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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
(Mark One)
xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year Ended June 30, 20152016
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition Period from                      to                     
Commission File Number 000-09992
KLA-TENCOR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-2564110
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
   
One Technology Drive, Milpitas, California 95035
(Address of Principal Executive Offices) (Zip Code)
Registrant’s Telephone Number, Including Area Code: (408) 875-3000
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $0.001 par value per shareThe Nasdaq Stock Market, LLC
 The NASDAQ Global Select Market
 Securities Registered Pursuant to Section 12(g) of the Act: 
 None 
 (Title of Class) 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  o    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
  
Accelerated filer  o
Non-accelerated filer  o (Do not check if a smaller reporting  company)
  
Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant based upon the closing price of the registrant’s stock, as of December 31, 20142015, was approximately $11.45$10.78 billion.
The registrant had 157,530,878155,995,003 shares of common stock outstanding as of July 17, 201515, 2016.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 20152016 Annual Meeting of Stockholders to be held on November 4, 2015 (“Proxy Statement”), and to be filed pursuant to Regulation 14A within 120 days after the registrant’s fiscal year ended June 30, 20152016, are incorporated by reference into Part III of this report.

Table of Contents

INDEX 
   
Special Note Regarding Forward-Looking Statements
ii
    
PART I
    
Item 1.  
Business
1
Item 1A.  
Risk Factors
16
Item 1B.  
Unresolved Staff Comments
3234
Item 2.  
Properties
3335
Item 3.  
Legal Proceedings
3335
Item 4.  
Mine Safety Disclosures
3335
    
PART II
    
Item 5.  
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
3436
Item 6.  
Selected Financial Data
3638
Item 7.  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
3739
Item 7A.  
Quantitative and Qualitative Disclosures About Market Risk
5861
Item 8.  
Financial Statements and Supplementary Data
5962
   
Consolidated Balance Sheets as of June 30, 20152016 and June 30, 20142015
6063
   
Consolidated Statements of Operations for each of the three years in the period ended June 30, 20152016
6164
  
Consolidated Statements of Comprehensive Income for each of the three years in the period ended June 30, 20152016
6265
   
Consolidated Statements of Stockholders’Stockholders' Equity for each of the three years in the period ended June 30, 20152016
6366
   
Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 20152016
6467
   
Notes to Consolidated Financial Statements
6568
   
Report of Independent Registered Public Accounting Firm
105109
Item 9.  
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
106110
Item 9A.  
Controls and Procedures
106110
Item 9B.  
Other Information
107111
    
PART III
    
Item 10.  
Directors, Executive Officers and Corporate Governance
108112
Item 11.  
Executive Compensation
108112
Item 12.  
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
108112
Item 13.  
Certain Relationships and Related Transactions, and Director Independence
108112
Item 14.  
Principal Accounting Fees and Services
108112
    
PART IV
    
Item 15.  
Exhibits, Financial Statement Schedules
109113
   
Signatures
110114
   
Schedule II Valuation and Qualifying Accounts
112116
   
Exhibit Index
113117

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact may be forward-looking statements. You can identify these and other forward-looking statements by the use of words such as “may,” “will,” “could,” “would,” “should,” “expects,” “plans,” “anticipates,” “relies,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” “thinks,” “seeks,” or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. Such forward-looking statements include, among others, our Merger with Lam Research; forecasts of the future results of our operations, including profitability; orders for our products and capital equipment generally; sales of semiconductors; the investments by our customers in advanced technologies and new materials; the allocation of capital spending by our customers (and, in particular, the percentage of spending that our customers allocate to process control); growth of revenue in the semiconductor industry, the semiconductor capital equipment industry and our business; technological trends in the semiconductor industry; future developments or trends in the global capital and financial markets; our future product offerings and product features; the success and market acceptance of new products; timing of shipment of backlog; our future product shipments and product and service revenues; our future gross margins; our future research and development expenses and selling, general and administrative expenses; our ability to successfully maintain cost discipline; international sales and operations; our ability to maintain or improve our existing competitive position; success of our product offerings; creation and funding of programs for research and development; attraction and retention of employees; results of our investment in leading edge technologies; the effects of hedging transactions; the effect of the sale of trade receivables and promissory notes from customers; our future effective income tax rate; our recognition of tax benefits; future payments of dividends to our stockholders; the completion of any acquisitions of third parties, or the technology or assets thereof; benefits received from any acquisitions and development of acquired technologies; sufficiency of our existing cash balance, investments, cash generated from operations and unfunded revolving line of credit under a Credit Agreement (the “Credit Agreement”) to meet our operating and working capital requirements, including debt service and payment thereof; future dividends, and stock repurchases; our compliance with the financial covenants under the Credit Agreement; the expected timing of the completion of our global employee workforce reduction; the additional charges that we may incur in connection with our global employee workforce reduction; the expected cost savings that we expect to recognize as a result of such workforce reduction; the adoption of new accounting pronouncements; the timing for the consummation of the Merger; and our repayment of our approximately $3.21 billion of outstanding indebtedness.
Our actual results may differ significantly from those projected in the forward-looking statements in this report. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in Item 1A, “Risk Factors” in this Annual Report on Form 10-K, as well as in Item 1, “Business” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report. You should carefully review these risks and also review the risks described in other documents we file from time to time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q that we will file in the fiscal year ending June 30, 20162017. You are cautioned not to place undue reliance on these forward-looking statements, and we expressly assume no obligation and do not intend to update the forward-looking statements in this report after the date hereof.
 
 

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PART I

ITEM 1.BUSINESS
The Company
KLA-Tencor Corporation (“KLA-Tencor” or the “Company” and also referred to as “we” or “our”) is a leading supplier of process control and yield management solutions for the semiconductor and related nanoelectronics industries. Our products are also used in a number of other high technology industries, including the light emitting diode (“LED”) and data storage industries, as well as general materials research.
Within our primary area of focus, our comprehensive portfolio of defect inspection and metrology products, and related service, software and other offerings, helps integrated circuit (“IC” or “chip”) manufacturers manage yield throughout the entire semiconductor fabrication process—from research and development (“R&D”) to final volume production. These products and offerings are designed to provide comprehensive solutions to help our customers to accelerate their development and production ramp cycles, to achieve higher and more stable semiconductor die yields, and to improve their overall profitability.
KLA-Tencor’s products and services are used by the vast majority of bare wafer, IC, lithography reticle (“reticle” or “mask”) and disk manufacturers around the world. These customers turn to us for inline wafer and IC defect monitoring, review and classification; reticle defect inspection and metrology; packaging and interconnect inspection; critical dimension (“CD”) metrology; pattern overlay metrology; film thickness, surface topography and composition measurements; measurement of in-chamber process conditions, wafer shape and stress metrology; computational lithography tools; and overall yield and fab-wide data management and analysis systems. Our advanced products, coupled with our unique yield management services, allow us to deliver the solutions our customers need to accelerate their yield learning rates and significantly reduce their risks and costs.
Certain industry and technical terms used in this section are defined in the subsection entitled “Glossary” found at the end of this Item 1.
KLA-Tencor was formed in April 1997 through the merger of KLA Instruments Corporation and Tencor Instruments, two long-time leaders in the semiconductor equipment industry that originally began operations in 1975 and 1976, respectively.
Additional information about KLA-Tencor is available on our website at www.kla-tencor.com. Our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our website as soon as reasonably practicable after we electronically file them with or furnish them to the Securities and Exchange Commission (“SEC”). Information contained on our website is not part of this Annual Report on Form 10-K or our other filings with the SEC. Additionally, these filings may be obtained through the SEC’s website (www.sec.gov), which contains reports, proxy and information statements, and other information regarding issuers that file electronically. Documents that are not available through the SEC’s website may also be obtained by mailing a request to the U.S. Securities and Exchange Commission, Office of FOIA/PA Operations, 100 F Street, NE, Washington, DC 20549,20549-2736, by submitting an online request to the SEC at www.sec.gov or by calling the SEC at 1-800-732-0330.
Investors and others should note that we announce material financial information to our investors using our investor relations web site (www.ir.kla-tencor.com), SEC filings, press releases, public conference calls and webcasts. We use these channels as well as social media to communicate with the public about our company, our products and services and other matters. It is possible that the information we post on social media could be deemed to be material information. Therefore, we encourage investors, the media, and others interested in our company to review the information we post on the social media channels listed on our investor relations web site.

Proposed Merger with Lam 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 ultimately become a direct or indirect wholly-owned subsidiary of Lam Research through a merger with a subsidiary of Lam Research (the “Merger”). The Merger has been unanimously approved by the boards of directors of both companies. The consummation of the Merger is conditioned on the satisfaction of customary closing conditions, including domestic and foreign regulatory approvals and performance in all material respects by each party of its obligations under the Merger Agreement. On February 19, 2016, the Merger Agreement was approved by KLA-Tencor’s stockholders and Lam Research’s stockholders approved the issuance of Lam Research’s common stock in the Merger. Refer also to Note 1 “Description of Business and Summary of Significant Accounting Policies” and Item 1A, “Risk Factors.” 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.
Industry
General Background
KLA-Tencor’s core focus is the semiconductor industry. The semiconductor fabrication process begins with a bare silicon wafer—a round disk that is typically 150 millimeters, 200 millimeters or 300 millimeters in diameter, about as thick as a credit card and gray in color. The process of manufacturing wafers is in itself highly sophisticated, involving the creation of large ingots of silicon by pulling them out of a vat of molten silicon. The ingots are then sliced into wafers. Prime silicon wafers are then polished to a mirror finish. Other, more specialized wafers, such as epitaxial silicon (“epi”), silicon-on-insulator (“SOI”), gallium nitride (“GaN”) and silicon carbide (“SiC”), are also common in the semiconductor industry.

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The manufacturing cycle of an IC is grouped into three phases: design, fabrication and testing. IC design involves the architectural layout of the circuit, as well as design verification and reticle generation. The fabrication of a chip is accomplished by depositing a series of film layers that act as conductors, semiconductors or insulators on bare wafers. The deposition of these film layers is interspersed with numerous other process steps that create circuit patterns, remove portions of the film layers, and perform other functions such as heat treatment, measurement and inspection. Most advanced chip designs require hundreds of individual steps, many of which are performed multiple times. Most chips consist of two main structures: the lower structure, typically consisting of transistors or capacitors which perform the “smart” functions of the chip; and the upper “interconnect” structure, typically consisting of circuitry which connects the components in the lower structure. When all of the layers on the wafer have been fabricated, each chip on the wafer is tested for functionality. The wafer is then cut into individual chips, and those chips that passed functional testing are packaged. Final testing is performed on all packaged chips.
Current Trends
The growth of consumer demand for mobile devices, including smartphones, tablets and wearable devices, is currently driving growth in the electronics industry and, as a result, growth in the semiconductor industry as well. Contained within each of these latest consumer devices are advanced semiconductors that are helping to enable the features consumers want in device performance, such as smaller product form factors, lower power requirements, bigger and brighter screens and speed, at a lower cost. Alongside this market growth, the industry continues to experience a high rate of change in technology, with the emergence of new techniques and architectures in production today, such as three-dimensional (“3D”) transistors, advanced patterning lithography and advanced wafer-level packaging and semiconductors with critical dimensions at 28 nanometer and below.packaging. KLA-Tencor’s inspection and measurement technologies play a key role in enabling our customers’ advanced semiconductor manufacturing processes to support these trends.

Companies that anticipate future market demands by developing and refining new technologies and manufacturing processes are better positioned to lead in the semiconductor market. Accelerating the yield ramp and maximizing production yields of high-performance devices are key goals of modern semiconductor manufacturing. Ramping to high-volume production ahead of competitors can dramatically increase the revenue an IC manufacturer realizes for a given product. During past industry cycles, semiconductor manufacturers generally contended with a few key new technologies or market trends, such as a specific design rule shrink. In today’s market, driven by consumer demand for low-cost electronic goods, the leading semiconductor manufacturers are investing in simultaneous production integration of multiple new process technologies, some requiring new substrate and film materials, new geometries, advanced lithography and advanced packaging techniques.
While many of these technologies have been adopted at the development and pilot production stages of chip manufacturing, significant challenges and risks associated with each technology have affected the adoption of these technologies into full-volume production. For example, as design rules decrease, yields become more sensitive to the size and density of defects and device performance characteristics (namely speed, capacity or power management) become more sensitive to parameters, such as line width and film thickness variation. New process materials, such as high-k dielectrics, SOI wafers and immersion lithography-capable photoresists, require extensive characterization before they can be used in the manufacturing process. Moving several of these advanced technologies into production at once only adds to the risks that chipmakers face.
The continuing evolution of semiconductor devices to smaller geometries and more complex multi-level circuitry has significantly increased the performance and cost requirements of the capital equipment used to manufacture these devices. Construction of an advanced wafer fabrication facility today can cost over $5 billion, substantially more than previous-generation facilities. In addition, chipmakers are demanding increased productivity and higher returns from their manufacturing equipment and are also seeking ways to extend the performance of their existing equipment.
By developing new process control and yield management tools that help chipmakers accelerate the adoption of these new technologies into volume production, we enable our customers to better leverage these increasingly expensive facilities and significantly improve their return on investment (“ROI”). Once customers’ production lines are operating at high volume, our tools help ensure that yields are stable and process excursions are identified for quick resolution. In addition, the move to each new generation’s smaller design rules, coupled with new materials and device innovation, has increased in-process variability, which requires an increase in inspection and metrology sampling.

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KLA-Tencor systems not only analyze defectivity and metrology issues at critical points in the wafer, reticle and IC manufacturing processes, but also provide information to our customers so that they can identify and address the underlying process problems. The ability to locate the source of defects and resolve the underlying process issues enables our customers to improve control over their manufacturing processes. This helps them increase their yield of high-performance parts and deliver their products to market faster—thus maximizing their profits. With our broad portfolio of application-focused technologies and our dedicated yield technology expertise, we are in position to be a key supplier of comprehensive yield management solutions for customers’ next-generation products, helping our customers respond to the challenges posed by shrinking device sizes, the transition to new production materials, new device and circuit architecture, more demanding lithography processes, and new back-end packaging techniques.
Products
KLA-Tencor is engaged primarily in the design, manufacture and marketing of process control and yield management solutions for the semiconductor and related nanoelectronics industries and provides a comprehensive portfolio of defect inspection and metrology products, and related service, software and other offerings.
KLA-Tencor’s defect inspection and metrology products and related offerings can be broadly categorized intoas supporting customers in the following groups: Chip Manufacturing, Wafer Manufacturing, Reticle Manufacturing, LED, Power Device and Compound Semiconductor Manufacturing, Data Storage Media/Head Manufacturing, Microelectromechanical Systems (“MEMS”) Manufacturing, and General Purpose/Lab Applications. The more significant of these products are included in the product table at the end of this “Products” section. Every year, we introduce a number of new products; some of the new products we introduced in the fiscal year ended June 30, 2015 are described below. We also provide refurbished KLA-Tencor tools as part of our K-T CertifiedTM program for customers manufacturing larger design-rule devices, as well as comprehensive service and support for our products.
Chip Manufacturing
KLA-Tencor’s comprehensive portfolio of defect inspection and metrology products, and related service, software and other offerings, helps chip manufacturers manage yield throughout the entire semiconductor fabrication process—from research and development to final volume production. These products and offerings are designed to provide comprehensive solutions to help our customers to accelerate their development and production ramp cycles, to achieve higher and more stable semiconductor die yields, and to improve their overall profitability.

Front-End Defect Inspection
KLA-Tencor’s front-end defect inspection tools cover a broad range of yield applications within the IC manufacturing environment, including: research and development; incoming wafer qualification; reticle qualification; and tool, process and line monitoring. Patterned and unpatterned wafer inspectors find particles, pattern defects and electrical issues on the front surface, back surface and edge of the wafer, allowing engineers to detect and monitor critical yield excursions. Fabs rely on our high sensitivity reticle inspection systems to identify defects in reticles at an early stage and to prevent reticle defects from printing on production wafers. The defect data generated by our inspectors is compiled and reduced to relevant root-cause and yield-analysis information with our suite of data management tools. By implementing our front-end defect inspection and analysis systems, chipmakers are able to take quick corrective action, resulting in faster yield improvement and better time to market.
InDuring the fiscal year ended June 2015, we introduced the 8920 system, which provides high productivity inspection for a diverse range of applications, including advanced IC front-end lithography and chemical mechanical planarization (“CMP”) processes, automotive device fabrication and advanced legacy fab process control. In July 2014,30, 2016, we launched several front-end defect inspection products that help accelerate yield for next-generation design node devices: 29203900 Series, Puma™ 98502930 Series, PumaTM 9980 Series and Surfscan® SP5.SP5XP. The 29203900 Series broadband plasma patterned wafer inspection systems incorporate a new high resolution deep ultra-violet (“DUV”) wavelength range and optical inspection speed, supporting defect discovery and debug of advanced IC processes. The 2930 Series broadband plasma patterned wafer inspection systems are used to discover and monitor defects related to design or process issues, supporting advanced IC development and ramp. The Puma™ 9850PumaTM 9980 laser scanning patterned wafer inspection system utilizesinspector provides enhanced defect type capture for high throughput production ramp monitoring across a wide range of operating modes to support yield-relevant defect capture for lithography and etch applications and cost-effective excursion monitoring for film and CMP process modules.IC applications. The Surfscan® SP5XP unpatterned wafer inspection system utilizes extended deep ultra-violet (“DUV”) optical technologies for cost-effective, early detection of process and high throughput to assess incoming wafer quality, evaluate and qualify processes during R&D and monitor processes during production.tool excursions.

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The products that we launched during the fiscal year ended June 30, 20152016 further strengthened our broad range of offerings that support the front-end defect inspection market. In the field of patterned wafer inspection, we offer our 29203900 Series 2910 Series, 2900 Series, 2830 Series, 2820(for high resolution broadband plasma defect inspection); our 2930 Series and 28102920 Series systems (for broadband plasma defect inspection); our PumaTM 9980 Series, PumaTM9850 Series and PumaTM 9650 Series and PumaTM 9500 Series systems (for laser scanning defect inspection); our eS805TM Series and eS800 Series systems (for electron-beam defect inspection); our 8 Series systems (for high productivity defect inspection); and our CIRCLTM cluster tool (for defect inspection, review and metrology of all wafer surfaces - front side, edge and back side). In the field of unpatterned wafer and surface inspection, we offer the Surfscan® SP5 Series and Surfscan® SP3 Series (wafer defect inspection systems for process tool qualification and monitoring using blanket films and bare wafers); and the SURFmonitorTM (integrated on the Surfscan® SP5 and Surfscan® SP3 Series), which enables surface quality measurements and capture of low-contrast defects. For reticle inspection, we offer our X5.2TM, X5.3TM and TeronTM SL650 Series products, which are photomask inspection systems that allow IC fabs to qualify incoming reticles and inspect production reticles for contaminants and other process-related changes. In addition, we offer a number of other products for the front-end defect inspection market, as reflected in the product table at the conclusion of this “Products” section.
Defect Review
KLA-Tencor’s defect review systems capture high resolution images of the defects detected by inspection tools. These images enable defect classification, helping chipmakers to identify and resolve yield issues. KLA-Tencor’s suite of defect inspectors, defect review and classification tools and data management systems form a broad solution for finding, identifying and tracking yield-critical defects and process issues. In July 2014,During the fiscal year ended June 30, 2016, we introduced the eDReDR7280TM-7110,, an electron-beam wafer defect review and classification system that utilizes improved imaging and automatic defect classification capability to quickly identify detected defects and produce an accurate representation of the detected defect population.
Advanced Packaging Process Control
KLA-Tencor offers standalone and cluster inspection and metrology systems for various applications in the field of advanced semiconductor packaging (i.e., at the middle and back-end of the semiconductor manufacturing process). Our CIRCL-AP™ all-surface inspection, metrology and review system supports advanced wafer-level packaging processes, such as 2.5D/3D IC integration using through silicon vias (“TSVs”), wafer-level chip scale packaging (“WLCSP”) and fan-out wafer-level packaging (“FOWLP”). Used for packaging applications associated with LEDs, MEMS, image sensors and flip-chip packaging, our WI-22x0 Series products focus on front side wafer inspection and provide feedback on wafer surface quality, quality of the wafer dicing, or quality of wafer bumps, pads and pillars. Our component inspector products, the ICOS® T830 and ICOS® T640, inspect various semiconductor components that are handled in a tray, such as microprocessors or memory chips. Component inspection capability includes 3D coplanarity inspection, measurement of the evenness of the contacts, component height and two-dimensional (“2D”) surface inspection.
In April 2015, we introduced two systems that support advanced packaging applications: CIRCL-AP™ and the ICOS® T830. The CIRCL-APTM includes the 8 Series front side defect inspection and metrology module, the CV350i edge inspection and metrology module and the Micro300 2D and 3D metrology module. It provides cost-efficient process control for a range of advanced wafer-level packaging processes. The ICOS® T830 provides automated, optical inspection of IC packages, leveraging high sensitivity and 2D and 3D measurements to determine final package quality for a wide range of package types and sizes.
Metrology
KLA-Tencor’s array of metrology solutions addresses IC and substrate manufacturing, as well as scientific research and other applications. Precise metrology and control of pattern dimensions, film thicknesses, layer-to-layer alignment, pattern placement, surface topography and electro-optical properties are important in many industries as critical dimensions narrow, film thicknesses shrink to countable numbers of atomic layers and devices become more complex.

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In August 2014, we introduced our 5D™ patterning control solution whichsystems and solutions that support the metrology market. Our 5D Patterning Control Solution™ addresses five elements of patterning process control--the three geometrical dimensions of device structures, time-to-results and overall equipment efficiency. Our 5D™ patterning control solutionefficiency--and supports advanced patterning technologies through the characterization, optimization and monitoring of fab-wide processes. During the fiscal year ended June 30, 2015, we launched several metrology products that are key components in our 5D™ patterning control solution and help accelerate the ramp of innovative patterning techniques for advanced design node devices:
Overlay Metrology
In February 2015, we introduced the ArcherTM 500LCM, a high performance overlay metrology system which provides accurate overlay error data that can be used for scanner corrections or for identification of inline excursions, helping engineers determine when to re-work wafers or adjust processes to meet patterning requirements. Offering both imaging and laser-based scatterometry measurement technologies, the ArcherTM 500LCM provides flexible overlay control for all process layers in leading-edge development and high volume production.
Film Thickness and Stress Metrology
In February 2015, we introduced the SpectraFilm™ LD10 system, which utilizes a laser-driven plasma light source to produce reliable, high-precision film measurements for a broad range of film layers, including the thin, multilayer film stacks used in forming complex device structures such as FinFETs. An infrared-based subsystem on the SpectraFilmTM LD10 enables characterization of thick films and film stacks, such as those found in 3D NAND flash devices.
Patterned Wafer Geometry Metrology
In August 2014, we introduced the WaferSightTM PWG system, which measures patterned wafer geometry after a wide range of IC processes, helping identify and monitor variations that can affect patterning. The WaferSightTM PWG enables faster process ramp, overlay control, lithography focus window control and in-line process monitoring for processes such as thin films, etch, CMP and rapid thermal processing (“RTP”).
Reticle Registration Metrology
In August 2014, we introduced the LMS IPRO6 system, which is used by mask shops for comprehensive characterization of reticle pattern placement error, which is a direct contributor to wafer-level pattern overlay error. The LMS IPRO6 utilizes model-based metrology to accurately measure reticle registration for on-device pattern features and standard registration marks, producing higher sampling for better determination of mask quality.
Metrology Data Analysis
In August 2014, we introduced K-T Analyzer® 9.0, which offers advanced, run-time data analysis for a wide range of metrology system types, including overlay, reticle registration, wafer geometry, films, critical dimension and device profile metrology systems.
The products that we launched during the fiscal year ended June 30, 2015 further strengthened our broad range of offerings that support the metrology market. The ArcherTM Series of overlay metrology tools enableenables characterization of overlay error on lithography process layers for advanced patterning technologies. The SpectraShapeTM family of optical CD and shape metrology systems fully characterizecharacterizes and monitormonitors the critical dimensions and 3D shapes of geometrically complex features incorporated by some IC manufacturers in their latest generation devices. Finally, theThe SpectraFilmTM and AlerisTM families of film metrology tools provide reliable and precise measurement of film thickness, refractive index, stress and composition for a broad range of film layers. The WaferSight™ PWG system measures patterned wafer geometry after a wide range of IC processes, helping identify and monitor variations that can affect patterning. Finally, K-T Analyzer® offers advanced, run-time data analysis for a wide range of metrology system types. In addition, we offer a number of other products for the metrology market, as reflected in the product table at the conclusion of this “Products” section.
In-Situ Process Monitoring
KLA-Tencor’s SensArray® SensorWafers are a portfolio of advanced wireless and wired temperature monitoring wafers that capture the effect of the process environment on production wafers. These SensorWafers provide unique insight into thermal uniformity and profile temperature under real production conditions. SensArray® products are used in many semiconductor and flat panel display fabrication processes, including lithography, etch and deposition.

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Lithography Software
KLA-Tencor’s PROLITHTM product line provides researchers at advanced IC manufacturers, lithography hardware suppliers, track companies and material providers with virtual lithography software to explore critical-feature designs, manufacturability and process-limited yield of proposed lithographic technologies without the time and expense of printing hundreds of test wafers using experimental materials and prototype process equipment. Our ProDATA™ process window analysis software tool speeds critical decision making within the IC fab by enabling fast, easy and accurateprovides analysis of experimental data, including CD, roughness, sidewall angle, top loss and pattern collapse.
In January 2015, we introduced PROLITHTM X5.1, which provides simulation capability for anamorphic imaging for high numerical aperture extreme ultraviolet (“EUV”) lithography, and supports all lithography technologies, including 193nm immersion lithography, spacer-based Self-Aligned Double Patterning ("SADP") and thick resist lithography for 3D interconnects and MEMS manufacturing. In May 2015, we released the latest version of our process window analysis software tool, ProDATA™ V2.0, which provides engineers with a systematic, robust approach to understanding and optimizing lithography processes across the IC fab.
Wafer Manufacturing
KLA-Tencor’s portfolio of products focused on the demands of wafer manufacturers includes inspection, metrology and data management systems. Specialized inspection tools assess surface quality and detect, count and bin defects during the wafer manufacturing process and as a critical part of outgoing inspection. Wafer geometry tools ensure that the wafer is extremely flat and uniform in thickness, with precisely controlled surface topography. Specifications for wafer defectivity, geometry and surface quality are tightening as the dimensions of transistors become so small that the geometry of the substrate can substantially affect transistor performance.
Our wafer inspection portfolio for wafer manufacturing is anchored by the edge handling configuration of the Surfscan® SP5 and the Surfscan® SP5XP, both launched during the fiscal year ended June 30, 2016. The Surfscan® SP5 Series and Surfscan® SP3 Series defectare wafer inspection systems designed to enable development and production monitoring of polished wafers, epi wafers and engineered substrates. The SURFmonitorTM module (integrated on the Surfscan® SP5 Series and Surfscan® SP3 Series) characterizes wafer surface quality and captures the low-contrast defects. The WaferSightTM platformSeries offers bare wafer geometry and nanotopography metrology capabilities. Other products that we offerFabVision® offers fab-wide data management and automated yield analysis for the wafer manufacturing market are highlighted in the product table at the conclusion of this “Products” section.manufacturers.

Reticle Manufacturing
Error-free reticles, or masks, are necessary to achieving high semiconductor device yields, since reticle defects can be replicated in every die on production wafers. KLA-Tencor offers high sensitivity reticle inspection and metrology systems for mask shops, designed to help them manufacture reticles that are free of pattern defects that could print on the wafers and meet pattern placement and critical dimension uniformity specifications. In August 2014, we introduced the LMS IPRO6 reticle metrology system which enables improved characterization of mask quality through accurate measurement of reticle pattern placement error for on-device pattern features in addition to standard registration marks.
Our reticle inspection portfolio includes the TeronTM 600 Series for development and manufacturing of advanced optical and EUV masks, the TeraScanTM 500XR system for mask shop production of reticles for the 32nm node and above and our X5.2TM, X5.3™ and TeronTM SL650 Series products for reticle quality control capability for IC fabs. These products include the capability for mapping critical dimension uniformity across the reticle. In addition, we offer the LMS IPRO line of reticle metrology systems for measuring pattern placement error.error, including the LMS IPRO6 which measures on-device pattern features in addition to standard registration marks. If the pattern on the reticle is displaced from its intended location, overlay error can result on the wafer, which can lead to electrical continuity issues affecting yield, performance or reliability of the IC device.
LED, Power Device and Compound Semiconductor Manufacturing
LEDs are becoming more commonly used in solid-state lighting, television and notebook backlighting, and automotive applications. As LED device makers target aggressive cost and performance targets, they place significant emphasis on improved process control and yield during the manufacturing process.
KLA-Tencor offers a portfolio of three systems to help LED manufacturers reduce production costs and increase product output: Candela® 8620,8720, Klarity® LED, WI-2280, 8 Series, MicroXAM Series optical profilers and WI-2280.P-Series and HRP®-Series stylus profilers. The Candela 8620® 8720 substrate and epi wafer inspection system provides automated inspection and quality control of LED substrates, detecting defects that can impact device performance, yield and field reliability. Klarity® LED is an automated defect data management and analysis system for LED yield enhancement. The WI-2280 system is a patterned wafer inspection tool that is designed specifically for defect inspection and 2D metrology for LED applications. The 8 Series provides patterned wafer defect inspection capability for LED manufacturing. The MicroXAM Series optical profilers measure step height, texture and form for LED applications. The P-Series and HRP®-Series stylus profilers are metrology systems for measurement of step heights and roughness for LED substrates and pattern wafer applications.

Leading power device manufacturers are targeting faster development and ramp times, high product yields and lower device costs. To achieve these goals, they are implementing solutions for characterizing yield-limiting defects and processes. Full-surface, high sensitivity defect inspection and profiler metrology systems provide accurate process feedback, enabling improvements in SiC substrate quality and optimal epitaxial growth yields on both SiC epi and GaN-on-silicon processes.
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TableKLA-Tencor offers inspection and metrology systems to support power device manufacturing. The Candela® CS920 inspection system integrates surface defect detection and Photoluminescence technology for inspection and defect classification of Contentsa wide range of defects on SiC substrates and epi layers. The MicroXAM Series optical profilers measure step height, texture and form for power device applications. The P-Series and HRP®-Series stylus profilers measure step heights and roughness for SiC substrates and pattern wafer applications.

OurFinally, our primary products for compound semiconductor manufacturing include Candela® CS20, the MicroXAM Series optical profilers and the P-Series Stylus Profiler,and HRP®-Series stylus profilers, used for the inspection and metrology of substrates, epi-layers and process films. In addition, the Candela CS920 is used by power device manufacturers for defect inspection and classification on SiC substrate and epi wafers.
Data Storage Media/Head Manufacturing
Advancements in data storage are being driven by a wave of innovative consumer electronics with small form factors and immense storage capacities, as well as an increasing need for high-volume storage options to back up modern methods of remote computing and networking (such as cloud computing). Our process control and yield management solutions are designed to enable customers to rapidly understand and resolve complex manufacturing problems, which can help improve time to market and product yields. In the front-end and back-end of thin-film head wafer manufacturing, we offer the same process control equipment that we serve to the semiconductor industry. In addition, we offer an extensive range of test equipment and surface profilers with particular strength in photolithography. In substrate and media manufacturing, we offer metrology and defect inspection solutions with KLA-Tencor’s optical surface analyzers. Products that we offer for the data storage media/head manufacturing market manufacturing are highlighted in the product table at the conclusion of this “Products” section.

MEMS Manufacturing
The increasing demand for MEMS technology is coming from diverse industries such as automotive, space and consumer electronics. MEMS have the potential to revolutionize nearly every product category by bringing together silicon-based microelectronics with micromachining technology, making possible the realization of complete systems-on-a-chip. KLA-Tencor offers tools and techniques for this emerging market, such as defect inspection and review, optical inspection and surface profiling, which were first developed for the integrated circuit industry. Products that we offer for MEMS manufacturing are highlighted in the product table at the conclusion of this “Products” section.
General Purpose/Lab Applications
A range of industries, including general scientific and materials research and optoelectronics, require measurements of surface topography to either control their processes or research new material characteristics. Typical measurement parameters that our tools address include flatness, roughness, curvature, peak-to-valley, asperity, waviness, texture, volume, sphericity, slope, density, stress, bearing ratio and distance (mainly in the micron to nanometer range). In September 2014,The profiler and in-situ process monitoring products that we introducedoffer for general purpose/lab applications are highlighted in the Alpha-Step® D-500 stylus profiler designed for 2D measurementsproduct table at the conclusion of surface topography and the Alpha-Step D-600 stylus profiler designed for high resolution 2D and 3D surface topography measurements. The two systems support a broad range of R&D and production applications.this “Products” section.
K-T Certified
K-T Certified is our refurbished tools program that delivers fully refurbished, tested and certified KLA-Tencor tools to our customers. In addition to high-quality pre-owned 300mm and sub-200mm tools for the integrated circuit, reticle, substrate, MEMS and data storage markets, K-T Certified also offers system software and hardware performance upgrades to extend the capabilities of existing equipment. When a customer needs to move to the next manufacturing node, K-T Certified can help maximize the value of the customer’s existing assets through K-T Certified’s repurchase, trade-in and redeployment services.
K-T Services
Our K-T Services program enables our customers in all business sectors to maintain the high performance and productivity of our products through a flexible portfolio of services. Whether a manufacturing site is producing integrated circuits, wafers or reticles, K-T Services delivers yield management expertise spanning advanced technology nodes, including collaboration with customers to determine the best products and services to meet technology requirements and optimize cost of ownership. Our comprehensive services include service engineers, technical support teams and knowledge management systems; and an extensive parts network to ensure worldwide availability of parts.

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Table of Contents

Product Table
The following table presents a representative list of the products that we offered during the course of the fiscal year ended June 30, 2015:
MARKETSAPPLICATIONSPRODUCTS
Chip Manufacturing  
Front-End Defect InspectionPatterned Wafer
29203900 Series, 29102930 Series, 2900 Series, 2830 Series, 2820 Series, 28102920 Series,
PumaTM 9850,9980 Series, Puma 9650, Puma 9500 Series
eS805TM 9850 Series, eS800PumaTM 9650 Series
High Productivity and All Surface
CIRCLTM with 8 Series, CV350i, BDR300TM and Micro300 modules
8 Series (8800, 8820, 8900, 8920)
Unpatterned Wafer/Surface
Surfscan® SP3 and Surfscan® SP5 Series
SURFmonitorTM
Reticle
X5.2TM and X5.3™
TeronTM SL650 Series
Data Management
Klarity® product family
Defect ReviewElectron-beam
eDR7200TM Series
Advanced PackagingWafer-Level Packaging
CIRCL-APTM with 8 Series, CV350i and Micro300 modules
WI-22x0 Series
Component Inspection
ICOS® T640T830 and ICOS T830
Defect ReviewElectron-beam
eDRTM®-7100 Series, eDR-7000 Series T640
MetrologyPatterning Control5D Patterning Control Solution™
Overlay
ArcherTM Series
Optical CD and Shape
SpectraShapeTM product family
Film Thickness/Index
SpectraFilmTM product family
AlerisTM product family
Wafer Geometry and Topography
WaferSightTM Series
SURFmonitorTM
Ion Implant and Anneal
Therma-Probe®
Surface Metrology
HRP® -350product family
P-Series product family
ResistivityRS product family
Data Management
K-T Analyzer®
In-Situ Process MonitoringLithography
SensArray® product family
Plasma Etch
SensArray® product family
Implant and Wet
SensArray® PlasmaSuite
Lithography SoftwareLithography Simulation
PROLITHTM
Process Window Analysis
ProDATATM

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Table of Contents

MARKETS AND APPLICATIONSPRODUCTS
Wafer Manufacturing 
Surface and Defect Inspection
Surfscan® SP3 Series and Surfscan® SP5 Series
SURFmonitorTM
Wafer Geometry and Nanotopography Metrology
WaferSightTM Series
SURFmonitorTM
Data Management
FabVisionTM®
Reticle Manufacturing 
Defect Inspection
TeraScanTMXR
500XR and TeronTM 600 Series
Pattern Placement MetrologyLMS IPRO Series
LED, Power Device and Compound Semiconductor Manufacturing 
Patterned Wafer Inspection
8 Series (8800, 8820, 8900, 8920)
WI product family
Defect Inspection (substrates and epi wafers)
Candela® product family
Surface Metrology
P-Series product family
MicroXAM Series
HRP® product family
Data Management
Klarity® LED
Data Storage Media/Head Manufacturing 
Thin-Film Head Metrology and Inspection
Aleris product family
CIRCLTM with 8 Series, CV350i, BDR300 and Micro300 modules
8 Series (8800, 8820, 8900, 8920)
HRP® -250product family
P-Series product family
Virtual Lithography
PROLITHTM
In-Situ Process Monitoring
SensArray® product family
Transparent and Metal Substrate Inspection
Candela® product family
Data Management
Klarity® Defect
K-T Analyzer®
MEMS Manufacturing 
Surface Metrology: Stylus Profiling
P-Series product family
HRP® product family
Surface Metrology: Optical ProfilingMicroXAM Series
Optical Inspection
8 Series (8800, 8820, 8900, 8920)
WI product family
General Purpose/Lab Applications 
Surface Metrology: Stylus Profiling
P-Series product family
Alpha-Step® product family
HRP® product family
Surface Metrology: Optical ProfilingMicroXAM Series
Process Chamber Conditions
SensArray® product family
The product information shown in the tables above excludes some products that were solely offered through our K-T Certified refurbished tools program.

