KLA Annual Report 2015 | Quarterlytics

FY2015 Annual Report · KLA

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A N N U A L R E P O R T

2 0 1 5

TO OUR STOCKHOLDERS:

KLA-Tencor delivered strong operating and financial performance in fiscal year 2015, as well as solid
execution of our strategic objectives.

Total revenues in 2015 were $2.8 billion, with net income of $366 million, and diluted earnings per share of
$2.24. The Company also continued the steady growth of its service business, generating $689 million in
revenues in fiscal year 2015, a growth rate of 7% in the year. Additionally, we delivered $606 million in
operating cash flow, and ended the year with $2.4 billion in cash and investments. In keeping with our ongoing
commitment to rewarding our long-term stockholders, we returned $3.6 billion to stockholders through our
dividend and stock repurchase programs in fiscal year 2015. That amount was comprised of dividend
payments of $3.0 billion, which included a $16.50 per share special cash dividend paid in December 2014 and
the effect of an 11% increase in our regular quarterly cash dividend level that we announced in July 2014.
We also repurchased approximately $603 million in common stock during the year. Additionally, we sustained
our market leadership and strong pace of innovation by maintaining a high level of investment in research and
development to ensure our continued ability to create advanced next-generation technology that meets our
customers’ highly sophisticated needs.

Our success in fiscal year 2015 was built upon the framework of our four strategic objectives—Customer
Focus, Growth, Operational Excellence and Talent Development—the guiding principles which direct our
decision making as we execute our long-term growth strategies.

CUSTOMER FOCUS: GROW SHARE IN PROCESS CONTROL

The driving forces behind our Customer Focus objective are effective collaboration with our customers and
successful execution of our product development roadmaps. Our focus on innovation and helping our
customers solve their most complex yield challenges in leading-edge semiconductor manufacturing has
enabled us to lead innovation in wafer inspection, as evidenced by our continued ability to drive a cadence of
new product introductions, including, most recently, our next-generation flagship optical inspection platform,
currently scheduled for introduction in calendar year 2016. This demonstrates our customer focus and market
leadership, as well as the critical role KLA-Tencor plays in helping our customers address the higher cost and
complexity associated with competing at the leading edge.

GROWTH: LONG-TERM REVENUE GROWTH RATE OF 5-7%

KLA-Tencor’s Growth objective is to deliver through-cycle revenue growth of 5-7%. This objective has three
major components: process control industry adoption, expansion of the company’s market leadership, and
growth in our services business. The foundation for our growth objective is based on market leadership and the
critical role we play in enabling process control industry adoption. Another key factor for growth is our ability to
successfully execute strategies to capture a greater share of our customers’ investment in process control. The
focus here centers on innovation and driving a cadence of new product introduction(cid:86) at a faster pace than the
competition, delivering a portfolio of differentiated products that solve our customers’ most complex yield
issues at the leading edge. Finally, the services business continues to expand and is expected to be of
increasing importance in our long-term growth strategies. KLA-Tencor’s services business is a key component
of the overall product differentiation and customer value proposition, helping to reduce our customers’ cost of
ownership and enhance the productivity and capability of KLA-Tencor equipment in the field. We see
opportunities for growth of service revenue from broadening our service product offering and through further
penetration of the installed base.

OPERATIONAL EXCELLENCE: GROW OPERATING INCOME 2X REVENUE GROWTH RATE

To achieve Operational Excellence, we focus on achieving our challenging business goals while maximizing
operating efficiencies and delivering superior profits and cash flows.

In fiscal year 2015, we continued our track record of being among the top tier in key financial metrics, such as
gross, operating and free cash flow margins, as compared to our semiconductor manufacturing equipment
peers. Our superior business model enables us to continue to drive strong stockholder value. Consistent with
our continuing focus on Operational Excellence, in April of 2015, we redesigned our organization to streamline
our “go-to-market” activities in response to changing customer requirements and focus our research and
development investments on the best opportunities. This program is targeting a reduction of $100 million in
annual operating costs, which we expect to achieve in fiscal year 2016.

TALENT DEVELOPMENT: ATTRACT, DEVELOP AND INSPIRE TALENT

Our Talent Development strategic objective centers on attracting, developing and inspiring our global
workforce. We seek to hire top talent, recruiting high-caliber graduates from top-tier universities across the
world. The employee career development process at KLA-Tencor encompasses many approaches, including
making available vertical and horizontal career opportunities within the company, a process that not only
engages employees by offering opportunities to periodically take on new roles and learning experiences, but
also empowers KLA-Tencor with a workforce enriched by a breadth of experience across multiple parts of the
business. We believe this process enhances employee knowledge and job satisfaction, while enabling closer
collaboration with peers across the various functional groups in the company. We also offer extensive
continuing education benefits through our award-winning Corporate Learning Center and advanced-degree
tuition reimbursement programs. Our work to attract, develop and inspire talent helps KLA-Tencor consistently
maintain a low attrition rate.

