		$	4,782,102		$	10,172,416			$	24,978,780

See the accompanying notes to the unaudited pro forma condensed combined financial statements, which are an integral part of these statements. The pro forma adjustments are explained in Note 7—Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheets.

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NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

1. Description of Transaction

On October 20, 2015, Lam Research entered into an Agreement and Plan of Merger and Reorganization with KLA-Tencor, under which KLA-Tencor will ultimately become a direct or indirect wholly-owned subsidiary of Lam Research.

As a result of the merger, Lam Research will pay cash and issue common stock and equity-based awards, subject to certain exceptions, as follows:

• Each KLA-Tencor stockholder may elect to receive, for all shares of KLA-Tencor common stock held, one of the following forms of merger consideration, which will be payable on a per share basis, and is collectively referred to as the “merger consideration”:

• “mixed consideration,” consisting of 0.5 shares of Lam Research common stock and $32.00 in cash;

• “all-stock consideration,” consisting of (1) a number of shares of Lam Research common stock equal to 0.5 plus (2) a number of shares of Lam Research common stock equal to $32.00 divided by the five-trading day VWAP, subject to proration; or

• “all-cash consideration,” consisting of (1) $32.00 in cash plus (2) an amount in cash equal to 0.5 times the five-trading day VWAP, subject to proration;

• each then-unvested KLA-Tencor RSU (including performance-based restricted stock units) that is held by a continuing service provider will be converted into a Lam Research RSU with economically equivalent terms as applied immediately prior to the effective time of the merger;

• each share of KLA-Tencor common stock underlying KLA-Tencor RSUs that is vested (after taking into account any acceleration of vesting that occurs at the effective time of the merger) but as to which such share of stock has not yet been issued will be issued as of immediately prior to the effective time of the merger, treated as KLA-Tencor common stock in the merger and converted into the right to receive the merger consideration; and

• each KLA-Tencor stock option will be cancelled and converted into the right to receive an amount of cash (without interest) equal to the product of (a) the number of shares of KLA-Tencor common stock subject to such KLA-Tencor stock option multiplied by (b) (i) the all-cash consideration less (ii) the exercise price per share for such KLA-Tencor option.

At the effective time of the merger, each KLA-Tencor RSU that is unvested and held by an individual who is not a continuing service provider will be cancelled without payment of any consideration.

Lam Research has entered into (1) a senior unsecured term loan agreement which provides up to $1.53 billion in term loans, subject to certain conditions; and (2) a debt commitment letter which provides for a senior unsecured 364-day bridge facility in a principal amount of up to $2.67 billion, subject to certain conditions. Lam Research has also entered into an amendment and restatement of its existing revolving credit agreement pursuant to which, among other things, the revolving lenders agreed to increase their aggregate commitments under the revolving credit agreement from $300 million to $750 million.

Lam Research intends to fund the cash component of the merger consideration and related fees and expenses and to prepay KLA-Tencor’s term loans of approximately $616 million with a combination of approximately $1.5 billion of the combined companies’ balance sheet cash and proceeds of approximately $4.2 billion under the term loans, the revolving credit agreement and from the issuance of debt securities or, to the extent necessary, borrowings under the bridge facility. In connection with the merger, we expect to offer to holders of KLA-Tencor’s outstanding $2.5 billion aggregate principal amount of senior unsecured notes, referred to as the KLA-Tencor Senior Notes, new series of Lam Research senior unsecured notes in exchange for the KLA-Tencor Senior Notes.

Lam Research is pursuing financing that would replace financing available under the bridge facility.

Completion of the merger is subject to certain closing conditions, including but not limited to receipt of all required regulatory approvals, and other customary conditions. On February 19, 2016, at special meetings of the stockholders of Lam Research and KLA-Tencor, respectively, Lam Research’s stockholders approved the issuance of common stock to KLA-Tencor stockholders in connection with the merger and KLA-Tencor’s stockholders adopted the merger agreement, satisfying two of the conditions to closing. The merger agreement contains certain termination rights for both Lam Research and KLA-Tencor and further provides that, Lam Research or KLA-Tencor, as applicable, may be required to pay a termination fee of $290 million.

Subsequent to the periods presented within the pro forma financial statements, the Lam Research’s Senior Convertible Notes due 2016 (the “2016 Notes”) matured on May 15, 2016. Lam Research paid approximately $451.6 million in settlement of the notes and did not issue any shares of its common stock in respect of the 2016 Notes on a net basis as a result of the exercise of an associated convertible note hedge. Settlement of the convertible note hedge resulted in Lam Research receiving 771 shares of its common stock on a net basis and a de minimis amount of cash in lieu of fractional shares.