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Table of Contents

Customers
To support our growing global customer base, we maintain a significant presence throughout Asia, the United States and Europe, staffed with local sales and applications engineers, customer and field service engineers and yield management consultants. We count among our largest customers the leading semiconductor manufacturers in each of these regions.
For the fiscal years ended June 30, 20152016, 20142015 and 20132014, the following customers each accounted for more than 10% of total revenues:
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 
Year ended June 30,
2016 2015 2014
Micron Technology, Inc. Intel Corporation Intel Corporation
Taiwan Semiconductor Manufacturing Company Limited Samsung Electronics Co., Ltd. Samsung Electronics Co., Ltd.

 Taiwan Semiconductor Manufacturing Company Limited Taiwan Semiconductor Manufacturing Company Limited
Our business depends upon the capital expenditures of semiconductor manufacturers, which in turn is driven by the current and anticipated market demand for ICs and products utilizing ICs. We do not consider our business to be seasonal in nature, but it is cyclical with respect to the capital equipment procurement practices of semiconductor manufacturers, and it is impacted by the investment patterns of such manufacturers in different global markets. Downturns in the semiconductor industry or slowdowns in the worldwide economy as well as customer consolidation could have a material adverse effect on our future business and financial results.
Sales, Service and Marketing
Our sales, service and marketing efforts are aimed at building long-term relationships with our customers. We focus on providing a single and comprehensive resource for the full breadth of process control and yield management products and services. Our customers benefit from the simplified planning and coordination, as well as the increased equipment compatibility, which are realized as a result of dealing with a single supplier for multiple products and services. Our revenues are derived primarily from product sales, mostly through our direct sales force.
We believe that the size and location of our field sales, service and applications engineering, and marketing organizations represent a competitive advantage in our served markets. We have direct sales forces in Asia, the United States and Europe. We maintain an export compliance program that is designed to meet the requirements of the United States Departments of Commerce and State.
As of June 30, 20152016, we employed approximately 2,3902,110 full-time sales and related personnel, service engineers and applications engineers. In addition to sales and service offices in the United States, we conduct sales, marketing and services out of wholly-owned subsidiaries or branches in other countries, including Belgium, China, Germany, Israel, Japan, Singapore, South Korea and Taiwan. International revenues accounted for approximately 71%82%, 76%71% and 70%76% of our total revenues in the fiscal years ended June 30, 20152016, 20142015 and 20132014, respectively. Additional information regarding our revenues from foreign operations for our last three fiscal years can be found in Note 17,16, “Segment Reporting and Geographic Information” to the Consolidated Financial Statements.consolidated financial statements.
We believe that sales outside the United States will continue to be a significant percentage of our total revenues. Our future performance will depend, in part, on our ability to continue to compete successfully in Asia, one of the largest markets for our equipment. Our ability to compete in this area is dependent upon the continuation of favorable trading relationships between countries in the region and the United States, and our continuing ability to maintain satisfactory relationships with leading semiconductor companies in the region.

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International sales and operations may be adversely affected by the imposition of governmental controls, restrictions on export technology, political instability, trade restrictions, changes in tariffs and the difficulties associated with staffing and managing international operations. In addition, international sales may be adversely affected by the economic conditions in each country and by fluctuations in currency exchange rates, and such fluctuations may negatively impact our ability to compete on price with local providers or the value of revenues we generate from our international business. Although we attempt to manage some of the currency risk inherent in non-U.S. dollar product sales through hedging activities, there can be no assurance that such efforts will be adequate. These factors, as well as any of the other risk factors related to our international business and operations that are described in Item 1A, “Risk Factors,” could have a material adverse effect on our future business and financial results.
Backlog
Our shipment backlog for systems and associated warranty totaled $984 million$1.21 billion and $977$984 million as of June 30, 20152016 and 20142015, respectively, and primarily consists of sales orders where written customer requests have been received and the delivery is anticipated within the next 12 months. Orders for service contracts and unreleased products are excluded from shipment backlog. All orders are subject to cancellation or delay by the customer, often with limited or no penalties. We make adjustments for shipment backlog obtained from acquired companies, sales order cancellations, customer delivery date changes and currency adjustments. Shipment backlog is not subject to normal accounting controls for information that is either reported in or derived from our consolidated financial statements. In addition, the concept of shipment backlog is not defined in the accounting literature, making comparisons between periods and with other companies difficult and potentially misleading.
Our revenue backlog, which includes the gross value of sales orders where physical deliveries have been completed, but for which revenue has not been recognized pursuant to our policy for revenue recognition, totaled $221$255 million and $269$221 million as of June 30, 20152016 and 20142015, respectively. Orders for service contracts are excluded from revenue backlog.
Because customers can potentially change delivery schedules or delay or cancel orders, and because some orders are received and shipped within the same quarter, our shipment backlog at any particular date is not necessarily indicative of business volumes or actual sales for any succeeding periods. The cyclicality of the semiconductor industry combined with the lead times from our suppliers sometimes result in timing disparities between, on the one hand, our ability to manufacture, deliver and install products and, on the other, the requirements of our customers. In our efforts to balance the requirements of our customers with the availability of resources, management of our operating model and other factors, we often must exercise discretion and judgment as to the timing and prioritization of manufacturing, deliveries and installations of products, which may impact the timing of revenue recognition with respect to such products.
Research and Development
The market for yield management and process monitoring systems is characterized by rapid technological development and product innovation. These technical innovations are inherently complex and require long development cycles and appropriate professional staffing. We believe that continued and timely development of new products and enhancements to existing products are necessary to maintain our competitive position. Accordingly, we devote a significant portion of our human and financial resources to research and development programs and seek to maintain close relationships with customers to remain responsive to their needs. In addition, we may enter into certain strategic development and engineering programs whereby certain government agencies or other third parties fund a portion of our research and development costs. As of June 30, 20152016, we employed approximately 1,4801,430 full-time research and development personnel.
Our key research and development activities during the fiscal year ended June 30, 20152016 involved the development of process control and yield management equipment aimed at addressing the challenges posed by shrinking device sizes, the transition to new production materials, new device and circuit architecture, more demanding lithography processes and new back-end packaging techniques. For information regarding our research and development expenses during the last three fiscal years, including costs offset by our strategic development and engineering programs, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K.

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The strength of our competitive positions in many of our existing markets is largely due to our leading technology, which is the result of our continuing significant investments in product research and development. Even during down cycles in the semiconductor industry, we have remained committed to significant engineering efforts toward both product improvement and new product development in order to enhance our competitive position. New product introductions, however, may contribute to fluctuations in operating results, since customers may defer ordering existing products, and, if new products have reliability or quality problems, those problems may result in reduced orders, higher manufacturing costs, delays in acceptance of and payment for new products, and additional service and warranty expenses. There can be no assurance that we will successfully develop and manufacture new products, or that new products introduced by us will be accepted in the marketplace. If we do not successfully introduce new products, our results of operations will be adversely affected.
Manufacturing, Raw Materials and Supplies
We perform system design, assembly and testing in-house and utilize an outsourcing strategy for the manufacture of components and major subassemblies. Our in-house manufacturing activities consist primarily of assembling and testing components and subassemblies that are acquired through third-party vendors and integrating those subassemblies into our finished products. Our principal manufacturing activities take place in the United States (Milpitas, California), Singapore, Israel, Germany and China. As of June 30, 20152016, we employed approximately 970 full-time manufacturing personnel.
Some critical parts, components and subassemblies (collectively, “parts”) that we use are designed by us and manufactured by suppliers in accordance with our specifications, while other parts are standard commercial products. We use numerous vendors to supply parts and raw materials for the manufacture and support of our products. Although we make reasonable efforts to ensure that these parts and raw materials are available from multiple suppliers, this is not always possible, and certain parts and raw materials included in our systems may be obtained only from a single supplier or a limited group of suppliers. Through our business interruption planning, we endeavor to minimize the risk of production interruption by, among other things, monitoring the financial condition of suppliers of key parts and raw materials, identifying (but not necessarily qualifying) possible alternative suppliers of such parts and materials, and ensuring adequate inventories of key parts and raw materials are available to maintain manufacturing schedules.
Although we seek to reduce our dependence on sole and limited source suppliers, in some cases the partial or complete loss of certain of these sources, or disruptions within our suppliers’ often-complex supply chains, could disrupt scheduled deliveries to customers, damage customer relationships and have a material adverse effect on our results of operations.
Competition
The worldwide market for process control and yield management systems is highly competitive. In each of our product markets, we face competition from established and potential competitors, such as Applied Materials, Inc., ASML Holding N.V., Hermes Microvision, Inc., Hitachi High-Technologies Corporation, Nanometrics, Inc. and Nanometrics,Rudolph Technologies, Inc., some of which may have greater financial, research, engineering, manufacturing and marketing resources than we have. We may also face future competition from new market entrants from other overseas and domestic sources. We expect our competitors to continue to improve the design and performance of their current products and processes and to introduce new products and processes with improved price and performance characteristics. We believe that, to remain competitive, we will require significant financial resources to offer a broad range of products, to maintain customer service and support centers worldwide, and to invest in product and process research and development.
We believe that, while price and delivery are important competitive factors, the customers’ overriding requirement is for systems that easily and effectively incorporate automated and highly accurate inspection and metrology capabilities into their existing manufacturing processes to enhance productivity. Significant competitive factors in the market for process control and yield management systems include system performance, ease of use, reliability, interoperability with the existing installed base and technical service and support, as well as overall cost of ownership.
Management believes that we are well positioned in the market with respect to both our products and services. However, any loss of competitive position could negatively impact our prices, customer orders, revenues, gross margins and market share, any of which would negatively impact our operating results and financial condition.

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Acquisitions and Alliances
We continuously evaluate strategic acquisitions and alliances to expand our technologies, product offerings and distribution capabilities. Acquisitions involve numerous risks, including management issues and costs in connection with integration of the operations, technologies and products of the acquired companies, and the potential loss of key employees of the acquired companies. The inability to manage these risks effectively could negatively impact our operating results and financial condition.
Patents and Other Proprietary Rights
We protect our proprietary technology through reliance on a variety of intellectual property laws, including patent, copyright and trade secret. We have filed and obtained a number of patents in the United States and abroad and intend to continue pursuing the legal protection of our technology through intellectual property laws. In addition, from time to time we acquire license rights under United States and foreign patents and other proprietary rights of third parties, and we attempt to protect our trade secrets and other proprietary information through confidentiality and other agreements with our customers, suppliers, employees and consultants and through other security measures.
Although we consider patents and other intellectual property significant to our business, due to the rapid pace of innovation within the process control and yield management systems industry, we believe that our protection through patent and other intellectual property rights is less important than factors such as our technological expertise, continuing development of new systems, market penetration, installed base and the ability to provide comprehensive support and service to customers worldwide.
No assurance can be given that patents will be issued on any of our applications, that license assignments will be made as anticipated, or that our patents, licenses or other proprietary rights will be sufficiently broad to protect our technology. No assurance can be given that any patents issued to or licensed by us will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide us with a competitive advantage. In addition, there can be no assurance that we will be able to protect our technology or that competitors will not be able to independently develop similar or functionally competitive technology.
Environmental Matters
We are subject to a variety of federal, state and local governmental laws and regulations related to the protection of the environment, including without limitation the management of hazardous materials that we use in our business operations. Compliance with these environmental laws and regulations has not had, and is not expected to have, a material effect on our capital expenditures, financial condition, results of operations or competitive position.
However, any failure to comply with environmental laws and regulations may subject us to a range of consequences, including fines, suspension of certain of our business activities, limitations on our ability to sell our products, obligations to remediate environmental contamination, and criminal and civil liabilities or other sanctions. In addition, changes in environmental laws and regulations could require us to invest in potentially costly pollution control equipment, alter our manufacturing processes or use substitute materials. Our failure to comply with these laws and regulations could subject us to future liabilities.
Employees
As of June 30, 20152016, we employed approximately 5,8805,580 full-time employees. Except for our employees in Belgium (where a trade union delegation has been recognized) and our employees in the German operations of our MIE business unit (who are represented by employee works council), none of our employees are represented by a labor union. We have not experienced work stoppages and believe that our employee relations are good.
Competition is intense in the recruiting of personnel in the semiconductor and semiconductor equipment industry. We believe that our future success will depend, in part, on our continued ability to hire and retain qualified management, marketing and technical employees.
As discussed in our Note 15, “Restructuring Charges,” we announced in April 2015 a plan to reduce our global workforce to streamline our organization and business processes in response to changing customer requirements 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. Refer to the above footnote for additional details.


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Glossary
This section provides definitions for certain industry and technical terms commonly used in our business, which are used elsewhere in this Item 1:
back-end  Process steps that make up the second half of the semiconductor manufacturing process, from contact through completion of the wafer prior to electrical test.
   
broadband  An illumination source with a wide spectral bandwidth.
   
critical dimension (CD)  The dimension of a specified geometry (such as the width of a patterned line or the distance between two lines) that must be within design tolerances in order to maintain semiconductor device performance consistency.
   
design rules  Rules that set forth the allowable dimensions of particular features used in the design and layout of integrated circuits.
   
die  The term for a single semiconductor chip on a wafer.
   
electron-beam  An illumination source comprised of a stream of electrons emitted by a single source.
   
epitaxial silicon (epi) A substrate technology based on growing a crystalline silicon layer on top of a silicon wafer. The added layer, where the structure and orientation are matched to those of the silicon wafer, includes dopants (impurities) to imbue the substrate with special electronic properties.
   
excursion  For a manufacturing step or process, a deviation from normal operating conditions that can lead to decreased performance or yield of the final product.
   
fab The main manufacturing facility for processing semiconductor wafers.
   
front-end  The processes that make up the first half of the semiconductor manufacturing process, from wafer start through final contact window processing.
   
in-situ  Refers to processing steps or tests that are done without moving the wafer. Latin for “in original position.”
   
interconnect  A highly conductive material, usually copper or aluminum, thatwhich carries electrical signals to different parts of a die.
   
lithography  A process in which a masked pattern is projected onto a photosensitive coating that covers a substrate.
   
mask shop  A manufacturer that produces the reticles used by semiconductor manufacturers.
   
metrology  The science of measurement to determine dimensions, quantity or capacity. In the semiconductor industry, typical measurements include critical dimension, overlay and film thickness.
   
microelectromechanical systems (MEMS) Micron-sized mechanical devices powered by electricity, created using processes similar to those used to manufacture IC devices.
   
micron  
A metric unit of linear measure that equals 1/1,000,000 meter (10-6m), or 10,000 angstroms (the diameter of a human hair is approximately 75 microns).
   
Moore’s Law
An observation made by Gordon Moore in 1965 and revised in 1975 that the number of transistors on a typical integrated circuit doubles approximately every two years.
nanometer (nm)  
One billionth (10-9) of a meter.
   
narrowband  An illumination source with a narrow spectral bandwidth, such as a laser.
   

patterned  For semiconductor manufacturing and industries using similar processing technologies, refers to substrates that have electronic circuits (transistors, interconnects, etc.) fabricated on the surface.

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photoresist  A radiation-sensitive material that, when properly applied to a variety of substrates and then properly exposed and developed, masks portions of the substrate with a high degree of integrity.
   
process control  The ability to maintain specifications of products and equipment during manufacturing operations.
   
reticle  A very flat glass plate that contains the patterns to be reproduced on a wafer.
   
silicon-on-insulator (SOI) A substrate technology comprised of a thin top silicon layer separated from the silicon substrate by a thin insulating layer of glass or silicon dioxide, used to improve performance and reduce the power consumption of IC circuits.
   
substrate  A wafer on which layers of various materials are added during the process of manufacturing semiconductor devices or circuits.
   
unpatterned  For semiconductor manufacturing and industries using similar processing technologies, refers to substrates that do not have electronic circuits (transistors, interconnects, etc.) fabricated on the surface. These can include bare silicon wafers, other bare substrates or substrates on which blanket films have been deposited.
   
yield management  The ability of a semiconductor manufacturer to oversee, manage and control its manufacturing processes so as to maximize the percentage of manufactured wafers or die that conform to pre-determined specifications.
__________________ 
The definitions above are from internal sources, as well as the SEMATECH Dictionary of Semiconductor Terms.







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ITEM 1A.RISK FACTORS
A description of factors that could materially affect our business, financial condition or operating results is provided below.
Risks Associated with the Merger
There are risks and uncertainties associated with the Merger with Lam Research Corporation.
On October 21, 2015, KLA-Tencor announced it had entered into the Merger Agreement with Lam Research. Consummation of the Merger is subject to certain conditions, including (1) the expiration or termination of any waiting periods applicable to the consummation of the Merger under applicable antitrust and competition laws; and (2) the absence of any law or order restraining, enjoining or otherwise prohibiting the Merger. Each of Lam Research’s and KLA-Tencor’s obligation to consummate the Merger is also subject to certain additional customary conditions, including (1) subject to specific standards, the accuracy of the representations and warranties of the other party; and (2) performance in all material respects by the other party of its obligations under the Merger Agreement. There is no assurance that the conditions to the Merger will be satisfied in a timely manner or at all. Further, the pendency of the Merger Agreement may have an adverse effect on our business and share price. Additionally, if the Merger is not completed, we may suffer a number of consequences that could adversely affect our business, results of operations, and stock price. There are numerous risks related to the Merger, including the following:

Various conditions to the closing of the Merger may not be satisfied or waived;
If the Merger does not close on or before October 20, 2016, subject to certain limitations, either party will have the right to terminate the Merger Agreement;
The Merger may not be consummated, which among other things may cause our share price to decline to the extent that the current price of our common stock reflects an assumption that the Merger will be completed;
The failure to consummate the Merger may result in negative publicity and a negative impression of us in the investment community;
Required regulatory approvals from governmental entities may delay the Merger or result in the imposition of conditions that could cause Lam Research to abandon the Merger;
The Merger Agreement may be terminated in circumstance that would require us to pay Lam Research a termination fee of $290.0 million;
We will have incurred significant costs in connection with the acquisition that we may be unable to recover;
Our ability to attract, recruit, retain and motivate current and prospective employees may be adversely affected;
The attention of our employees and management may be diverted due to activities related to the Merger;
We may forego opportunities we might otherwise pursue absent the Merger Agreement, and may not be able to take advantage of alternative business opportunities or effectively respond to competitive pressures; and
The Merger Agreement restricts us from engaging in certain actions without Lam Research’s approval, which could prevent us from pursuing certain business opportunities outside the ordinary course of business that arise prior to the closing of the Merger.
In addition, we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the Merger, and these fees and costs are payable by us regardless of whether the Merger is consummated.
Several lawsuits have been filed against Lam Research and us challenging the Merger and an adverse ruling may prevent the Merger from being completed.
Lam Research, KLA-Tencor, Merger Sub 1 and Merger Sub 2, as well as the members of the KLA-Tencor Board, have been named as defendants in several lawsuits brought by KLA-Tencor stockholders. Additional lawsuits may be filed against Lam Research, KLA-Tencor, Merger Sub 1, Merger Sub 2 and the directors of one of the foregoing companies in connection with the Merger.
One of the conditions to the closing of the Merger is that no order, injunction, decree or other legal restraint or prohibition shall be in effect that prevents completion of the Merger. Consequently, if a settlement or other resolution is not reached in the lawsuits referenced above and the plaintiffs secure injunctive or other relief prohibiting, delaying or otherwise adversely affecting the defendants’ ability to complete the Merger, then such injunctive or other relief may prevent the Merger from becoming effective within the expected time frame or at all.

The Merger is subject to the receipt of consents and clearances from domestic and foreign regulatory authorities that may impose conditions that could have an adverse effect on Lam Research, KLA-Tencor or the combined company or, if not obtained, could prevent completion of the Merger.
Before the Merger may be completed, applicable waiting periods must expire or terminate under antitrust and competition laws and various approvals or consents must be obtained from regulatory entities. In addition, at any time prior to the Merger, competition authorities may seek to enjoin completion of the Merger. In deciding whether to grant antitrust or regulatory clearances, the relevant governmental entities will consider the effect of the Merger on competition within their relevant jurisdiction. The terms and conditions of any approvals that are granted may impose requirements, limitations or costs or place restrictions on the conduct of the combined company’s business. KLA-Tencor and Lam Research have obtained consents or clearances from regulatory authorities in Germany, Israel, Ireland and Taiwan. The Merger Agreement may require KLA-Tencor and Lam Research to comply with conditions imposed by regulatory entities and, in certain circumstances, either company may refuse to close the Merger on the basis of those regulatory conditions. There can be no assurance that regulators will not impose conditions, terms, obligations or restrictions, or that such conditions, terms, obligations or restrictions will not have the effect of delaying completion of the Merger or imposing additional material costs on or materially limiting the revenues of the combined company following the Merger. In addition, we can provide no assurance that any such conditions, obligations or restrictions will not result in the delay or abandonment of the Merger.
On May 13, 2016, Lam Research and KLA-Tencor each received a request for additional information and documentary material (commonly referred to as a “Second Request”) from the United States Department of Justice (DOJ) in connection with the proposed transaction between the companies. The companies are working with the staff of the DOJ on the terms of a consent decree.
For additional information on the risks associated with our proposed Merger with Lam Research, please review the risks beginning on page 22 of the joint proxy statement/prospectus filed by Lam Research with the SEC on January 13, 2016, which risks are incorporated by reference herein and included as Exhibit 99.1 to this annual report.
Risks Associated with Our Industry
Ongoing changes in the technology industry, as well as the semiconductor industry in particular, could expose our business to significant risks.
The semiconductor equipment industry and other industries that we serve are constantly developing and changing over time. Many of the risks associated with operating in these industries are comparable to the risks faced by all technology companies, such as the uncertainty of future growth rates in the industries that we serve, pricing trends in the end-markets for consumer electronics and other products (which place a growing emphasis on our customers’ cost of ownership), changes in our customers’ capital spending patterns and, in general, an environment of constant change and development, including decreasing product and component dimensions; use of new materials; and increasingly complex device structures, applications and process steps. If we fail to appropriately adjust our cost structure and operations to adapt to any of these trends, or, with respect to technological advances, if we do not timely develop new technologies and products that successfully anticipate and address these changes, we could experience a material adverse effect on our business, financial condition and operating results.
In addition, we face a number of risks specific to ongoing changes in the semiconductor industry, as the significant majority of our sales are made to semiconductor manufacturers. Some of the trends that our management monitors in operating our business include the following:

the trend of increasing cost per transistor for leading edge technology transitions below the 28 nanometer node, a reversal of the historical trend of declining cost per transistor with each new generation of technological advancement within the semiconductor industry, and the adverse impact that such reversal may have upon our business;
the increasing cost of building and operating fabrication facilities and the impact of such increases on our customers’ investment decisions;
differing market growth rates and capital requirements for different applications, such as memory, logic and foundry;
lower level of process control adoption by our memory customers compared to our foundry and logic customers;
our customers’ reuse of existing and installed products, which may decrease their need to purchase new products or solutions at more advanced technology nodes;
the emergence of disruptive technologies that change the prevailing semiconductor manufacturing processes (or the economics associated with semiconductor manufacturing) and, as a result, also impact the inspection and metrology requirements associated with such processes;

the higher design costs for the most advanced integrated circuits, which could economically constrain leading-edge manufacturing technology customers to focus their resources on only the large, technologically advanced products and applications;
the possible introduction of integrated products by our larger competitors that offer inspection and metrology functionality in addition to managing other semiconductor manufacturing processes;
changes in semiconductor manufacturing processes that are extremely costly for our customers to implement and, accordingly, our customers could reduce their available budgets for process control equipment by reducing inspection and metrology sampling rates for certain technologies;
the reversal of the historical trend of declining cost per transistor with each new generation of technological advancement within the semiconductor industry, and the adverse impact that such reversal would have upon our business;
the bifurcation of the semiconductor manufacturing industry into (a) leading edge manufacturers driving continued research and development into next-generation products and technologies and (b) other manufacturers that are content with existing (including previous generation) products and technologies;
the ever escalating cost of next-generation product development, which may result in joint development programs between us and our customers or government entities to help fund such programs that could restrict our control of, ownership of and profitability from the products and technologies developed through those programs;
the potential industry transition from 300mm to 450mm wafers; and
the entry by some semiconductor manufacturers into collaboration or sharing arrangements for capacity, cost or risk with other manufacturers, as well as increased outsourcing of their manufacturing activities, and greater focus only on specific markets or applications, whether in response to adverse market conditions or other market pressures.
Any of the changes described above may negatively affect our customers’ rate of investment in the capital equipment that we produce, which could result in downward pressure on our prices, customer orders, revenues and gross margins. If we do not successfully manage the risks resulting from any of these or other potential changes in our industries, our business, financial condition and operating results could be adversely impacted.

16

We are exposed to risks associated with a highly concentrated customer base.
Our customer base, particularly in the semiconductor industry, historically has been, and is becoming increasingly, highly concentrated due to corporate consolidation, acquisitions and business closures. In this environment, orders from a relatively limited number of manufacturers have accounted for, and are expected to continue to account for, a substantial portion of our sales. This increasing concentration exposes our business, financial condition and operating results to a number of risks, including the following:
The mix and type of customers, and sales to any single customer, may vary significantly from quarter to quarter and from year to year, which exposes our business and operating results to increased volatility tied to individual customers.
New orders from our foundry customers in the past several years have constituted a significant portion of our total orders. This concentration increases the impact that future business or technology changes within the foundry industry may have on our business, financial condition and operating results.
In a highly concentrated business environment, if a particular customer does not place an order, or if they delay or cancel orders, we may not be able to replace the business. Furthermore, because our products are configured to each customer’s specifications, any changes, delays or cancellations of orders may result in significant, non-recoverable costs.
As a result of this consolidation, the customers that survive the consolidation represent a greater portion of our sales and, consequently, have greater commercial negotiating leverage. Many of our large customers have more aggressive policies regarding engaging alternative, second-source suppliers for the products we offer and, in addition, may seek and, on occasion, receive pricing, payment, intellectual property-related or other commercial terms that may have an adverse impact on our business. Any of these changes could negatively impact our prices, customer orders, revenues and gross margins.
Certain customers have undergone significant ownership changes, created alliances with other companies, experienced management changes or have outsourced manufacturing activities, any of which may result in additional complexities in managing customer relationships and transactions. Any future change in ownership or management of our existing customers may result in similar challenges, including the possibility of the successor entity or new management deciding to select a competitor’s products.
The highly concentrated business environment also increases our exposure to risks related to the financial condition of each of our customers. For example, as a result of the challenging economic environment during fiscal year 2009, we were (and in some cases continue to be) exposed to additional risks related to the continued financial viability of certain of our customers. To the extent our customers experience liquidity issues in the future, we may be required to incur additional bad debt expense with respect to receivables owed to us by those customers. In addition, customers with liquidity issues may be forced to reduce purchases of our equipment, delay deliveries of our products, discontinue operations or may be acquired by one of our customers, and in either case such event would have the effect of further consolidating our customer base.

Semiconductor manufacturers generally must commit significant resources to qualify, install and integrate process control and yield management equipment into a semiconductor production line. We believe that once a semiconductor manufacturer selects a particular supplier’s process control and yield management equipment, the manufacturer generally relies upon that equipment for that specific production line application for an extended period of time. Accordingly, we expect it to be more difficult to sell our products to a given customer for that specific production line application and other similar production line applications if that customer initially selects a competitor’s equipment. Similarly, we expect it to be challenging for a competitor to sell its products to a given customer for a specific production line application if that customer initially selects our equipment.
Prices differ among the products we offer for different applications due to differences in features offered or manufacturing costs. If there is a shift in demand by our customers from our higher-priced to lower-priced products, our gross margin and revenue would decrease. In addition, when products are initially introduced, they tend to have higher costs because of initial development costs and lower production volumes relative to the previous product generation, which can impact gross margin.
Any of these factors could have a material adverse effect on our business, financial condition and operating results.

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The semiconductor equipment industry is highly cyclical. The purchasing decisions of our customers are highly dependent on the economies of both the local markets in which they are located and the semiconductor industry worldwide. If we fail to respond to industry cycles, our business could be seriously harmed.
The timing, length and severity of the up-and-down cycles in the semiconductor equipment industry are difficult to predict. The cyclical nature of the primary industry in which we operate is largely a function of our customers’ capital spending patterns and need for expanded manufacturing capacity, which in turn are affected by factors such as capacity utilization, consumer demand for products, inventory levels and our customers’ access to capital. This cyclicality affects our ability to accurately predict future revenue and, in some cases, future expense levels. During down cycles in our industry, the financial results of our customers may be negatively impacted, which could result not only in a decrease in, or cancellation or delay of, orders (which are generally subject to cancellation or delay by the customer with limited or no penalty) but also a weakening of their financial condition that could impair their ability to pay for our products or our ability to recognize revenue from certain customers. Our ability to recognize revenue from a particular customer may also be negatively impacted by the customer’s funding status, which could be weakened not only by adverse business conditions or inaccessibility to capital markets for any number of macroeconomic or company-specific reasons, but also by funding limitations imposed by the customer’s unique corporate structure. Any of these factors could negatively impact our business, operating results and financial condition.
When cyclical fluctuations result in lower than expected revenue levels, operating results may be adversely affected and cost reduction measures may be necessary in order for us to remain competitive and financially sound. During periods of declining revenues, we must be in a position to adjust our cost and expense structure to prevailing market conditions and to continue to motivate and retain our key employees. If we fail to respond, or if our attempts to respond fail to accomplish our intended results, then our business could be seriously harmed. Furthermore, any workforce reductions and cost reduction actions that we adopt in response to down cycles may result in additional restructuring charges, disruptions in our operations and loss of key personnel. In addition, during periods of rapid growth, we must be able to increase manufacturing capacity and personnel to meet customer demand. We can provide no assurance that these objectives can be met in a timely manner in response to industry cycles. Each of these factors could adversely impact our operating results and financial condition.

In addition, our management typically provides quarterly forecasts for certain financial metrics, which, when made, are based on business and operational forecasts that are believed to be reasonable at the time. However, largely due to the cyclicality of our business and the industries in which we operate, and the fact that business conditions in our industries can change very rapidly as part of these cycles, our actual results may vary (and have varied in the past) from forecasted results. These variations can occur for any number of reasons, including, but not limited to, unexpected changes in the volume or timing of customer orders, product shipments or product acceptances; an inability to adjust our operations rapidly enough to adapt to changing business conditions; or a different than anticipated effective tax rate. The impact on our business of delays or cancellations of customer orders may be exacerbated by the short lead times that our customers expect between order placement and product shipment. This is because order delays and cancellations may lead not only to lower revenues, but also, due to the advance work we must do in anticipation of receiving a product order in order to meet the expected lead times, to significant inventory write-offs and manufacturing inefficiencies that decrease our gross margin. Any of these factors could materially and adversely affect our financial results for a particular quarter and could cause those results to differ materially from financial forecasts we have previously provided. We provide these forecasts with the intent of giving investors and analysts a better understanding of management’s expectations for the future, but parties reviewing such forecasts must recognize that such forecasts are comprised of, and are themselves, forward-looking statements subject to the risks and uncertainties described in this Item 1A and elsewhere in this report and in our other public filings and public statements. If our operating or financial results for a particular period differ from our forecasts or the expectations of investment analysts, or if we revise our forecasts, the market price of our common stock could decline.

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Risks Related to Our Business Model and Capital Structure
If we do not develop and introduce new products and technologies in a timely manner in response to changing market conditions or customer requirements, our business could be seriously harmed.
Success in the semiconductor equipment industry depends, in part, on continual improvement of existing technologies and rapid innovation of new solutions. For over 25 years theThe primary driver of technology advancement in the semiconductor industry has been to shrink the lithography that prints the circuit design on semiconductor chips. That driver appears to be slowing, which may cause semiconductor manufacturers to delay investments in equipment, investigate more complex device architectures, use new materials and develop innovative fabrication processes. These and other evolving customer plans and needs require us to respond with continued development programs and cut back or discontinue older programs, which may no longer have industry-wide support. Technical innovations are inherently complex and require long development cycles and appropriate staffing of highly qualified employees. Our competitive advantage and future business success depend on our ability to accurately predict evolving industry standards, develop and introduce new products and solutions that successfully address changing customer needs, win market acceptance of these new products and solutions, and manufacture these new products in a timely and cost-effective manner. Our failure to accurately predict evolving industry standards and develop as well as offer competitive technology solutions in a timely manner with cost-effective products could result in loss of market share, unanticipated costs, and inventory obsolescence, which would adversely impact our business, operating results and financial condition.
In this environment, we must continue to make significant investments in research and development in order to enhance the performance, features and functionality of our products, to keep pace with competitive products and to satisfy customer demands. Substantial research and development costs typically are incurred before we confirm the technical feasibility and commercial viability of a new product, and not all development activities result in commercially viable products. There can be no assurance that revenues from future products or product enhancements will be sufficient to recover the development costs associated with such products or enhancements. In addition, we cannot be sure that these products or enhancements will receive market acceptance or that we will be able to sell these products at prices that are favorable to us. Our business will be seriously harmed if we are unable to sell our products at favorable prices or if the market in which we operate does not accept our products.
In addition, the complexity of our products exposes us to other risks. We regularly recognize revenue from a sale upon shipment of the applicable product to the customer (even before receiving the customer’s formal acceptance of that product) in certain situations, including sales of products for which installation is considered perfunctory, transactions in which the product is sold to an independent distributor and we have no installation obligations, and sales of products where we have previously delivered the same product to the same customer location and that prior delivery has been accepted. However, our products are very technologically complex and rely on the interconnection of numerous subcomponents (all of which must perform to their respective specifications), so it is conceivable that a product for which we recognize revenue upon shipment may ultimately fail to meet the overall product’s required specifications. In such a situation, the customer may be entitled to certain remedies, which could materially and adversely affect our operating results for various periods and, as a result, our stock price.

We derive a substantial percentage of our revenues from sales of defect inspection products. As a result, any delay or reduction of sales of these products could have a material adverse effect on our business, financial condition and operating results. The continued customer demand for these products and the development, introduction and market acceptance of new products and technologies are critical to our future success.

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Our success is dependent in part on our technology and other proprietary rights. If we are unable to maintain our lead or protect our proprietary technology, we may lose valuable assets.
Our success is dependent in part on our technology and other proprietary rights. We own various United States and international patents and have additional pending patent applications relating to some of our products and technologies. The process of seeking patent protection is lengthy and expensive, and we cannot be certain that pending or future applications will actually result in issued patents or that issued patents will be of sufficient scope or strength to provide meaningful protection or commercial advantage to us. Other companies and individuals, including our larger competitors, may develop technologies and obtain patents relating to our business that are similar or superior to our technology or may design around the patents we own, adversely affecting our business. In addition, we at times engage in collaborative technology development efforts with our customers and suppliers, and these collaborations may constitute a key component of certain of our ongoing technology and product research and development projects. The termination of any such collaboration, or delays caused by disputes or other unanticipated challenges that may arise in connection with any such collaboration, could significantly impair our research and development efforts, which could have a material adverse impact on our business and operations.
We also maintain trademarks on certain of our products and services and claim copyright protection for certain proprietary software and documentation. However, we can give no assurance that our trademarks and copyrights will be upheld or successfully deter infringement by third parties.
While patent, copyright and trademark protection for our intellectual property is important, we believe our future success in highly dynamic markets is most dependent upon the technical competence and creative skills of our personnel. We attempt to protect our trade secrets and other proprietary information through confidentiality and other agreements with our customers, suppliers, employees and consultants and through other security measures. We also maintain exclusive and non-exclusive licenses with third parties for strategic technology used in certain products. However, these employees, consultants and third parties may breach these agreements, and we may not have adequate remedies for wrongdoing. In addition, the laws of certain territories in which we develop, manufacture or sell our products may not protect our intellectual property rights to the same extent as do the laws of the United States. In any event, the extent to which we can protect our trade secrets through the use of confidentiality agreements is limited, and our success will depend to a significant extent on our ability to innovate ahead of our competitors.
Our future performance depends, in part, upon our ability to continue to compete successfully worldwide.
Our industry includes large manufacturers with substantial resources to support customers worldwide. Some of our competitors are diversified companies with greater financial resources and more extensive research, engineering, manufacturing, marketing, and customer service and support capabilities than we possess. We face competition from companies whose strategy is to provide a broad array of products and services, some of which compete with the products and services that we offer. These competitors may bundle their products in a manner that may discourage customers from purchasing our products, including pricing such competitive tools significantly below our product offerings. In addition, we face competition from smaller emerging semiconductor equipment companies whose strategy is to provide a portion of the products and services that we offer, using innovative technology to sell products into specialized markets. The strength of our competitive positions in many of our existing markets is largely due to our leading technology, which is the result of continuing significant investments in product research and development. However, we may enter new markets, whether through acquisitions or new internal product development, in which competition is based primarily on product pricing, not technological superiority. Further, some new growth markets that emerge may not require leading technologies. Loss of competitive position in any of the markets we serve, or an inability to sell our products on favorable commercial terms in new markets we may enter, could negatively affect our prices, customer orders, revenues, gross margins and market share, any of which would negatively affect our operating results and financial condition.