In fiscal year 2015, KLA-Tencor delivered superior performance through close collaboration with our customers
and the strong execution of our long-term growth strategies by our global workforce. Moving forward, we
believe we are well-positioned to enable our customers to navigate the challenges they will face as our industry
progresses. I am confident that KLA-Tencor’s continuing commitment to advanced technology research and
development, as well as our focus on partnering with our customers to help solve their critical yield management
challenges, will enable us to maintain our market and technology leadership positions and deliver superior
stockholder value.

Thank you for your continuing support of KLA-Tencor.

Sincerely,
y,

Rick Wallace
President and Chief Executive Officer

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2015

‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934
For the Transition Period from

to
Commission File Number 000-09992

KLA-TENCOR CORPORATION

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

One Technology Drive, Milpitas, California
(Address of Principal Executive Offices)

04-2564110
(I.R.S. Employer
Identification Number)

95035
(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

Common Stock, $0.001 par value per share

Name of Each Exchange on Which Registered

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 È No ‘
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 ‘ No È
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 È No ‘

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 È No ‘

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. È

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 È
Non-accelerated filer ‘ (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ‘ No È
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant based upon the closing price

Accelerated filer ‘
Smaller reporting company ‘

of the registrant’s stock, as of December 31, 2014, was approximately $11.45 billion.

The registrant had 157,530,878 shares of common stock outstanding as of July 17, 2015.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2015 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, 2015, are incorporated by reference into Part
III of this report.

INDEX

Special Note Regarding Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART I

Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.

Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . .
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Consolidated Balance Sheets as of June 30, 2015 and June 30, 2014 . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for each of the three years in the period ended

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

Consolidated Statements of Stockholders’ Equity for each of the three years in the period

ended June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Cash Flows for each of the three years in the period ended

June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART III

Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART IV

Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule II Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Item 9.
Item 9A.
Item 9B.

Item 10.
Item 11.
Item 12.

Item 13.
Item 14.

Item 15.

1
17
36
37
37
37

38
40
41
65
67
68

72
73
118
119
119
120

121
121

121
121
121

122
123
124
125

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

industry and our business;

the semiconductor capital equipment

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, 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,
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 income tax rate; 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,
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; and our repayment of our
approximately $3.21 billion of outstanding indebtedness.

including debt service and payment

technological

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, 2016. 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.

ITEM 1. BUSINESS

The Company

PART I

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, by submitting
an online request to the SEC at www.sec.gov or by calling the SEC at 1-800-732-0330.

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.

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,
advanced wafer-level packaging and semiconductors with critical dimensions at 28 nanometer and below. 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
the leading semiconductor
today’s market, driven by consumer demand for low-cost electronic goods,
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.

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
industries and provides a
the semiconductor and related nanoelectronics
comprehensive portfolio of defect inspection and metrology products, and related service, software and other
offerings.

solutions

for

KLA-Tencor’s defect inspection and metrology products and related offerings can be broadly categorized
into the following groups: Chip Manufacturing, Wafer Manufacturing, Reticle Manufacturing, LED 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
reticle

incoming wafer qualification;

research and development;

manufacturing environment,

including:

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.

In 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, we
launched several front-end defect inspection products that help accelerate yield for next-generation design node
devices: 2920 Series, Puma™ 9850 and Surfscan® SP5. The 2920 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™ 9850 laser scanning patterned wafer inspection system utilizes
a 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. The Surfscan® SP5 unpatterned wafer
inspection system utilizes deep ultra-violet (“DUV”) optical technologies and high throughput to assess incoming
wafer quality, evaluate and qualify processes during R&D and monitor processes during production.

The products that we launched during the fiscal year ended June 30, 2015 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 2920 Series, 2910 Series, 2900 Series, 2830 Series, 2820 Series and 2810 Series systems (for
broadband plasma defect inspection); our PumaTM 9850 Series, 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 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, we
introduced the eDRTM-7110, an electron-beam wafer defect review and classification system that utilizes
improved 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 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.

In August 2014, we introduced our 5D™ patterning control solution which 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 solution 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 enable
characterization of overlay error on lithography process layers for advanced patterning technologies. The
SpectraShapeTM family of optical CD and shape metrology systems fully characterize and monitor the critical
dimensions and 3D shapes of geometrically complex features incorporated by some IC manufacturers in their
latest generation devices. Finally, the 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. 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.