2. Basis of Presentation

The unaudited pro forma condensed combined financial information was prepared using the acquisition method of accounting and was based on the historical financial statements of Lam Research and KLA-Tencor. All unaudited pro forma condensed combined financial statements use Lam Research’s period end dates.

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The acquisition method of accounting is based on Accounting Standards Codification (ASC) Topic 805, Business Combinations, which uses the fair value concepts defined in ASC Topic 820, Fair Value Measurements and Disclosures.

ASC Topic 805 requires, among other things, that assets and liabilities acquired be recognized at their fair values as of the acquisition date. Financial statements of Lam Research issued after completion of the merger will reflect such fair values, measured as of the acquisition date, which may be different than the estimated fair values included in these unaudited pro forma condensed combined financial statements. The financial statements of Lam Research issued after the completion of the merger will not be retroactively restated to reflect the historical financial position or results of operations of KLA-Tencor. In addition, ASC Topic 805 establishes that the consideration transferred be measured at the closing date of the merger at the then-current market price, which will likely result in a purchase price that is different from the amount assumed in these unaudited pro forma condensed combined financial statements.

ASC Topic 820, defines the term “fair value” and sets forth the valuation requirements for any asset or liability measured at fair value, expands related disclosure requirements and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” This is an exit price concept for the valuation of the asset or liability. In addition, market participants are assumed to be buyers and sellers unrelated to Lam Research in the principal (or the most advantageous) market for the asset or liability. Fair value measurements for an asset assume the highest and best use by these market participants. As a result of these standards, Lam Research may be required to record assets which are not intended to be used or sold and/or to value assets at fair value measures that do not reflect Lam Research’s intended use of those assets. Many of these fair value measurements can be highly subjective and it is also possible that other professionals, applying reasonable judgment to the same facts and circumstances, could develop and support a range of alternative estimated amounts.

Under ASC 805, acquisition-related transaction costs (such as advisory, legal, valuation, and other professional fees) are not included as a component of consideration transferred and are excluded from the unaudited pro forma condensed combined statements of operations. Such costs will be expensed in the historical statements of operations in the period incurred. Lam Research and KLA-Tencor expect to incur total acquisition-related transaction costs of approximately $55.0 million and $64.6 million, respectively.

3. Accounting Policies

As part of preparing the unaudited pro forma condensed combined financial statements, Lam Research conducted an initial review of the accounting policies of KLA-Tencor to determine if differences in accounting policies require recasting or reclassification of results of operations or reclassification of assets or liabilities to conform to Lam Research’s accounting policies and classifications. Management’s assessment is ongoing and, at the time of preparing the pro forma financial statements, other than the adjustments and reclassifications made herein, management is not aware of any other material differences.

As a result of the preliminary analysis, Lam Research identified certain adjustments to conform KLA-Tencor’s accounting policies to those of Lam Research relative to the timing of systems revenue recognition and associated costs as it relates to customer acceptance criteria. Management has also identified certain reclassifications necessary to conform KLA-Tencor’s financial statement presentation to that of Lam Research. These reclassifications and adjustments made in the preparation of the unaudited pro forma condensed combined financial statements are presented in Notes 6 and 7.

Upon consummation of the merger, Lam Research will perform a more comprehensive review of KLA-Tencor’s accounting policies in an effort to determine if additional differences in accounting policies and/or financial statement classification exist. As a result of that review, Lam management may identify differences that, when conformed, could have a material impact on the unaudited pro forma condensed combined financial statements.

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4. Estimate of Consideration Expected to be Transferred

The following is a preliminary estimate of consideration expected to be transferred to effect the acquisition of KLA-Tencor:

(in thousands, except per share amounts)	Conversion Calculation		Estimated Fair Value
KLA-Tencor outstanding stock at March 31, 2016		155,708,389
KLA-Tencor vested stock awards		9,060
Total KLA-Tencor Shares		155,717,449
Exchange ratio		0.50
Lam common stock to be issued		77,858,725
Per share price of Lam common stock as of May 17, 2016	$	73.14
Estimated fair value of Lam common stock to be issued			$	5,694,587
Cash to be paid				4,983,108
Cash paid on behalf of KLA-Tencor to terminate existing term loans				616,250
Vested restricted stock units and performance restricted stock units consideration				50,355
Estimated purchase price consideration (1)			$	11,344,300