20

Our business would be harmed if we do not receive parts sufficient in number and performance to meet our production requirements and product specifications in a timely and cost-effective manner.
We use a wide range of materials in the production of our products, including custom electronic and mechanical components, and we use numerous suppliers to supply these materials. We generally do not have guaranteed supply arrangements with our suppliers. Because of the variability and uniqueness of customers’ orders, we do not maintain an extensive inventory of materials for manufacturing. Through our business interruption planning, we seek to minimize the risk of production and service interruptions and/or shortages of key parts by, among other things, monitoring the financial stability of key suppliers, identifying (but not necessarily qualifying) possible alternative suppliers and maintaining appropriate inventories of key parts. Although we make reasonable efforts to ensure that parts are available from multiple suppliers, certain key parts may beare available only from a single supplier or a limited group of suppliers. Also, key parts we obtain from some of our suppliers incorporate the suppliers’ proprietary intellectual property; in those cases we are increasingly reliant on third parties for high-performance, high-technology components, which reduces the amount of control we have over the availability and protection of the technology and intellectual property that is used in our products. In addition, if certain of our key suppliers experience liquidity issues and are forced to discontinue operations, which is a heightened risk during economic downturns, it could affect their ability to deliver parts and could result in delays for our products. Similarly, especially with respect to suppliers of high-technology components, our suppliers themselves have increasingly complex supply chains, and delays or disruptions at any stage of their supply chains may prevent us from obtaining parts in a timely manner and result in delays for our products. Our operating results and business may be adversely impacted if we are unable to obtain parts to meet our production requirements and product specifications, or if we are only able to do so on unfavorable terms. Furthermore, a supplier may discontinue production of a particular part for any number of reasons, including the supplier’s financial condition or business operational decisions, which would require us to purchase, in a single transaction, a large number of such discontinued parts in order to ensure that a continuous supply of such parts remains available to our customers. Such “end-of-life” parts purchases could result in significant expenditures by us in a particular period, and ultimately any unused parts may result in a significant inventory write-off, either of which could have a material and adverse impact on our financial condition and results of operations for the applicable periods.
If we fail to operate our business in accordance with our business plan, our operating results, business and stock price may be significantly and adversely impacted.
We attempt to operate our business in accordance with a business plan that is established annually, revised frequently (generally quarterly), and reviewed by management even more frequently (at least monthly). Our business plan is developed based on a number of factors, many of which require estimates and assumptions, such as our expectations of the economic environment, future business levels, our customers’ willingness and ability to place orders, lead-times, and future revenue and cash flow. Our budgeted operating expenses, for example, are based in part on our future revenue expectations. However, our ability to achieve our anticipated revenue levels is a function of numerous factors, including the volatile and cyclical nature of our primary industry, customer order cancellations, macroeconomic changes, operational matters regarding particular agreements, our ability to manage customer deliveries, the availability of resources for the installation of our products, delays or accelerations by customers in taking deliveries and the acceptance of our products (for products where customer acceptance is required before we can recognize revenue from such sales), our ability to operate our business and sales processes effectively, and a number of the other risk factors set forth in this Item 1A.
Because our expenses are in most cases relatively fixed in the short term, any revenue shortfall below expectations could have an immediate and significant adverse effect on our operating results. Similarly, if we fail to manage our expenses effectively or otherwise fail to maintain rigorous cost controls, we could experience greater than anticipated expenses during an operating period, which would also negatively affect our results of operations. If we fail to operate our business consistent with our business plan, our operating results in any period may be significantly and adversely impacted. Such an outcome could cause customers, suppliers or investors to view us as less stable, or could cause us to fail to meet financial analysts’ revenue or earnings estimates, any of which could have a material adverse impact on our business, financial condition or stock price.
In addition, our management is constantly striving to balance the requirements and demands of our customers with the availability of resources, the need to manage our operating model and other factors. In furtherance of those efforts, we often must exercise discretion and judgment as to the timing and prioritization of manufacturing, deliveries, installations and payment scheduling. Any such decisions may impact our ability to recognize revenue, including the fiscal period during which such revenue may be recognized, with respect to such products, which could have a material adverse effect on our business, financial condition or stock price.

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Our outstanding indebtedness was substantially increased in the second quarter of our fiscal year ended June 30, 2015 and, as a result, our capital structure is more highly leveraged.
As of June 30, 2015,2016, we had approximately $3.21$3.08 billion aggregate principal amount of outstanding indebtedness, consisting of $2.50 billion aggregate principal amount of senior, unsecured long-term notes and approximately $711.3$576.3 million of term loans under a Credit Agreement (the “Credit Agreement”). Additionally, we have commitments for an unfunded revolving credit facility of $500.0 million under the Credit Agreement. We may incur additional indebtedness in the future by accessing the unfunded revolving credit facility under the Credit Agreement and/or entering into new financing arrangements. Our ability to pay interest and repay the principal of our current indebtedness is dependent upon our ability to manage our business operations, our credit rating, the ongoing interest rate environment and the other risk factors discussed in this section. There can be no assurance that we will be able to manage any of these risks successfully.
In addition, the interest rates of the senior, unsecured long-term notes may be subject to adjustments from time to time if Moody’s Investors Service, Inc. (“Moody’s”), 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 notes such that the adjusted rating is below investment grade. Accordingly, changes by Moody’s, S&P, or a Substitute Rating Agency to the rating of any series of notes, our outlook or credit rating could require us to pay additional interest, which may negatively affect the value and liquidity of our debt and the market price of our common stock could decline. Factors that can affect our credit rating include changes in our operating performance, the economic environment, conditions in the semiconductor and semiconductor equipment industries, our financial position, including the incurrence of additional indebtedness, and our business strategy.
In certain circumstances involving a change of control followed by a downgrade of the rating of a series of notes by at least two of Moody’s, S&P and Fitch Inc., unless we have exercised its right to redeem the notes of such series, we will be required to make an offer to repurchase all or, at the holder’s option, any part, of each holder’s notes of that series pursuant to the offer described below (the “Change of Control Offer”). In the Change of Control Offer, we will be required to offer payment in cash equal to 101% of the aggregate principal amount of notes repurchased plus accrued and unpaid interest, if any, on the notes repurchased, up to, but not including, the date of repurchase. We cannot make any assurance that we will have sufficient financial resources at such time or will be able to arrange financing to pay the repurchase price of that series of notes. Our ability to repurchase that series of notes in such event may be limited by law, by the indenture associated with that series of notes, or by the terms of other agreements to which we may be party at such time. If we fail to repurchase that series of notes as required by the terms of such notes, it would constitute an event of default under the indenture governing that series of notes which, in turn, may also constitute an event of default under other of our obligations.
The term loans under the Credit Agreement bear interest at a floating rate, which is based on the London Interbank Offered Rate plus a fixed spread, and, therefore, any increase in interest rates would require us to pay additional interest, which may have an adverse effect on the value and liquidity of our debt and the market price of our common stock could decline. The interest rate under the Credit Facility is also subject to an adjustment in conjunction with our credit rating downgrades or upgrades. Additionally, under the Credit Agreement, we are required to comply with affirmative and negative covenants, which include the maintenance of certain financial ratios, the details of which can be found in Note 7,6, “Debt.” If we fail to comply with these covenants, we will be in default and our borrowings will become immediately due and payable. There can be no assurance that we will have sufficient financial resources or we will be able to arrange financing to repay our borrowings at such time. In addition, certain of our domestic subsidiaries under the Credit Agreement are required to guarantee our borrowings under the Credit Agreement. In the event that we default on our borrowings, these domestic subsidiaries shall be liable for our borrowings, which could disrupt our operations and result in a material adverse impact on our business, financial condition or stock price.

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Our leveraged capital structure may adversely affect our financial condition, results of operations and earningsnet income per share.
We completed our leveraged recapitalization transaction during the fiscal quarter ended December 31, 2014, which included raising approximately $3.25 billion in new borrowings, consisting of $2.50 billion aggregate principal amount of senior, unsecured long-term notes and approximately $750.0 million of term loans under the Credit Agreement, payment of a special cash dividend of approximately $2.76 billion and prepayment of our $750 million of existing senior notes due in 2018. Our issuance and maintenance of higher levels of indebtedness could have adverse consequences including, but not limited to:
a negative impact on our ability to satisfy our future obligations;
an increase in the portion of our cash flows that may have to be dedicated to increased interest and principal payments that may not be available for operations, working capital, capital expenditures, acquisitions, investments, dividends, stock repurchases, general corporate or other purposes;

an impairment of our ability to obtain additional financing in the future; and
obligations to comply with restrictive and financial covenants as noted in the above risk factor and Note 7,6, “Debt.”
Our ability to satisfy our future expenses as well as our new debt obligations will depend on our future performance, which will be affected by financial, business, economic, regulatory and other factors. Furthermore, our future operations may not generate sufficient cash flows to enable us to meet our future expenses and service our new debt obligations, which may impact our ability to manage our capital structure to preserve and maintain our investment grade rating. If our future operations do not generate sufficient cash flows, we may need to access the unfunded revolving credit facility of $500 million under the Credit Agreement or enter into new financing arrangements to obtain necessary funds. If we determine it is necessary to seek additional funding for any reason, we may not be able to obtain such funding or, if funding is available, we may not be able to obtain it on acceptable terms. Any additional borrowing under the Credit Agreement will place further pressure on us to comply with the financial covenants. If we fail to make a payment associated with our new debt obligations, we could be in default on such debt, and such a default could cause us to be in default on our other outstanding indebtedness.
There can be no assurance that we will continue to declare cash dividends at all or in any particular amounts.
Our Board of Directors first instituted a quarterly dividend during the fiscal year ended June 30, 2005. Since that time, we have announced a number of increases in the amount of our quarterly dividend level as well as payment of a special cash dividend that was declared and substantially paid in the second quarter of our fiscal year ended June 30, 2015. We intend to continue to pay quarterly dividends subject to capital availability and periodic determinations by our Board of Directors that cash dividends are in the best interest of our stockholders and are in compliance with all laws and agreements applicable to the declaration and payment of cash dividends by us. Future dividends may be affected by, among other factors: our views on potential future capital requirements for investments in acquisitions and the funding of our research and development; legal risks; stock repurchase programs; changes in federal and state income tax laws or corporate laws; changes to our business model; restrictions on increasing dividends under the Merger Agreement; and our increased interest and principal payments required by our approximately $3.21$3.08 billion aggregate principal amount of outstanding indebtedness and any additional indebtedness that we may incur in the future. Our dividend payments may change from time to time, and we cannot provide assurance that we will continue to declare dividends at all or in any particular amounts. A reduction in our dividend payments could have a negative effect on our stock price.
We are exposed to risks related to our commercial terms and conditions, including our indemnification of third parties, as well as the performance of our products.
Although our standard commercial documentation sets forth the terms and conditions that we intend to apply to commercial transactions with our business partners, counterparties to such transactions may not explicitly agree to our terms and conditions. In situations where we engage in business with a third party without an explicit master agreement regarding the applicable terms and conditions, or where the commercial documentation applicable to the transaction is subject to varying interpretations, we may have disputes with those third parties regarding the applicable terms and conditions of our business relationship with them. Such disputes could lead to a deterioration of our commercial relationship with those parties, costly and time-consuming litigation, or additional concessions or obligations being offered by us to resolve such disputes, or could impact our revenue or cost recognition. Any of these outcomes could materially and adversely affect our business, financial condition and results of operations.

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In addition, in our commercial agreements, from time to time in the normal course of business we indemnify third parties with whom we enter into contractual relationships, including customers, suppliers and lessors, with respect to certain matters. We have agreed, under certain conditions, to hold these third parties harmless against specified losses, such as those arising from a breach of representations or covenants, other third party claims that our products when used for their intended purposes infringe the intellectual property rights of such other third parties, or other claims made against certain parties. We may be compelled to enter into or accrue for probable settlements of alleged indemnification obligations, or we may be subject to potential liability arising from our customers’ involvements in legal disputes. In addition, notwithstanding the provisions related to limitations on our liability that we seek to include in our business agreements, the counterparties to such agreements may dispute our interpretation or application of such provisions, and a court of law may not interpret or apply such provisions in our favor, any of which could result in an obligation for us to pay material damages to third parties and engage in costly legal proceedings. It is difficult to determine the maximum potential amount of liability under any indemnification obligations, whether or not asserted, due to our limited history of prior indemnification claims and the unique facts and circumstances that are likely to be involved in any particular claim. Our business, financial condition and results of operations in a reported fiscal period could be materially and adversely affected if we expend significant amounts in defending or settling any purported claims, regardless of their merit or outcomes.

We are also exposed to potential costs associated with unexpected product performance issues. Our products and production processes are extremely complex and thus could contain unexpected product defects, especially when products are first introduced. Unexpected product performance issues could result in significant costs being incurred by us, including increased service or warranty costs, providing product replacements for (or modifications to) defective products, litigation related to defective products, reimbursement for damages caused by our products, product recalls, or product write-offs or disposal costs. These costs could be substantial and could have an adverse impact upon our business, financial condition and operating results. In addition, our reputation with our customers could be damaged as a result of such product defects, which could reduce demand for our products and negatively impact our business.
Furthermore, we occasionally enter into volume purchase agreements with our larger customers, and these agreements may provide for certain volume purchase incentives, such as credits toward future purchases. We believe that these arrangements are beneficial to our long-term business, as they are designed to encourage our customers to purchase higher volumes of our products. However, these arrangements could require us to recognize a reduced level of revenue for the products that are initially purchased, to account for the potential future credits or other volume purchase incentives. As a result, these volume purchase arrangements, while expected to be beneficial to our business over time, could materially and adversely affect our results of operations in near-term periods, including the revenue we can recognize on product sales and therefore our gross margins.
In addition, we 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, we may give these customers limited audit or inspection rights to enable them to confirm that we are complying with these commitments. If a customer elects to exercise its audit or inspection rights, we 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, we have made no significant accruals in our consolidated financial statements for this contingency. While we have not in the past incurred significant expenses for resolving disputes regarding these types of commitments, we cannot make any assurance that we will not incur any such liabilities in the future. Our business, financial condition and results of operations in a reported fiscal period could be materially and adversely affected if we expend significant amounts in supporting an audit or inspection, or defending or settling any purported claims, regardless of their merit or outcomes.

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There are risks associated with our receipt of government funding for research and development.
We are exposed to additional risks related to our receipt of external funding for certain strategic development programs from various governments and government agencies, both domestically and internationally. Governments and government agencies typically have the right to terminate funding programs at any time in their sole discretion, or a project may be terminated by mutual agreement if the parties determine that the project’s goals or milestones are not being achieved, so there is no assurance that these sources of external funding will continue to be available to us in the future. In addition, under the terms of these government grants, the applicable granting agency typically has the right to audit the costs that we incur, directly and indirectly, in connection with such programs. Any such audit could result in modifications to, or even termination of, the applicable government funding program. For example, if an audit were to identify any costs as being improperly allocated to the applicable program, those costs would not be reimbursed, and any such costs that had already been reimbursed would have to be refunded. We do not know the outcome of any future audits. Any adverse finding resulting from any such audit could lead to penalties (financial or otherwise), termination of funding programs, suspension of payments, fines and suspension or prohibition from receiving future government funding from the applicable government or government agency, any of which could adversely impact our operating results, financial condition and ability to operate our business.

We have recorded significant restructuring, inventory write-off and asset impairment charges in the past and may do so again in the future, which could have a material negative impact on our business.
Historically, we recorded material restructuring charges related to our prior global workforce reduction,reductions, large excess inventory write-offs, and material impairment charges related to our goodwill and purchased intangible assets. During the fiscal year ended June 30, 2015, we recorded net restructuring charges of $31.6 million of which $22.4 million was recorded in the fourth quarter of fiscal year ended June 30, 2015, primarily related to ourwe implemented a plan to reduce our global employee workforce in order to streamline our organization and business processes in response to changing customer requirements in our industry. We substantially completed the global employee workforce reduction during the fiscal year ended June 30, 2016 and recorded net restructuring charges of $8.9 million during the same period. Such workforce changes can also temporarily reduce workforce productivity, which could be disruptive to our business and adversely affect our results of operations. In addition, we may not achieve or sustain the expected cost savings or other benefits of our restructuring plans, or do so within the expected time frame. If we again restructure our organization and business processes, implement additional cost reduction actions or discontinue certain business operations, we may take additional, potentially material, restructuring charges related to, among other things, employee terminations or exit costs. We may also be required to write-off additional inventory if our product build plans or usage of service inventory decline. Also, as our lead times from suppliers increase (due to the increasing complexity of the parts and components they provide) and the lead times demanded by our customers decrease (due to the time pressures they face when introducing new products or technology or bringing new facilities into production), we may be compelled to increase our commitments, and therefore our risk exposure, to inventory purchases to meet our customers’ demands in a timely manner, and that inventory may need to be written-off if demand for the underlying product declines for any reason. Such additional write-offs could constitute material charges.
As noted above, in the past, we recorded a material charge related to the impairment of our goodwill and purchased intangible assets. Goodwill represents the excess of costs over the net fair value of net assets acquired in a business combination. Goodwill is not amortized, but is instead tested for impairment at least annually in accordance with authoritative guidance for goodwill. Purchased intangible assets with estimable useful lives are amortized over their respective estimated useful lives based on economic benefit if known or using the straight-line method, and are reviewed for impairment in accordance with authoritative guidance for long-lived assets. The valuation of goodwill and intangible assets requires assumptions and estimates of many critical factors, including revenue and market growth, operating cash flows, market multiples, and discount rates. A substantial decline in our stock price, or any other adverse change in market conditions, particularly if such change has the effect of changing one of the critical assumptions or estimates we previously used to calculate the value of our goodwill or intangible assets (and, as applicable, the amount of any previous impairment charge), could result in a change to the estimation of fair value that could result in an additional impairment charge.
Any such additional material charges, whether related to restructuring or goodwill or purchased intangible asset impairment, may have a material negative impact on our operating results and related financial statements.

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We are exposed to risks related to our financial arrangements with respect to receivables factoring and banking arrangements.
We enter into factoring arrangements with financial institutions to sell certain of our trade receivables and promissory notes from customers without recourse. In addition, we maintain bank accounts with several domestic and foreign financial institutions, any of which may prove not to be financially viable. If we were to stop entering into these factoring arrangements, our operating results, financial condition and cash flows could be adversely impacted by delays or failures in collecting trade receivables. However, by entering into these arrangements, and by engaging these financial institutions for banking services, we are exposed to additional risks. If any of these financial institutions experiences financial difficulties or is otherwise unable to honor the terms of our factoring or deposit arrangements, we may experience material financial losses due to the failure of such arrangements or a lack of access to our funds, any of which could have an adverse impact upon our operating results, financial condition and cash flows.

We are subject to the risks of additional government actions in the event we were to breach the terms of any settlement arrangement into which we have entered.
In connection with the settlement of certain government actions and other legal proceedings related to our historical stock option practices, we have explicitly agreed as a condition to such settlements that we will comply with certain laws, such as the books and records provisions of the federal securities laws. If we were to violate any such law, we might not only be subject to the significant penalties applicable to such violation, but our past settlements may also be impacted by such violation, which could give rise to additional government actions or other legal proceedings. Any such additional actions or proceedings may require us to expend significant management time and incur significant accounting, legal and other expenses, and may divert attention and resources from the operation of our business. These expenditures and diversions, as well as an adverse resolution of any such action or proceeding, could have a material adverse effect on our business, financial condition and results of operations.
General Commercial, Operational, Financial and Regulatory Risks
We are exposed to risks associated with a weakening in the condition of the financial markets and the global economy.
The markets for semiconductors, and therefore our business, are ultimately driven by the global demand for electronic devices by consumers and businesses. Economic uncertainty frequently leads to reduced consumer and business spending, which caused our customers to decrease, cancel or delay their equipment and service orders from us in the economic slowdown during fiscal year 2009. In addition, the tightening of credit markets and concerns regarding the availability of credit that accompanied that slowdown made it more difficult for our customers to raise capital, whether debt or equity, to finance their purchases of capital equipment, including the products we sell. Reduced demand, combined with delays in our customers’ ability to obtain financing (or the unavailability of such financing), has at times in the past adversely affected our product and service sales and revenues and therefore has harmed our business and operating results, and our operating results and financial condition may again be adversely impacted if economic conditions decline from their current levels.
In addition, a decline in the condition of the global financial markets could adversely impact the market values or liquidity of our investments. Our investment portfolio includes corporate and government securities, money market funds and other types of debt and equity investments. Although we believe our portfolio continues to be comprised of sound investments due to the quality and (where applicable) credit ratings, a decline in the capital and financial markets would adversely impact the market value of our investments and their liquidity. If the market value of such investments were to decline, or if we were to have to sell some of our investments under illiquid market conditions, we may be required to recognize an impairment charge on such investments or a loss on such sales, either of which could have an adverse effect on our financial condition and operating results.
If we are unable to timely and appropriately adapt to changes resulting from difficult macroeconomic conditions, our business, financial condition or results of operations may be materially and adversely affected.

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A majority of our annual revenues are derived from outside the United States, and we maintain significant operations outside the United States. We are exposed to numerous risks as a result of the international nature of our business and operations.
A majority of our annual revenues are derived from outside the United States, and we maintain significant operations outside the United States. We expect that these conditions will continue in the foreseeable future. Managing global operations and sites located throughout the world presents a number of challenges, including but not limited to:
managing cultural diversity and organizational alignment;
exposure to the unique characteristics of each region in the global semiconductor market, which can cause capital equipment investment patterns to vary significantly from period to period;
periodic local or international economic downturns;
potential adverse tax consequences, including withholding tax rules that may limit the repatriation of our earnings, and higher effective income tax rates in foreign countries where we do business;
government controls, either by the United States or other countries, that restrict our business overseas or the import or export of semiconductor products or increase the cost of our operations;
compliance with customs regulations in the countries in which we do business;
tariffs or other trade barriers (including those applied to our products or to parts and supplies that we purchase);
political instability, natural disasters, legal or regulatory changes, acts of war or terrorism in regions where we have operations or where we do business;


fluctuations in interest and currency exchange rates. Fluctuations in currency exchange rates may adversely impact our ability to compete on price with local providers or the value of revenues we generate from our international business. Although we attempt to manage some of our near-term currency risks through the use of hedging instruments, there can be no assurance that such efforts will be adequate;
longer payment cycles and difficulties in collecting accounts receivable outside of the United States;
difficulties in managing foreign distributors (including monitoring and ensuring our distributors’ compliance with all applicable United States and local laws); and
inadequate protection or enforcement of our intellectual property and other legal rights in foreign jurisdictions.
Any of the factors above could have a significant negative impact on our business and results of operations.
We might be involved in claims or disputes related to intellectual property or other confidential information that may be costly to resolve, prevent us from selling or using the challenged technology and seriously harm our operating results and financial condition.
As is typical in the semiconductor equipment industry, from time to time we have received communications from other parties asserting the existence of patent rights, copyrights, trademark rights or other intellectual property rights which they believe cover certain of our products, processes, technologies or information. In addition, we occasionally receive notification from customers who believe that we owe them indemnification or other obligations related to intellectual property claims made against such customers by third parties. With respect to intellectual property infringement disputes, our customary practice is to evaluate such infringement assertions and to consider whether to seek licenses where appropriate. However, we cannot ensure that licenses can be obtained or, if obtained, will be on acceptable terms or that costly litigation or other administrative proceedings will not occur. The inability to obtain necessary licenses or other rights on reasonable terms could seriously harm our results of operations and financial condition. Furthermore, we may potentially be subject to claims by customers, suppliers or other business partners, or by governmental law enforcement agencies, related to our receipt, distribution and/or use of third-party intellectual property or confidential information. Legal proceedings and claims, regardless of their merit, and associated internal investigations with respect to intellectual property or confidential information disputes are often expensive to prosecute, defend or conduct; may divert management’s attention and other company resources; and/or may result in restrictions on our ability to sell our products, settlements on significantly adverse terms or adverse judgments for damages, injunctive relief, penalties and fines, any of which could have a significant negative effect on our business, results of operations and financial condition. There can be no assurance regarding the outcome of future legal proceedings, claims or investigations. The instigation of legal proceedings or claims, our inability to favorably resolve or settle such proceedings or claims, or the determination of any adverse findings against us or any of our employees in connection with such proceedings or claims could materially and adversely affect our business, financial condition and results of operations, as well as our business reputation.

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We are exposed to various risks related to the legal (including environmental), regulatory and tax environments in which we perform our operations and conduct our business.
We are subject to various risks related to compliance with new, existing, different, inconsistent or even conflicting laws, rules and regulations enacted by legislative bodies and/or regulatory agencies in the countries in which we operate and with which we must comply, including environmental, safety, antitrust, anti-corruption/anti-bribery, unclaimed property and export control regulations. Our failure or inability to comply with existing or future laws, rules or regulations, or changes to existing laws, rules or regulations (including changes that result in inconsistent or conflicting laws, rules or regulations), in the countries in which we operate could result in violations of contractual or regulatory obligations that may adversely affect our operating results, financial condition and ability to conduct our business. From time to time, we may receive inquiries or audit notices from governmental or regulatory bodies, or we may participate in voluntary disclosure programs, related to legal, regulatory or tax compliance matters, and these inquiries, notices or programs may result in significant financial cost (including investigation expenses, defense costs, assessments and penalties), reputational harm and other consequences that could materially and adversely affect our operating results and financial condition.

Our properties and many aspects of our business operations are subject to various domestic and international environmental laws and regulations, including those that control and restrict the use, transportation, emission, discharge, storage and disposal of certain chemicals, gases and other substances. Any failure to comply with applicable environmental laws, regulations or requirements may subject us to a range of consequences, including fines, suspension of certain of our business activities, limitations on our ability to sell our products, obligations to remediate environmental contamination, and criminal and civil liabilities or other sanctions. In addition, changes in environmental regulations (including regulations relating to climate change and greenhouse gas emissions) could require us to invest in potentially costly pollution control equipment, alter our manufacturing processes or use substitute (potentially more expensive and/or rarer) materials. Further, we use hazardous and other regulated materials that subject us to risks of strict liability for damages caused by any release, regardless of fault. We also face increasing complexity in our manufacturing, product design and procurement operations as we adjust to new and prospective requirements relating to the materials composition of our products, including restrictions on lead and other substances and requirements to track the sources of certain metals and other materials. The cost of complying, or of failing to comply, with these and other regulatory restrictions or contractual obligations could adversely affect our operating results, financial condition and ability to conduct our business.
In addition, we may from time to time be involved in legal proceedings or claims regarding employment, immigration, contracts, product performance, product liability, antitrust, environmental regulations, securities, unfair competition and other matters (in addition to proceedings and claims related to intellectual property matters, which are separately discussed elsewhere in this Item 1A). These legal proceedings and claims, regardless of their merit, may be time-consuming and expensive to prosecute or defend, divert management’s attention and resources, and/or inhibit our ability to sell our products. There can be no assurance regarding the outcome of current or future legal proceedings or claims, which could adversely affect our operating results, financial condition and ability to operate our business.
Recent regulationsRegulations related to “conflict minerals” may force us to incur additional expenses, may result in damage to our business reputation and may adversely impact our ability to conduct our business.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC adopted requirements for companies that use certain minerals and derivative metals (referred to as “conflict minerals,” regardless of their actual country of origin) in their products. Some of these metals are commonly used in electronic equipment and devices, including our products. These requirements require companies to annually investigate, disclose and report whether or not such metals originated from the Democratic Republic of Congo or adjoining countries. We have an extremely complex supply chain, with numerous suppliers (many of whom are not obligated to investigate their own supply chains) for the components and parts used in each of our products. As a result, we may incur significant costs to comply with the diligence and disclosure requirements, including costs related to determining the source of any of the relevant metals used in our products. In addition, because our supply chain is so complex, we may not be able to sufficiently verify the origin of all the relevant metals used in our products through the due diligence procedures that we implement, which may harm our business reputation. Though we do not anticipate that our customers will need to know our conflict mineral status to satisfy their own SEC reporting obligations (if any), we may also face difficulties in satisfying customers if they nonetheless require that we prove or certify that our products are “conflict free.” Key components and parts that can be shown to be “conflict free” may not be available to us in sufficient quantity, or at all, or may only be available at significantly higher cost to us. If we are not able to meet customer requirements, customers may choose to disqualify us as a supplier. Any of these outcomes could adversely impact our business, financial condition or operating results.

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We depend on key personnel to manage our business effectively, and if we are unable to attract, retain and motivate our key employees, our sales and product development could be harmed.
Our employees are vital to our success, and our key management, engineering and other employees are difficult to replace. We generally do not have employment contracts with our key employees. Further, we do not maintain key person life insurance on any of our employees. The expansion of high technology companies worldwide has increased demand and competition for qualified personnel. If we are unable to retain key personnel, or if we are not able to attract, assimilate and retain additional highly qualified employees to meet our needs in the future, our business and operations could be harmed.

We outsource a number of services to third-party service providers, which decreases our control over the performance of these functions. Disruptions or delays at our third-party service providers could adversely impact our operations.
We outsource a number of services, including our transportation, information systems management and logistics management of spare parts and certain accounting and procurement functions, to domestic and overseas third-party service providers. While outsourcing arrangements may lower our cost of operations, they also reduce our direct control over the services rendered. It is uncertain what effect such diminished control will have on the quality or quantity of products delivered or services rendered, on our ability to quickly respond to changing market conditions, or on our ability to ensure compliance with all applicable domestic and foreign laws and regulations. In addition, many of these outsourced service providers, including certain hosted software applications that we use for confidential data storage, employ “cloud computing” technology for such storage (which refers to an information technology hosting and delivery system in which data is not stored within the user’s physical infrastructure but instead is delivered to and consumed by the user as an Internet-based service). These providers’ cloud computing systems may be susceptible to “cyber incidents,” such as intentional cyber attacks aimed at theft of sensitive data or inadvertent cyber-security compromises, thatwhich are outside of our control. If we do not effectively develop and manage our outsourcing strategies, if required export and other governmental approvals are not timely obtained, if our third-party service providers do not perform as anticipated or do not adequately protect our data from cyber-related security breaches, or if there are delays or difficulties in enhancing business processes, we may experience operational difficulties (such as limitations on our ability to ship products), increased costs, manufacturing or service interruptions or delays, loss of intellectual property rights or other sensitive data, quality and compliance issues, and challenges in managing our product inventory or recording and reporting financial and management information, any of which could materially and adversely affect our business, financial condition and results of operations.
We are exposed to risks related to cybersecurity threats and cyber incidents.
In the conduct of our business, we collect, use, transmit and store data on information systems. This data includes confidential information, transactional information and intellectual property belonging to us, our customers and our business partners, as well as personally-identifiable information of individuals. We allocate significant resources to network security, data encryption and other measures to protect our information systems and data from unauthorized access or misuse. Despite our ongoing efforts to enhance our network security measures, our information systems are susceptible to computer viruses, cyber-related security breaches and similar disruptions from unauthorized intrusions, tampering, misuse, criminal acts, including phishing, or misuse,other events or developments that we may be unable to anticipate or fail to mitigate and are subject to the inherent vulnerabilities of network security measures. We have experienced cyber-related attacks in the past, and may experience cyber-related attacks in the future. Our security measures may also be breached due to employee errors, malfeasance, or otherwise. Third parties may also attempt to influence employees, users, suppliers or customers to disclose sensitive information in order to gain access to our, our customers’ or business partners’ data. Because the techniques used to obtain unauthorized access to the information systems change frequently, and may not be recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.
Any of thesesuch occurrences could result in disruptions to our operations; misappropriation, corruption or theft of confidential information, including intellectual property and other critical data, of KLA-Tencor, our customers and other business partners; misappropriation of funds and company assets; reduced value of our investments in research, development and engineering; litigation with, or payment of damages to, third parties; reputational damage; costs to comply with regulatory inquiries or actions; data privacy issues; costs to rebuild our internal information systems; and increased cybersecurity protection and remediation costs.
We carry insurance that provides some protection against the potential losses arising from a cybersecurity incident but it will not likely cover all such losses, and the losses that it does not cover may be significant.

We rely upon certain critical information systems for our daily business operations. Our inability to use or access our information systems at critical points in time could unfavorably impact our business operations.
Our global operations are dependent upon certain information systems, including telecommunications, the internet, our corporate intranet, network communications, email and various computer hardware and software applications. System failures or malfunctioning, such as difficulties with our customer relationship management (“CRM”) system, could disrupt our operations and our ability to timely and accurately process and report key components of our financial results. Our enterprise resource planning (“ERP”) system is integral to our ability to accurately and efficiently maintain our books and records, record transactions, provide critical information to our management, and prepare our financial statements. Any disruptions or difficulties that may occur in connection with our ERP system or other systems (whether in connection with the regular operation, periodic enhancements, modifications or upgrades of such systems or the integration of our acquired businesses into such systems) could adversely affect our ability to complete important business processes, such as the evaluation of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. Any of these events could have an adverse effect on our business, operating results and financial condition.

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Acquisitions are an important element of our strategy but, because of the uncertainties involved, we may not find suitable acquisition candidates and we may not be able to successfully integrate and manage acquired businesses. We are also exposed to risks in connection with strategic alliances into which we may enter.
In addition to our efforts to develop new technologies from internal sources, part of our growth strategy is to pursue acquisitions and acquire new technologies from external sources. As part of this effort, we may make acquisitions of, or significant investments in, businesses with complementary products, services and/or technologies. There can be no assurance that we will find suitable acquisition candidates or that acquisitions we complete will be successful. In addition, we may use equity to finance future acquisitions, which would increase our number of shares outstanding and be dilutive to current stockholders.
If we are unable to successfully integrate and manage acquired businesses or if acquired businesses perform poorly, then our business and financial results may suffer. It is possible that the businesses we have acquired, as well as businesses that we may acquire in the future, may perform worse than expected or prove to be more difficult to integrate and manage than anticipated. In addition, we may lose key employees of the acquired companies. As a result, risks associated with acquisition transactions may give rise to a material adverse effect on our business and financial results for a number of reasons, including:
we may have to devote unanticipated financial and management resources to acquired businesses;
the combination of businesses may cause the loss of key personnel or an interruption of, or loss of momentum in, the activities of our company and/or the acquired business;
we may not be able to realize expected operating efficiencies or product integration benefits from our acquisitions;
we may experience challenges in entering into new market segments for which we have not previously manufactured and sold products;
we may face difficulties in coordinating geographically separated organizations, systems and facilities;
the customers, distributors, suppliers, employees and others with whom the companies we acquire have business dealings may have a potentially adverse reaction to the acquisition;
we may have to write-off goodwill or other intangible assets; and
we may incur unforeseen obligations or liabilities in connection with acquisitions.
At times, we may also enter into strategic alliances with customers, suppliers or other business partners with respect to development of technology and intellectual property. These alliances typically require significant investments of capital and exchange of proprietary, highly sensitive information. The success of these alliances depends on various factors over which we may have limited or no control and requires ongoing and effective cooperation with our strategic partners. Mergers and acquisitions and strategic alliances are inherently subject to significant risks, and the inability to effectively manage these risks could materially and adversely affect our business, financial condition and operating results.

Disruption of our manufacturing facilities or other operations, or in the operations of our customers, due to earthquake, flood, other natural catastrophic events, health epidemics or terrorism could result in cancellation of orders, delays in deliveries or other business activities, or loss of customers and could seriously harm our business.
We have significant manufacturing operations in the United States, Singapore, Israel, Germany and China. In addition, our business is international in nature, with our sales, service and administrative personnel and our customers located in numerous countries throughout the world. Operations at our manufacturing facilities and our assembly subcontractors, as well as our other operations and those of our customers, are subject to disruption for a variety of reasons, including work stoppages, acts of war, terrorism, health epidemics, fire, earthquake, volcanic eruptions, energy shortages, flooding or other natural disasters. Such disruption could cause delays in, among other things, shipments of products to our customers, our ability to perform services requested by our customers, or the installation and acceptance of our products at customer sites. We cannot ensure that alternate means of conducting our operations (whether through alternate production capacity or service providers or otherwise) would be available if a major disruption were to occur or that, if such alternate means were available, they could be obtained on favorable terms.
In addition, as part of our cost-cutting actions, we have consolidated several operating facilities. Our California operations are now primarily centralized in our Milpitas facility. The consolidation of our California operations into a single campus could further concentrate the risks related to any of the disruptive events described above, such as acts of war or terrorism, earthquakes, fires or other natural disasters, if any such event were to impact our Milpitas facility.