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 accurate 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 is anchored by the Surfscan® SP3 Series defect inspection systems designed
to enable development and production monitoring of polished wafers, epi wafers and engineered substrates. The
SURFmonitorTM module characterizes wafer surface quality and captures the low-contrast defects. The
WaferSightTM platform offers bare wafer geometry and nanotopography metrology capabilities. Other products
that we offer for the wafer manufacturing market are highlighted in the product table at the conclusion of this
“Products” section.

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 and TeronTM SL650 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. 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 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, Klarity® LED and WI-2280. The Candela 8620 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.

Our primary products for compound semiconductor manufacturing include Candela CS20 and the P-Series
Stylus Profiler, used for the inspection 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.

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.

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, we introduced the Alpha-Step® D-500 stylus profiler designed
for 2D measurements 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.

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.

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:

MARKETS

APPLICATIONS

PRODUCTS

Chip Manufacturing

Patterned Wafer

Front-End Defect Inspection

High Productivity and All
Surface

Unpatterned Wafer/Surface

Reticle

2920 Series, 2910 Series, 2900
Series, 2830 Series, 2820 Series,
2810 Series
PumaTM 9850, Puma 9650, Puma
9500 Series
eS805TM Series, eS800 Series

CIRCLTM with 8 Series, CV350i,
BDR300TM and Micro300 modules
8 Series (8800, 8820, 8900, 8920)

Surfscan® SP3 and Surfscan SP5
Series
SURFmonitorTM

X5.2TM
TeronTM SL650

Advanced Packaging

Data Management

Klarity® product family

Wafer-Level Packaging

CIRCL-APTM with 8 Series,
CV350i and Micro300 modules
WI-22x0 Series

Component Inspection

ICOS® T640 and ICOS T830

Defect Review

Electron-beam

eDRTM-7100 Series, eDR-7000
Series

Metrology

In-Situ Process Monitoring

Lithography Software

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
SURFmonitor

Ion Implant and Anneal

Therma-Probe®

Surface Metrology

Resistivity

Data Management

Lithography

Plasma Etch

HRP® -350
P-Series product family

RS product family

K-T Analyzer®

SensArray® product family

SensArray product family

Implant and Wet

SensArray PlasmaSuite

Lithography Simulation

Process Window Analysis

PROLITHTM

ProDATATM

MARKETS AND APPLICATIONS

PRODUCTS

Wafer Manufacturing

Surface and Defect Inspection

Wafer Geometry and Nanotopography Metrology

Data Management

Reticle Manufacturing

Defect Inspection

Pattern Placement Metrology

LED and Compound Semiconductor Manufacturing

Surfscan SP3 Series
SURFmonitor

WaferSight Series
SURFmonitor

FabVisionTM

TeraScanTMXR
Teron 600 Series

LMS IPRO Series

Patterned Wafer Inspection

WI product family

Defect Inspection (substrates and epi wafers)

Candela® product family

Surface Metrology

Data Management

Data Storage Media/Head Manufacturing

Thin-Film Head Metrology and Inspection

P-Series product family
MicroXAM Series
HRP product family

Klarity LED

Aleris product family
CIRCL with 8 Series, CV350i, BDR300 and
Micro300 modules
HRP -250
P-Series product family

Virtual Lithography

In-Situ Process Monitoring

PROLITH

SensArray product family

Transparent and Metal Substrate Inspection

Candela product family

Data Management

MEMS Manufacturing

Surface Metrology: Stylus Profiling

Klarity Defect
K-T Analyzer

P-Series product family
HRP product family

Surface Metrology: Optical Profiling

MicroXAM Series

Optical Inspection

General Purpose/Lab Applications

Surface Metrology: Stylus Profiling

8 Series (8800, 8820, 8900, 8920)
WI product family

P-Series product family
Alpha-Step® product family
HRP product family

Surface Metrology: Optical Profiling

MicroXAM 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.

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, 2015, 2014 and 2013, the following customers each accounted for more

than 10% of total revenues:

2015

Year ended June 30,

2014

2013

Intel Corporation

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, 2015, we employed approximately 2,390 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%, 76% and 70% of our total revenues in the fiscal years ended June 30, 2015, 2014 and
2013, respectively. Additional information regarding our revenues from foreign operations for our last three
fiscal years can be found in Note 17, “Segment Reporting and Geographic Information” to the 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.

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 and $977 million as of
June 30, 2015 and 2014, 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 million and $269 million as of June 30, 2015 and 2014, 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, 2015, we
employed approximately 1,480 full-time research and development personnel.

Our key research and development activities during the fiscal year ended June 30, 2015 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.

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
introductions, however, may contribute to fluctuations in operating results, since
position. New product
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, 2015, 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 and Nanometrics,
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.