(1) The estimated consideration expected to be transferred reflected in these unaudited pro forma condensed combined financial statements does not purport to represent what the actual consideration transferred will be when the merger is completed. In accordance with ASC Topic 805, the fair value of equity securities issued as part of the consideration transferred will be measured on the closing date of the merger at the then-current market price. This requirement will likely result in a per share equity component different from the $73.14 closing price of Lam Research common stock on May 17, 2016 that is assumed in these unaudited pro forma condensed combined financial statements, and that difference may be material. Lam Research believes that an increase or decrease by as much as 10% in the Lam Research common stock price on the closing date of the merger from the common stock price assumed in these unaudited pro forma condensed combined financial statements is reasonably possible based upon the recent history of Lam Research’s common stock price. A change in the estimated fair value of Lam Research’s share price of 10% would increase or decrease the consideration paid as follows, with a corresponding increase or decrease in the goodwill recorded in connection with the merger.

Sensitivity of common stock price

% change in common stock price		-10%		10%
Stock price	$	—	$	—
Change in consideration transferred	$	(573,980)	$	573,895

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5. Estimate of Assets to be Acquired and Liabilities to be Assumed

The following is a preliminary estimate of the assets to be acquired and the liabilities to be assumed by Lam Research in the merger, reconciled to the estimate of consideration expected to be transferred:

	(in thousands)
Net book value of assets acquired as of March 31, 2016	$	476,572
Less: write off of existing KLA-Tencor goodwill		(335,205	)
Less: write off of existing KLA-Tencor term loans		616,250
Add: KLA-Tencor intangible assets		(5,625	)
Adjusted net book value of assets acquired as of March 31, 2016		751,992
Adjustments:
Property and equipment		157,980
Identifiable intangible assets		5,804,683
Inventory		648,000
Debt issuance costs		(15,529	)
Deferred revenue		210,104
Deferred taxes		(1,672,922	)
Debt fair value adjustment		(108,595	)
Goodwill		5,568,587
Total net assets acquired	$	11,344,300

The preliminary valuation of assets acquired and liabilities assumed performed for the purposes of these unaudited pro forma condensed combined financial statements was primarily limited to the identification and valuation of intangible assets, property and equipment, inventory, deferred revenue and taxes. Lam Research believes this was an appropriate approach based on a review of similar acquisitions, which appeared to indicate that the most significant and material portion of the purchase price would be allocated to identifiable intangible assets. Lam Research will continue to refine its identification and valuation of assets to be acquired and the liabilities to be assumed as further information becomes available.

The following is a discussion of the adjustments made to KLA-Tencor’s assets and liabilities in connection with the preparation of these unaudited pro forma condensed combined financial statements:

Property and equipment: As of the effective time of the merger, property, equipment and software is required to be measured at fair value, unless those assets are classified as held-for-sale on the acquisition date. The acquired assets can include assets that are not intended to be used or sold, or that are intended to be used in a manner other than their highest and best use. For purposes of these unaudited pro forma condensed combined financial statements, the fair value of property and equipment has been determined primarily through the use of either the sales comparison method or the depreciated replacement cost method. The sales comparison method is a form of the “market approach” in which the value of the asset is estimated based on the market price of an asset of comparable features such as location and size. The depreciated replacement cost method is a form of the “cost approach” in which the value of the asset is estimated based on the cost to replace the asset with an asset of comparable utility and adjusting for physical deterioration, functional obsolescence and economic obsolescence.

8

Lam Research does not have sufficient information at this time as to the specific types, nature, age, condition or location of these assets to perform a final valuation. However, for the purposes of these unaudited pro forma condensed combined financial statements, using currently available information, such as KLA-Tencor’s balance sheet, fixed asset register, high-level discussions with company management, real estate information and certain other high-level assumptions, the fair value of property and equipment were estimated by Lam Research management and were as follows:

(in thousands, except years)	Estimated Average Useful Lives (years)	Estimated Fair Value March 27, 2016
Land	-	$	35,000
Buildings and improvements	20 - 40		120,000
Leasehold improvements	8 - 12		105,000
Machinery and equipment	3 - 8		145,900
Computer & office equipment	2 - 5		19,000
Computer software	2 - 5		6,400
Furniture & fixtures	6 - 8		9,600
Construction in progress	-		4,954
Total		$	445,854

These preliminary estimates of fair value and weighted-average useful life will likely be different from the final acquisition accounting, and the difference could have a material impact on the accompanying pro forma condensed combined financial statements.