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We are predominantly uninsured for losses and interruptions caused by terrorist acts and acts of war. If international political instability continues or increases, our business and results of operations could be harmed.
The threat of terrorism targeted at, or acts of war in, the regions of the world in which we do business increases the uncertainty in our markets. Any act of terrorism or war that affects the economy or the semiconductor industry could adversely affect our business. Increased international political instability in various parts of the world, disruption in air transportation and further enhanced security measures as a result of terrorist attacks may hinder our ability to do business and may increase our costs of operations. We maintain significant manufacturing and research and development operations in Israel, an area that has historically experienced a high degree of political instability, and we are therefore exposed to risks associated with future instability in that region. Such instability could directly impact our ability to operate our business (or our customers’ ability to operate their businesses) in the affected region, cause us to incur increased costs in transportation, make such transportation unreliable, increase our insurance costs, and cause international currency markets to fluctuate. Such instability could also have the same effects on our suppliers and their ability to timely deliver their products. If international political instability continues or increases in any region in which we do business, our business and results of operations could be harmed. We are predominantly uninsured for losses and interruptions caused by terrorist acts and acts of war.
We self-insure certain risks including earthquake risk. If one or more of the uninsured events occurs, we could suffer major financial loss.
We purchase insurance to help mitigate the economic impact of certain insurable risks; however, certain risks are uninsurable, are insurable only at significant cost or cannot be mitigated with insurance. Accordingly, we may experience a loss that is not covered by insurance, either because we do not carry applicable insurance or because the loss exceeds the applicable policy amount or is less than the deductible amount of the applicable policy. For example, we do not currently hold earthquake insurance. An earthquake could significantly disrupt our manufacturing operations, a significant portion of which are conducted in California, an area highly susceptible to earthquakes. It could also significantly delay our research and engineering efforts on new products, much of which is also conducted in California. We take steps to minimize the damage that would be caused by an earthquake, but there is no certainty that our efforts will prove successful in the event of an earthquake. We self-insure earthquake risks because we believe this is a prudent financial decision based on our large cash reserves and the high cost and limited coverage available in the earthquake insurance market. Certain other risks are also self-insured either based on a similar cost-benefit analysis, or based on the unavailability of insurance. If one or more of the uninsured events occurs, we could suffer major financial loss.

We are exposed to foreign currency exchange rate fluctuations. Although we hedge certain currency risks, we may still be adversely affected by changes in foreign currency exchange rates or declining economic conditions in these countries.
We have some exposure to fluctuations in foreign currency exchange rates, primarily the euroJapanese Yen and the Japanese Yen.euro. We have international subsidiaries that operate and sell our products globally. In addition, an increasing proportion of our manufacturing activities are conducted outside of the United States, and many of the costs associated with such activities are denominated in foreign currencies. We routinely hedge our exposures to certain foreign currencies with certain financial institutions in an effort to minimize the impact of certain currency exchange rate fluctuations, but these hedges may be inadequate to protect us from currency exchange rate fluctuations. To the extent that these hedges are inadequate, or if there are significant currency exchange rate fluctuations in currencies for which we do not have hedges in place, our reported financial results or the way we conduct our business could be adversely affected. Furthermore, if a financial counterparty to our hedges experiences financial difficulties or is otherwise unable to honor the terms of the foreign currency hedge, we may experience material financial losses.
We are exposed to fluctuations in interest rates and the market values of our portfolio investments; impairment of our investments could harm our earnings. In addition, we and our stockholders are exposed to risks related to the volatility of the market for our common stock.
Our investment portfolio primarily consists of both corporate and government debt securities that are susceptible to changes in market interest rates and bond yields. As market interest rates and bond yields increase, those securities with a lower yield-at-cost show a mark-to-market unrealized loss. We believe we have the ability to realize the full value of all these investments upon maturity. However, an impairment of the fair market value of our investments, even if unrealized, must be reflected in our financial statements for the applicable period and may therefore have a material adverse effect on our results of operations for that period.

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In addition, the market price for our common stock is volatile and has fluctuated significantly during recent years. The trading price of our common stock could continue to be highly volatile and fluctuate widely in response to various factors, including without limitation conditions in the semiconductor industry and other industries in which we operate, fluctuations in the global economy or capital markets, our operating results or other performance metrics, or adverse consequences experienced by us as a result of any of the risks described elsewhere in this Item 1A. Volatility in the market price of our common stock could cause an investor in our common stock to experience a loss on the value of their investment in us and could also adversely impact our ability to raise capital through the sale of our common stock or to use our common stock as consideration to acquire other companies.
We are exposed to risks in connection with tax and regulatory compliance audits in various jurisdictions.
We are subject to tax and regulatory compliance audits (such as related to customs or product safety requirements) in various jurisdictions, and such jurisdictions may assess additional income or other taxes, penalties, fines or other prohibitions against us. Although we believe our tax estimates are reasonable and that our products and practices comply with applicable regulations, the final determination of any such audit and any related litigation could be materially different from our historical income tax provisions and accruals related to income taxes and other contingencies. The results of an audit or litigation could have a material adverse effect on our operating results or cash flows in the period or periods for which that determination is made.
A change in our effective tax rate can have a significant adverse impact on our business.
We earn profits in, and are therefore potentially subject to taxes in, the U.S. and numerous foreign jurisdictions, including Singapore, Israel and the Cayman Islands, the countries in which we earn the majority of our non-U.S. profits. Due to economic, political or other conditions, tax rates in those jurisdictions may be subject to significant change. A number of factors may adversely impact our future effective tax rates, such as the jurisdictions in which our profits are determined to be earned and taxed; changes in the tax rates imposed by those jurisdictions; the resolution of issues arising from tax audits with various tax authorities; changes in the valuation of our deferred tax assets and liabilities; adjustments to estimated taxes upon finalization of various tax returns; increases in expenses not deductible for tax purposes, including write-offs of acquired in-process research and development and impairment of goodwill in connection with acquisitions; changes in available tax credits; changes in stock-based compensation expense; changes in tax laws or the interpretation of such tax laws (for example, proposals for fundamental United States international tax reform); changes in generally accepted accounting principles; and the repatriation of earnings from outside the United States for which we have not previously provided for United States taxes. A change in our effective tax rate can materially and adversely impact our results from operations.

Compliance with federal securities laws, rules and regulations, as well as NASDAQ requirements, is becoming increasingly complex, and the significant attention and expense we must devote to those areas may have an adverse impact on our business.
Federal securities laws, rules and regulations, as well as NASDAQ rules and regulations, require companies to maintain extensive corporate governance measures, impose comprehensive reporting and disclosure requirements, set strict independence and financial expertise standards for audit and other committee members and impose civil and criminal penalties for companies and their chief executive officers, chief financial officers and directors for securities law violations. These laws, rules and regulations have increased, and in the future are expected to continue to increase, the scope, complexity and cost of our corporate governance, reporting and disclosure practices, which could harm our results of operations and divert management’s attention from business operations.
A change in accounting standards or practices or a change in existing taxation rules or practices (or changes in interpretations of such standards, practices or rules) can have a significant effect on our reported results and may even affect reporting of transactions completed before the change is effective.
New accounting pronouncements and taxation rules and varying interpretations of accounting pronouncements and taxation rules have occurred and will continue to occur in the future. Changes to (or revised interpretations or applications of) existing tax or accounting rules or the questioning of current or past practices may adversely affect our reported financial results or the way we conduct our business.
ITEM 1B.UNRESOLVED STAFF COMMENTS

None.

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ITEM 2.PROPERTIES
Information regarding our principal properties as of June 30, 20152016 is set forth below:
Location Type Principal Use 
Square
Footage
 Ownership
Milpitas, CA 
Office, plant and
warehouse
 Principal Executive Offices, Research, Engineering, Marketing, Manufacturing, Service and Sales Administration 727,302 Owned
         
Westwood, MA(1)
 Office and plant Engineering, Marketing, Manufacturing and Service 116,908 Leased
         
Leuven, Belgium(1)
 
Office, plant and
warehouse
 Engineering, Marketing and Service and Sales Administration 99,31560,619 Owned
         
Shenzhen, China Office and plant Sales, Service and Manufacturing 47,213 Leased
         
Shanghai, China Office Research, Service and Sales Administration 41,184 Leased
         
Weilburg, Germany Office and plant Engineering, Marketing, Manufacturing, Service and Sales Administration 138,119 Leased
         
Chennai, India Office Engineering 33,366 Owned
         
Migdal Ha’Emek, Israel Office and plant Research, Engineering, Marketing, Manufacturing, Service and Sales Administration 191,982 Owned
         
Yokohama, Japan 
Office and
warehouse
 Sales and Service 37,41835,531 Leased
         
Serangoon, Singapore(2)
 Office and plant Sales, Service and Manufacturing 248,155 Owned
         
Hsinchu, Taiwan Office Sales and Service 73,676 Leased
__________________   
(1)Portions of this property are sublet, are vacant and marketed to sublease, or are leased to third parties.
(2)We own the building at our location in Serangoon, Singapore, but the land on which this building resides is leased.
As of June 30, 20152016, we owned or leased a total of approximately 2.12.0 million square feet of space worldwide, including the locations listed above and office space for smaller sales and service offices in several locations throughout the world. Our operating leases expire at various times through December 31, 2021, subject to renewal, with some of the leases containing renewal option clauses at the fair market value, for additional periods up to five years. Additional information regarding these leases is incorporated herein by reference to Note 13,12, “Commitments and Contingencies” to the Consolidated Financial Statements.consolidated financial statements. We believe our properties are adequately maintained and suitable for their intended use and that our production facilities have capacity adequate for our current needs.
ITEM 3.LEGAL PROCEEDINGS
The information set forth below under Note 14,13, “Litigation and Other Legal Matters” to the Consolidated Financial Statementsconsolidated financial statements is incorporated herein by reference.
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.

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PART II

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed and traded on the NASDAQ Global Select Market under the symbol “KLAC.”
The prices per share reflected in the following table represent the high and low closing prices for our common stock on the NASDAQ Global Select Market for the periods indicated:
Year ended June 30, 2015 Year ended June 30, 2014Year ended June 30, 2016 Year ended June 30, 2015 
High     Low     Cash Dividends Declared per share High     Low     Cash Dividends Declared per shareHigh     Low     Cash Dividends Declared per share High     Low     Cash Dividends Declared per share 
First Fiscal Quarter$80.86
 $71.40
 $0.50
 $62.01
 $54.67
 $0.45
$57.35
 $44.95
 $0.52
 $81.27
 $70.10
 $0.50
 
Second Fiscal Quarter$84.18
 $65.61
 $17.00
*$66.19
 $59.46
 $0.45
$70.28
 $48.73
 $0.52
 $84.21
 $65.25
 $17.00
*
Third Fiscal Quarter$70.95
 $58.29
 $0.50
 $70.02
 $59.73
 $0.45
$73.19
 $62.33
 $0.52
 $71.26
 $57.49
 $0.50
 
Fourth Fiscal Quarter$60.30
 $55.65
 $0.50
 $72.64
 $62.30
 $0.45
$75.17
 $67.32
 $0.52
 $60.80
 $55.24
 $0.50
 
__________________
* Includes a special cash dividend of $16.50 per share that was declared by our Board of Directors on November 19, 2014 and was paid on December 9, 2014 to the stockholders of record as of the close of business on December 1, 2014 during the second quarter of the fiscal year ended June 30, 2015. Additional information regarding special cash dividendsdividend can be found in Note 8,7, “Equity and Long-term Incentive Compensation Plans.”
On July 14, 2015, we announced that our Board of Directors had authorized a further increase in the level of the Company’s quarterly dividend from $0.50 to $0.52 per share. Additional information regarding the increase in cash dividends after fiscal year-end can be found in Note 19, “Subsequent Events.”
As of July 17, 201515, 2016, there were 451312 holders of record of our common stock.
Equity Repurchase Plans
The following isOur Board of Directors has authorized a summaryprogram for us to repurchase shares of our common stock under which an aggregate of approximately 5.9 million shares were available for repurchase as of June 30, 2016. In connection with entering into the Merger Agreement, we suspended further repurchases for each monthunder our repurchase program effective October 21, 2015. We did not repurchase any shares during the fourth quarter ofthree months ended June 30, 2016 and repurchased 3.4 million shares ($175.7 million) in the fiscal year ended June 30, 2015(1): 2016.

Period
Total Number of
Shares
Purchased (2)
 Average Price Paid
per Share		 
Maximum Number of
Shares that May
Yet Be Purchased Under the Plans or Programs (3)
April 1, 2015 to April 30, 20151,350,089
 $58.93
 10,760,336
May 1, 2015 to May 31, 2015634,622
 $59.31
 10,125,714
June 1, 2015 to June 30, 2015764,301
 $57.26
 9,361,413
Total2,749,012
 $58.55
  

  __________________ 
(1)Our Board of Directors has authorized a program for us to repurchase shares of our common stock. The total number and dollar amount of shares repurchased for the fiscal years ended June 30, 2015, 2014 and 2013 were 9.3 million shares ($608.9 million), 3.8 million shares ($240.8 million) and 5.4 million shares ($273.3 million), respectively. On July 7, 2014, our Board of Directors authorized KLA-Tencor to repurchase up to 13 million additional shares of our common stock. On October 23, 2014, as part of the leveraged recapitalization transaction, our Board of Directors authorized an increase to the existing stock repurchase program of 3.6 million additional shares of our common stock.
(2)All shares were purchased pursuant to the publicly announced repurchase program described in footnote 1 above. Shares are reported based on the trade date of the applicable repurchase.
(3)The stock repurchase program has no expiration date. Future repurchases of our common stock under our repurchase program may be effected through various different repurchase transaction structures, including isolated open market transactions or systematic repurchase plans.

34

Stock Performance Graph and Cumulative Total Return
Notwithstanding any statement to the contrary in any of our previous or future filings with the Securities and Exchange Commission, the following information relating to the price performance of our common stock shall not be deemed “filed” with the Commission or “soliciting material” under the Securities Exchange Act of 1934 and shall not be incorporated by reference into any such filings.
The following graph compares the cumulative 5-year total return attained by stockholders on our common stock relative to the cumulative total returns of the S&P 500 Index (as required by SEC regulations) and the Philadelphia Semiconductor Index (PHLX). The graph tracks the performance of a $100 investment in our common stock and in each of the indices (with the reinvestment of all dividends) from June 30, 20102011 to June 30, 20152016.
6/10 6/11 6/12 6/13 6/14 6/15June 2011 June 2012 June 2013 June 2014 June 2015 June 2016
KLA-Tencor Corporation$100.00 $148.99 $187.01 $218.28 $292.87 $290.54$100.00 $125.52 $146.51 $196.57 $195.01 $262.83
S&P 500$100.00 $130.69 $137.81 $166.20 $207.10 $222.47$100.00 $105.45 $127.17 $158.46 $170.22 $177.02
PHLX Semiconductor$100.00 $135.83 $139.10 $165.22 $223.35 $233.52$100.00 $104.43 $123.18 $166.91 $174.92 $184.43
__________________ 
 * Assumes $100 invested on June 30, 20102011 in stock or index, including reinvestment of dividends.
Our fiscal year ends June 30. The comparisons in the graph above are based upon historical data and are not necessarily indicative of, nor intended to forecast, future stock price performance.

35

ITEM 6.SELECTED FINANCIAL DATA
The following tables include selected consolidated summary financial data for each of our last five fiscal years. This data should be read in conjunction with Item 8, “Financial Statements and Supplementary Data,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K. 
Year ended June 30,Year ended June 30,
(In thousands, except per share amounts)2015 2014 2013 2012 20112016 2015 2014 2013 2012
Consolidated Statements of Operations:                  
Total revenues$2,814,049
 $2,929,408
 $2,842,781
 $3,171,944
 $3,175,167
$2,984,493
 $2,814,049
 $2,929,408
 $2,842,781
 $3,171,944
Net income(1)
$366,158
 $582,755
 $543,149
 $756,015
 $794,488
$704,422
 $366,158
 $582,755
 $543,149
 $756,015
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
 $1.40
 $1.00
$2.08
 $18.50
 $1.80
 $1.60
 $1.40
Net income per share:                  
Basic$2.26
 $3.51
 $3.27
 $4.53
 $4.75
$4.52
 $2.26
 $3.51
 $3.27
 $4.53
Diluted$2.24
 $3.47
 $3.21
 $4.44
 $4.66
$4.49
 $2.24
 $3.47
 $3.21
 $4.44
                  
As of June 30,As of June 30,
2015 2014 2013 2012 20112016 2015 2014 2013 2012
Consolidated Balance Sheets:                  
Cash, cash equivalents and marketable securities$2,387,111
 $3,152,637
 $2,918,881
 $2,534,444
 $2,038,535
$2,491,294
 $2,387,111
 $3,152,637
 $2,918,881
 $2,534,444
Working capital(2)$2,902,813
 $3,690,484
 $3,489,236
 $3,300,401
 $2,796,414
$2,865,609
 $2,902,813
 $3,690,484
 $3,489,236
 $3,300,401
Total assets(3)
$4,826,012
 $5,535,846
 $5,283,804
 $5,096,020
 $4,670,498
$4,962,432
 $4,826,012
 $5,535,846
 $5,283,804
 $5,096,020
Long-term debt(2) (3)
$3,173,435
 $745,101
 $743,823
 $742,545
 $741,267
Long-term debt(3)
$3,057,936
 $3,173,435
 $745,101
 $743,823
 $742,545
Total stockholders’ equity(2)(3)
$421,439
 $3,669,346
 $3,482,152
 $3,315,595
 $2,860,893
$689,114
 $421,439
 $3,669,346
 $3,482,152
 $3,315,595
______________________
(1)Our net income decreased to $366.2 million in the fiscal year ended June 30, 2015, primarily as a result of the impact of the pre-tax net loss of $131.7 million for the loss on extinguishment of debt and certain one-time expenses of $2.5 million associated with the leveraged recapitalization that was completed during the three months ended December 31, 2014.
(2)We early adopted the accounting standards update regarding classification of deferred taxes at the beginning of the fourth quarter of fiscal year ended 2016. Upon adoption, approximately $218 million in net current deferred tax assets were reclassified to noncurrent. No prior periods were retrospectively adjusted. Refer to Note 1, “Description of Business and Summary of Significant Accounting Policies” for additional details.
(3)Our long-term debt increased to $3.17 billion at the end of fiscal year ended June 30, 2015, because, as part of the leveraged recapitalization plan, we issued $2.50 billion aggregate principal amount of senior, unsecured long-term notes (collectively referred to as “Senior Notes”), entered into $750$750.0 million of five-year senior unsecured prepayable term loans and a $500 million unfunded revolving credit facility and redeemed our $750$750.0 million aggregate principal amount of 6.900% Senior Notes due in 2018 (the “2018 Notes”). Refer to Note 7,6, “Debt” for additional details. Our total stockholders’ equity decreased to $421.4 million at the end of fiscal year ended June 30, 2015, because, as part of our leveraged recapitalization plan, we declared a special cash dividend of approximately $2.76 billion. Refer to Note 8,7, “Equity and Long-term Incentive Compensation Plans” for additional details.
(3)We 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, we applied the accounting standard update on a retrospective basis by reclassifying the presentation of the debt issuance costs which was originally included in other current and other non-current assets against the long-term debt on the Consolidated Balance Sheets as of June 30, 2014, 2013, 2012 and 2011. The change in the classification of the debt issuance costs reduced total assets and total liabilities by $2.8 million, $3.6 million, $4.3 million and $5.0 million as of June 30, 2014, 2013, 2012 and 2011, respectively. There is no impact to our Consolidated Statements of Operations, Comprehensive Income, Stockholder’s Equity and Cash Flows for the fiscal years ended June 30, 2014, 2013, 2012 and 2011.

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ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related notes included in Item 8, “Financial Statements and Supplementary Data,” in this Annual Report on Form 10-K. This discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors, including but not limited to those discussed in Item 1A, “Risk Factors” and elsewhere in this Annual Report on Form 10-K. (See “Special Note Regarding Forward-Looking Statements.”)
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of our 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 our accounting policies that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base these estimates and assumptions on historical experience, and evaluate them on an on-going basis to ensure that they remain reasonable under current conditions. Actual results could differ from those estimates. We discuss the development and selection of the critical accounting estimates with the Audit Committee of our Board of Directors on a quarterly basis, and the Audit Committee has reviewed our related disclosure in this Annual Report on Form 10-K. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
Revenue Recognition. We recognize 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. We derive revenue from three sources—sales of systems, spare parts and services. In general, we recognize revenue for systems when the system has been installed, is operating according to predetermined specifications and is accepted by the customer. When we have demonstrated a history of successful installation and acceptance, we recognize revenue upon delivery and customer acceptance. Under certain circumstances, however, we recognize 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 we 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 we recognize 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. We have 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, we allocate arrangement consideration based on the selling price hierarchy. For substantially all of the arrangements with multiple deliverables pertaining to products and services, we use vendor-specific objective evidence (“VSOE”) or third-party evidence (“TPE”) to allocate the selling price to each deliverable. We determine TPE based on historical prices charged for products and services when sold on a stand-alone basis. When we are unable to establish relative selling price using VSOE or TPE, we use estimated selling price (“ESP”) in our allocation of arrangement consideration. The objective of ESP is to determine the price at which we 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. We regularly review relative selling prices and maintain internal controls over the establishment and updates of these estimates.
In a multiple element revenue arrangement, we defer 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 our control. 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. We estimate the value of the trade-in right and reduce 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.

37

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.
We sell stand-alone software that is subject to the software revenue recognition guidance. We periodically review selling prices to determine whether VSOE exists, and in situations where we are unable to establish VSOE for undelivered elements such as post-contract service, revenue is recognized ratably over the term of the service contract.
We also defer 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 our 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.
We enter into sales arrangements that may consist of multiple deliverables of our products and services where certain elements of the sales arrangement are not delivered and accepted in one reporting period. Judgment is required to properly identify the accounting units of the multiple deliverable transactions and to determine the manner in which revenue should be allocated among the accounting units. Additionally, judgment is required to interpret various commercial terms and determine when all criteria of revenue recognition have been met in order for revenue recognition to occur in the appropriate accounting period. While changes in the allocation of the estimated selling price between the accounting units will not affect the amount of total revenue recognized for a particular arrangement, any material changes in these allocations could impact the timing of revenue recognition, which could have a material effect on our financial position and results of operations.
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. Our 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. We write 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.
Warranty. We provide standard warranty coverage on our systems for 40 hours per week for 12 months, providing labor and parts necessary to repair the systems during the warranty period. We account 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, we calculate the average service hours and parts expense per system and apply the actual labor and overhead rates to determine the estimated warranty charge. We update these estimated charges on a regular basis. The actual product performance and/or field expense profiles may differ, and in those cases we adjust our warranty accruals accordingly. See Note 13,12, “Commitments and Contingencies” to the Consolidated Financial Statements for a detailed description.additional details.

Allowance for Doubtful Accounts. A majority of our trade receivables are derived from sales to large multinational semiconductor manufacturers throughout the world. In order to monitor potential credit losses, we perform ongoing credit evaluations of our customers’ financial condition. An allowance for doubtful accounts is maintained for probable credit losses based upon our 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. We take into consideration (1) any circumstances of which we are aware of a customer’s inability to meet its financial obligations; and (2) our judgments as to prevailing economic conditions in the industry and their impact on our customers. If circumstances change, such that the financial conditions of our customers are adversely affected and they are unable to meet their financial obligations to us, we may need to record additional allowances, which would result in a reduction of our net income.

38

Accounting for Stock-Based Compensation.Compensation Plans. We account 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 our common stock on the grant date for restricted stock units, 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 our common stock on the grant date. The award holder is not entitled to receive 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 our common stock, equal to the cash dividends that would have been received on the shares of our 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 our Employee Stock Purchase Plan. 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 our common stock. We have elected not to include the indirect tax effects of stock-based compensation deductions when calculating the windfall benefits and therefore recognize 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 our 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 us 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.
Contingencies and Litigation. We are 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. We accrue a liability and recognize 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 13,12, “Commitments and Contingencies” and Note 14,13, “Litigation and Other Legal Matters” to the Consolidated Financial Statements for a detailed description.additional details.
Goodwill and Intangible Assets. We assess 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 recoverabilityimpairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. See Note 6,5, “Goodwill and Purchased Intangible Assets” to the Consolidated Financial Statements for a detailed description.additional details. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination. We performed our annual qualitative assessment of the goodwill by reporting unit in our second quarter of fiscal year ended June 30, 20152016 and concluded that there was no impairment. There have been no significant events or circumstances affecting the valuation of goodwill subsequent to our annual impairment test. The next annual evaluation of the goodwill by reporting unit will be performed in the second quarter of the fiscal year ending June 30, 2016.2017.
If we were to encounter challenging economic conditions, such as a decline in our operating results, an unfavorable industry or macroeconomic environment, a substantial decline in our stock price, or any other adverse change in market conditions, we may be required to perform the two-step quantitative goodwill impairment analysis. In addition, if such conditions have the effect of changing one of the critical assumptions or estimates we use to calculate the value of our goodwill or intangible assets, we may be required to record goodwill and/or intangible asset impairment charges in future periods. It is not possible at this time to determine if any such future impairment charge would occur or, if it does, whether such charge would be material to our results of operations.

Income Taxes. We account 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 a portion of the deferred tax asset will not be realized. We have determined that a valuation allowance is necessary against a portion of the deferred tax assets, but we anticipate that our future taxable income will be sufficient to recover the remainder of our deferred tax assets. However, should there be a change in our ability to recover our deferred tax assets that are not subject to a valuation allowance, we could be required to record an additional valuation allowance against such deferred tax assets. This would result in an increase to our tax provision in the period in which we determine that the recovery is not probable.

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On a quarterly basis, we provide for income taxes based upon an estimated annual effective income tax rate. The effective tax rate is highly dependent upon the geographic composition of worldwide earnings, tax regulations governing each region, availability of tax credits and the effectiveness of our tax planning strategies. We carefully monitor the changes in many factors and adjust our effective income tax rate on a timely basis. If actual results differ from these estimates, this could have a material effect on our financial condition and results of operations.
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. In accordance with the authoritative guidance on accounting for uncertainty in income taxes, we recognize liabilities for uncertain tax positions based on the two-step process prescribed within the interpretation.process. 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. We reevaluate 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.
Valuation of Marketable Securities. Our investments in available-for-sale securities are reported at fair value. Unrealized gains related to increases in the fair value of investments and unrealized losses related to decreases in the fair value are included in accumulated other comprehensive income (loss), net of tax, as reported on our Consolidated Statements of Stockholders’ Equity. However, changes in the fair value of investments impact our net income only when such investments are sold or an impairment charge is recognized. Realized gains and losses on the sale of securities are determined by specific identification of the security’s cost basis. We periodically review our investment portfolio to determine if any investment is other-than-temporarily impaired due to changes in credit risk or other potential valuation concerns, which would require us to record an impairment charge in the period during which any such determination is made. In making this judgment, we evaluate, among other things, the duration of the investment, the extent to which the fair value of an investment is less than its cost, the credit rating and any changes in credit rating for the investment, default and loss rates of the underlying collateral, structure and credit enhancements to determine if a credit loss may exist. Our assessment that an investment is not other-than-temporarily impaired could change in the future due to new developments or changes in our strategies or assumptions related to any particular investment.
Effects of Recent Accounting Pronouncements
Recently Adopted
In July 2013,November 2015, the Financial Accounting Standards Boardboard (“FASB”) issued an accounting standard update that provides guidance onfor 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.deferred income taxes. Under this accounting standard update, in most circumstances, an unrecognizednew guidance, deferred tax benefit, or a portion of an unrecognized tax benefit,assets and liabilities should be presentedclassified as noncurrent in our 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 our interim period ended September 30, 2014, and its adoption did not have a material impact on our 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 beginning in the first quarter of our fiscal year ending June 30, 2017, with early adoption permitted.classified balance sheet. We early adopted this accounting standard update in the third quarter of our fiscal year ended June 30, 2015 and the adoption did not have a material impact on our 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 in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The update is effective for us 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 we are required to apply the guidance on a retrospectiveprospective basis with additional disclosure requirements upon transition. We early adopted this accounting standard update inat the beginning of the fourth quarter of our fiscal year ended June 30, 2015 and the2016. Upon adoption, did not have a material impact on our consolidated financial statements.approximately $218 million in net current deferred tax assets were reclassified to noncurrent. No prior periods were retrospectively adjusted.

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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. TheIn August 2015, the FASB issued an amendment to defer the effective date of the update by one year, with early adoption on the original effective date permitted. With this amendment, the updates are effective for us beginning in the first quarter of our fiscal year ending June 30, 2018. In July 2015, the FASB announced a deferral of the effective date by one year,2019, with early adoption onpermitted beginning in the original effective date permitted.first quarter of our fiscal year ending June 30, 2018. Subsequent to this amendment, the FASB has issued additional clarifying implementation guidance. 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. We are currently evaluating the impact of this accounting standard update on our 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 us beginning in the first quarter of our fiscal year ending June 30, 2017, with early2017. Early adoption permitted.is permitted as of the beginning of an interim or annual period. We are currently evaluating the impact of this accounting standard update on our 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 us beginning in the first quarter of our fiscal year ending June 30, 2018 and should be applied prospectively with early adoption permitted to be applied prospectively.as of the beginning of an interim or annual reporting period. We are currently evaluating the impact of this accounting standard update on our consolidated financial statements.
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 us beginning in the first quarter of our fiscal year ending 2019, and early adoption is permitted. We are currently evaluating the impact of this accounting standard update on our 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 us beginning in the first quarter of our fiscal year ending June 30, 2020 using a modified retrospective transition method. Early adoption is permitted. We are currently evaluating the impact of this accounting standard update on our 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 us beginning in the first quarter of our fiscal year ending June 30, 2018, with early adoption permitted and all of the guidance must be adopted in the same period. We are currently evaluating the impact of this accounting standard update on our consolidated financial statements.
In June 2016, the FASB issued an accounting standard update that changes the accounting for recognizing impairments of financial assets. Under the update, credit losses for certain types of financial instruments will be estimated based on expected losses. The update also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. The update is effective for us beginning in the first quarter of our fiscal year ending June 30, 2021, with early adoption permitted starting in the first quarter of fiscal year ending 2020. We are currently evaluating the impact of this accounting standard update on our consolidated financial statements.

EXECUTIVE SUMMARY
KLA-Tencor Corporation is a leading supplier of process control and yield management solutions for the semiconductor and related nanoelectronics industries. Our broad portfolio of defect inspection and metrology products, and related service, software and other offerings primarily supports integrated circuit (“IC” or “chip”) manufacturers throughout the entire semiconductor fabrication process, from research and development to final volume production. We provide 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, we also provide 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.
Our products and services are used by the vast majority of bare wafer, IC, lithography reticle (“reticle” or “mask”) and disk manufacturers around the world. Our products, services and expertise are used by our customers to measure, detect, analyze and resolve critical product defects that arise in that environment in order to control nanometric level manufacturing processes. Our revenues are driven largely by our customers’ spending on capital equipment and related maintenance services necessary to support key transitions in their underlying product technologies, or to increase their production volumes in response to market demand. Our semiconductor customers generally operate in one or more of the three major semiconductor markets - memory, foundry and logic. All three of these markets are characterized by rapid technological changes and sudden shifts in end-user demand, which influence the level and pattern of our customers’ spending on our products and services. Although capital spending in all three semiconductor markets has historically been very cyclical, the demand for more advanced and lower cost chips used in a growing number of consumer electronics, communications, data processing, and industrial and automotive products has resulted over the long term in a favorable demand environment for our process control and yield management solutions, particularly in the foundry and logic markets, which have higher levels of process control adoption than the memory market.

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As we are a supplier to the global semiconductor and semiconductor-related industries, our customer base continues to become more highly concentrated over time, thereby increasing the potential impact of a sudden change in capital spending by a major customer on our revenues and profitability. As our customer base becomes increasingly more concentrated, large orders from a relatively limited number of customers account for a substantial portion of our sales, which potentially exposes us to more volatility for revenues and earnings. We are also subject to the cyclical capital spending that has historically characterized the semiconductor and semiconductor-related industries. The timing, length, intensity and volatility of the capacity-oriented capital spending cycles of our customers are unpredictable.
The semiconductor industry has also been characterized by constant technological innovation. The growing use of increasingly sophisticated semiconductor devices in mobile consumer products has caused many of our customers to invest in additional semiconductor manufacturing capabilities and capacity. On the other hand, higher design costs for the most advanced ICs could economically constrain leading-edge manufacturing technology customers to focus their resources on only the large technologically advanced products and applications. We believe that, over the long term, our customers will continue to invest in advanced technologies and new materials to enable smaller design rules and higher density applications that fuel demand for process control equipment, although the growth for such equipment may be adversely impacted by higher design costs for advanced ICs, reuse of installed products, and delays in production ramps by our customers in response to higher costs and technical challenges at more advanced technology nodes.
The demand for our products and our revenue levels are driven by our customers’ needs to solve the process challenges that they face as they adopt new technologies required to fabricate advanced ICs that are incorporated into sophisticated mobile devices. The timing for our customers in ordering and taking delivery of process control and yield management equipment is also determined by our customers’ requirements to meet the next generation production ramp schedules, and the timing for capacity expansion to meet end customer demand. During the fiscal year ended June 30, 2016, we experienced strong demand for our products as we released a new generation of inspection products and our foundry customers increased their level of investments in our process control tools. Our earnings will depend not only on our revenue levels, but also on the amount of research and development spending required to meet our customers’ technology roadmaps. We have maintained production volumes and capacity to meet anticipated customer requirements and remain at risk of incurring significant inventory-related and other restructuring charges if business conditions deteriorate. Over the past year, our customers have taken delivery of lowerhigher volumes of process control equipment that we had expected. Anythan they did in the previous year. However, any delay or push out by our customers in taking delivery of process control and yield management equipment may cause earnings volatility, due to increases in the risk of inventory related charges as well as timing of revenue recognition due to expiration of credits or volume discounts, which, if not used by a stipulated time frame, will expire.

Proposed Merger with Lam Research
DuringOn October 20, 2015, the most recent quarter, we implementedCompany entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Lam Research Corporation (“Lam Research”), under which KLA-Tencor will ultimately become a plandirect or indirect wholly-owned subsidiary of Lam Research. The Merger has been unanimously approved by the boards of directors of both companies. The consummation of the Merger is conditioned on the satisfaction of customary closing conditions, including domestic and foreign regulatory approvals and performance in all material respects by each party of its obligations under the Merger Agreement. On February 19, 2016, the Merger Agreement was approved by KLA-Tencor’s stockholders and Lam Research’s stockholders approved the issuance of Lam Research’s common stock in the Merger. Refer also to reduce our global employee workforce aimed at streamlining our organizationNote 1 “Description of Business and business processes in responseSummary of Significant Accounting Policies” and Item 1A, “Risk Factors.” For additional details on the transaction, refer to the changing customer requirements 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. We expect to substantially complete the global employee workforce reduction by the endcopy of the first quarter of fiscal year 2016, but certain reductions will occur inMerger Agreement attached as an Exhibit to the second quarter of fiscal year 2016.Form 8-K filed with the U.S. Securities and Exchange Commission (“SEC”) on October 21, 2015.
The following table sets forth some of our key consolidated financial information for each of our last three fiscal years: 
Year ended June 30,Year ended June 30,
(Dollar amounts in thousands)2015 2014 20132016 2015 2014
Total revenues$2,814,049
 $2,929,408
 $2,842,781
$2,984,493
 $2,814,049
 $2,929,408
Costs of revenues$1,215,229
 $1,232,962
 $1,237,452
$1,163,391
 $1,215,229
 $1,232,962
Gross margin percentage57% 58% 56%61% 57% 58%
Net income$366,158
 $582,755
 $543,149
$704,422
 $366,158
 $582,755
Diluted income per share$2.24
 $3.47
 $3.21
Diluted net income per share$4.49
 $2.24
 $3.47

Total revenues during the fiscal year ended June 30, 2016 increased by 6% compared to the fiscal year ended June 30, 2015. Our year over year revenue growth reflected increases from sales of both our inspection and metrology products as our customers continue to invest in process control and services. Increased revenues during the fiscal year ended June 30, 2016 were also driven by the introduction of our new generation of inspection products as well strong demand from our foundry customers and an increase in the number of post-warranty systems installed at our customers’ sites over this time period for our service revenues.
Total revenues during the fiscal year ended June 30, 2015 decreased by 4% compared to the fiscal year ended June 30, 2014.2014. Revenue decreases from sales of both our defect inspection and metrology products for the fiscal year ended June 30, 2015 reflected our customers’ decline in capital spending for process control equipment, due to shifts in the timing of the new technology ramps and capacity-related expansion plans.
Total revenues during the fiscal year ended June 30, 2014 increased by 3% compared to the fiscal year ended June 30, 2013, as our customers continued to invest in process control and services to improve manufacturing yields as they adopt advanced technologies and new materials to enable smaller design rules required to fabricate advanced ICs.

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Revenues and Gross Margin 
Year ended June 30,        Year ended June 30,        
(Dollar amounts in thousands)2015 2014 2013 FY15 vs. FY14 FY14 vs. FY132016 2015 2014 FY16 vs. FY15 FY15 vs. FY14
Revenues:                          
Product$2,125,396
 $2,286,437
 $2,247,147
 $(161,041) (7)% $39,290
 2 %$2,250,260
 $2,125,396
 $2,286,437
 $124,864
 6 % $(161,041) (7)%
Service688,653
 642,971
 595,634
 45,682
 7 % 47,337
 8 %734,233
 688,653
 642,971
 45,580
 7 % 45,682
 7 %
Total revenues$2,814,049
 $2,929,408
 $2,842,781
 $(115,359) (4)% $86,627
 3 %$2,984,493
 $2,814,049
 $2,929,408
 $170,444
 6 % $(115,359) (4)%
Costs of revenues$1,215,229
 $1,232,962
 $1,237,452
 $(17,733) (1)% $(4,490) — %$1,163,391
 $1,215,229
 $1,232,962
 $(51,838) (4)% $(17,733) (1)%
Gross margin percentage57% 58% 56% (1)%   2%  61% 57% 58% 4%   (1)%  
Product revenues
Our business is affected by the concentration of our customer base and our customers’ capital equipment procurement schedules as a result of their investment plans. Our product revenues in any particular period are significantly impacted by the amount of new orders that we receive during that period and, depending upon the duration of manufacturing and installation cycles, in the preceding period.

Product revenues increased by 6% in the fiscal year ended June 30, 2016 compared to the fiscal year ended June 30, 2015, primarily due to growth in revenues from our customers in China, Taiwan and Japan, partially offset by lower revenues from our customers in North America, Korea, Rest of Asia and Europe & Israel. The year over year increase in our product revenues were primarily driven by strong demand for our inspection and metrology products, the introduction of our new generation of inspection products and the expansion of semiconductor investments in Asia, particularly in China and Taiwan from our foundry customers.
Product revenues decreased by 7% in the fiscal year ended June 30, 2015 compared to the fiscal year ended June 30, 2014, primarily as a result of lower revenues from our customers in Taiwan, certain countries inChina and the rest of Asia, and Europe and Israel, partially offset by higher revenues from our customers in North America, Korea and Japan. The decline in revenues was impacted by the timing of development and new technology ramps of our customers as well as the lower shipments of our products, particularly to our foundry customers in Taiwan, due to timing of capacity-related expansion plans.
Product revenues increased by 2% in the fiscal year ended June 30, 2014 compared to the fiscal year ended June 30, 2013, as our customers increased their investments in defect inspection capabilities to address the yield challenges caused by the introduction of new technologies and architectures, and added production capacity to meet the growing needs for advanced ICs demanded in an environment of rising global demand for mobile devices.
Service revenues
Service revenues are generated from maintenance contracts, as well as billable time and material service calls made to our customers after the expiration of the warranty period. The amount of our service revenues is typically a function of the number of post-warranty systems installed at our customers’ sites and the utilization of those systems, but it is also impacted by other factors, such as our rate of service contract renewals, the types of systems being serviced and fluctuations in foreign exchange rates. Service revenues increased sequentially over the fiscal years ended June 30, 2013, 2014, 2015 and 2015,2016, primarily as a result of an increase over time in the number of post-warranty systems installed at our customers’ sites over that time period.
Revenues - Top Customers
The following customers each accounted for more than 10% of our 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 
Year ended June 30,
2016 2015 2014
Micron Technology, Inc. Intel Corporation Intel Corporation
Taiwan Semiconductor Manufacturing Company Limited Samsung Electronics Co., Ltd. Samsung Electronics Co., Ltd.

 Taiwan Semiconductor Manufacturing Company Limited Taiwan Semiconductor Manufacturing Company Limited

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Revenues by region
Revenues by region for the periods indicated were as follows:
Year ended June 30,Year ended June 30,
(Dollar amounts in thousands)2015 2014 20132016 2015 2014
Taiwan$894,557
 30% $691,482
 25% $741,470
 25%
North America$815,914
 29% $705,159
 24% $846,125
 30%521,335
 18% 815,914
 29% 705,159
 24%
Taiwan691,482
 25% 741,470
 25% 936,445
 33%
Japan426,963
 15% 334,653
 11% 310,204
 11%444,216
 15% 426,963
 15% 334,653
 11%
China430,074
 14% 162,669
 6% 260,089
 9%
Korea367,905
 12% 405,320
 14% 371,139
 13%
Europe & Israel194,670
 7% 306,779
 11% 211,121
 7%167,936
 6% 194,670
 7% 306,779
 11%
Korea405,320
 14% 371,139
 13% 292,724
 10%
Rest of Asia279,700
 10% 470,208
 16% 246,162
 9%158,470
 5% 117,031
 4% 210,119
 7%
Total$2,814,049
 100% $2,929,408
 100% $2,842,781
 100%$2,984,493
 100% $2,814,049
 100% $2,929,408
 100%
A significant portion of our revenues continues to be generated in Asia, where a substantial portion of the world’s semiconductor manufacturing capacity is located, and we expect that trend to continue.

Gross margin
Our gross margin fluctuates with revenue levels and product mix and is affected by variations in costs related to manufacturing and servicing our products, including our ability to scale our operations efficiently and effectively in response to prevailing business conditions.
The following table summarizes the major factors that contributed to the changes in gross margin percentage:
 Gross Margin Percentage
Fiscal year ended June 30, 201356.5 %
Revenue volume of products and services— %
Mix of products and services sold(0.3)%
Manufacturing labor, overhead and efficiencies0.2 %
Other service and manufacturing costs1.5 %
Fiscal year ended June 30, 201457.9 %
Revenue volume of products and services(1.1)%
Mix of products and services sold0.3 %
Manufacturing labor, overhead and efficiencies(0.6)%
Other service and manufacturing costs0.3 %
Fiscal year ended June 30, 201556.8 %
Revenue volume of products and services0.4 %
Mix of products and services sold2.6 %
Manufacturing labor, overhead and efficiencies0.7 %
Other service and manufacturing costs0.5 %
Fiscal year ended June 30, 201661.0 %
Changes in gross margin percentage driven by revenue volume of products and services reflect our ability to leverage existing infrastructure to generate higher revenues. It also includes the effect of fluctuations in foreign exchange rates, average customer pricing and customer revenue deferrals associated with volume purchase agreements. Changes in gross margin percentage from mix of products and services sold reflect the impact of changes in the composition within product and service offerings. Changes in gross margin percentage from manufacturing labor, overhead and efficiencies reflect our ability to manage costs and drive productivity as we scale our manufacturing activity to respond to customer requirements; this includes the impact of capacity utilization, use of overtime and variability of cost structure. Changes in gross margin percentage from other service and manufacturing costs include the impact of customer support costs, including the efficiencies with which we deliver services to our customers, and the effectiveness with which we manage our production plans and inventory risk.
Our gross margin increased to 61.0% during the fiscal year ended June 30, 2016 from 56.8% during the fiscal year ended June 30, 2015, primarily due to a favorable mix of products and services sold, an increase in manufacturing efficiencies driven by lower warranty costs as well as a decrease in severance-related expenses, and higher revenue volume of products and service.
Our gross margin decreased to 56.8% during the fiscal year ended June 30, 2015 from 57.9% during the fiscal year ended June 30, 2014, primarily due to lower volume of products and services, as well as a reduction in manufacturing efficiencies driven by lower manufacturing output and severance-related expenses, a substantial amount of which is related to our global workforce reduction plan that we announced in the fourth quarter of the fiscal year ended June 30, 2015, refer to Note 15,14, “Restructuring Charges” for additional details. The above decreases were partially offset by a favorable mix of products and services sold and efficiencies derived from other service and manufacturing costs.

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Our gross margin increased to 57.9% during the fiscal year ended June 30, 2014 from 56.5% during the fiscal year ended June 30, 2013, primarily due to lower charges for inventory obsolescence as well as manufacturing and service efficiencies, partially offset by a less favorable mix of products and services sold.
Engineering, Research and Development (“R&D”) 
Year ended June 30,        Year ended June 30,        
(Dollar amounts in thousands)2015 2014 2013 FY15 vs. FY14 FY14 vs. FY132016 2015 2014 FY16 vs. FY15 FY15 vs. FY14
R&D expenses$530,616
 $539,469
 $487,832
 $(8,853) (2)% $51,637
 11%$481,258
 $530,616
 $539,469
 $(49,358) (9)% $(8,853) (2)%
R&D expenses as a percentage of total revenues19% 18% 17% 1%   1%  16% 19% 18% (3)%   1%  
R&D expenses may fluctuate with product development phases and project timing as well as our focused R&D efforts that are aligned with our overall business strategy. Historically,As technological innovation is essential to our R&D expenses have generally increased over time, primarily due to higher costs associated with advanced product and technology development projects. Wesuccess, we may incur significant costs associated with theseR&D projects, including compensation for engineering talent, engineering material costs, and other expenses.

R&D expenses during the fiscal year ended June 30, 2016 were lower compared to the fiscal year ended June 30, 2015, primarily due to a decrease in employee related expenses, including severance-related expenses of $33.9 million as technological innovation is essential to our success. Onea result of the goals of our plan to reducereduced headcount from our global employee workforce isreduction that we initiated during the three months ended June 30, 2015, partially offset by an increase in variable compensation of $10.6 million. Additionally, there was a decrease in engineering materials and supplies expenses of $21.0 million and an increase in the benefit to streamline our organization and business processes and direct our resources toward our best opportunities.R&D expense from external funding of $5.4 million.
R&D expenses during the fiscal year ended June 30, 2015 were lower compared to the fiscal year ended June 30, 2014, primarily due to a decrease in engineering materials and consulting costs of $19.8 million associated with the completion of major platform developments, a decrease in depreciation expense of $2.1 million and a decrease in travel expenses of $1.2 million. This was partially offset by an increase in employee-related expenses of $10.6 million mainly as a result of our severance-related expenses, a substantial amount of which is related to our global workforce reduction plan that we announced in the fourth quarter of the fiscal year ended June 30, 2015, refer to Note 15,14, “Restructuring Charges” for additional details. In addition, the decrease was partially offset by a $6.3 million reduction in external funding used to offset the cost of R&D activities.
R&D expenses during the fiscal year ended June 30, 2014 were higher compared to the fiscal year ended June 30, 2013, primarily due to an increase in employee-related expenses of $41.8 million as a result of hiring additional engineering talent and an increase in travel expenses of $2.6 million, as well as a $4.2 million reduction in external funding used to offset the cost of R&D activities.
R&D expenses include the benefit of $1.9 million, $8.2 million and $12.4 million of external funding received during the fiscal years ended June 30, 2015, 2014 and 2013, respectively, for certain strategic development programs, primarily from government grants.
Our future operating results will depend significantly on our ability to produce products and provide services that have a competitive advantage in our marketplace. To do this, we believe that we must continue to make substantial and focused investments in our research and development. We remain committed to product development in new and emerging technologies as we address the yield challenges our customers face at future technology nodes.

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Selling, General and Administrative (“SG&A”)
Year ended June 30,        Year ended June 30,        
(Dollar amounts in thousands)2015 2014 2013 FY15 vs. FY14 FY14 vs. FY132016 2015 2014 FY16 vs. FY15 FY15 vs. FY14
SG&A expenses$406,864
 $384,907
 $387,812
 $21,957
 6% $(2,905) (1)%$379,399
 $406,864
 $384,907
 $(27,465) (7)% $21,957
 6%
SG&A expenses as a percentage of total revenues14% 13% 14% 1%   (1)%  13% 14% 13% (1)%   1%  
SG&A expenses during the fiscal year ended June 30, 2016 were lower compared to the fiscal year ended June 30, 2015, primarily due to a decrease in employee-related expenses, including severance-related expenses, of $28.0 million as a result of the reduced headcount from our global workforce reduction that we initiated during the three months ended June 30, 2015 partially offset by an increase in variable compensation of $16.4 million, a decrease in cost of support for sales evaluation of $8.6 million, a decrease in contributions to support our corporate social responsibility program of $7.0 million and a decrease in travel-related expenses of $4.7 million. The decreases above were partially offset by an increase in our merger-related expenses of $15.6 million pertaining to the pending Merger with Lam Research, principally for financial advisory services including the fairness opinion fees, employee-related expenses and legal fees during the fiscal year ended June 30, 2016.
SG&A expenses during the fiscal year ended June 30, 2015 were higher compared to the fiscal year ended June 30, 2014, primarily due to an increase in employee-related expenses of $8.3 million mainly as a result of severance-related expenses, a substantial amount of which is related to our global workforce reduction plan that we announced in the fourth quarter of the fiscal year ended June 30, 2015 (refer to Note 15,14, “Restructuring Charges” for additional details), an increase in cost of support for sales evaluation of $6.5 million, an increase in certain expenses of $2.5 million as a result of our one-time leveraged recapitalization expense that was completed in the three months ended December 31, 2014, a payment related to a contractual settlement for $2.0 million, an increase due to the impairment charge recorded for certain long-lived assets of $1.7 million and an increase in legal fees of $1.6 million. In addition, during the three months ended December 31, 2013, SG&A expenses were favorably impacted by our receipt of $1.1 million in proceeds from a class action settlement, as well as our recovery of $1.1 million in receivables that had previously been classified as a bad debt expense during the three months ended December 31, 2013, both of which resulted in a decrease of our SG&A expense for the fiscal year ended June 30, 2014. The increases described above were partially offset by a decrease in travel related expenses of $4.3 million and a decrease in marketing-related expenses of $1.9 million.
SG&A expenses during
Restructuring Charges
During the fourth quarter of the fiscal year ended June 30, 2014 were slightly lower compared to the fiscal year ended June 30, 2013, primarily due to lower levels of consulting expenses of $4.5 million and a decrease in amortization of intangible assets of $2.6 million as some intangible assets became fully amortized. This was partially offset by an increase in employee-related expenses of $4.4 million as a result of hiring additional personnel.
Restructuring Charges
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 requirementrequirements in ourits industry. The goals of this reduction arewere to enable continued innovation, direct our resources toward ourits best opportunities and lower our ongoing expense run rate. We expectsubstantially completed our global workforce reduction during the fiscal year ended June 30, 2016 and recorded an $8.9 million net restructuring charge, of which $3.6 million was recorded to recognize significant cost savings from a numbercosts of activities we have recently undertaken, including estimated annual cost savings of approximately $100revenues, $1.6 million of employee related costs as a result of our announced global employee workforce reduction.to research and development expense and $3.7 million to selling, general and administrative expense. 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. A net restructuring charge amounting to $22.4 million was recorded during the fourth quarter of fiscal year ended June 30, 2015, a substantial majority of which was related to our global workforce reduction plan. Refer to Note 15,14, “Restructuring Charges” for additional details.
The following table shows the activity primarily related to accrual for severance and benefits expense for the fiscal yearyears ended June 30, 2015:2016 and 2015:
Year ended June 30,
(In thousands)
Year ended
June 30, 2015
2016 2015
Beginning Balance$2,329
Beginning balance$24,887
 $2,329
Restructuring costs31,569
8,926
 31,569
Adjustments1,177
(142) 1,177
Cash payments(10,188)(33,084) (10,188)
Ending Balance$24,887
Ending balance$587
 $24,887
The remaining accrual for severance and benefits as of June 30, 20152016 is expected to be paid out by the end of our fiscal quarter ending December 31, 2015.2016.
We expect to incur additional charges, including additional severance costs and other related costs, in connection with the completion of our global workforce reduction during the first two quarters of fiscal year 2016.

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Interest Expense and Other Expense (Income), Net
Year ended June 30,Year ended June 30,
(Dollar amounts in thousands)2015 2014 20132016 2015 2014
Interest expense$106,009
 $53,812
 $54,176
$122,887
 $106,009
 $53,812
Other expense (income), net$(10,469) $(16,203) $(15,112)$(20,634) $(10,469) $(16,203)
Interest expense as a percentage of total revenues4% 2% 2%4% 4% 2%
Other expense (income), net as a percentage of total revenues—% 1% 1%1% —% 1%
The increase in interest expense during the fiscal year ended June 30, 2016 compared to the fiscal year ended June 30, 2015 was primarily attributable to the $2.50 billion aggregate principal amount of senior, unsecured long-term notes (collectively referred to as “Senior Notes”), the $750.0 million unsecured prepayable term loans and the $500.0 million unfunded revolving credit facility which were executed during the three months ended December 31, 2014 and which were not outstanding for the entire fiscal year ended June 30, 2015. In addition, the $750.0 million of 2018 Senior Notes were redeemed during the three months ended December 31, 2014.
The increase in interest expense during the fiscal year ended June 30, 2015 compared to the fiscal year ended June 30, 2014 was primarily attributable to the issuance of $2.50 billion aggregate principal amount of senior, unsecured long-term notes and entry into the $750$750.0 million unsecured prepayable term loan facility during the three months ended December 31, 2014, as compared to $750$750.0 million of 2018 Senior Notes for the fiscal year ended June 30, 2014. The interest expense during the fiscal year ended June 30, 2014 remained relatively unchanged compared to the fiscal year ended June 30, 2013.
Other expense (income), net is comprised primarily of realized gains or losses on sales of marketable securities, gains or losses from revaluations of certain foreign currency denominated assets and liabilities as well as foreign currency contracts, impairments associated with equity investments in privately-held companies, interest related accruals (such as interest and penalty accruals related to our tax obligations) and interest income earned on our investment and cash portfolio. Since
The increase in other expense (income), net during the fiscal year ended June 30, 2014, our investment balance2016 compared to the fiscal year ended June 30, 2015 was primarily due to reduction of interest and penalty accruals related to uncertain tax positions of $5.5 million and an increase of $4.5 million for our marketable securities portfolio declined by $973 million as a resultgain on the sale of our strategic decision to liquidate certain marketable securitiesequity investments in our investment portfolio to fund our working capital requirements. With this decision, our interest income earned from our investment portfolio is expected to decline and the realized gains as a resultprivately-held companies net of liquidation of our investment portfolio are not expected to recur.impairment charges.

The decrease in other expense (income), net during the fiscal year ended June 30, 2015 compared to the fiscal year ended June 30, 2014 was primarily attributable to a net decline of $4.7 million in gains from the sale of equity investments in privately-held companies, a $1.1 million decrease in interest income from our investment portfolio as a result of our decision to liquidate certain marketable securities and a $1.1 million increase in net foreign currency losses resulting from the volatility of the foreign currencies against the U.S. dollar, which was partially offset by a decrease in an impairment charge of $1.0 million related to an equity investment in a privately-held company that was deemed to be other-than-temporary impairment and an increase of $0.9 million of realized gains from the investment portfolio liquidation.
The increase in other expense (income), net during the fiscal year ended June 30, 2014 compared to the fiscal year ended June 30, 2013 was primarily attributable to an increase of $3.7 million gain from the sale of an equity investment in a privately-held company, partially offset by an impairment charge of $1.4 million recognized during the three months ended December 31, 2013 related to an equity investment in a privately-held company that was deemed to be other-than-temporary impairment, and a decrease in interest income of $1.3 million driven by lower interest rates.
Loss on extinguishment of debt and other, net
For the fiscal year ended June 30, 2015, loss on extinguishment of debt and other, net, reflected a pre-tax net loss of $131.7 million associated with the redemption of our $750$750.0 million of 2018 Senior Notes during the three months ended December 31, 2014. Included in the loss on extinguishment of debt and other, net is the $1.2 million gain on the non-designated forward contract that was entered into by us in anticipation of the redemption of the 2018 Senior Notes, which were redeemed during the three months ended December 31, 2014. Refer to “Note 7,6, Debt” and “Note 16,15, Derivative Instruments and Hedging Activities” for further details. We had no loss on extinguishment of debt and other, net, in the fiscal years ended June 30, 20142016 and 2013.2014.

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Provision for Income Taxes
The following table provides details of income taxes:
Year ended June 30,Year ended June 30,
(Dollar amounts in thousands)2015 2014 20132016 2015 2014
Income before income taxes$434,131
 $734,461
 $690,621
$858,192
 $434,131
 $734,461
Provision for income taxes$67,973
 $151,706
 $147,472
$153,770
 $67,973
 $151,706
Effective tax rate15.7% 20.7% 21.4%17.9% 15.7% 20.7%
The provision for income taxes differs from the statutory U.S. federal rate primarily due to foreign income with lower tax rates, tax credits, and other domestic incentives.
Tax expense as a percentage of income during the fiscal year ended June 30, 2016 was 17.9% compared to 15.7% for the fiscal year ended June 30, 2015. Tax expense as a percentage of income increased primarily due to an increase in the percentage of income earned in the U.S. compared to income earned outside the U.S. in jurisdictions with lower tax rates. During the fiscal year ended June 30, 2015, the loss on extinguishment of debt decreased income earned in the U.S.
Tax expense as a percentage of income during the fiscal year ended June 30, 2015 was 15.7% compared to 20.7% for the fiscal year ended June 30, 2014. Tax expense as a percentage of income decreased primarily due to an increase in our research and development credits, an increase in the domestic manufacturing deduction as a percentage of income, and a decrease in the percentage of income earned in the U.S. as a result of the loss on extinguishment of debt compared to income earned outside the U.S. in jurisdictions with lower tax rates.
Tax expense as a percentage of income during the fiscal year ended June 30, 2014 was 20.7% compared to 21.4% for the fiscal year ended June 30, 2013. Tax expense decreased primarily due to a decrease in tax reserves and an increase in the percentage of our revenues that were earned outside the U.S. in jurisdictions with lower tax rates, partially offset by a decrease in our research and development credits and an increase in tax expense related to employee stock activity.
Our future effective income tax rate depends on various factors, such as tax legislation, the geographic composition of our pre-tax income, the amount of our pre-tax income as business activities fluctuate, non-deductible expenses incurred in connection with acquisitions, research and development credits as a percentage of aggregate pre-tax income, the domestic manufacturing deduction, non-taxable or non-deductible increases or decreases in the assets held within our Executive Deferred Savings Plan, the tax effects of employee stock activity and the effectiveness of our tax planning strategies.
In the normal course of business, we are subject to tax audits in various jurisdictions, and such jurisdictions may assess additional income or other taxes against us. We are under a United States federal income tax examination for the fiscal year ended June 30, 2013. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. The results of an audit or litigation could have a material adverse effect on our results of operations or cash flows in the period or periods for which that determination is made.

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Liquidity and Capital Resources
As of June 30,As of June 30,
(Dollar amounts in thousands)2015 2014 20132016 2015 2014
Cash and cash equivalents$838,025
 $630,861
 $985,390
$1,108,488
 $838,025
 $630,861
Marketable securities1,549,086
 2,521,776
 1,933,491
1,382,806
 1,549,086
 2,521,776
Total cash, cash equivalents and marketable securities$2,387,111
 $3,152,637
 $2,918,881
$2,491,294
 $2,387,111
 $3,152,637
Percentage of total assets49% 57% 55%50% 49% 57%
          
Year ended June 30,Year ended June 30,
(In thousands)2015 2014 20132016 2015 2014
Cash flows:          
Net cash provided by operating activities$605,906
 $778,886
 $913,188
$759,696
 $605,906
 $778,886
Net cash provided by (used in) investing activities918,221
 (676,109) (241,447)144,687
 918,221
 (676,109)
Net cash used in financing activities(1,302,972) (458,887) (428,510)(636,702) (1,302,972) (458,887)
Effect of exchange rate changes on cash and cash equivalents(13,991) 1,581
 (9,135)2,782
 (13,991) 1,581
Net increase (decrease) in cash and cash equivalents$207,164
 $(354,529) $234,096
$270,463
 $207,164
 $(354,529)
Cash and Cash Equivalents and Marketable Securities:
As of June 30, 20152016, our cash, cash equivalents and marketable securities totaled $2.39$2.49 billion, which is a decreasean increase of $766$104.2 million from June 30, 2014.2015. The decreaseincrease is primarily attributable to payment of a specialour cash dividend of approximately $2.72 billion,generated from operations and our net proceeds from investing activities, partially offset by the payment of regular quarterly cash dividends of $324.8 million, payment for the redemption of our 2018 Senior Notes of $877.4and a special cash dividend with respect to fully vested restricted stock units with dividend equivalent rights aggregating to $346.3 million, payment for stock repurchases of $602.9$181.7 million payment of principal amount and prepaymentpayment of term loans and interest with respect to Senior Notes, term loans and unfunded revolving credit facility aggregating to $98.3 million, payment of interest up to the redemption date with respect to our 2018 Senior Notes of $32.8 million, partially offset by net proceeds of an aggregate of $3.22 billion from our issuance of Senior Notes, borrowings under our five-year senior unsecured prepayable term loans under our Credit Facility, and net proceeds from cash generated from operating activities.$135.0 million. As of June 30, 2015, $1.472016, $1.73 billion of our $2.39$2.49 billion of cash, cash equivalents, and marketable securities were held by our foreign subsidiaries and branch offices. We currently intend to permanentlyindefinitely reinvest $1.34$1.57 billion of the cash held by our foreign subsidiaries and branch offices. If, however, a portion of these funds were to be repatriated to the United States, we would be required to accrue and pay U.S. and foreign taxes of approximately 30%-50% of the funds repatriated. The amount of taxes due will depend on the amount and manner of the repatriation, as well as the location from which the funds are repatriated. We have accrued (but have not paid) U.S. taxes on the remaining cash of $136.3$157.3 million of the $1.47$1.73 billion held by our foreign subsidiaries and branch offices. As such, these funds can be returned to the U.S. without accruing any additional U.S. tax expense.
Cash Dividends and Special Cash Dividend:
The total amount of regular quarterly cash dividends paid during the fiscal years ended June 30, 2016, 2015 and 2014 and 2013 was $324.8$324.5 million, $298.9324.8 million and $265.9$298.9 million, respectively. The increase in the amount of regular quarterly cash dividends paid during the fiscal year ended June 30, 20152016 reflected the increase in the level of our regular quarterly cash dividend from $0.45$0.50 to $0.50$0.52 per share that was instituted during the three months ended September 30, 2014.2015. The amount of accrued dividends payable for regular quarterly cash dividends on unvested restricted stock units with dividend equivalent rights was $2.7 million and $0.9 million as of June 30, 2015.2016 and 2015, respectively. We did not have accrued dividends payable in the fiscal years endedas of June 30, 2014 and 2013.2014. These amounts will be paid upon vesting of the underlying unvested restricted stock units as described in Note 8,7, “Equity and Long-term Incentive Compensation Plans.” On July 14, 2015, we announced that our Board of Directors had authorized a further increase in the level of our quarterly cash dividend from $0.50 to $0.52 per share. Refer to Note 19, “Subsequent Events” for additional information regarding the quarterly cash dividend increase announced subsequent to June 30, 2015.

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On November 19, 2014, we declared a special cash dividend of $16.50 per share on our outstanding common stock which was paid on December 9, 2014 to our stockholders of record as of the close of business on December 1, 2014. Additionally, in connection with the special cash dividend, our Board of Directors and our Compensation Committee of our Board of Directors approved a proportionate and equitable adjustment to outstanding equity awards (restricted stock units and stock options) under the 2004 Equity Incentive Plan (the “2004 Plan”), as required by 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. The declaration and payment of the special cash dividend was part of our 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 7,6, “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, 2014.2014, except for the aggregate special cash dividend of $43.0 million that was accrued for the unvested restricted stock units. As of June 30, 2016 and 2015, we have $16.9 million and $41.1 million, respectively, of accrued 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 as described in detail in Note 8,7, “Equity and Long-term Incentive Compensation Plans.” We paid a special cash dividend with respect to vested restricted stock units during the fiscal years ended June 30, 2016 and 2015 of $21.8 million and $1.8 million, respectively. We did not declare any special cash dividend in the fiscal years ended June 30, 20142016 and 2013.2014. Other than the special cash dividend declared during the three months ended December 31, 2014, we historically have not declared any special cash dividends.
Stock Repurchases:
The shares repurchased under our stock repurchase program have decreasedreduced our basic and diluted weighted-average shares outstanding for the fiscal year ended June 30, 2015 compared to the fiscal year ended June 30, 2014.outstanding. The stock repurchase program is intended, in part, to offset shares issued in connection with the purchases under our ESPP program and the vesting of employee restricted stock units andunits. In connection with entering into the exercise of employee stock options.Merger Agreement with Lam Research, we suspended further repurchases under our repurchase program effective October 21, 2015.
Fiscal Year 20152016 Compared to Fiscal Year 20142015
Cash Flows from Operating Activities:
We have historically financed our liquidity requirements through cash generated from operations. Net cash provided by operating activities during the fiscal year ended June 30, 2016 increased compared to the fiscal year ended June 30, 2015, from $605.9 million to $759.7 million primarily as a result of the following key factors:
An increase in collections of approximately $294.0 million mostly due to higher shipments during the fiscal year ended June 30, 2016 compared to the fiscal year ended June 30, 2015;
A decrease in payroll and employee-related payments of approximately $34.0 million during the fiscal year ended June 30, 2016 compared to the fiscal year ended June 30, 2015; partially offset by
An increase in vendor payments of approximately $65.0 million during the fiscal year ended June 30, 2016 mainly due to higher inventory purchases compared to the fiscal year ended June 30, 2015;
A net increase of realized foreign exchange hedge losses of approximately $48.0 million during the fiscal year ended June 30, 2016 compared to the fiscal year ended June 30, 2015, mainly due to the substantial foreign exchange fluctuations in Japanese Yen during these periods;
An increase in debt interest payments of approximately $27.0 million during the fiscal year ended June 30, 2016 due to higher average outstanding debt balances compared to the fiscal year ended June 30, 2015;
An increase in income tax and other tax payments net of tax refunds of approximately $22.0 million during the fiscal year ended June 30, 2016 compared to the fiscal year ended June 30, 2015; and
An increase in cash LTI payments of approximately $13.0 million during the fiscal year ended June 30, 2016 compared to the fiscal year ended June 30, 2015.
Cash Flows from Investing Activities:
Net cash provided by investing activities during the fiscal year ended June 30, 2016 decreased to $144.7 million compared to the fiscal year ended June 30, 2015 from net cash provided in investing activities of $918.2 million, primarily as a result of our strategic decision to liquidate certain marketable securities in our investment portfolio to fund our working capital requirements during the fiscal year ended June 30, 2015, partially offset by approximately $14.0 million lower capital expenditures during the fiscal year ended June 30, 2016, as compared to the fiscal year ended June 30, 2015.

Cash Flows from Financing Activities:
Net cash used in financing activities during the fiscal year ended June 30, 2016 decreased compared to the fiscal year ended June 30, 2015, from $1.30 billion to $636.7 million, primarily as a result of the following key factors:
A decrease in payment of dividends to stockholders of $2.70 billion, primarily from the payment of special cash dividend during the fiscal year ended June 30, 2015;
A decrease in repayment of debt of approximately $781.0 million mainly as a result of the redemption of the 2018 Senior Notes during the fiscal year ended June 30, 2015;
A decrease in common stock repurchases of $421.0 million during the fiscal year ended June 30, 2016 compared to the fiscal year ended June 30, 2015. In connection with entering into the Merger Agreement, we suspended further repurchases under our repurchase program effective October 21, 2015; partially offset by
Net proceeds of $3.22 billion from the issuance of Senior Notes and the term loans during the fiscal year ended June 30, 2015.
Fiscal Year 2015 Compared to Fiscal Year 2014
Cash Flows from Operating Activities:
Net cash provided by operating activities during the fiscal year ended June 30, 2015 decreased compared to the fiscal year ended June 30, 2014, from $779$778.9 million to $606$605.9 million primarily as a result of the following key factors:
A decrease of cash collections by approximately $270$270.0 million during the fiscal year ended June 30, 2015 compared to the fiscal year ended June 30, 2014,
An increase of debt-related interest payments of approximately $40$40.0 million during the fiscal year ended June 30, 2015 compared to the fiscal year ended June 30, 2014,
An increase in payments of approximately $15$15.0 million upon vesting of cash-based long-term incentive ("(“Cash LTI"LTI”) awards during the fiscal year ended June 30, 2015 under our Cash LTI employee compensation plan, compared to the fiscal year ended June 30, 2014,
An increase in payroll payments of approximately $15$15.0 million during the fiscal year ended June 30, 2015 compared to the fiscal year ended June 30, 2014, partially offset by
A decrease in accounts payable payments of approximately $143$143.0 million during the fiscal year ended June 30, 2015 compared to the fiscal year ended June 30, 2014, and
A decrease in income tax and other tax payments net of tax refunds of approximately $30$30.0 million during the fiscal year ended June 30, 2015 compared to the fiscal year ended June 30, 2014.
Cash Flows from Investing Activities:
Net cash provided by investing activities during the fiscal year ended June 30, 2015 increased to $918$918.2 million compared to the fiscal year ended June 30, 2014 from net cash used in investing activities of $676$676.1 million, primarily as a result of an increase in the proceeds from sale of available-for-sale and trading securities, net of sales and maturities, of approximately $964$964.0 million during the fiscal year ended June 30, 2015, compared to the purchases of available-for-sale and trading securities, net of sales and maturities, of approximately $593$593.0 million during fiscal year ended June 30, 2014. In addition, we acquired a privately-held company for a total purchase consideration of $18$18.0 million in cash during the fiscal year ended June 30, 2014.

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Cash Flows from Financing Activities:
Net cash used in financing activities during the fiscal year ended June 30, 2015 increased compared to the fiscal year ended June 30, 2014, from $459$458.9 million to $1.30 billion, primarily as a result of the following key factors:
An increase in dividend payments of $2.74 billion during the fiscal year ended June 30, 2015 compared to the fiscal year ended June 30, 2014, reflecting the payments for the special cash dividend during the fiscal year ended June 30, 2015 and an increase in our quarterly dividend payout amount from $0.45 to $0.50 per share that was instituted during the three months ended September 30, 2014,
Payments for redemption of the 2018 Senior Notes and payments for the term loans, including prepayment for the principal amount for the term loans, aggregating to $916$916.0 million during the fiscal year ended June 30, 2015, whereas no such payments were made during the fiscal year ended June 20, 2014,
An increase in common stock repurchases of $362$362.0 million during the fiscal year ended June 30, 2015 compared to the fiscal year ended June 30, 2014 and

A decrease in proceeds from the exercise of stock options of $65$65.0 million during the fiscal year ended June 30, 2015 compared to the fiscal year ended June 30, 2014, partially offset by
Net proceeds of $3.22 billion from issuance of Senior Notes and the term loans during the fiscal year ended June 30, 2015.
Fiscal Year 2014 Compared to Fiscal Year 2013
Cash Flows from Operating Activities:
Net cash provided by operating activities during the fiscal year ended June 30, 2014 decreased compared to the fiscal year ended June 30, 2013, from $913 million to $779 million primarily as a result of the following key factors:
An increase in payroll of approximately $44 million during the fiscal year ended June 30, 2014 compared to the fiscal year ended June 30, 2013,
An increase in accounts payable payments of approximately $39 million during the fiscal year ended June 30, 2014 compared to the fiscal year ended June 30, 2013,
An increase in income tax and other tax payments of approximately $19 million during the fiscal year ended June 30, 2014 compared to the fiscal year ended June 30, 2013 and
Payments of approximately $15 million upon vesting of Cash LTI awards during the fiscal year ended June 30, 2014 under our Cash LTI employee compensation plan, whereas no such payments occurred during the fiscal year ended June 30, 2013.
Cash Flows from Investing Activities:
Net cash used in investing activities during the fiscal year ended June 30, 2014 increased compared to the fiscal year ended June 30, 2013 from $241 million to $676 million, primarily as a result of an increase in the use of cash for purchases of available-for-sale and trading securities, net of sales and maturities, of approximately $424 million during the fiscal year ended June 30, 2014 compared to the fiscal year ended June 30, 2013. In addition, we acquired a privately-held company for a total purchase consideration of $18 million in cash during the fiscal year ended June 30, 2014.
Cash Flows from Financing Activities:
Net cash used in financing activities during the fiscal year ended June 30, 2014 increased compared to the fiscal year ended June 30, 2013 from $429 million to $459 million, primarily as a result of the following key factors:
An increase in dividend payments of $33 million during the fiscal year ended June 30, 2014 compared to the fiscal year ended June 30, 2013, mainly due to an increase in the quarterly dividend payout amount that we announced in July 2013, and
A decrease in proceeds from the exercise of stock options of $14 million during the fiscal year ended June 30, 2014 compared to the fiscal year ended June 30, 2013, partially offset by
A decrease in common stock repurchases of $32 million during the fiscal year ended June 30, 2014 compared to the fiscal year ended June 30, 2013.

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Debt Issuance - Senior Notes:
In November 2014, we issued $2.50 billion aggregate principal amount of senior, unsecured long-term notes (collectively referred to as “Senior Notes”). We 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$750.0 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 our 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, we 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 16,15, “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 our 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, 2015,2016, we were in compliance with all of the covenants under the Indenture associated with the Senior Notes.
Debt Issuance - Credit Facility (Term Loans and Unfunded Revolving Credit Facility):
In November 2014, we entered into $750$750.0 million of five-year senior unsecured prepayable term loans and a $500$500.0 million unfunded revolving credit facility (collectively, the “Credit Facility”) under 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 our credit rating downgrades or upgrades by Moody’s and S&P. The spread ranges from 100 bps to 175 bps based on the Company’s then effective credit rating. We are 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 our credit rating downgrades or upgrades. 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”). We 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 additional2016, we made term loan principal payments of $20.0 million in addition to the scheduled quarterly payments for the term loans.$135.0 million.