Intangible assets: As of the effective time of the merger, identifiable intangible assets are required to be measured at fair value and these acquired assets could include assets that are not intended to be used or sold or that are intended to be used in a manner other than their highest and best use. For purposes of these unaudited pro forma condensed combined financial statements, it is assumed that all assets will be used in a manner that represents their highest and best use. Based on internal assessments as well as discussions with KLA-Tencor, Lam Research identified the following significant intangible assets: customer relationships, technology, and in-process research and development.

For purposes of these unaudited pro forma condensed combined financial statements, the fair value of these intangible assets has been determined primarily through the use of the “income approach,” which requires an estimate or forecast of all the expected future cash flows through the use of either the multi-period excess earnings method or the relief-from-royalty method.

At this time, Lam Research does not have sufficient information as to the amount, timing and risk of the estimated future cash flows needed to perform a final valuation of customer relationships, technology, backlog, or in-process research and development. Some of the more significant assumptions inherent in the development of estimated cash flows, from the perspective of a market participant, include: the amount and timing of projected future cash flows (including revenue, cost of revenue, sales and marketing expenses, working capital, capital expenditures and contributory asset charges) and the discount rate selected to measure the risks inherent in the projections of future cash flows. However, for the purposes of these unaudited pro forma condensed combined financial statements, using currently available information, such as KLA-Tencor’s historical and projected revenues, customer attrition rates, cost structure and certain other high-level assumptions, the fair value of the customer relationships, technology, backlog, and in-process research and development were estimated by Lam Research management.

These preliminary estimates of fair value and weighted-average useful life will likely be different from the final acquisition accounting, and the difference could have a material impact on the accompanying pro forma condensed combined financial statements. Once Lam Research has full access to the specifics of KLA-Tencor’s intangible assets, additional insight will be gained that could impact: (i) the estimated total value assigned to intangible assets, and (ii) the estimated useful life of each category of intangible assets. The estimated intangible asset values and their useful lives could be impacted by a variety of factors that may become known to Lam Research only upon access to additional information and/or changes in such factors that may occur prior to the effective time of the merger. For each $100 million change in the fair value of identifiable intangible assets, there could be an annual change in amortization expense—increase or decrease—of approximately $12.7 million ($3.2 million per quarter), assuming a weighted-average useful life of 8 years.

Inventory: As of the effective time of the merger, inventory is required to be measured at fair value. KLA-Tencor’s inventory consists of raw materials, work in process, finished goods and spare parts. For purposes of these unaudited pro forma condensed combined financial statements, the preliminary fair value of inventory has been determined based on currently available information and certain high-level assumptions and may be different from the final acquisition accounting, and the difference could have an impact on the accompanying pro forma condensed combined financial statements. Raw materials were valued based on KLA-Tencor’s current net book values. Work in process, finished goods and spare parts were valued using the comparative sales method, which estimates the expected sales price of the subject inventory, reduced for all costs expected to be incurred in its completion (for work in process), disposition and a profit on those efforts.

Deferred revenue: Deferred revenue in the context of a business combination represents an obligation to provide future products or services to a customer when payment for such products or services has been made prior to the products being delivered or services being rendered. A certain portion of KLA-Tencor’s deferred revenue is for tools that have been delivered to the customer and for which KLA-Tencor is awaiting installation or customer acceptance. Therefore there are only minimal future costs required to secure customer acceptance of the tools. Accordingly, Lam Research reduced the balance of deferred revenue as of March 27, 2016 by $210.1 million for the preliminary estimate of the portion of deferred revenue for which future costs exists.

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Debt: As of the effective time of the merger, debt is required to be measured at fair value. The fair value of KLA-Tencor’s notes payable have been determined using readily available market information. It has been preliminarily determined that book value approximates fair value. In addition, Lam Research intends to extinguish KLA-Tencor’s term loans at transaction close.

Deferred income taxes: As of the effective time of the merger, Lam Research will provide deferred taxes and other tax adjustments as part of the accounting for the acquisition, primarily related to the estimated fair value adjustments for acquired intangibles. The $1.7 billion net increase to deferred tax liabilities included in the unaudited pro forma condensed combined balance sheet reflects the summation of those adjustments. These estimates are based on a preliminary valuation and are subject to further review by Lam Research’s management, which may result in material adjustments at the closing date of the merger.

To account for the combined results, Lam Research has decreased the pro forma combined provision for income taxes by $235.6 million for the year ended June 28, 2015 and decreased the pro forma combined provision for income taxes by $112.5 million for the nine months ended March 27, 2016.