Future principal payments for the term loans (without giving effect for anyto $117.5 million of principal prepayments made)made as of June 30, 2015,2016 that shall be applied to the future scheduled quarterly payments) as of June 30, 2016, are as follows:
Fiscal Quarters Ending 
Quarterly Payment
(in thousands)
 
Quarterly Payment
(in thousands)
June 30, 2015 through December 31, 2016 $9,375
September 30, 2016 through December 31, 2016 $9,375
March 31, 2017 through December 31, 2017 $14,063
 $14,063
March 31, 2018 through September 30, 2019 $18,750
 $18,750
December 31, 2019 $487,500
 $487,500

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The Credit Facility requires us 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, we are 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, 20154.25:1.00
September 30, 2015 and December 31, 20154.00:1.00
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
We were in compliance with the financial covenants under the Credit Agreement as of June 30, 20152016 (the interest expense coverage ratio was 7.939.12 to 1.00 and the leverage ratio was 3.822.75 to 1.00) and had no outstanding borrowings under the unfunded revolving credit facility. Considering our current liquidity position, short-term financial forecasts and ability to prepay the term loans, if necessary, we expect to continue to be in compliance with our financial covenants at the end of our first quarter of fiscal year ending June 30, 2016.2017.
Debt Redemption:
In December 2014, we redeemed the $750$750.0 million aggregate principal amount of 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, which includesafter an offset of a $1.2 million of gain upon the termination of the non-designated forward contract described below.
In addition, in November 2014, we entered into a non-designated forward contract to lock the treasury rate to be used for determining the redemption amount in connection withas part of our redemption ofplan to redeem the then outstandingexisting 2018 Senior Notes that occurred during the three months ended December 31, 2014.Notes. The notional amount of the non-designated forward contract was $750$750.0 million. For additional details, refer to Note 16,15, “Derivative Instruments and Hedging Activities.”

Merger-related Commitment and Fees:
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TableWe have an agreement with a financial advisor in relation to the pending Merger with Lam Research. We agreed to pay a fee of Contentsapproximately $58.0 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 fiscal year ended June 30, 2016, $5.1 million of the above fees were recorded in selling, general and administrative line of the consolidated statements of operations. In addition, the Merger Agreement contains certain termination rights for us and further provides that we may be required to pay a termination fee of $290.0 million to Lam Research under certain circumstances.


Contractual Obligations
The following is a schedule summarizing our significant obligations to make future payments under contractual obligations as of June 30, 20152016: 
Fiscal year ending June 30,Fiscal year ending June 30,
(In thousands)Total 2016 2017 2018 2019 2020 2021 and thereafter OthersTotal 2017 2018 2019 2020 2021 2022 and thereafter Others
Debt obligations(1)
$3,211,250
 $17,500
 $46,875
 $315,625
 $75,000
 $756,250
 $2,000,000
 $—
$3,076,250
 $—
 $250,000
 $70,000
 $756,250
 $—
 $2,000,000
 $—
Interest payment associated with all
debt obligations(2)
1,060,852
 119,117
 118,606
 114,796
 110,711
 100,310
 497,312
 —
946,076
 119,053
 116,084
 112,650
 100,976
 92,875
 404,438
 —
Purchase commitments(3)
298,717
 296,908
 1,347
 337
 63
 —
 62
 —
292,937
 290,576
 2,100
 97
 —
 164
 —
 —
Income taxes
payable(4)
76,939
 —
 —
 —
 —
 —
 —
 76,939
54,030
 —
 —
 —
 —
 —
 —
 54,030
Operating leases21,381
 8,008
 5,818
 3,964
 1,815
 1,220
 556
 —
17,058
 8,026
 5,006
 2,363
 1,613
 25
 25
 —
Cash long-term incentive program (5)
124,972
 42,962
 39,624
 27,839
 14,547
 —
 —
 —
121,447
 47,942
 37,085
 24,908
 11,512
 —
 —
 —
Pension obligations(6)21,546
 3,034
 1,348
 1,570
 1,559
 1,413
 12,622
 —
22,086
 1,301
 1,487
 1,536
 1,452
 1,664
 14,646
 —
Executive Deferred
Savings Plan(6)(7)
167,886
 —
 —
 —
 —
 —
 —
 167,886
162,289
 —
 —
 —
 —
 —
 —
 162,289
Other(7)(8)
42,002
 22,173
 9,599
 6,985
 3,245
 —
 —
 —
43,406
 8,917
 30,520
 3,576
 393
 —
 —
 —
Total contractual cash obligations$5,025,545
 $509,702
 $223,217
 $471,116
 $206,940
 $859,193
 $2,510,552
 $244,825
$4,735,579
 $475,815
 $442,282
 $215,130
 $872,196
 $94,728
 $2,419,109
 $216,319
__________________ 
(1)In November 2014, we issued $750$750.0 million aggregate principal amount of term loans due in fiscal year 2020 (outstanding balance of $711.3$576.3 million as of June 30, 2015)2016) and $2.50 billion aggregate principal amount of Senior Notes due from fiscal year 2018 to fiscal year 2035. During our fiscal year ended June 30, 2016, we made term loan principal payments of $135.0 million.
(2)The interest payments associated with the Senior Notes obligations included in the table above are based on the principal amount multiplied by the applicable coupon rate for each series of Senior Notes. Our future interest payments are subject to change if our then effective credit rating is below investment grade as discussed above. The interest payments under the term loans are payable on the borrowed amounts at the LIBOR plus 125 bps. As of June 30, 2015,2016, we utilized the existing interest rates to project our estimated term loans interest payments for the next five years. The interest payment under the revolving credit facility for the undrawn balance is payable at 15 bps as a commitment fee based on the daily undrawn balance and we utilized the existing rate for the projected interest payments included in the table above. Our future interest payments for the term loans and the revolving credit facility are subject to change due to future fluctuations in the LIBOR rates as well as any upgrades or downgrades to our then effective credit rating.
(3)Represents an estimate of significant commitments to purchase inventory from our suppliers as well as an estimate of significant purchase commitments associated with other goods and services in the ordinary course of business. Our 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. 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 the arrangements are renegotiated or canceled. Certain agreements provide for potential cancellation penalties.
(4)Represents the estimated income tax payable obligation related to uncertain tax positions as well as related accrued interest. We are unable to make a reasonably reliable estimate of the timing of payments in individual years due to uncertainties in the timing of tax audit outcomes.
(5)Represents the amount committed under our cash long-term incentive program. The expected payment after estimated forfeitures is approximately $101.8$97.9 million.
(6)Represents an estimate of expected benefit payments up to fiscal year 2026 that was actuarially determined and excludes the minimum cash required to contribute to the plan. As of June 30, 2016, our defined pension plans do not have material required minimum cash contribution obligations.

(7)Represents the amount committed under our non-qualified executive deferred compensation plan. We are unable to make a reasonably reliable estimate of the timing of payments in individual years due to the uncertainties in the timing around participant’s separation and any potential changes that participants may decide to make to the previous distribution elections.
(7)(8)RepresentsIncludes $23.8 million of employee-related retention commitments which are estimated to be paid over the stipulated period in connection with the pending Merger with Lam Research as well as the amount committed for accrued dividends payable of $19.6 million, substantially all of which are for the special cash dividend for the unvested restricted stock units as of the dividend record date as well as restricted stock units granted with dividend equivalent rights. For additional details, refer to Note 8,7, “Equity and Long-term Incentive Compensation Plans”.

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Starting in fiscal year ended June 30, 2013, we adopted a cash-based long-term incentive (“Cash LTI”) program for many of our employees as part of our employee compensation program. Cash LTI awards issued to employees under the Cash Long-Term Incentive Plan (“Cash LTI Plan”) generally 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 the Cash LTI Plan, participants must remain employed by us as of the applicable award vesting date.
We have agreements with financial institutions to sell certain of our trade receivables and promissory notes from customers without recourse. In addition, we periodically sell 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,Year ended June 30,
(In thousands)2015 2014 20132016 2015 2014
Receivables sold under factoring agreements$137,285
 $116,292
 $144,307
$205,790
 $137,285
 $116,292
Proceeds from sales of LCs$6,920
 $8,323
 $3,808
$21,904
 $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.
We maintain guarantee arrangements available through various financial institutions for up to $22.5$22.1 million, of which $19.0$18.7 million had been issued as of June 30, 20152016, primarily to fund guarantees to customs authorities for value-added tax (“VAT”) and other operating requirements of our subsidiaries in Europe and Asia.
We maintain certain open inventory purchase commitments with our suppliers to ensure a smooth and continuous supply for key components. Our 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. Our open inventory purchase commitments were approximately $298.7$292.9 million as of June 30, 20152016 and 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.
We provide standard warranty coverage on our systems for 40 hours per week for 12 months, providing labor and parts necessary to repair the systems during the warranty period. We account 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. The actual product performance and/or field expense profiles may differ, and in those cases we adjust our warranty accruals accordingly. The difference between the estimated and actual warranty costs tends to be larger for new product introductions as there is limited historical product performance to estimate warranty expense; our warranty charge estimates for more mature products with longer product performance histories tend to be more stable. Non-standard warranty coverage generally includes services incremental to the standard 40-hours per week coverage for 12 months. See Note 13,12, “Commitments and Contingencies” to the Consolidated Financial Statements for a detailed description.additional details.

Working Capital:
Working capital was $2.90$2.87 billion as of June 30, 2015,2016, which was a decrease of $787.7$37.2 million compared to our working capital as of June 30, 2014. The decrease in working capital is primarily attributable to payment of a special cash dividend of approximately $2.72 billion, payment of regular quarterly cash dividends of $324.8 million, payment for the redemption of the 2018 Senior Notes of $877.4 million, payment for stock repurchases of $602.9 million, payment of principal amount and prepayment of term loans and interest with respect to Senior Notes, term loans and unfunded revolving credit facility aggregating to $98.3 million, payment of interest up to the redemption date with respect to our 2018 Senior Notes of $32.8 million, partially offset by the aggregate of net proceeds of $3.22 billion from the issuance of Senior Notes and borrowings under our prepayable term loans.2015. As of June 30, 2015,2016, our principal sources of liquidity consisted of $2.39$2.49 billion of cash, cash equivalents and marketable securities. Our liquidity is affected by many factors, some of which are based on the normal ongoing operations of the business, and others of which relate to the uncertainties of global and regional economies and the semiconductor and the semiconductor equipment industries. Although cash requirements will fluctuate based on the timing and extent of these factors, we believe that cash generated from operations, together with the liquidity provided by existing cash and cash equivalents balances and our $500 million unfunded revolving credit facility, will be sufficient to satisfy our liquidity requirements associated with working capital needs, capital expenditures, dividends, stock repurchases and other contractual obligations, including repayment of outstanding debt, for at least the next 12 months.

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Our credit ratings and outlooks as of June 30, 20152016 are summarized below: 
Rating AgencyRating Outlook
FitchBBB- Stable
Moody’sBaa2 Stable
Standard & Poor’sBBB Stable
Factors that can affect our credit ratings include changes in our operating performance, the economic environment, conditions in the semiconductor and semiconductor equipment industries, our financial position and changes in our business strategy.
Off-Balance Sheet Arrangements
Under our foreign currency risk management strategy, we utilize derivative instruments to protect our interestsearnings and cash flows from unanticipated fluctuations in earnings and cash flows caused by volatility in currency exchange rates. This financial exposure is monitored and managed as an integral part of our overall risk management program, which focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on our operating results. We continue our policy of hedging our current and forecasted foreign currency exposures with hedging instruments having tenors of up to 18 months (see Note 16,15, “Derivative Instruments and Hedging Activities” to the Consolidated Financial Statements for a detailed description)additional details). Our outstanding hedge contracts, with maximum maturityremaining maturities of approximately seven months and 16 months as of June 30, 2016 and 2015, respectively, were as follows: 
As of June 30,As of June 30,
(In thousands)2015 20142016 2015
Cash flow hedge contracts      
Purchase$32,775
 $6,066
$7,591
 $32,775
Sell$88,800
 $33,999
$91,793
 $88,800
Other foreign currency hedge contracts      
Purchase$64,012
 $108,901
$122,275
 $64,012
Sell$123,091
 $106,322
$115,087
 $123,091

In October 2014, in anticipation of the issuance of the Senior Notes, we 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$1.00 billion in aggregate which matured in the second quarter of the fiscal year ended June 30, 2015. We 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 we 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 yearyears ended June 30, 2016 and 2015, we recognized $0.8 million and $0.5 million, respectively, for the amortization of the gain recognized in accumulated other comprehensive income (loss), which amount reduced the interest expense. We did not record any ineffectivenessAs of June 30, 2016, the unamortized portion of the fair value of the forward contracts for the fiscal year ended June 30, 2015.rate lock agreements was $6.3 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 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.
In addition, in November 2014, we 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$750.0 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 ended 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.

56
Table of Contents

Indemnification Obligations. Subject to certain limitations, we are obligated to indemnify our current and former directors, officers and employees with respect to certain litigation matters and investigations that arise in connection with their service to us. These obligations arise under the terms of our certificate of incorporation, our bylaws, applicable contracts, and Delaware and California law. The obligation to indemnify generally means that we are required to pay or reimburse the individuals’ reasonable legal expenses and possibly damages and other liabilities incurred in connection with these matters. For example, we have paid or reimbursed legal expenses incurred in connection with the investigation of our historical stock option practices and the related litigation and government inquiries by a number of our current and former directors, officers and employees. Although the maximum potential amount of future payments we could be required to make under the indemnification obligations generally described in this paragraph is theoretically unlimited, we believe the fair value of this liability, to the extent estimable, is appropriately considered within the reserve we have established for currently pending legal proceedings.
We are a party to a variety of agreements pursuant to which we 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 we customarily agree to hold the other party harmless against losses arising from, or provide customers with other remedies to protect against, bodily injury or damage to personal property caused by our products, non-compliance with our product performance specifications, infringement of third-party intellectual property rights used in our products 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 us is typically subject to the other party making a claim to and cooperating with us pursuant to the procedures specified in the particular contract. This usually allows us 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, our obligations under these agreements may be limited in terms of amounts, activity (typically at our option to replace or correct the products or terminate the agreement with a refund to the other party), and duration. In some instances, we may have recourse against third parties and/or insurance covering certain payments made by us.

In addition, we may in limited circumstances enter into agreements that contain customer-specific commitments on pricing, tool reliability, spare parts stocking levels, service response time and other commitments. Furthermore, we may give these customers limited audit or inspection rights to enable them to confirm that we are complying with these commitments. If a customer elects to exercise its audit or inspection rights, we 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, we have made no accruals in our consolidated financial statements for this contingency. While we have not in the past incurred significant expenses for resolving disputes regarding these types of commitments, we cannot make any assurance that we 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 our obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by us under these agreements have not had a material effect on our business, financial condition, results of operations or cash flows.

57

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in interest rates, foreign currency exchange rates and marketable equity security prices. To mitigate these risks, we utilize derivative financial instruments, such as foreign currency hedges. All of the potential changes noted below are based on sensitivity analyses performed on our financial position as of June 30, 20152016. Actual results may differ materially.
As of June 30, 20152016, we had an investment portfolio of fixed income securities of $1.65$1.48 billion. These securities, as with all fixed income instruments, are subject to interest rate risk and will decline in fair value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 100 bps from levels as of June 30, 20152016, the fair value of the portfolio would have declined by $18.1$16.5 million.
In November 2014, we issued $2.50 billion aggregate principal amount of fixed rate senior, unsecured long-term notes (collectively referred to as “Senior Notes”) due in various fiscal years ranging from 2018 to 2035. The fair market value of long-term fixed interest rate notes is subject to interest rate risk. Generally, the fair market value of fixed interest rate notes will increase as interest rates fall and decrease as interest rates rise. As of June 30, 2015,2016, the fair value and the book value of our Senior Notes ofwere $2.68 billion and $2.50 billion, approximates the fair value.respectively. Additionally, the interest expense for the Senior Notes is subject to interest rate adjustments following a downgrade of our credit ratings below investment grade by the credit rating agencies. Following a rating change below investment grade, the stated interest rate for each series of Senior Notes may increase between 25 bps to 100 bps based on the adjusted credit rating. Refer to Note 7,6, “Debt” to the Consolidated Financial Statements in Part II, Item 8 and Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Liquidity and Capital Resources,” in Part II, Item 7 for additional details. Factors that can affect our credit ratings include changes in our operating performance, the economic environment, conditions in the semiconductor and semiconductor equipment industries, our financial position, and changes in our business strategy. As of June 30, 2015,2016, if our credit rating was downgraded below investment grade by Moody’s and S&P, the maximum potential increase to our annual interest expense on the Senior Notes, considering a 200 bps increase to the stated interest rate for each series of our Senior Notes, is estimated to be approximately $50.0$53.4 million.

In November 2014, we entered into $750 million aggregate principal amount of floating rate senior, unsecured prepayable term loans due in 2019 and a $500 million unfunded revolving credit facility. The interest rates for the term loans are based on LIBOR plus a fixed spread and this spread is subject to adjustment in conjunction with our credit rating downgrades or upgrades. The spread ranges from 100 bps to 175 bps based on the adjusted credit rating. The fair value of the term loans is subject to interest rate risk only to the extent of the fixed spread portion of the interest rates which does not fluctuate with change in interest rates. As of June 30, 2015,2016, the difference between book value and fair value of our term loans was immaterial. We are also obligated to pay an annual commitment fee of 15 bps on the daily undrawn balance of the unfunded revolving credit facility which is also subject to an adjustment in conjunction with our credit rating downgrades or upgrades. 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. As of June 30, 2015,2016, if LIBOR-based interest rates increased by 100 bps, the change would increase our annual interest expense annually by approximately $6.3$5.2 million as it relates to our borrowings under the term loans. Additionally, as of June 30, 2015,2016, if our credit rating was downgraded to be below investment grade, the maximum potential increase to our annual interest expense for the term loans and the revolving credit facility, using the highest range of the ranges discussed above, is estimated to be approximately $4.1$3.4 million.
See Note 4, “Marketable Securities” to the Consolidated Financial Statements in Part II, Item 8; Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Liquidity and Capital Resources,” in Part II, Item 7; and Risk Factors in Part I, Item 1A of this Annual Report on Form 10-K for a description of recent market events that may affect the value of the investments in our portfolio that we held as of June 30, 20152016.
As of June 30, 20152016, we had net forward and option contracts to sell $115.1$77.0 million in foreign currency in order to hedge certain currency exposures (see Note 16,15, “Derivative Instruments and Hedging Activities” to the Consolidated Financial Statements for a detailed description)additional details). If we had entered into these contracts on June 30, 20152016, the U.S. dollar equivalent would have been $115.1$87.6 million. A 10% adverse move in all currency exchange rates affecting the contracts would decrease the fair value of the contracts by $23.9$21.1 million. However, if this occurred, the fair value of the underlying exposures hedged by the contracts would increase by a similar amount. Accordingly, we believe that, as a result of the hedging of certain of our foreign currency exposure, changes in most relevant foreign currency exchange rates should have no material impact on our income or cash flows.

58

ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
Consolidated Balance Sheets as of June 30, 20152016 and 20142015
6063
  
Consolidated Statements of Operations for each of the three years in the period ended June 30, 20152016
6164
  
Consolidated Statements of Comprehensive Income for each of the three years in the period ended June 30, 20152016
6265
  
Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended June 30, 20152016
6366
  
Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 20152016
6467
  
Notes to Consolidated Financial Statements
6568
  
Report of Independent Registered Public Accounting Firm
105109

59

KLA-TENCOR CORPORATION
Consolidated Balance Sheets
 
As of June 30,As of June 30,
(In thousands, except par value)2015 20142016 2015
ASSETS      
Current assets:      
Cash and cash equivalents$838,025
 $630,861
$1,108,488
 $838,025
Marketable securities1,549,086
 2,521,776
1,382,806
 1,549,086
Accounts receivable, net585,494
 492,863
613,233
 585,494
Inventories617,904
 656,457
698,635
 617,904
Deferred income taxes236,253
 215,676
—
 236,253
Other current assets77,814
 68,462
64,870
 77,814
Total current assets3,904,576
 4,586,095
3,868,032
 3,904,576
Land, property and equipment, net314,591
 330,263
278,014
 314,591
Goodwill335,263
 335,355
335,177
 335,263
Deferred income taxes, non-current302,219
 78,648
Purchased intangibles, net11,895
 27,697
4,331
 11,895
Other non-current assets259,687
 256,436
174,659
 181,039
Total assets$4,826,012
 $5,535,846
$4,962,432
 $4,826,012
LIABILITIES AND STOCKHOLDERS’ EQUITY      
Current liabilities:      
Accounts payable$103,342
 $103,422
$106,517
 $103,342
Deferred system profit148,691
 147,923
174,551
 148,691
Unearned revenue71,335
 59,176
59,147
 71,335
Current portion of long-term debt16,981
 —
—
 16,981
Other current liabilities661,414
 585,090
662,208
 661,414
Total current liabilities1,001,763
 895,611
1,002,423
 1,001,763
Non-current liabilities:      
Long-term debt3,173,435
 745,101
3,057,936
 3,173,435
Unearned revenue47,145
 57,500
56,336
 47,145
Other non-current liabilities182,230
 168,288
156,623
 182,230
Total liabilities4,404,573
 1,866,500
4,273,318
 4,404,573
Commitments and contingencies (Notes 13 and 14)
 
Commitments and contingencies (Notes 12 and 13)
 
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, respectively158
 165
Common stock, $0.001 par value, 500,000 shares authorized, 260,619 and 259,007 shares issued, 155,955 and 157,851 shares outstanding, as of June 30, 2016 and June 30, 2015, respectively156
 158
Capital in excess of par value474,216
 1,220,339
452,818
 474,216
Retained earnings (accumulated deficit)(12,362) 2,479,113
284,825
 (12,362)
Accumulated other comprehensive income (loss)(40,573) (30,271)(48,685) (40,573)
Total stockholders’ equity421,439
 3,669,346
689,114
 421,439
Total liabilities and stockholders’ equity$4,826,012
 $5,535,846
$4,962,432
 $4,826,012
See accompanying notes to consolidated financial statements.

60

KLA-TENCOR CORPORATION
Consolidated Statements of Operations
 
Year ended June 30,Year ended June 30,
(In thousands, except per share amounts)2015 2014 20132016 2015 2014
Revenues:          
Product$2,125,396
 $2,286,437
 $2,247,147
$2,250,260
 $2,125,396
 $2,286,437
Service688,653
 642,971
 595,634
734,233
 688,653
 642,971
Total revenues2,814,049
 2,929,408
 2,842,781
2,984,493
 2,814,049
 2,929,408
Costs and expenses:          
Costs of revenues1,215,229
 1,232,962
 1,237,452
1,163,391
 1,215,229
 1,232,962
Engineering, research and development530,616
 539,469
 487,832
Research and development481,258
 530,616
 539,469
Selling, general and administrative406,864
 384,907
 387,812
379,399
 406,864
 384,907
Loss on extinguishment of debt and other, net131,669
 —
 —
—
 131,669
 —
Interest expense106,009
 53,812
 54,176
122,887
 106,009
 53,812
Other expense (income), net(10,469) (16,203) (15,112)(20,634) (10,469) (16,203)
Income before income taxes434,131
 734,461
 690,621
858,192
 434,131
 734,461
Provision for income taxes67,973
 151,706
 147,472
153,770
 67,973
 151,706
Net income$366,158
 $582,755
 $543,149
$704,422
 $366,158
 $582,755
Net income per share:          
Basic$2.26
 $3.51
 $3.27
$4.52
 $2.26
 $3.51
Diluted$2.24
 $3.47
 $3.21
$4.49
 $2.24
 $3.47
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
$2.08
 $18.50
 $1.80
Weighted-average number of shares:          
Basic162,282
 166,016
 166,089
155,869
 162,282
 166,016
Diluted163,701
 168,118
 169,260
156,779
 163,701
 168,118

See accompanying notes to consolidated financial statements.

61

KLA-TENCOR CORPORATION
Consolidated Statements of Comprehensive Income

Year ended June 30,Year ended June 30,
(In thousands)2015 2014 20132016 2015 2014
Net income$366,158
 $582,755
 $543,149
$704,422
 $366,158
 $582,755
Other comprehensive income (loss):          
Currency translation adjustments:          
Change in currency translation adjustments(20,740) 6,428
 (11,298)(3,898) (20,740) 6,428
Change in income tax benefit or expense8,086
 (1,232) (750)1,399
 8,086
 (1,232)
Net change related to currency translation adjustments(12,654) 5,196
 (12,048)(2,499) (12,654) 5,196
Cash flow hedges:          
Change in net unrealized gains or losses13,745
 1,641
 4,929
(9,622) 13,745
 1,641
Reclassification adjustments for net gains or losses included in net income(6,615) (4,145) (1,483)3,722
 (6,615) (4,145)
Change in income tax benefit or expense(2,565) 898
 (1,233)2,122
 (2,565) 898
Net change related to cash flow hedges4,565
 (1,606) 2,213
(3,778) 4,565
 (1,606)
Net change related to unrecognized losses and transition obligations in connection with defined benefit plans(147) (617) (2,255)(4,552) (147) (617)
Available-for-sale securities:          
Change in net unrealized gains or losses(1,069) 7,212
 (2,953)3,549
 (1,069) 7,212
Reclassification adjustments for net gains or losses included in net income(2,119) (2,084) (2,287)(312) (2,119) (2,084)
Change in income tax benefit or expense1,122
 (1,726) 1,827
(520) 1,122
 (1,726)
Net change related to available-for-sale securities(2,066) 3,402
 (3,413)2,717
 (2,066) 3,402
Other comprehensive income (loss)(10,302) 6,375
 (15,503)(8,112) (10,302) 6,375
Total comprehensive income$355,856
 $589,130
 $527,646
$696,310
 $355,856
 $589,130
See accompanying notes to consolidated financial statements.


62

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
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 Shares Amount 
Balances as of June 30, 2012166,710
 $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 plans4,099
 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, 2013165,435
 1,159,565
 2,359,233
 (36,646) 3,482,152
165,435
 $1,159,565
 $2,359,233
 $(36,646) $3,482,152
Net income—
 —
 582,755
 —
 582,755
—
 —
 582,755
 —
 582,755
Other comprehensive income—
 —
 —
 6,375
 6,375
—
 —
 —
 6,375
 6,375
Net issuance under employee stock plans3,848
 60,320
 —
 —
 60,320
3,848
 60,320
 —
 —
 60,320
Repurchase of common stock(3,835) (76,839) (164,004) —
 (240,843)(3,835) (76,839) (164,004) —
 (240,843)
Cash dividends declared ($1.80 per share)—
 —
 (298,871) —
 (298,871)—
 —
 (298,871) —
 (298,871)
Stock-based compensation expense—
 60,940
 —
 —
 60,940
—
 60,940
 —
 —
 60,940
Tax benefit for equity awards—
 16,518
 —
 —
 16,518
—
 16,518
 —
 —
 16,518
Balances as of June 30, 2014165,448
 1,220,504
 2,479,113
 (30,271) 3,669,346
165,448
 1,220,504
 2,479,113
 (30,271) 3,669,346
Net income—
 —
 366,158
 —
 366,158
—
 —
 366,158
 —
 366,158
Other comprehensive loss—
 —
 —
 (10,302) (10,302)—
 —
 —
 (10,302) (10,302)
Net issuance under employee stock plans1,658
 16,186
 —
 —
 16,186
1,658
 16,186
 —
 —
 16,186
Repurchase of common stock(9,255) (26,891) (581,965) —
 (608,856)(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)
Cash dividends ($18.50 per share including a special cash dividend of $16.50 per share declared during the three months ended December 31, 2014) and dividend equivalents declared—
 (807,391) (2,275,668) —
 (3,083,059)
Stock-based compensation expense—
 55,302
 —
 —
 55,302
—
 55,302
 —
 —
 55,302
Tax benefit for equity awards—
 16,664
 —
 —
 16,664
—
 16,664
 —
 —
 16,664
Balances as of June 30, 2015157,851
 $474,374
 $(12,362) $(40,573) $421,439
157,851
 474,374
 (12,362) (40,573) 421,439
Net income—
 —
 704,422
 —
 704,422
Other comprehensive loss—
 —
 —
 (8,112) (8,112)
Net issuance under employee stock plans1,589
 14,354
 —
 —
 14,354
Repurchase of common stock(3,445) (10,049) (165,694) —
 (175,743)
Cash dividends ($2.08 per share) and dividend equivalents declared—
 (82,295) (241,541) —
 (323,836)
Stock-based compensation expense—
 45,050
 —
 —
 45,050
Tax benefit for equity awards—
 11,540
 —
 —
 11,540
Balances as of June 30, 2016155,995
 $452,974
 $284,825
 $(48,685) $689,114
See accompanying notes to consolidated financial statements.

63

KLA-TENCOR CORPORATION
Consolidated Statements of Cash Flows
Year Ended June 30,Year Ended June 30,
(In thousands)2015 2014 20132016 2015 2014
Cash flows from operating activities:          
Net income$366,158
 $582,755
 $543,149
$704,422
 $366,158
 $582,755
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization80,536
 83,072
 87,534
66,932
 80,536
 83,072
Asset impairment charges2,126
 1,374
 1,327
1,396
 2,126
 1,374
Loss on extinguishment of debt and other, net131,669
 —
 —
—
 131,669
 —
Net gain on sale of assets—
 —
 (1,160)
Non-cash stock-based compensation expense55,302
 60,940
 70,084
45,050
 55,302
 60,940
Deferred income taxes(24,245) 17,176
 4,532
19,804
 (24,245) 17,176
Excess tax benefit from equity awards(15,403) (20,554) (14,198)(11,936) (15,403) (20,554)
Net gain on sale of marketable securities and other investments(2,119) (5,920) (2,287)(5,887) (2,119) (5,920)
Changes in assets and liabilities, net of impact of acquisition of business:          
Decrease (increase) in accounts receivable, net(118,520) 32,591
 159,245
(8,292) (118,520) 32,591
Decrease (increase) in inventories27,500
 (26,173) 14,787
(67,579) 27,500
 (26,173)
Decrease (increase) in other assets11,135
 (26,265) 6,035
14,613
 11,135
 (26,265)
Increase (decrease) in accounts payable848
 (12,333) (22,812)3,109
 848
 (12,333)
Increase (decrease) in deferred system profit768
 (10,042) 10,748
25,860
 768
 (10,042)
Increase in other liabilities90,151
 102,265
 56,204
Increase (decrease) in other liabilities(27,796) 90,151
 102,265
Net cash provided by operating activities605,906
 778,886
 913,188
759,696
 605,906
 778,886
Cash flows from investing activities:          
Acquisition of non-marketable securities—
 (1,345) —
—
 —
 (1,345)
Acquisition of business—
 (18,000) —
—
 —
 (18,000)
Capital expenditures, net(45,791) (67,502) (74,573)(31,741) (45,791) (67,502)
Proceeds from sale of assets—
 3,836
 1,838
7,076
 —
 3,836
Purchase of available-for-sale securities(1,731,551) (1,834,223) (1,588,093)
Purchases of available-for-sale securities(1,175,720) (1,731,551) (1,834,223)
Proceeds from sale of available-for-sale securities1,993,396
 987,512
 1,117,511
737,817
 1,993,396
 987,512
Proceeds from maturity of available-for-sale securities699,108
 251,876
 300,209
602,446
 699,108
 251,876
Purchase of trading securities(60,808) (64,053) (40,850)
Purchases of trading securities(68,378) (60,808) (64,053)
Proceeds from sale of trading securities63,867
 65,790
 42,511
73,187
 63,867
 65,790
Net cash provided by (used in) investing activities918,221
 (676,109) (241,447)144,687
 918,221
 (676,109)
Cash flows from financing activities:          
Proceeds from issuance of debt, net of issuance costs3,224,906
 —
 —
—
 3,224,906
 —
Repayment of debt(916,117) —
 —
(135,000) (916,117) —
Issuance of common stock47,008
 112,221
 126,121
38,298
 47,008
 112,221
Tax withholding payments related to vested and released restricted stock units(30,229) (51,948) (29,682)(23,942) (30,229) (51,948)
Common stock repurchases(602,888) (240,843) (273,254)(181,711) (602,888) (240,843)
Payment of dividends to stockholders(3,041,055) (298,871) (265,893)(346,283) (3,041,055) (298,871)
Excess tax benefit from equity awards15,403
 20,554
 14,198
11,936
 15,403
 20,554
Net cash used in financing activities(1,302,972) (458,887) (428,510)(636,702) (1,302,972) (458,887)
Effect of exchange rate changes on cash and cash equivalents(13,991) 1,581
 (9,135)2,782
 (13,991) 1,581
Net increase (decrease) in cash and cash equivalents207,164
 (354,529) 234,096
270,463
 207,164
 (354,529)
Cash and cash equivalents at beginning of period630,861
 985,390
 751,294
838,025
 630,861
 985,390
Cash and cash equivalents at end of period$838,025
 $630,861
 $985,390
$1,108,488
 $838,025
 $630,861
Supplemental cash flow disclosures:          
Income taxes paid, net$69,681
 $117,348
 $120,342
$105,187
 $69,681
 $117,348
Interest paid$92,982
 $52,474
 $53,693
$120,433
 $92,982
 $52,474
Non-cash activities:          
Purchase of land, property and equipment - investing activities$1,843
 $3,457
 $6,839
$2,035
 $1,843
 $3,457
Unsettled common stock repurchase - financing activities$—
 $5,968
 $—
Dividends payable - financing activities$42,002
 $—
 $—
$19,556
 $42,002
 $—
See accompanying notes to consolidated financial statements.

64

KLA-TENCOR CORPORATION
Notes to Consolidated Financial Statements
NOTE 1— DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of OperationsBusiness 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. KLA-Tencor’s broad portfolio of inspection and metrology 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. 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.
Merger Agreement. 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 through a merger with a subsidiary of Lam Research (the “Merger”).
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 Merger or if the Merger is not consummated by October 20, 2016. Upon termination of the Merger Agreement under specified circumstances, the Company or Lam Research may be required to pay the other party a termination fee of $290.0 million. During the fiscal year ended June 30, 2016, the Company incurred merger-related costs of $18.2 million of which $0.7 million was recorded within costs of revenues, $1.7 million was recorded within research and development and $15.8 million was recorded within selling, general and administrative in the Consolidated Statements of Operations.
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.

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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 CategoryPeriodRange of Useful Lives
Buildings30 to 35 years
Leasehold improvementsShorter of 10 to 15 years or lease term
Machinery and equipment2 to 5 years
Office furniture and fixtures5 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, 20152016, 20142015 and 20132014 was $55.8$52.6 million,$55.8 million and $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 recoverabilityimpairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. See Note 6,5, “Goodwill and Purchased Intangible Assets” for a detailed description.additional details.
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.

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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,consolidations, 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 
Year ended June 30,
2016 2015 2014
Micron Technology, Inc. Intel Corporation Intel Corporation
Taiwan Semiconductor Manufacturing Company Limited Samsung Electronics Co., Ltd. Samsung Electronics Co., Ltd.

 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
2016 2015
SK Hynix, Inc. Taiwan Semiconductor Manufacturing Company Limited
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 13,12, “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-salessources—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.

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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 receivedreceive 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. 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 onin 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 onin the consolidated balance sheet.sheets. Changes in the Executive Deferred Savings Plan liability is recorded in selling, general and administrative expense in the consolidated statements of operations. The expense (benefit) associated with changes in the liability included in selling, general and administrative expense werewas $(0.8) million, $10.4 million $24.4 million and $14.2$24.4 million for the fiscal years ended June 30, 2016, 2015 2014 and 20132014, 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 onin the consolidated balance sheet.sheets. 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 net gains (losses), net included in selling, general and administrative expense were $0.1 million, $10.4 million $24.8 million and $14.1$24.8 million for the fiscal years ended June 30, 2016, 2015 and 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. During its fiscal year ended 2016, the Company prospectively adopted the accounting standard update for the presentation of deferred income taxes which requires it to classify deferred tax assets and liabilities as noncurrent in a classified balance sheet. See “Recent Accounting Pronouncements” below for additional details.
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.
EarningsNet Income Per Share. Basic earningsnet income 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 earningsnet 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 dilutive potential shares of common stock had been issued. The dilutive effect of outstanding options and restricted stock units is reflected in diluted earningsnet income 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.
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 13,12, “Commitments and Contingencies” and Note 14,13, “Litigation and Other Legal Matters” for a detailed description.additional details.
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.