Other assets/liabilities: Adjustments to KLA-Tencor’s remaining assets and liabilities may also be necessary, however at this time Lam Research has limited knowledge as to the specific details and nature of those assets and liabilities necessary in order to make adjustments to those values. However, since the majority of the remaining assets and liabilities are current assets and liabilities, Lam Research believes that the current KLA-Tencor book values for these assets represent reasonable estimates of fair value or net realizable value, as applicable. Lam Research does not anticipate that the actual adjustments for these assets and liabilities on the closing date will be materially different.

Goodwill: Goodwill is calculated as the difference between the acquisition date fair value of the consideration expected to be transferred and the values assigned to the assets acquired and liabilities assumed. Goodwill is not amortized but rather subject to an annual fair value impairment test.

6. Adjustments to Unaudited Pro Forma Condensed Combined Statements of Operations:

The following reclassifications have been made in the presentation of the historical consolidated financial statements to conform to the combined presentation:

• $131.7 million of loss on extinguishment of debt and other, net to other expense (income), net for the year ended June 28, 2015. There was no loss on extinguishment of debt and other, net realized in the nine months ended March 27, 2016.

• $74.1 million and $73.7 million of other expense, net to interest expense for the nine months ended March 27, 2016 and year ended June 28, 2015, respectively.

(A) Conforming Accounting Policies—Adjustment to conform KLA-Tencor’s accounting policies to those of Lam Research relative to the timing of systems revenue recognition and associated costs as it relates to customer acceptance criteria. KLA-Tencor’s revenue recognition policy differs from Lam Research’s in that KLA-Tencor recognizes systems revenue upon installation and title transfer when there is a history of meeting defined acceptance experience levels for both the customer and specific equipment type; whereas Lam Research defers recognizing systems revenue until customer acceptance.

	Year         Ended         June 30,  2015			Nine Months         Ended         March  27, 2016
	(in thousands)
Revenue	$	(124,989	)	$	100,576
Cost of sales		(48,746	)		39,225
Gross margin	$	(76,243	)	$	61,351

(B) Inter-company transactions—To eliminate revenue and cost of goods sold resulting from transactions occurring between Lam Research and KLA-Tencor.

(C) Intangible amortization—To eliminate historical amortization expense related to KLA-Tencor’s existing intangible assets and to reflect amortization of acquired intangible assets based on the preliminary estimated fair values and useful lives expected to be recorded as a result of the merger. For estimated intangible asset values and the estimated associated useful lives, see footnote (G) in Note 7.

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(in thousands)	Year Ended        June 28, 2015			Nine Months Ended March 27, 2016
Eliminate KLA-Tencor historical amortization
Cost of goods sold	$	(9,944	)	$	(3,607	)
Research & development	$	(3,049	)	$	(725	)
Selling, general and administrative		(2,809	)		(1,938	)
	$	(15,802	)	$	(6,270	)
New intangible asset amortization
Cost of goods sold	$	321,108		$	240,831
Selling, general and administrative		392,856			294,642
	$	713,964		$	535,473
Pro Forma amortization adjustment
Cost of goods sold	$	311,164		$	237,224
Research & development	$	(3,049	)	$	(725	)
Selling, general and administrative		390,047			292,704
	$	698,162		$	529,203

(D) Depreciation—To eliminate historical depreciation expense related to KLA-Tencor’s property and equipment based on historical cost and to reflect new depreciation expense based on the preliminary estimated fair values and useful lives of property and equipment to be acquired. For estimated property and equipment values and the estimated associated useful lives, see Note 5—Estimate of Assets to be Acquired and Liabilities to be Assumed.

(in thousands)	Year Ended        June 28, 2015			Nine Months Ended March 27, 2016
Eliminate KLA-Tencor historical depreciation
Cost of goods sold	$	(13,240	)	$	(8,959	)
Research and development		(18,163	)		(13,804	)
Selling, general and administrative		(24,447	)		(17,514	)
	$	(55,850	)	$	(40,277	)
New intangible asset depreciation
Cost of goods sold	$	11,032		$	8,274
Research and development		15,135			11,351
Selling, general and administrative		20,371			15,278
	$	46,538		$	34,903
Pro Forma depreciation adjustment
Cost of goods sold	$	(2,208	)	$	(685	)
Research and development	$	(3,028	)	$	(2,453	)
Selling, general and administrative	$	(4,076	)	$	(2,236	)
	$	(9,312	)	$	(5,374	)

(E) Stock-based compensation expense—To eliminate the historical stock-based compensation expense related to KLA-Tencor’s existing equity awards and reflect new stock-based compensation expense based on the preliminary estimated fair values and vesting periods of equity awards expected to be assumed by Lam Research as a result of the merger.

(F) Historical interest expense—To eliminate historical interest expense related to the KLA-Tencor term loans that will be extinguished at, or near, the date of the merger.

(G) New interest expense—To record new interest expense and amortization of deferred financing fees associated with the anticipated debt financing to partially finance the acquisition.

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	Pro Forma
	Year Ended       June 28, 2015		Nine Months Ended March 27, 2016
	(in thousands)
Interest expense on debt financing	$	141,640	$	97,731

A sensitivity analysis on interest expense for the year ended June 28, 2015 and the nine months ended March 27, 2016 has been performed to assess the effects of a change of 12.5 basis points of the hypothetical interest rate would have on the debt financing. Stated interest rates related to the new debt financing are as follows:

	Stated Interest Rate
Term Loan Tranche 1	Adjusted LIBOR + 1.25%
Term Loan Tranche 2	Adjusted LIBOR + 1.125%
Revolving Credit Facility	Adjusted LIBOR + 1.00%

The following table shows the change in interest expense for the debt financing:

	Pro Forma
	Year Ended       June 28, 2015			Nine Months Ended March 27, 2016
Change in interest expense assuming	(in thousands)
Increase of 0.125%	$	(2,000	)	$	(1,000	)
Decrease of 0.125%		2,000		$	1,000

(H) Interest expense— To reflect new interest expense based on the preliminary estimated fair values of the KLA-Tencor Senior Notes to be acquired.

(I) Transaction costs— To reverse costs of approximately $33.6 million recorded in the historical statements of operations, which were directly related to the transaction, as they are not expected to have a continuing impact beyond the next twelve months. To the extent that Lam Research or KLA-Tencor incur such costs in the future they will be expensed in the statements of operations of the respective companies in the periods incurred.

(J) Income tax expense—This represents the tax effect of adjustments to income before income taxes, resulting in a blended tax rate benefit of 28.8% and (1.0%) for the year end June 28, 2015 and the nine months ended March 27, 2016, respectively, representing the estimated combined effective U.S. federal, state, and foreign statutory rates. However, the effective tax rate of the combined company could be significantly different (either higher or lower) depending on post-acquisition activities.

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(K) The unaudited pro forma condensed combined basic and diluted earnings per share calculations are based on the combined basic and diluted weighted-average shares, after giving effect to the exchange ratio. The historical basic and diluted weighted average shares of KLA-Tencor are assumed to be replaced by the shares expected to be issued by Lam Research to effect the merger as follows:

	Year Ended        June 28, 2015		Nine months ended March 27, 2016
Pro Forma Weighted Average Shares (Basic)
Weighted Average Shares (Basic)		159,629		158,605
Issued ordinary shares as consideration for KLA-Tencor shares		81,141		77,961
Restricted stock units vested during the period		693		693
Pro Forma Weighted Average Shares (Basic)		241,463		237,259
Pro Forma Weighted Average Shares (Diluted)
Pro Forma Weighted Average Shares (Basic)		241,463		237,259
Unvested restricted stock units		1,068		1,068
Lam Research dilution		17,438		15,724
Pro Forma Weighted Average Shares (Diluted)		259,969		254,051
Pro Forma Basic Earnings Per Share
Pro Forma Income		367,955		694,821
Basic Weighted Average Shares Outstanding		241,463		237,259
Pro Forma Basic Earnings Per Share	$	1.52	$	2.93
Pro Forma Diluted Earnings Per Share
Pro Forma Income		367,955		694,821
Diluted Weighted Average Shares Outstanding		259,969		254,051
Pro Forma Diluted Earnings Per Share	$	1.41	$	2.73

7. Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheets:

The following reclassifications have been made in the presentation of the historical consolidated financial statements to conform to the combined presentation:

• $51.8 million of unearned revenue in current liabilities reclassified to deferred system profit

• $51.1 million of unearned revenue in non-current liabilities reclassified to other non-current liabilities

(A) Represents the use of the anticipated combined company cash balance reflecting the new debt financing of $4.2 billion to fund a portion of the estimated merger consideration, as described in Note 4. Additionally, estimated transaction costs and debt issuance costs, anticipated to be paid concurrently with the closing of the merger are included in the net cash outflow as follows:

	(in thousands)
Cash proceeds of new debt	$	4,205,983
Cash consideration paid		(4,983,108	)
Termination of existing KLA-Tencor term loans		(616,250	)
Transaction costs paid		(33,786	)
Net cash outflow	$	(1,427,161	)

(B) Inventory—To record the difference between the historical book value and preliminary estimated fair values of KLA-Tencor inventory acquired in the transaction. No corresponding adjustments have been recorded in the unaudited pro forma condensed combined statement of operations as the step-up in inventory value is not expected to be recurring.