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Recent Accounting Pronouncements
Recently Adopted
In July 2013,November 2015, the Financial Accounting Standards Boardboard (“FASB”) issued an accounting standard update that provides guidance onfor 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.deferred income taxes. Under this accounting standard update, in most circumstances, an unrecognizednew guidance, deferred tax benefit, or a portion of an unrecognized tax benefit,assets and liabilities should be presentedclassified as noncurrent 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.classified balance sheet. The Company early adopted this accounting standard update inon a prospective basis at the thirdbeginning of the fourth quarter of the fiscal year ended June 30, 2015 and the2016. Upon adoption, did not have a material impact on the Company’s consolidated financial statements.approximately $218 million in net current deferred tax assets were reclassified to noncurrent. No prior periods were retrospectively adjusted.
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. TheIn August 2015, the FASB issued an amendment to defer the effective date of the update by one year, with early adoption on the original effective date permitted. With this amendment, 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,2019, with early adoption onpermitted beginning in the original effective date permitted.first quarter of the fiscal year ending June 30, 2018. Subsequent to this amendment, the FASB has issued additional clarifying implementation guidance. 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.
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 early2017. Early adoption permitted.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 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 consolidated financial statements.
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 its fiscal year ending 2019, and early adoption is permitted. The Company is currently evaluating the impact of this accounting standard update on its 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 applied prospectively.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 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 consolidated financial statements.


In June 2016, the FASB issued an accounting standard update that changes the accounting for recognizing impairments of financial assets. Under the update, credit losses for certain types of financial instruments will be estimated based on expected losses. The update also modifies the impairment models for available-for-sale debt securities and for purchased financial assets with credit deterioration since their origination. The update is effective for the Company beginning in the first quarter of its fiscal year ending June 30, 2021, with early adoption permitted starting in the first quarter of fiscal year ending 2020. The Company is currently evaluating the impact of this accounting standard update on its consolidated financial statements.
71

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, 20152016, 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, 20152016, 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, 20152016, the types of instruments valued based on other observable inputs included corporate debt securities, municipal securities, and 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.


72

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)
As of June 30, 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. Government agency securities$7,500
 $7,500
 $—
U.S. Treasury securities$68,748
 $68,748
 $—
Corporate debt securities13,099
 —
 13,099
20,569
 —
 20,569
Money market and other611,385
 611,385
 —
626,156
 626,156
 —
Marketable securities:          
U.S. Treasury securities275,555
 275,555
 —
258,754
 258,754
 —
U.S. Government agency securities564,768
 556,019
 8,749
405,705
 385,731
 19,974
Municipal securities31,816
 —
 31,816
5,016
 —
 5,016
Corporate debt securities612,862
 —
 612,862
657,905
 —
 657,905
Sovereign securities57,093
 8,976
 48,117
41,257
 6,426
 34,831
Total cash equivalents and marketable securities(1)
2,174,078
 1,459,435
 714,643
2,084,110
 1,345,815
 738,295
Other current assets:          
Derivative assets3,064
 —
 3,064
1,095
 —
 1,095
Other non-current assets:          
Executive Deferred Savings Plan165,655
 91,203
 74,452
162,160
 106,149
 56,011
Total financial assets(1)
$2,342,797
 $1,550,638
 $792,159
$2,247,365
 $1,451,964
 $795,401
Liabilities          
Other current liabilities:          
Derivative liabilities$(3,106) $—
 $(3,106)$(11,647) $—
 $(11,647)
Total financial liabilities$(3,106) $—
 $(3,106)$(11,647) $—
 $(11,647)
__________________ 
(1) Excludes cash of $183.1$330.1 million held in operating accounts and time deposits of $29.9$77.1 million as of June 30, 2015.2016.

73

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)
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$28,000
 $8,000
 $20,000
$7,500
 $7,500
 $—
Municipal securities2,891
 —
 2,891
Corporate debt securities68,992
 —
 68,992
13,099
 —
 13,099
Money market and other397,517
 397,517
 —
611,385
 611,385
 —
Marketable securities:          
U.S. Treasury securities384,400
 365,401
 18,999
275,555
 275,555
 —
U.S. Government agency securities839,843
 811,841
 28,002
564,768
 556,019
 8,749
Municipal securities93,325
 —
 93,325
31,816
 —
 31,816
Corporate debt securities1,155,176
 —
 1,155,176
612,862
 —
 612,862
Sovereign securities42,264
 9,253
 33,011
57,093
 8,976
 48,117
Total cash equivalents and marketable securities(1)
3,012,408
 1,592,012
 1,420,396
2,174,078
 1,459,435
 714,643
Other current assets:          
Derivative assets666
 —
 666
3,064
 —
 3,064
Other non-current assets:          
Executive Deferred Savings Plan159,995
 105,311
 54,684
165,655
 91,203
 74,452
Total financial assets(1)
$3,173,069
 $1,697,323
 $1,475,746
$2,342,797
 $1,550,638
 $792,159
Liabilities          
Other current liabilities:          
Derivative liabilities$(898) $—
 $(898)$(3,106) $—
 $(3,106)
Total financial liabilities$(898) $—
 $(898)$(3,106) $—
 $(3,106)
__________________ 
(1) Excludes cash of $106.7183.1 million held in operating accounts and time deposits of $33.529.9 million as of June 30, 20142015. 
There were no transfers in and out of Level 1 and Level 2 fair value measurements during the fiscal year ended June 30, 20152016 or 20142015. 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, 20152016 or 20142015.

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NOTE 3 — FINANCIAL STATEMENT COMPONENTS
Consolidated Balance Sheets
As of June 30,As of June 30,
(In thousands)2015 20142016 2015
Accounts receivable, net:      
Accounts receivable, gross$607,157
 $514,690
$634,905
 $607,157
Allowance for doubtful accounts(21,663) (21,827)(21,672) (21,663)
$585,494
 $492,863
$613,233
 $585,494
Inventories:      
Customer service parts$209,726
 $203,194
$234,712
 $209,726
Raw materials194,218
 221,612
208,689
 194,218
Work-in-process156,820
 171,249
187,733
 156,820
Finished goods57,140
 60,402
67,501
 57,140
$617,904
 $656,457
$698,635
 $617,904
Other current assets:      
Prepaid expenses(1)
$37,006
 $34,743
$37,127
 $37,006
Income tax related receivables32,850
 27,452
18,190
 32,850
Other current assets7,958
 6,267
9,553
 7,958
$77,814
 $68,462
$64,870
 $77,814
Land, property and equipment, net:      
Land$40,397
 $41,848
$40,603
 $40,397
Buildings and leasehold improvements316,566
 302,537
313,239
 316,566
Machinery and equipment510,642
 491,167
507,378
 510,642
Office furniture and fixtures21,411
 20,945
21,737
 21,411
Construction-in-process3,152
 8,945
5,286
 3,152
892,168
 865,442
888,243
 892,168
Less: accumulated depreciation and amortization(577,577) (535,179)(610,229) (577,577)
$314,591
 $330,263
$278,014
 $314,591
Other non-current assets:      
Executive Deferred Savings Plan$165,655
 $159,996
$162,160
 $165,655
Deferred tax assets—long-term78,648
 75,138
Other non-current assets(1)
15,384
 21,302
Other non-current assets12,499
 15,384
$259,687
 $256,436
$174,659
 $181,039
Other current liabilities:      
Compensation and benefits$224,496
 $196,682
Executive Deferred Savings Plan162,289
 167,886
Customer credits and advances81,994
 93,212
Warranty$36,413
 $37,746
34,773
 36,413
Executive Deferred Savings Plan167,886
 160,527
Compensation and benefits196,682
 203,990
Income taxes payable15,582
 15,283
27,964
 15,582
Interest payable19,395
 8,769
19,395
 19,395
Customer credits and advances93,212
 79,373
Other accrued expenses132,244
 79,402
111,297
 132,244
$661,414
 $585,090
$662,208
 $661,414
Other non-current liabilities:      
Pension liabilities$55,696
 $59,908
$69,418
 $55,696
Income taxes payable69,018
 59,575
50,365
 69,018
Other non-current liabilities57,516
 48,805
36,840
 57,516
$182,230
 $168,288
$156,623
 $182,230


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 __________________ 
(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.
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 TotalCurrency 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, 2016$(32,424) $3,451
 $775
 $(20,487) $(48,685)
         
Balance as of June 30, 2015$(29,925) $734
 $4,553
 $(15,935) $(40,573)$(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,		 Location in the Consolidated Statements of Operations Year ended June 30,
Accumulated OCI Components 2015 2014 2016 2015
Unrealized gains (losses) on cash flow hedges from foreign exchange and interest rate contracts Revenues $7,615
 $3,851
 Revenues $(2,926) $7,615
 Costs of revenues (1,503) 294
 Costs of revenues (1,551) (1,503)
 Interest expense 503
 —
 Interest expense 755
 503
 Net gains reclassified from accumulated OCI $6,615
 $4,145
 Net gains reclassified from accumulated OCI $(3,722) $6,615
        
Unrealized gains on available-for-sale securities Other expense (income), net $2,119
 $2,084
Unrealized gains (losses) on available-for-sale securities Other expense (income), net $312
 $2,119
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, 2016 and 2015 and 2014 were $1.3$1.4 million and $1.3 million, respectively. For additional details, refer to Note 11,10, “Employee Benefit Plans.”
Consolidated Statements of Operations
Year ended June 30,Year ended June 30,
(In thousands)2015 2014 20132016 2015 2014
Other expense (income), net:          
Interest income$(12,545) $(13,555) $(14,976)$(14,507) $(12,545) $(13,555)
Foreign exchange losses, net1,764
 514
 1,002
1,235
 1,764
 514
Net realized gains on sale of investments(2,119) (2,084) (2,287)(311) (2,119) (2,084)
Other2,431
 (1,078) 1,149
(7,051) 2,431
 (1,078)
$(10,469) $(16,203) $(15,112)$(20,634) $(10,469) $(16,203)

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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, 2016 (In thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 Fair Value
U.S. Treasury securities$326,321
 $1,181
 $—
 $327,502
U.S. Government agency securities404,889
 830
 (14) 405,705
Municipal securities5,014
 2
 —
 5,016
Corporate debt securities676,259
 2,372
 (157) 678,474
Money market and other626,156
 —
 —
 626,156
Sovereign securities41,224
 38
 (5) 41,257
Subtotal2,079,863
 4,423
 (176) 2,084,110
Add: Time deposits(1)
77,131
 —
 —
 77,131
Less: Cash equivalents778,451
 1
 (17) 778,435
Marketable securities$1,378,543
 $4,422
 $(159) $1,382,806
       
As of June 30, 2015 (In thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 Fair Value
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 Fair Value
U.S. Treasury securities$274,965
 $605
 $(15) $275,555
$274,965
 $605
 $(15) $275,555
U.S. Government agency securities571,843
 551
 (126) 572,268
571,843
 551
 (126) 572,268
Municipal securities31,819
 7
 (10) 31,816
31,819
 7
 (10) 31,816
Corporate debt securities625,965
 511
 (515) 625,961
625,965
 511
 (515) 625,961
Money market and other611,385
 —
 —
 611,385
611,385
 —
 —
 611,385
Sovereign securities57,091
 33
 (31) 57,093
57,091
 33
 (31) 57,093
Subtotal2,173,068
 1,707
 (697) 2,174,078
2,173,068
 1,707
 (697) 2,174,078
Add: Time deposits(1)
29,941
 —
 —
 29,941
29,941
 —
 —
 29,941
Less: Cash equivalents654,933
 —
 —
 654,933
654,933
 —
 —
 654,933
Marketable securities$1,548,076
 $1,707
 $(697) $1,549,086
$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 securities867,309
 651
 (117) 867,843
Municipal securities96,198
 93
 (75) 96,216
Corporate debt securities1,220,794
 3,526
 (152) 1,224,168
Money market and other397,517
 —
 —
 397,517
Sovereign securities42,227
 46
 (9) 42,264
Subtotal3,008,210
 4,603
 (405) 3,012,408
Add: Time deposits(1)
33,509
 —
 —
 33,509
Less: Cash equivalents524,149
 —
 (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)
As of June 30, 2016 (In thousands)Fair Value 
Gross
Unrealized
Losses(1)
Corporate debt securities$94,448
 $(140)
U.S. Government agency securities133,933
 (126)40,306
 (14)
Municipal securities9,776
 (10)
Corporate debt securities286,355
 (515)
Sovereign securities26,729
 (31)19,341
 (5)
Total$491,301
 $(697)$154,095
 $(159)
 __________________ 
(1)
As of June 30, 20152016, 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
As of June 30, 2016 (In thousands)
Amortized
Cost
 Fair Value
Due within one year$496,916
 $497,121
$468,650
 $468,985
Due after one year through three years1,051,160
 1,051,965
909,893
 913,821
$1,548,076
 $1,549,086
$1,378,543
 $1,382,806
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, 20152016, 20142015 and 20132014 were $0.9 million, $2.4 million $2.2and $2.2 million, and $2.5 million, respectively. Realized losses on available for sale securities were immaterial for the fiscal year ended June 30, 2015, 2014 and 2013 were $0.3 million, $0.1 million and $0.2 million, respectively.all years presented.
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
Goodwill8,730
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, 20152016 and 2014:2015: 
(In thousands)  
As of June 30, 2013$326,635
Acquisition8,730
Adjustments(10)
As of June 30, 2014335,355
$335,355
Adjustments(92)(92)
As of June 30, 2015$335,263
335,263
Adjustments(86)
As of June 30, 2016$335,177
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. Goodwill is net of accumulated impairment losses of $277.6 million, which were recorded prior to the fiscal year ended June 30, 2014.
The Company has made certain organizational changes and consolidated its product divisions effective in the first quarter of fiscal year ended 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 had four reporting units as of June 30, 2016: Wafer Inspection, Patterning, Global Service and Support, and Others. Prior to the organizational changes, the Company had four reporting units: Defect Inspection, Metrology, Service and Other. AsThe goodwill balances by reporting units as of June 30, 2015, substantially all of the goodwill balance resided within the Defect Inspection reporting unit.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 (86) —
 —
 (86)
Balance as of June 30, 2016 $281,026
 $53,255
 $896
 $335,177
__________________
(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 fiscal yearyears ended June 30, 2016 and 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, 20142015 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, 20152016. The next annual assessment of the goodwill by reporting unit willis scheduled to be performed in the second quarter of the fiscal year ending June 30, 20162017.
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 As of June 30, 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
Range of
Useful Lives
 
Gross
Carrying
Amount
 
Accumulated
Amortization and Impairment
 
Net
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization and Impairment
 
Net
Amount
Existing technology4-7 years $141,659
 $134,664
 $6,995
 $141,659
 $126,567
 $15,092
4-7 years $141,659
 $138,160
 $3,499
 $141,659
 $134,664
 $6,995
Patents6-13 years 57,648
 56,998
 650
 57,648
 54,398
 3,250
6-13 years 57,648
 57,648
 —
 57,648
 56,998
 650
Trade name/Trademark4-10 years 19,893
 18,899
 994
 19,893
 17,427
 2,466
4-10 years 19,893
 19,743
 150
 19,893
 18,899
 994
Customer relationships6-7 years 54,980
 51,724
 3,256
 54,980
 48,915
 6,065
6-7 years 54,980
 54,298
 682
 54,980
 51,724
 3,256
Other0-1 year 17,299
 17,299
 —
 17,299
 16,475
 824
Total $291,479
 $279,584
 $11,895
 $291,479
 $263,782
 $27,697
 $274,180
 $269,849
 $4,331
 $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.

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For the fiscal years ended June 30, 20152016, 20142015 and 20132014, amortization expense for other intangible assets was $15.8$7.6 million, $16.215.8 million and $20.816.2 million, respectively. Based on the intangible assets recorded as of June 30, 20152016, 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)
Amortization
(In thousands)
2016$7,564
20172,806
$2,806
20181,525
1,525
Total$11,895
$4,331

NOTE 76 — DEBT
The following table summarizes the debt of the Company as of June 30, 20152016 and June 30, 2014:2015:
As of June 30, 2015 As of June 30, 2014As of June 30, 2016 As of June 30, 2015
Amount
(in thousands)
 
Effective
Interest Rate
 Amount
(in thousands)		 
Effective
Interest Rate
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, 2017250,000
 2.396% —
  $250,000
 2.396% $250,000
 2.396%
Fixed-rate 3.375% Senior notes due on November 1, 2019250,000
 3.377% —
  250,000
 3.377% 250,000
 3.377%
Fixed-rate 4.125% Senior notes due on November 1, 2021500,000
 4.128% —
  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% 1,250,000
 4.682%
Fixed-rate 5.650% Senior notes due on November 1, 2034250,000
 5.670% —
  250,000
 5.670% 250,000
 5.670%
Term loans711,250
   —
  576,250
 1.714% 711,250
 1.498%
Total debt3,211,250
   750,000
  3,076,250
   3,211,250
  
Unamortized discount(3,723)   (2,081)  (3,312)   (3,723)  
Unamortized debt issuance costs(2)
(17,111)   (2,818)  
Unamortized debt issuance costs(15,002)   (17,111)  
Total debt$3,190,416
   $745,101
  $3,057,936
   $3,190,416
  
              
Reported as:              
Current portion of long-term debt$16,981
   $—
  $—
   $16,981
  
Long-term debt3,173,435
   745,101
  3,057,936
   3,173,435
  
Total debt$3,190,416
   $745,101
  $3,057,936
   $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%.
(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.

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As of June 30, 2015,2016, future principal payments for the long-term debt including the current portion, are summarized as follows. There are no scheduled payments for the term loans for the fiscal years ending June 30, 2017 and 2018 since the Company made $117.5 million of principal prepayments as of June 30, 2016.
Fiscal year ending June 30,
Amount
(In thousands)
Amount
(In thousands)
2016$17,500
201746,875
$—
2018315,625
250,000
201975,000
70,000
2020756,250
756,250
2021—
Thereafter2,000,000
2,000,000
Total payments$3,211,250
$3,076,250

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$750.0 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 16,15, “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, 2015,2016, 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 June 30, 20152016 and June 30, 20142015 was $2.52approximately $2.68 billion and $893.7 million,$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.

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Debt Issuance - Credit Facility (Term Loans and Unfunded Revolving Credit Facility):
In November 2014, the Company entered into $750$750.0 million of five-year senior unsecured prepayable term loans and a $500$500.0 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 Company’s 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 additional2016, we made term loan principal payments of $20.0 million in addition to the scheduled quarterly payments for the term loans.$135.0 million.
Future principal payments for the Company’s term loans (without giving effect for anyto $117.5 million of principal prepayments made) as of June 30, 2015,2016 that shall be applied to the future schedule quarterly payments) as of June 30, 2016, are as follows:
Fiscal Quarters Ending 
Quarterly Payment
(in thousands)
 
Quarterly Payment
(in thousands)
June 30, 2015 through December 31, 2016 $9,375
September 30, 2016 through December 31, 2016 $9,375
March 31, 2017 through December 31, 2017 $14,063
 $14,063
March 31, 2018 through September 30, 2019 $18,750
 $18,750
December 31, 2019 $487,500
 $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, 20154.25:1.00
September 30, 2015 and December 31, 20154.00:1.00
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, 20152016 and had no outstanding borrowings under the unfunded revolving credit facility.
Debt Redemption:
In December 2014, the Company redeemed the $750$750.0 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$750.0 million. Refer to Note 16,15, “Derivative Instruments and Hedging Activities.”


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NOTE 87 — EQUITY AND LONG-TERM INCENTIVE COMPENSATION PLANS
Equity Incentive Program
As of June 30, 2015,2016, 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”).

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, 6.12016, 5.1 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, 2015,2016, 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, 20127,969
Restricted stock units granted(1)(3)
(1,899)
Restricted stock units canceled(1)
466
Options canceled/expired/forfeited207
Plan shares expired(2)
(47)
Balances as of June 30, 20136,696
Plan shares increased2,900
Restricted stock units granted(1)(3)
(1,268)
Restricted stock units canceled(1)
468
Options canceled/expired/forfeited59
Plan shares expired(2)
(51)
Balances as of June 30, 20148,804
Restricted stock units granted(1)(3)
(1,191)
Restricted stock units canceled(1)
196
Options granted/canceled/expired/forfeited11
Plan shares expired(2)
(10)
Balances as of June 30, 2015(4)
7,810
Restricted stock units granted(1)(3)
(1,541)
Restricted stock units canceled(1)
509
Balances as of June 30, 20166,778
__________________  
(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, 2015,2016, 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 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., 0.60.7 million shares for the fiscal year ended June 30, 2013, 0.6 million shares for the fiscal year ended June 30, 20142016 and 0.6 million shares for each of the fiscal yearyears ended June 30, 2015 and 2014, 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, 2015,2016, the Company accrued $42.0$19.6 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, 2015,2016, 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: 
Year ended June 30,Year ended June 30,
(In thousands)2015 2014 20132016 2015 2014
Stock-based compensation expense by:          
Costs of revenues$7,242
 $9,101
 $11,433
$4,689
 $7,242
 $9,101
Engineering, research and development12,259
 16,397
 19,346
Research and development8,618
 12,259
 16,397
Selling, general and administrative35,801
 35,442
 39,305
31,743
 35,801
 35,442
Total stock-based compensation expense$55,302
 $60,940
 $70,084
$45,050
 $55,302
 $60,940
The following table shows stock-based compensation capitalized as inventory as of the dates indicated below:
(In thousands)As of June 30,As of June 30,
2015 20142016 2015
Inventory$3,242
 $8,278
$2,685
 $3,242

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, 2014141
 $40.70
Granted4
 $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.  As of June 30, 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: 
(In thousands)Year ended June 30,Year ended June 30,
2015 2014 20132016 2015 2014
Total intrinsic value of options exercised$4,549
 $18,022
 $15,884
$3
 $4,549
 $18,022
Total cash received from employees and non-employee Board members as a result of stock option exercises$5,892
 $72,700
 $89,935
$4
 $5,892
 $72,700
Tax benefits realized by the Company in connection with these exercises$1,989
 $5,708
 $5,223
$1
 $1,989
 $5,708
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, 20152016 and restricted stock units outstanding as of June 30, 20152016 and 20142015: 
Restricted Stock Units
Shares
(In thousands) (1)
 
Weighted-Average
Grant Date
Fair Value
Shares
(In thousands) (1)
 
Weighted-Average
Grant Date
Fair Value
Outstanding restricted stock units as of June 30, 2014(2)
3,356
 $38.95
Outstanding restricted stock units as of June 30, 2015(2)
2,674
 $49.36
Granted(2)
596
 $74.48
770
 $51.12
Vested and released(765) $32.50
(855) $39.26
Withheld for taxes(405) $32.50
(469) $39.26
Forfeited(108) $38.90
(271) $55.62
Outstanding restricted stock units as of June 30, 2015(2)
2,674
 $49.36
Outstanding restricted stock units as of June 30, 2016(2)
1,849
 $56.41
 __________________ 
(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, 2015,2016, 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 for each of the fiscal yearyears ended June 30, 2013, 0.3 million shares for the fiscal year ended June 30, 20142016, 2015 and 0.3 million shares for the fiscal year ended June 30, 2015)2014) 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 .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 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: 
(In thousands, except for weighted-average grant date fair value)Year ended June 30,Year ended June 30,
2015 2014 20132016 2015 2014
Weighted-average grant date fair value per unit$74.48
 $53.28
 $47.71
$51.12
 $74.48
 $53.28
Tax benefits realized by the Company in connection with vested and released restricted stock units$26,250
 $44,298
 $29,204
$27,412
 $26,250
 $44,298
As of June 30, 20152016, the unrecognized stock-based compensation expense balance related to restricted stock units was $60.3$55.8 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.1.3 years. The total grant date fair value of vested restricted stock units was $52.0 million, $38.9 million and $81.9 million, in the fiscal years ended 2016, 2015 and 2014, respectively. The intrinsic value of outstanding restricted stock units as of June 30, 20152016 was $150.3$135.4 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 yearyears ended June 30, 20152016, and 2015, the Company approved Cash LTI awards of $49.3 million and $67.7 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 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, 2016, 2015 and 2014, the Company recognized $44.6 million, $39.6 million and $26.2 million, respectively, in compensation expense under the Cash LTI Plan. As of June 30, 2015,2016, the unrecognized compensation balanceexpense (excluding the impact of estimated forfeitures) related to the Cash LTI Plan was $94.5$87.2 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 Summary of Significant Accounting Policies” for additional details regarding the Merger.

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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,Year ended June 30,
2015 2014 20132016 2015 2014
Stock purchase plan:          
Expected stock price volatility24.5% 27.5% 28.8%25.4% 24.5% 27.5%
Risk-free interest rate0.1% 0.1% 0.1%0.2% 0.1% 0.1%
Dividend yield2.8% 2.9% 3.2%3.3% 2.8% 2.9%
Expected life (in years)0.50
 0.50
 0.50
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,Year ended June 30,
2015 2014 20132016 2015 2014
Total cash received from employees for the issuance of shares under the ESPP$41,116
 $39,675
 $36,186
$38,295
 $41,116
 $39,675
Number of shares purchased by employees through the ESPP759
 796
 877
735
 759
 796
Tax benefits realized by the Company in connection with the disqualifying dispositions of shares purchased under the ESPP$1,741
 $2,221
 $1,452
$2,194
 $1,741
 $2,221
Weighted-average fair value per share based on Black-Scholes model$14.55
 $12.31
 $10.46
$12.48
 $14.55
 $12.31
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, 2015,2016, a total of 2.11.4 million shares were reserved and available for issuance under the ESPP.
Quarterly cash dividends
On May 7, 2015,5, 2016, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.50$0.52 per share on the outstanding shares of the Company’s common stock, which was paid on June 1, 20152016 to the stockholders of record as of the close of business on May 18, 2015.16, 2016. Under the authoritative guidance, athe dividend when declared is recognized as a reduction of retained earnings, to the extent available, with any excessshortfall 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, 2016 and 2015 and 2014 was $324.8$324.5 million and $298.9$324.8 million, respectively. The amount of accrued dividends for quarterly cash dividends for unvested restricted stock units with dividend equivalent rights was $2.7 million and $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, 2014.2016 and 2015, respectively.
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 excessshortfall 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 7,6, “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, 2014.2014, except for the aggregate special cash dividend of $43.0 million that was accrued for the unvested restricted stock units. As of June 30, 2016 and 2015, the Company accruedhad a total of $16.9 million and $41.1 million, respectively, of accrued 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. The Company paid a special cash dividend with respect to vested restricted stock units during the fiscal years ended June 30, 2016 and 2015 of $21.8 million and $1.8 million respectively. 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 98 — 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 bewere 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, 20152016, an aggregate of approximately 9.45.9 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: 
(In thousands)Year ended June 30,Year ended June 30,
2015 20142016 2015
Number of shares of common stock repurchased9,255
 3,835
3,445
 9,255
Total cost of repurchases$608,856
 $240,843
$175,743
 $608,856
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 were2015. The amount was recorded as a component of other current liabilities.liabilities for the period presented.

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NOTE 109 — 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 and stock options had been issued. The dilutive effect of outstanding options and 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)Year ended June 30,Year ended June 30,
2015 2014 20132016 2015 2014
Numerator:          
Net income$366,158
 $582,755
 $543,149
$704,422
 $366,158
 $582,755
Denominator:          
Weighted-average shares-basic, excluding unvested restricted stock units162,282
 166,016
 166,089
155,869
 162,282
 166,016
Effect of dilutive options and restricted stock units1,419
 2,102
 3,171
910
 1,419
 2,102
Weighted-average shares-diluted163,701
 168,118
 169,260
156,779
 163,701
 168,118
Basic net income per share$2.26
 $3.51
 $3.27
$4.52
 $2.26
 $3.51
Diluted net income per share$2.24
 $3.47
 $3.21
$4.49
 $2.24
 $3.47
Anti-dilutive securities excluded from the computation of diluted net income per share36
 —
 1,366
9
 36
 —
NOTE 1110 — 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$15.3 million, $15.414.2 million and $13.115.4 million in the fiscal years ended June 30, 20152016, 20142015 and 20132014, 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, 20152016 and 20142015.

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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,Year ended June 30,
(In thousands)2015 20142016 2015
Change in projected benefit obligation:      
Projected benefit obligation as of the beginning of the fiscal year$77,035
 $71,276
$75,928
 $77,035
Service cost3,905
 4,054
3,349
 3,905
Interest cost1,562
 1,401
1,322
 1,562
Contributions by plan participants81
 102
163
 81
Actuarial loss3,702
 1,927
9,029
 3,702
Benefit payments(3,982) (1,910)(2,517) (3,982)
Foreign currency exchange rate changes and others, net(6,375) 185
2,649
 (6,375)
Projected benefit obligation as of the end of the fiscal year$75,928
 $77,035
$89,923
 $75,928
      
Year ended June 30,Year ended June 30,
(In thousands)2015 20142016 2015
Change in fair value of plan assets:      
Fair value of plan assets as of the beginning of the fiscal year$15,163
 $13,317
$17,038
 $15,163
Actual return on plan assets334
 274
588
 334
Employer contributions3,568
 3,229
4,330
 3,568
Benefit and expense payments(3,982) (1,910)(2,517) (3,982)
Foreign currency exchange rate changes and others, net1,955
 253
(545) 1,955
Fair value of plan assets as of the end of the fiscal year$17,038
 $15,163
$18,894
 $17,038
 
As of June 30,As of June 30,
(In thousands)2015 20142016 2015
Underfunded status$58,890
 $61,872
$71,029
 $58,890
      
As of June 30,As of June 30,
(In thousands)2015 20142016 2015
Plans with accumulated benefit obligations in excess of plan assets:      
Accumulated benefit obligation$46,419
 $47,122
$53,198
 $46,419
Projected benefit obligation$75,928
 $77,035
$89,923
 $75,928
Plan assets at fair value$17,038
 $15,163
$18,894
 $17,038
 
Year ended June 30,Year ended June 30,
2015
2014
20132016
2015
2014
Weighted-average assumptions:    
Discount rate1.3%-2.0% 1.5%-3.5% 1.5%-3.5%0.5%-2.0% 1.3%-2.0% 1.5%-3.5%
Expected rate of return on assets1.8%-2.5% 1.8%-3.8% 1.8%-4.0%1.8%-2.5% 1.8%-2.5% 1.8%-3.8%
Rate of compensation increases3.0%-5.5% 3.0%-5.5% 3.0%-5.0%3.0%-5.8% 3.0%-5.5% 3.0%-5.5%
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,Year ended June 30,
(In thousands)2015 20142016 2015
Unrecognized transition obligation$515
 $772
$108
 $515
Unrecognized prior service cost180
 225
113
 180
Unrealized net loss24,119
 23,645
31,739
 24,119
Amount of losses recognized$24,814
 $24,642
$31,960
 $24,814
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, 20162017 are as follows: 
(In thousands)
Year ending
June 30, 2016
Year ending
June 30, 2017
Unrecognized transition obligation$255
$243
Unrecognized prior service cost42
50
Unrealized net loss824
1,329
Amount of losses expected to be recognized$1,121
$1,622
 
The components of the Company’s net periodic cost relating to its foreign subsidiaries’ defined pension plans are as follows: 
Year ended June 30,Year ended June 30,
(In thousands)2015 2014 20132016 2015 2014
Components of net periodic pension cost:          
Service cost$3,905
 $4,054
 $3,399
$3,349
 $3,905
 $4,054
Interest cost1,562
 1,401
 1,320
1,322
 1,562
 1,401
Return on plan assets(450) (321) (315)(406) (450) (321)
Amortization of transitional obligation259
 262
 372
249
 259
 262
Amortization of prior service cost46
 52
 58
46
 46
 52
Amortization of net loss1,014
 1,021
 633
1,132
 1,014
 1,021
Adjustment(177) —
 (1,436)—
 (177) —
Net periodic pension cost$6,159
 $6,469
 $4,031
$5,692
 $6,159
 $6,469
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, 20152016 and 20142015.
The expected aggregate employer contribution for the foreign plans during the fiscal year ending June 30, 20162017 is $1.7$1.8 million.
The total benefits to be paid from the foreign pension plans are not expected to exceed $2.5$2.9 million in any year through the fiscal year ending June 30, 2025.2026.

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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, 20152016 and 2014,2015, respectively:
As of June 30, 2016 (In thousands)Total 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant Other
Observable Inputs
(Level 2)
Cash and cash equivalents$11,950
 $11,950
 $—
Bonds, equity securities and other investments6,944
 —
 6,944
Total assets measured at fair value$18,894
 $11,950
 $6,944
     
As of June 30, 2015 (In thousands)Total 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant Other
Observable Inputs
(Level 2)
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
 $—
$10,954
 $10,954
 $—
Bonds, equity securities and other investments6,084
 —
 6,084
6,084
 —
 6,084
Total assets measured at fair value$17,038
 $10,954
 $6,084
$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 investments4,102
 —
 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, 2015,2016, the Company did not have concentrations of plan asset investment risk in any single entity, manager, counterparty, sector, industry or country.
NOTE 1211 — INCOME TAXES
The components of income before income taxes are as follows: 
Year ended June 30,Year ended June 30,
(In thousands)2015 2014 20132016 2015 2014
Domestic income before income taxes$157,251
 $434,336
 $420,862
$417,803
 $157,251
 $434,336
Foreign income before income taxes276,880
 300,125
 269,759
440,389
 276,880
 300,125
Total income before income taxes$434,131
 $734,461
 $690,621
$858,192
 $434,131
 $734,461
The provision for income taxes is comprised of the following: 
(In thousands)Year ended June 30,Year ended June 30,
2015 2014 20132016 2015 2014
Current:          
Federal$63,123
 $98,937
 $118,888
$94,088
 $63,123
 $98,937
State3,655
 8,580
 4,404
6,123
 3,655
 8,580
Foreign25,438
 27,867
 25,112
37,680
 25,438
 27,867
92,216
 135,384
 148,404
137,891
 92,216
 135,384
Deferred:          
Federal(22,390) 22,904
 (2,552)15,645
 (22,390) 22,904
State409
 (334) (1,036)3,583
 409
 (334)
Foreign(2,262) (6,248) 2,656
(3,349) (2,262) (6,248)
(24,243) 16,322
 (932)15,879
 (24,243) 16,322
Provision for income taxes$67,973
 $151,706
 $147,472
$153,770
 $67,973
 $151,706
For the fiscal year ended June 30, 2015, actual currentCurrent tax liabilities were lower than reflected in the table above for the fiscal years ended June 30, 2016, 2015 and 2014by $11.5 million, $16.7 million and $16.5 million, respectively, 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.