(C) Debt issuance costs—Reflects the recognition of capitalized debt issuance costs of $17.0 million associated with anticipated borrowings to fund the merger, with $3.7 million classified in other current assets and $13.3 million classified in other long-term assets.

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(D) Deferred tax assets and liabilities—To record adjustments to deferred tax balances related to the change in fair values in connection with acquisition accounting and the recording of purchased intangible assets as well as the assumed equity awards:

	(in thousands)
Changes in temporary differences:
Decrease in deferred tax assets of certain stock-based awards	$	(12,271	)
Decrease to noncurrent deferred tax asset related to combined entity reporting		(62,817	)
Decrease to noncurrent deferred tax liability related to combined entity reporting		62,817
Establish deferred tax liability for the increase in the basis of identified acquired intangible assets		(1,361,897	)
Establish deferred tax liability for the increase in the basis of acquired inventory		(145,902	)
Establish deferred tax liability for the increase in the basis of acquired property and equipment		(38,216	)
Establish deferred tax liability related to decrease in deferred profit		(75,575	)
Establish deferred tax asset for accrued expenses		(39,062	)
	$	(1,672,923	)
Total change from the unaudited pro forma condensed combined balance sheet:
Net change in current portion of deferred tax assets	$	(197,479	)
Net change in long-term portion of deferred tax assets		(62,817	)
Net change in long-term portion of deferred tax liabilities		(1,404,116	)
	$	(1,664,412	)

(E) Property and equipment—To record the difference between the historical book value and preliminary estimated fair values of KLA-Tencor real property acquired in the transaction.

(F) Goodwill—To eliminate KLA-Tencor’s historical goodwill and record the preliminary estimate of goodwill for the acquisition of KLA-Tencor.

	(in thousands)
Estimated transaction goodwill	$	5,568,587
Eliminate KLA-Tencor’s historical goodwill as of March 27, 2016		(335,205	)
Total	$	5,233,382

(G) Intangible assets—To record the difference between the historical amounts of KLA-Tencor net intangible assets and preliminary fair values of KLA-Tencor intangible assets acquired. These estimated fair values and useful lives are considered preliminary and are subject to change at the closing date of the transaction. Accordingly, the estimates related to deferred taxes are also subject to change. Changes in fair value or useful lives of the acquired intangible assets may be material. Determination of the estimated remaining useful lives of the individual categories of intangible assets was based on the nature of the applicable intangible asset and the expected future cash flows to be derived from the intangible asset. The acquired finite-lived intangible assets are being amortized over the estimated useful life in proportion to the economic benefits consumed using the straight-line method. Reflects adjustments to the following:

(in thousands, except years)	Estimated  Average Useful  Lives (years)	Estimated Fair Value March 27, 2016		Net Book Value  March 27, 2016		Pro Forma Adjustment (BS)
Order backlog	less than 1	$	90,000		—	$	90,000
Developed technology	9		2,890,000		3,999		2,886,001
In-process research and development	—		80,000		—		80,000
Customer relationships	7		2,750,000		1,318		2,748,682
Total		$	5,810,000	$	5,317	$	5,804,683

(H) Deferred revenue— To record the difference between the historical book value and preliminary estimated fair values of KLA-Tencor deferred revenue. No corresponding adjustments have been recorded in the unaudited pro forma condensed combined statement of operations as the impact is not expected to be recurring.

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(I) New issuance of long-term debt—To reflect adjustments to current and long-term debt for anticipated borrowings to fund the KLA-Tencor Merger. The adjustments to current and long-term debt are summarized as follows:

	As of March 27, 2016
	(in thousands)
Term loans	$	1,530,000
Revolving line of credit		293,000
Bond issuance		2,400,000
Anticipated new debt financing	$	4,223,000
Current portion of new debt financing	$	369,500
Long-term portion of new debt financing		3,853,500

(J) Equity—To eliminate KLA-Tencor historical stockholder’s equity.

(K) Common stock—To record the issuance of common stock.

(L) Historical term loans—To eliminate $616.3 million of principal, related to KLA-Tencor’s term debt that will be extinguished at, or near, the merger date.

(M) Transaction costs—To record estimated costs related directly to the transaction of approximately $52.2 million, including estimated investment banking, legal and accounting fees, and other external costs directly related to the merger.

(N) Long-term debt—To eliminate debt issuance costs related to historical KLA-Tencor debt assumed as part of the transaction.

(O) Long-term debt—To record the difference between the historical book value and preliminary estimated fair values of KLA-Tencor long-term debt in the transaction.

(P) Additional paid in capital—To reflect the preliminary fair value of equity awards that were considered to be vested for accounting purposes as part of consideration transferred.

(Q) Accrued dividends payable—To reflect the payment of accrued dividends related to unvested equity awards with dividend equivalent rights that are expected to vest upon the close of the transaction.

(R) Inter-company transactions—To eliminate accounts receivable and deferred profit resulting from transactions occurring between Lam Research and KLA-Tencor.

(S) Deferred profit—To reclassify system credits from other current liabilities to deferred revenue in order to conform to Lam’s accounting policy.

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Helpful Definitions:

• “Agreement and Plan of Merger and Reorganization” or the “merger agreement” refers to the Agreement and Plan of Merger and Reorganization, dated as of October 20, 2015, by and among Lam Research, KLA-Tencor, Topeka Merger Sub 1 and Topeka Merger Sub 2;

• “bridge commitment letter” refers to the Commitment Letter, dated October 20, 2015, among Lam Research, Goldman Sachs Bank USA, Goldman Sachs Lending Partners, LLC and Lam Research, as amended by the Joinder Agreement, dated November 10, 2015, among Lam Research, JPMorgan Chase Bank, N.A., Barclays Bank PLC, Citigroup Global Markets Inc., BNP Paribas, Deutsche Bank AG Cayman Islands Branch, Mizuho Bank, Ltd., The Bank of Tokyo-Mitsubishi UFG, Ltd., Wells Fargo Bank, N.A., DBS Bank Ltd., HSBC Bank USA, N.A., PNC Capital Markets LLC, and SunTrust Bank;

• “continuing service provider” refers to an individual who will continue in the service of Lam Research or KLA-Tencor as of the effective time of the merger;

• “First Merger” refers to the merger of Topeka Merger Sub 1 with and into KLA-Tencor, with KLA-Tencor being the surviving entity;

• “five-trading day VWAP” refers to the volume-weighted average price of Lam Research common stock over a five-day trading period ending approximately two days before the closing of the merger;

• “GAAP” refers to U.S. Generally Accepted Accounting Principles;

• “Lam Research” refers to Lam Research Corporation, a Delaware corporation;

• “Lam Research common stock” refers to Lam Research common stock, par value $0.001 per share;

• “Lam Research RSU” refers to a restricted stock unit representing a right to receive Lam Research common stock;

• “KLA-Tencor” refers to KLA-Tencor Corporation, a Delaware corporation;

• “KLA-Tencor common stock” refers to KLA-Tencor common stock, par value $0.001 per share;

• “KLA-Tencor RSU” refers to a restricted stock unit outstanding at the effective time of the merger, representing a right to receive shares of KLA-Tencor common stock;

• “merger” refers to the First Merger and the Second Merger;

• “revolving credit agreement” refers to the Amendment and Restatement Agreement, dated November 10, 2015, among Lam Research, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders party thereto, which amends and restates Lam Research’s existing unsecured Credit Agreement, dated as of March 12, 2014, as amended, among Lam Research and the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent, Bank of America, N.A., as syndication agent, BNP Paribas, Barclays Bank PLC, Citibank, N.A. and Deutsche Bank Securities Inc., as co-documentation agents, and J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint bookrunners and joint lead arrangers;

• “SEC” refers to the U.S. Securities and Exchange Commission;

• “Second Merger” refers to the merger of KLA-Tencor, as the surviving entity of the First Merger, with and into Topeka Merger Sub 3 (as permitted assignee of Topeka Merger Sub 2), with Topeka Merger Sub 3 being the surviving entity;

• “term loan agreement” refers to the Amended and Restated Term Loan Agreement, dated as of May 13, 2016, among Lam Research, JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders party thereto, which amends and restates the Term Loan Agreement, dated November 10, 2015, among Lam Research, JPMorgan Chase Bank, N.A., as administrative agent, Goldman Sachs Bank, USA, JPMorgan Chase Bank, N.A., Barclays Bank PLC and Citibank, N.A., as joint bookrunners and joint lead arrangers, and the lenders and other agents named therein;

• “Topeka Merger Sub 1” refers to Topeka Merger Sub 1, Inc., a Delaware corporation and a wholly owned subsidiary of Lam Research;

• “Topeka Merger Sub 2” refers to Topeka Merger Sub 2, Inc., a Delaware corporation and a wholly owned subsidiary of Lam Research; and

• “Topeka Merger Sub 3” refers to Topeka Merger Sub 3, Inc., a Delaware corporation and a wholly owned subsidiary of Lam Research.

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