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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:
(In thousands)As of June 30,As of June 30,
2015 20142016 2015
Deferred tax assets:      
Tax credits and net operating losses$108,615
 $95,492
$116,277
 $108,615
Employee benefits accrual99,472
 97,308
109,524
 99,472
Stock-based compensation18,722
 17,676
13,607
 18,722
Capitalized R&D expenses47
 12,051
Inventory reserves92,649
 83,783
94,783
 92,649
Non-deductible reserves47,176
 41,469
34,484
 47,176
Depreciation and amortization13,267
 2,572
15,857
 13,267
Unearned revenue16,150
 13,937
14,375
 16,150
Other28,784
 29,483
26,877
 28,831
Gross deferred tax assets424,882
 393,771
425,784
 424,882
Valuation allowance(91,350) (76,328)(104,968) (91,350)
Net deferred tax assets$333,532
 $317,443
$320,816
 $333,532
Deferred tax liabilities:      
Unremitted earnings of foreign subsidiaries not permanently reinvested$(12,775) $(17,334)
Unremitted earnings of foreign subsidiaries not indefinitely reinvested$(11,571) $(12,775)
Deferred profit(7,372) (16,358)(10,346) (7,372)
Unrealized gain on investments(2,673) (1,168)(604) (2,673)
Total deferred tax liabilities(22,820) (34,860)(22,521) (22,820)
Total net deferred tax assets$310,712
 $282,583
$298,295
 $310,712
As of June 30, 20152016, the Company had U.S. federal, state and foreign net operating loss (“NOL”) carry-forwards of approximately $25.7$22.9 million, $90.8$63.2 million and $50.2$41.8 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$145.4 million will be carried over indefinitely. The foreign NOL carry-forwards will begin to expire in 2016.2017.
The net deferred tax asset valuation allowance was $91.4$105.0 million and $76.391.4 million as of June 30, 20152016 and June 30, 20142015, 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, 2015.2016. 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, 20152016, $76.9$89.8 million relates to state credit carry-forwards. The remainder of the valuation allowance relates primarily to state and foreign NOL carry-forwards.
 As of June 30, 20152016, U.S. income taxes were not provided for on a cumulative total of approximately $1.7$2.1 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$707 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 andtimes in 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.next three to five years. The Company was in compliance with all the terms and conditions of the tax holidays as of June 30, 2015.2016. The net impact of these tax holidays was to decrease the Company’s tax expense by approximately $20.4$19.5 million, $25.820.4 million and $25.8 million in the fiscal years ended June 30, 20152016, 20142015 and 20132014, respectively. The benefits of the tax holidays on diluted net income per share were $0.13,$0.12, $0.150.13 and $0.15 for the fiscal years ended June 30, 20152016, 20142015 and 20132014, 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,Year ended June 30,
2015 2014 20132016 2015 2014
Federal statutory rate35.0 % 35.0 % 35.0 %35.0 % 35.0 % 35.0 %
State income taxes, net of federal benefit0.7 % 0.7 % 0.3 %0.9 % 0.7 % 0.7 %
Effect of foreign operations taxed at various rates(15.3)% (11.5)% (9.6)%(13.0)% (15.3)% (11.5)%
Research and development tax credit(3.7)% (1.5)% (3.1)%(1.9)% (3.7)% (1.5)%
Net change in tax reserves1.5 % 0.3 % 1.7 %(2.2)% 1.5 % 0.3 %
Domestic manufacturing benefit(2.1)% (1.4)% (1.6)%(1.5)% (2.1)% (1.4)%
Effect of stock-based compensation0.8 % 0.4 % (0.3)%0.3 % 0.8 % 0.4 %
Other(1.2)% (1.3)% (1.0)%0.3 % (1.2)% (1.3)%
Effective income tax rate15.7 % 20.7 % 21.4 %17.9 % 15.7 % 20.7 %
A reconciliation of gross unrecognized tax benefits is as follows: 
Year ended June 30,Year ended June 30,
(In thousands)2015 2014 20132016 2015 2014
Unrecognized tax benefits at the beginning of the year$59,575
 $59,494
 $50,839
$69,018
 $59,575
 $59,494
Increases for tax positions taken in prior years1,245
 551
 2,701
4,245
 1,245
 551
Decreases for tax positions taken in prior years(7) (764) (905)(1,209) (7) (764)
Increases for tax positions taken in current year11,634
 11,585
 12,709
13,636
 11,634
 11,585
Decreases for settlements with taxing authorities—
 (3,601) (3,907)(8,762) —
 (3,601)
Decreases for lapsing of statutes of limitations(3,429) (7,690) (1,943)(26,563) (3,429) (7,690)
Unrecognized tax benefits at the end of the year$69,018
 $59,575
 $59,494
$50,365
 $69,018
 $59,575
 
The amount of unrecognized tax benefits that would impact the effective tax rate was $50.4 million, $69.0 million $59.6 million and $59.5$59.6 million as of June 30, 2016, 2015 2014 and 20132014 respectively. The amount of interest and penalties recognized during the years ended June 30, 2016, 2015, and 2014 and 2013 was income of $4.3 million as a result of a release of unrecognized tax benefits, expense of $1.2 million, $0.7 million, and $1.4expense of $0.7 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, 20152016 and 20142015 was approximately $7.9$3.7 million and $6.77.9 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, 2013.2014. The Company is subject to state income tax examinations for all years beginning from the fiscal year ended June 30, 2011.2012. 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, 2011.2012. 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$3.9 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 1312 — 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 $58.0 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 fiscal year ended June 30, 2016, $5.1 million of the above fees were recorded in selling, general and administrative line of the 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 under certain circumstances. The Company also has an estimated $23.8 million of employee-related retention commitments as of June 30, 2016 in connection with the pending Merger, which are expected to be paid over the stipulated period following the Merger.
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,Year ended June 30,
(In thousands)2015 20142016 2015 2014
Receivables sold under factoring agreements$137,285
 $116,292
$205,790
 $137,285
 $116,292
Proceeds from sales of LCs$6,920
 $8,323
$21,904
 $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$8.7 million, $8.79.1 million and $9.28.7 million for the fiscal years ended June 30, 20152016, 20142015 and 20132014, respectively.
The following is a schedule of expected operating lease payments: 
Fiscal year ending June 30,
Amount
(In thousands)
Amount
(In thousands)
2016$8,008
20175,818
$8,026
20183,964
5,006
20191,815
2,363
20201,220
1,613
2021 and thereafter556
202125
2022 and thereafter25
Total minimum lease payments$21,381
$17,058
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$292.9 million as of June 30, 20152016 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, 20152016, the Company had committed $125.0$121.4 million tofor 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,Year ended June 30,
(In thousands)2015 20142016 2015
Beginning balance$37,746
 $42,603
$36,413
 $37,746
Accruals for warranties issued during the period39,368
 45,540
39,175
 39,368
Changes in liability related to pre-existing warranties(572) (8,462)(9,146) (572)
Settlements made during the period(40,129) (41,935)(31,669) (40,129)
Ending balance$36,413
 $37,746
$34,773
 $36,413
The Company maintains guarantee arrangements available through various financial institutions for up to $22.5$22.1 million, of which $19.0$18.7 million had been issued as of June 30, 2015,2016, 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.
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 1413 — 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. 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.
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 1514 — 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 AprilDuring the fourth quarter of fiscal year ended 2015, we announcedthe Company implemented a plan to reduce ourits global employee workforce to streamline ourthe organization and business processes in response to changing customer requirementrequirements in ourthe industry. The goals of this reduction arewere to enable continued innovation, direct ourthe Company’s resources toward ourits best opportunities and lower ourits ongoing expense run rate. The Company substantially completed its global workforce reduction during the fiscal year ended June 31, 2016 and recorded an $8.9 million net restructuring charge, of which $3.6 million was recorded to costs of revenues, $1.6 million to research and development expense and $3.7 million to selling, general and administrative expense lines of the consolidated statements of operations. During the fiscal year ended June 30, 2015, wethe Company 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 duringexpense lines of the fourth quarterconsolidated statements of fiscal year ended June 30, 2015, substantial majority of which is related to our global workforce reduction plan.operations.
The following table shows the activity primarily related to accrual for severance and benefits for the fiscal years ended June 30, 20152016 and 20142015:
Year ended June 30,Year ended June 30,
(In thousands)2015 20142016 2015
Beginning balance$2,329
 $3,947
$24,887
 $2,329
Restructuring costs31,569
 6,662
8,926
 31,569
Adjustments1,177
 (459)(142) 1,177
Cash payments(10,188) (7,821)(33,084) (10,188)
Ending balance$24,887
 $2,329
$587
 $24,887
The remaining accrual for severance and benefits as of June 30, 20152016 is expected to be paid out by the end of our fiscalthe Company’s 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 2016.2016.



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NOTE 1615 — 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.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$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 receivable as a gain within accumulated other comprehensive income (loss) as of December 31, 2014. For the fiscal yearyears ended June 30, 2016 and 2015, the Company recognized $0.8 million and $0.5 million, respectively, 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 ineffectivenessAs of June 30, 2016, the unamortized portion of the fair value of the forward contracts for the fiscal year ended June 30, 2015.rate lock agreements was $6.3 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 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.
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.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$750.0 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 ended 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.

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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 consolidated financial statements for the indicated periods were as follows:
(In thousands)Location in Financial StatementsYear ended June 30,Location in Financial StatementsYear ended June 30,
2015 20142016 2015
Derivatives Designated as Hedging Instruments        
Gains in accumulated OCI on derivatives (effective portion)Accumulated OCI$13,745
 $1,641
Accumulated OCI$(9,622) $13,745
Gains reclassified from accumulated OCI into income (effective portion):Revenues$7,615
 $3,851
Revenues$(2,926) $7,615
Costs of revenues(1,503) 294
Costs of revenues(1,551) (1,503)
Interest expense503
 —
Interest expense755
 503
Net gains reclassified from accumulated OCI into income (effective portion)$6,615
 $4,145
Net gains reclassified from accumulated OCI into income (effective portion)$(3,722) $6,615
Gains recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)Other expense (income), net$243
 $18
Other expense (income), net$(989) $243
Derivatives Not Designated as Hedging Instruments        
Gains recognized in incomeOther expense (income), net$13,976
 $2,856
Other expense (income), net$(21,430) $13,976
Loss on extinguishment of debt and other, net$1,180
 $—
Loss on extinguishment of debt and other, net$—
 $1,180
The U.S. dollar equivalent of all outstanding notional amounts of hedge contracts, with maximum maturityremaining maturities of approximately seven months and 16 months as of the dates indicated below wasJune 30, 2016 and 2015, respectively, were as follows:
(In thousands)As of
June 30, 2015		 As of
June 30, 2014		As of
June 30, 2016		 As of
June 30, 2015
Cash flow hedge contracts      
Purchase$32,775
 $6,066
$7,591
 $32,775
Sell$88,800
 $33,999
$91,793
 $88,800
Other foreign currency hedge contracts      
Purchase$64,012
 $108,901
$122,275
 $64,012
Sell$123,091
 $106,322
$115,087
 $123,091
 

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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 DerivativesAsset 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		Balance Sheet Location As of
June 30, 2016		 As of
June 30, 2015		 Balance Sheet Location As of
June 30, 2016		 As of
June 30, 2015
(In thousands)Fair Value Fair ValueFair Value Fair Value
Derivatives designated as hedging instruments                
Foreign exchange contractsOther current assets $1,722
 $120
 Other current liabilities $1,920
 $100
Other current assets $342
 $1,722
 Other current liabilities $4,736
 $1,920
Total derivatives designated as hedging instruments 1,722
 120
 1,920
 100
 342
 1,722
 4,736
 1,920
Derivatives not designated as hedging instruments                
Foreign exchange contractsOther current assets 1,342
 546
 Other current liabilities 1,186
 798
Other current assets 753
 1,342
 Other current liabilities 6,911
 1,186
Total derivatives not designated as hedging instruments 1,342
 546
 1,186
 798
 753
 1,342
 6,911
 1,186
Total derivatives $3,064
 $666
 $3,106
 $898
 $1,095
 $3,064
 $11,647
 $3,106
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, Year ended June 30,
(In thousands) 2015 2014 2016 2015
Beginning balance $(20) $2,484
 $7,110
 $(20)
Amount reclassified to income (6,615) (4,145) 3,722
 (6,615)
Net change in unrealized gains or losses 13,745
 1,641
 (9,622) 13,745
Ending balance $7,110
 $(20) $1,210
 $7,110
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, 20152016 and 2014,2015, information related to the offsetting arrangements was as follows (in thousands):
As of June 30, 2016     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 $1,095
 $—
 $1,095
 $(843) $—
 $252
Derivatives - Liabilities $(11,647) $—
 $(11,647) $843
 $—
 $(10,804)
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 1716 — 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 theits 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 ended 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 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):
(Dollar amounts in thousands)Year ended June 30,Year ended June 30,
2015 2014 20132016 2015 2014
Revenues:                      
Taiwan$894,557
 30% $691,482
 25% $741,470
 25%
North America$815,914
 29% $705,159
 24% $846,125
 30%521,335
 18% 815,914
 29% 705,159
 24%
Taiwan691,482
 25% 741,470
 25% 936,445
 33%
Japan426,963
 15% 334,653
 11% 310,204
 11%444,216
 15% 426,963
 15% 334,653
 11%
China430,074
 14% 162,669
 6% 260,089
 9%
Korea367,905
 12% 405,320
 14% 371,139
 13%
Europe & Israel194,670
 7% 306,779
 11% 211,121
 7%167,936
 6% 194,670
 7% 306,779
 11%
Korea405,320
 14% 371,139
 13% 292,724
 10%
Rest of Asia279,700
 10% 470,208
 16% 246,162
 9%158,470
 5% 117,031
 4% 210,119
 7%
Total$2,814,049
 100% $2,929,408
 100% $2,842,781
 100%$2,984,493
 100% $2,814,049
 100% $2,929,408
 100%
The following is a summary of revenues by major products for the indicated periods (as a percentage of total revenues):
(Dollar amounts in thousands)Year ended June 30,Year ended June 30,
2015 2014 20132016 2015 2014
Revenues:                      
Defect inspection$1,541,422
 55% $1,685,114
 58% $1,594,128
 56%
Metrology492,175
 18% 532,002
 18% 540,835
 19%
Service688,653
 24% 642,971
 22% 595,634
 21%
Wafer Inspection$1,293,922
 43% $1,224,858
 44% $1,466,275
 50%
Patterning772,045
 26% 736,959
 26% 705,473
 24%
Global Service and Support (1)
824,297
 28% 752,881
 27% 685,658
 23%
Other91,799
 3% 69,321
 2% 112,184
 4%94,229
 3% 99,351
 3% 72,002
 3%
Total$2,814,049
 100% $2,929,408
 100% $2,842,781
 100%$2,984,493
 100% $2,814,049
 100% $2,929,408
 100%
__________________ 
(1) The Global Service and Support revenues includes service revenues as presented in the consolidated statements of operations as well as certain product revenues, primarily revenues from the Company’s K-T Certified business.

In the fiscal year ended June 30, 2016, two customers accounted for approximately 18% and 10% of total revenues. 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,As of June 30,
(In thousands)2015 20142016 2015
Long-lived assets:      
United States$207,779
 $219,280
$182,597
 $207,779
Europe16,536
 19,527
Singapore45,444
 48,938
41,658
 45,444
Israel33,841
 33,388
30,844
 33,841
Europe13,347
 16,536
Rest of Asia10,991
 9,130
9,568
 10,991
Total$314,591
 $330,263
$278,014
 $314,591
NOTE 1817 — RELATED PARTY TRANSACTIONS
During the fiscal years ended June 30, 20152016, 20142015 and 20132014, 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 System,Systems, Inc., Freescale Semiconductor, Inc., JDS Uniphase Corporation,Keysight Technologies, Inc., NetApp, Inc. and SAP AG. The following table provides the transactions with these parties for the indicated periods (for the portion of thesuch period during whichthat they were considered related):
Year ended June 30,Year ended June 30,
(In thousands)2015 2014 20132016 2015 2014
Total revenues$1,856
 $2,701
 $6,854
$8
 $1,856
 $2,701
Total purchases$1,098
 $2,622
 $4,460
$983
 $1,098
 $2,622
 The Company had aCompany’s receivable balancebalances from these parties of $0.1 million and $1.8 million as of were immaterial at June 30, 20152016 and 2014, respectively.2015. 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.

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NOTE 2018 — 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, 20152016 and 20142015.
(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
First quarter
ended
September 30, 2015
 
Second quarter
ended
December 31, 2015
 
Third quarter
ended
March 31, 2016
 
Fourth quarter
ended
June 30, 2016
Total revenues$642,901
 $676,357
 $738,459
 $756,332
$642,644
 $710,245
 $712,433
 $919,171
Gross margin$354,434
 $393,144
 $418,177
 $433,065
$372,400
 $429,265
 $437,834
 $581,603
Net income$72,233
 $20,268
 $131,638
 $142,019
$104,897
 $152,207
 $175,777
 $271,541
Net income per share:              
Basic(1)
$0.44
 $0.12
 $0.81
 $0.90
$0.67
 $0.98
 $1.13
 $1.74
Diluted(1)
$0.43
 $0.12
 $0.81
 $0.89
$0.66
 $0.98
 $1.12
 $1.73

(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
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$658,337
 $705,129
 $831,599
 $734,343
$642,901
 $676,357
 $738,459
 $756,332
Gross margin$380,680
 $419,315
 $488,773
 $407,678
$354,434
 $393,144
 $418,177
 $433,065
Net income$111,197
 $139,246
 $203,581
 $128,731
$72,233
 $20,268
 $131,638
 $142,019
Net income per share:              
Basic(1)
$0.67
 $0.84
 $1.22
 $0.78
$0.44
 $0.12
 $0.81
 $0.90
Diluted(1)
$0.66
 $0.83
 $1.21
 $0.77
$0.43
 $0.12
 $0.81
 $0.89
 __________________ 
(1)Basic and diluted earningsnet income 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 net income per share information may not equal annual basic and diluted earningsnet income 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.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Thethe Board of Directors and Stockholders of KLA-Tencor CorporationCorporation:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of KLA-Tencor Corporation and its subsidiaries at June 30, 20152016 and June 30, 20142015, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 20152016 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 index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 20152016 based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it classifies deferred taxes on the consolidated balance sheet in 2016.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP

San Jose, California
August 7, 20155, 2016

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ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
 
ITEM 9A.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (“Disclosure Controls”) as of the end of the period covered by this Annual Report on Form 10-K (this “Report”) required by Exchange Act Rules 13a-15(b) or 15d-15(b). The controls evaluation was conducted under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Based on this evaluation, the CEO and CFO have concluded that as of the end of the period covered by this Report the Company’s Disclosure Controls were effective at a reasonable assurance level.
Attached as exhibits to this Report are certifications of the CEO and CFO, which are required in accordance with Rule 13a-14 of the Exchange Act. This Controls and Procedures section includes the information concerning the controls evaluation referred to in the certifications, and it should be read in conjunction with the certifications for a more complete understanding of the topics presented.
Definition of Disclosure Controls
Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in the Company’s reports filed under the Exchange Act, such as this Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. The Company’s Disclosure Controls include components of its internal control over financial reporting, which consists of control processes designed to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles in the United States. To the extent that components of the Company’s internal control over financial reporting are included within its Disclosure Controls, they are included in the scope of the Company’s annual controls evaluation.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of the Company’s management, including the CEO and CFO, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on criteria established in the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, the Company’s management concluded that the Company’s internal control over financial reporting was effective as of June 30, 20152016.
The effectiveness of the Company’s internal control over financial reporting as of June 30, 20152016 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.

106

Limitations on the Effectiveness of Controls
The Company’s management, including the CEO and CFO, does not expect that the Company’s Disclosure Controls or internal control over financial reporting will prevent all errorerrors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of fiscal year 20152016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B.OTHER INFORMATION
None.
 

107

PART III

ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
For the information required by this Item, see “Information About the Directors and the Nominees,” “Information About Executive Officers,” “Security Ownership of Certain Beneficial Owners and Management—Section 16(a) Beneficial Ownership Reporting Compliance,” “Our Corporate Governance Practices—Standards of Business Conduct; Whistleblower Hotline and Website” and “Information About the Board of Directors and Its Committees—Audit Committee” in the Proxy Statement, which is incorporated herein by reference.

ITEM 11.EXECUTIVE COMPENSATION
For the information required by this Item, see “Executive Compensation and Other Matters,” “Director Compensation” and “Information About the Board of Directors and Its Committees—Compensation Committee—Risk Considerations in Our Compensation Programs” in the Proxy Statement, which is incorporated herein by reference.

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
For the information required by this Item, see “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the Proxy Statement, which is incorporated herein by reference.
 
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
For the information required by this Item, see “Certain Relationships and Related Transactions” and “Information About the Board of Directors and Its Committees —The Board of Directors” in the Proxy Statement, which is incorporated herein by reference.
 
ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES
For the information required by this Item, see “Proposal Two: Ratification of Appointment of PricewaterhouseCoopers LLP as Our Independent Registered Public Accounting Firm for the Fiscal Year Ending June 30, 20162017” in the Proxy Statement, which is incorporated herein by reference.
 

108

PART IV

ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report on Form 10-K:
1. Financial Statements:
The following financial statements and schedules of the Registrant are contained in Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K:
Consolidated Balance Sheets as of June 30, 20152016 and 2014June 30, 2015
6063
Consolidated Statements of Operations for each of the three years in the period ended June 30, 20152016
6164
Consolidated Statements of Comprehensive Income for each of the three years in the period ended June 30, 20152016
6265
Consolidated Statements of Stockholders’Stockholders' Equity for each of the three years in the period ended June 30, 20152016
6366
Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 20152016
6467
Notes to Consolidated Financial Statements
6568
Report of Independent Registered Public Accounting Firm
105109
2. Financial Statement Schedule:
The following financial statement schedule of the Registrant is filed as part of this Annual Report on Form 10-K and should be read in conjunction with the financial statements:
Schedule II—Valuation and Qualifying Accounts
112116
All other schedules are omitted because they are either not applicable or the required information is shown in the Consolidated Financial Statements or notes thereto.
3. Exhibits
The information required by this Item is set forth in the Exhibit Index following Schedule II included in this Annual Report.


109

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
    KLA-Tencor Corporation
     
August 7, 20155, 2016 By: 
/S/    RICHARD P. WALLACE        
(Date)   Richard P. Wallace
    President and Chief Executive Officer

110

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
Signature  Title Date
     
/s/    RICHARD P. WALLACE    
  President, Chief Executive Officer and Director (principal executive officer) August 7, 20155, 2016
Richard P. Wallace   
     
/s/     BREN D. HIGGINS 
  Executive Vice President and Chief Financial Officer (principal financial officer) August 7, 20155, 2016
Bren D. Higgins   
     
/s/    VIRENDRA A. KIRLOSKAR
  Senior Vice President and Chief Accounting Officer (principal accounting officer) August 7, 20155, 2016
Virendra A. Kirloskar  
     
/s/    EDWARD W. BARNHOLT
  Chairman of the Board and Director August 7, 20155, 2016
Edward W. Barnholt
/s/    ROBERT T. BOND 
DirectorAugust 7, 2015
Robert T. Bond  
     
/s/    ROBERT M. CALDERONI
  Director August 7, 20155, 2016
Robert M. Calderoni  
     
/s/    JOHN T. DICKSON  
  Director August 7, 20155, 2016
John T. Dickson  
     
/s/    EMIKO HIGASHI 
 Director August 7, 20155, 2016
Emiko Higashi  
     
/s/    KEVIN J. KENNEDY 
  Director August 7, 20155, 2016
Kevin J. Kennedy  
     
/s/    GARY B. MOORE
 Director August 7, 20155, 2016
Gary B. Moore  
     
/s/    KIRAN M. PATEL       
  Director August 7, 20155, 2016
Kiran M. Patel  
     
/s/    ROBERT A. RANGO      
 Director August 7, 20155, 2016
Robert A. Rango  
     
/s/    DAVID C. WANG    
  Director August 7, 20155, 2016
David C. Wang  
     

111

SCHEDULE II
Valuation and Qualifying Accounts
 
(In thousands)
Balance at
Beginning
of Period
 
Charged to
Expense
 
Deductions/
Adjustments
 
Balance
at End
of Period
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
$22,135
 $—
 $(308) $21,827
Allowance for Deferred Tax Assets$57,097
 $—
 $19,231
 $76,328
$57,097
 $—
 $19,231
 $76,328
Fiscal Year Ended June 30, 2015:

             
Allowance for Doubtful Accounts$21,827
 $—
 $(164) $21,663
$21,827
 $—
 $(164) $21,663
Allowance for Deferred Tax Assets$76,328
 $—
 $15,022
 $91,350
$76,328
 $—
 $15,022
 $91,350
Fiscal Year Ended June 30, 2016:

      
Allowance for Doubtful Accounts$21,663
 $—
 $9
 $21,672
Allowance for Deferred Tax Assets$91,350
 $1,763
 $11,855
 $104,968

112

KLA-TENCOR CORPORATION
EXHIBIT INDEX
 
Exhibit
Number
 Exhibit Description Incorporated by Reference
Form File No. 
Exhibit
Number
 Filing Date
3.1 Amended and Restated Certificate of Incorporation 10-Q No. 000-09992 3.1 May 14, 1997
3.2 Certificate of Amendment of Amended and Restated Certificate of Incorporation 10-Q No. 000-09992 3.1 February 14, 2001
3.3 Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Company effective as of November 8, 2012 8-K No. 000-09992 3.1 November 13, 2012
3.4 Amended and Restated Bylaws of the Company effective as of May 7, 2015 8-K No. 000-09992 3.1 May 8, 2015
4.1 Indenture dated November 6, 2014 between KLA-Tencor Corporation and Wells Fargo Bank, National Association, as trustee 8-K No. 000-09992 4.1 November 7, 2014
4.2 Form of Officer’s Certificate setting forth the terms of the Notes (with form of Notes attached) 8-K No. 000-09992 4.2 November 7, 2014
10.1 1998 Outside Director Option Plan* S-8 No. 333-68423 10.1 December 4, 1998
10.2 Form of Option Agreement under 1998 Outside Director Option Plan* 8-K No. 000-09992 10.1 October 18, 2004
10.3 2004 Equity Incentive Plan (as amended and restated)* 8-K No. 000-09992 10.46 October 8, 2009
10.4 2004 Equity Incentive Plan (as amended and restated (as of November 6, 2013))* DEF14A No. 000-09992 App. A September 26, 2013
10.5 2004 Equity Incentive Plan (as amended and restated (as of August 7, 2014))* 8-K No. 000-09992 10.45 August 12, 2014
10.6 Rules of the Company’s 2004 Equity Incentive Plan for the Grant of Restricted Stock Units to Participants in France* 10-Q No. 000-09992 10.50 January 30, 2009
10.7 Notice of Grant of Restricted Stock Units* 10-Q No. 000-09992 10.18 May 4, 2006
10.8 Option Grant Notification Form* 8-K No. 000-09992 10.1 September 29, 2005
10.9 Form of Restricted Stock Unit Award Notification (Performance-Vesting)* 8-K No. 000-09992 10.19 September 20, 2006
10.10 Form of Restricted Stock Unit Award Notification (Performance-Vesting) (approved August 2012)* 8-K No. 000-09992 10.2 August 2, 2012
10.11 Form of Restricted Stock Unit Award Notification (Performance-Vesting) (approved August 2014)* 8-K No. 000-09992 10.49 August 12, 2014
10.12 Form of Restricted Stock Unit Award Notification (Service-Vesting)* 10-K No. 000-09992 10.17 August 7, 2008
10.13 Form of Restricted Stock Unit Award Notification (Service-Vesting) (approved August 2012)* 8-K No. 000-09992 10.1 August 2, 2012
10.14 Form of Restricted Stock Unit Award Notification (Service-Vesting; 25% Annual Vesting) (approved August 2014)* 8-K No. 000-09992 10.50 August 12, 2014
10.15 Form of Restricted Stock Unit Award Notification (Service-Vesting; 50% Vesting Year Two, 50% Vesting Year Four) (approved August 2014)* 8-K No. 000-09992 10.51 August 12, 2014
Exhibit
Number
 Exhibit Description Incorporated by Reference
Form File No. 
Exhibit
Number
 Filing Date
2.1 Agreement and Plan of Merger and Reorganization, dated as of October 20, 2015, by and among Lam Research Corporation, Topeka Merger Sub 1, Inc., Topeka Merger sub 2, Inc. and KLA-Tencor Corporation 8-K No. 000-09992 2.1 October 21, 2015
3.1 Amended and Restated Certificate of Incorporation 10-Q No. 000-09992 3.1 May 14, 1997
3.2 Certificate of Amendment of Amended and Restated Certificate of Incorporation 10-Q No. 000-09992 3.1 February 14, 2001
3.3 Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Company effective as of November 8, 2012 8-K No. 000-09992 3.1 November 13, 2012
3.4 Amended and Restated Bylaws of the Company effective as of May 7, 2015 8-K No. 000-09992 3.1 May 8, 2015
4.1 Indenture dated November 6, 2014 between KLA-Tencor Corporation and Wells Fargo Bank, National Association, as trustee 8-K No. 000-09992 4.1 November 7, 2014
4.2 Form of Officer’s Certificate setting forth the terms of the Notes (with form of Notes attached) 8-K No. 000-09992 4.2 November 7, 2014
10.1 2004 Equity Incentive Plan (as amended and restated (as of August 7, 2014))* 8-K No. 000-09992 10.45 August 12, 2014
10.2 Rules of the Company’s 2004 Equity Incentive Plan for the Grant of Restricted Stock Units to Participants in France* 10-Q No. 000-09992 10.50 January 30, 2009
10.3 Notice of Grant of Restricted Stock Units* 10-Q No. 000-09992 10.18 May 4, 2006
10.4 Option Grant Notification Form* 8-K No. 000-09992 10.1 September 29, 2005
10.5 Form of Restricted Stock Unit Award Notification (Performance-Vesting)* 8-K No. 000-09992 10.19 September 20, 2006
10.6 Form of Restricted Stock Unit Award Notification (Performance-Vesting) (approved August 2012)* 8-K No. 000-09992 10.2 August 2, 2012
10.7 Form of Restricted Stock Unit Award Notification (Performance-Vesting) (approved August 2014)* 8-K No. 000-09992 10.49 August 12, 2014
10.8 Form of Restricted Stock Unit Award Notification (Service-Vesting)* 10-K No. 000-09992 10.17 August 7, 2008
10.9 Form of Restricted Stock Unit Award Notification (Service-Vesting) (approved August 2012)* 8-K No. 000-09992 10.1 August 2, 2012
10.10 Form of Restricted Stock Unit Award Notification (Service-Vesting; 25% Annual Vesting) (approved August 2014)* 8-K No. 000-09992 10.50 August 12, 2014
10.11 Form of Restricted Stock Unit Award Notification (Service-Vesting; 50% Vesting Year Two, 50% Vesting Year Four) (approved August 2014)* 8-K No. 000-09992 10.51 August 12, 2014
10.12 Form of Restricted Stock Unit Award Notification (France) (approved August 2014)* 8-K No. 000-09992 10.52 August 12, 2014
10.13 Form of Restricted Stock Unit Agreement* 8-K No. 000-09992 10.20 September 20, 2006

113

Exhibit
Number
 Exhibit Description Incorporated by Reference
Form File No. 
Exhibit
Number
 Filing Date
10.16 Form of Restricted Stock Unit Award Notification (France) (approved August 2014)* 8-K No. 000-09992 10.52 August 12, 2014
10.17 Form of Restricted Stock Unit Agreement* 8-K No. 000-09992 10.20 September 20, 2006
10.18 Form of Restricted Stock Unit Agreement for U.S. Employees (approved December 2008)* 10-Q No. 000-09992 10.44 January 30, 2009
10.19 Form of Restricted Stock Unit Agreement for U.S. Employees (with Dividend Equivalents) (approved August 2014)* 8-K No. 000-09992 10.46 August 12, 2014
10.20 Form of Restricted Stock Unit Agreement for French Participants (approved December 2008)* 10-Q No. 000-09992 10.45 January 30, 2009
10.21 Form of Restricted Stock Unit Agreement for French Participants (with Dividend Equivalents) (approved August 2014)* 8-K No. 000-09992 10.47 August 12, 2014
10.22 Form of Restricted Stock Unit Agreement for Non-U.S. Employees (approved December 2008)* 10-Q No. 000-09992 10.46 January 30, 2009
10.23 Form of Restricted Stock Unit Agreement for Non-U.S. Employees (with Dividend Equivalents) (approved August 2014)* 8-K No. 000-09992 10.48 August 12, 2014
10.24 Amended and Restated 1997 Employee Stock Purchase Plan (as amended February 11, 2011)* 10-Q No. 000-09992 10.47 April 29, 2011
10.25 Amended and Restated 1997 Employee Stock Purchase Plan (as amended February 7, 2013)* 10-Q No. 000-09992 10.46 April 26, 2013
10.26 Amended and Restated 1997 Employee Stock Purchase Plan (as amended May 8, 2014)* 10-K No. 000-09992 10.21 August 8, 2014
10.27 Therma-Wave, Inc.’s 2000 Equity Incentive Plan* (1) (1) (1) (1)
10.28 Amendment No. 1 to Therma-Wave, Inc.’s 2000 Equity Incentive Plan* (2) (2) (2) (2)
10.29 Amendment No. 2 to Therma-Wave, Inc.’s 2000 Equity Incentive Plan* (3) (3) (3) (3)
10.30 Amendment No. 3 to Therma-Wave, Inc.’s 2000 Equity Incentive Plan* (4) (4) (4) (4)
10.31 Amendment No. 4 to Therma-Wave, Inc.’s 2000 Equity Incentive Plan* (5) (5) (5) (5)
10.32 Form of Indemnification Agreement for Directors and Executive Officers* 10-K No. 000-09992 10.3 September 29, 1997
10.33 KLA-Tencor Corporation Performance Bonus Plan* DEF 14A No. 000-09992 App. B September 26, 2013
10.34 Fiscal Year 2013 Executive Incentive Plan*+ 10-Q No. 000-09992 10.41 October 26, 2012
10.35 Fiscal Year 2014 Executive Incentive Plan*+ 10-Q No. 000-09992 10.44 October 25, 2013
10.36 Fiscal Year 2015 Executive Incentive Plan*+ 10-Q No. 000-09992 10.53 October 24, 2014
10.37 Executive Deferred Savings Plan (as amended and restated effective November 7, 2012)* 10-Q No. 000-09992 10.42 January 25, 2013
10.38 Executive Severance Plan (as amended and restated November 8, 2012)* 10-Q No. 000-09992 10.43 January 25, 2013
10.39 2010 Executive Severance Plan (as amended and restated November 7, 2012)* 10-Q No. 000-09992 10.44 January 25, 2013
Exhibit
Number
 Exhibit Description Incorporated by Reference
Form File No. 
Exhibit
Number
 Filing Date
10.14 Form of Restricted Stock Unit Agreement for U.S. Employees (approved December 2008)* 10-Q No. 000-09992 10.44 January 30, 2009
10.15 Form of Restricted Stock Unit Agreement for U.S. Employees (with Dividend Equivalents) (approved August 2014)* 8-K No. 000-09992 10.46 August 12, 2014
10.16 Form of Restricted Stock Unit Agreement for French Participants (approved December 2008)* 10-Q No. 000-09992 10.45 January 30, 2009
10.17 Form of Restricted Stock Unit Agreement for French Participants (with Dividend Equivalents) (approved August 2014)* 8-K No. 000-09992 10.47 August 12, 2014
10.18 Form of Restricted Stock Unit Agreement for Non-U.S. Employees (approved December 2008)* 10-Q No. 000-09992 10.46 January 30, 2009
10.19 Form of Restricted Stock Unit Agreement for Non-U.S. Employees (with Dividend Equivalents) (approved August 2014)* 8-K No. 000-09992 10.48 August 12, 2014
10.20 Amended and Restated 1997 Employee Stock Purchase Plan (as amended May 8, 2014)* 10-K No. 000-09992 10.21 August 8, 2014
10.21 KLA-Tencor Corporation Performance Bonus Plan* DEF 14A No. 000-09992 App. B September 26, 2013
10.23 Fiscal Year 2014 Executive Incentive Plan*+ 10-Q No. 000-09992 10.44 October 25, 2013
10.24 Fiscal Year 2015 Executive Incentive Plan*+ 10-Q No. 000-09992 10.53 October 24, 2014
10.25 Fiscal Year 2016 Executive Incentive Plan*+ 10-Q No. 000-09992 10.44 October 22, 2015
10.26 Executive Deferred Savings Plan (as amended and restated effective November 7, 2012)* 10-Q No. 000-09992 10.42 January 25, 2013
10.27 Executive Severance Plan (as amended and restated September 21, 2015)* 10-Q No. 000-09992 10.44 October 22, 2015
10.28 2010 Executive Severance Plan (as amended and restated September 21, 2015)* 10-Q No. 000-09992 10.45 October 22, 2015
10.29 Credit Agreement dated November 14, 2014 among KLA-Tencor Corporation, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent 8-K No. 000-09992 10.54 November 17, 2014
12.1 Computation of Ratio of Earnings to Fixed Charges        
21.1 List of Subsidiaries        
23.1 Consent of Independent Registered Public Accounting Firm        
31.1 Certification of Chief Executive Officer under Rule 13a-14(a) of the Securities Exchange Act of 1934        
31.2 Certification of Chief Financial Officer under Rule 13a-14(a) of the Securities Exchange Act of 1934        
32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350        
99.1 Risks related to the Merger with Lam Research        
101.INS XBRL Instance Document        
101.SCH XBRL Taxonomy Extension Schema Document        

114
Exhibit
Number
Exhibit DescriptionIncorporated by Reference
FormFile No.
Exhibit
Number
Filing Date
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document

Exhibit
Number
 Exhibit Description Incorporated by Reference
Form File No. 
Exhibit
Number
 Filing Date
10.40 Letter Agreement by and between the Company and Brian M. Martin* 10-Q No. 000-09992 10.28 May 7, 2007
10.41 Letter Agreement by and between the Company and Mark Dentinger* 10-Q No. 000-09992 10.43 October 31, 2008
10.42 Letter Agreement between the Company and Mark Dentinger* 10-Q No. 000-09992 10.43 October 25, 2013
10.43 Credit Agreement dated November 14, 2014 among KLA-Tencor Corporation, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent 8-K No. 000-09992 10.54 November 17, 2014
12.1 Computation of Ratio of Earnings to Fixed Charges        
21.1 List of Subsidiaries        
23.1 Consent of Independent Registered Public Accounting Firm        
31.1 Certification of Chief Executive Officer under Rule 13a-14(a) of the Securities Exchange Act of 1934        
31.2 Certification of Chief Financial Officer under Rule 13a-14(a) of the Securities Exchange Act of 1934        
32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350        
101.INS XBRL Instance Document        
101.SCH XBRL Taxonomy Extension Schema Document        
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document        
101.DEF XBRL Taxonomy Extension Definition Linkbase Document        
101.LAB XBRL Taxonomy Extension Label Linkbase Document        
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document        
__________________
*Denotes a management contract, plan or arrangement.
+Confidential treatment has been requested as to a portion of this exhibit.
(1)Incorporated by reference to Exhibit 10.22 to Therma-Wave, Inc.’s Annual Report on Form 10-K for the fiscal year ended March 31, 2000 (Commission File No. 000-26911).
(2)Incorporated by reference to Exhibit 99.2 to Therma-Wave, Inc.’s Registration Statement on Form S-8, filed February 22, 2002 (Commission File No. 333-83282).
(3)Incorporated by reference to Exhibit 99.1 to Therma-Wave, Inc.’s Current Report on Form 8-K, filed August 27, 2004 (Commission File No. 000-26911).
(4)Incorporated by reference to Exhibit 99.2 to Therma-Wave, Inc.’s Current Report on Form 8-K, filed August 27, 2004 (Commission File No. 000-26911).
(5)Incorporated by reference to Exhibit 10.21 to Therma-Wave, Inc.’s Annual Report on Form 10-K for the fiscal year ended April 3, 2005 (Commission File No. 000-26911).

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