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, 2015, we employed approximately 5,880 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.

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)

design rules

die

electron-beam

epitaxial silicon (epi)

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.

Rules that set forth the allowable dimensions of particular features used in the
design and layout of integrated circuits.

The term for a single semiconductor chip on a wafer.

An illumination source comprised of a stream of electrons emitted by a single
source.

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

fab

front-end

in-situ

interconnect

lithography

mask shop

metrology

For a manufacturing step or process, a deviation from normal operating conditions
that can lead to decreased performance or yield of the final product.

The main manufacturing facility for processing semiconductor wafers.

The processes that make up the first half of the semiconductor manufacturing
process, from wafer start through final contact window processing.

Refers to processing steps or tests that are done without moving the wafer. Latin
for “in original position.”

A highly conductive material, usually copper or aluminum, that carries electrical
signals to different parts of a die.

A process in which a masked pattern is projected onto a photosensitive coating that
covers a substrate.

A manufacturer that produces the reticles used by semiconductor manufacturers.

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).

nanometer (nm)

One billionth (10-9) of a meter.

narrowband

patterned

photoresist

An illumination source with a narrow spectral bandwidth, such as a laser.

semiconductor manufacturing and industries using similar processing
(transistors,

For
technologies,
interconnects, etc.) fabricated on the surface.

that have electronic circuits

to substrates

refers

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

unpatterned

yield management

A wafer on which layers of various materials are added during the process of
manufacturing semiconductor devices or circuits.

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.

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.

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 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 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.

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.

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.

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 the 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
the development costs associated with such products or
enhancements will be sufficient

to recover

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.

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.

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, key parts may be
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.

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, we had approximately $3.21 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 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,
equipment
business strategy.

industries, our financial position,

the economic environment, conditions in the semiconductor and semiconductor
indebtedness, and our
including the incurrence of additional

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, “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.

Our leveraged capital structure may adversely affect our financial condition, results of operations and

earnings 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, “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; and our increased interest and principal payments required by our approximately $3.21 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.

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.

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,
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 our 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. 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 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.

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.

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
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.

investigations with respect

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 regulations 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.

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
including certain hosted software
regulations. In addition, many of these outsourced service providers,
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, that are outside of our control.
if required export and other
If we do not effectively develop and manage our outsourcing strategies,
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 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 or misuse, and subject to the inherent vulnerabilities of network security
measures. Any of these 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; 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 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.

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.

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 euro and the
Japanese Yen. 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.

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.

ITEM 2.

PROPERTIES

Information regarding our principal properties as of June 30, 2015 is set forth below:

Location

Type

Principal Use

Milpitas, CA . . . . . . . . . . . . . . . . . . . . . . . Office, plant and

warehouse

Principal Executive Offices,
Research, Engineering,
Marketing, Manufacturing,
Service and Sales
Administration

Square
Footage Ownership

727,302

Owned

Westwood, MA(1) . . . . . . . . . . . . . . . . . . . . Office and plant

Engineering, Marketing,

116,908

Leased

Manufacturing and Service

Leuven, Belgium(1)

. . . . . . . . . . . . . . . . . . Office, plant and

Engineering, Marketing and

99,315

Owned

Shenzhen, China . . . . . . . . . . . . . . . . . . . . Office and plant

warehouse

Service and Sales
Administration
Sales, Service and
Manufacturing

47,213

Leased

Shanghai, China . . . . . . . . . . . . . . . . . . . . . Office

Research, Service and Sales

41,184

Leased

Administration

Weilburg, Germany . . . . . . . . . . . . . . . . . . Office and plant

Engineering, Marketing,

138,119

Leased

Chennai, India . . . . . . . . . . . . . . . . . . . . . . Office
Migdal Ha’Emek, Israel

. . . . . . . . . . . . . . Office and plant Research, Engineering,

Manufacturing, Service and
Sales Administration

Engineering

Yokohama, Japan . . . . . . . . . . . . . . . . . . . . Office and

warehouse

Serangoon, Singapore(2) . . . . . . . . . . . . . . . Office and plant

Hsinchu, Taiwan . . . . . . . . . . . . . . . . . . . . Office

Marketing, Manufacturing,
Service and Sales
Administration
Sales and Service

Sales, Service and
Manufacturing
Sales and Service

33,366
191,982

Owned
Owned

37,418

Leased

248,155

Owned

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, 2015, we owned or leased a total of approximately 2.1 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, “Commitments and Contingencies” to the 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, “Litigation and Other Legal Matters” to the Consolidated

Financial Statements is incorporated herein by reference.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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, 2014

High

Low

Cash Dividends
Declared per
share

First Fiscal Quarter . . . . . . . . $80.86 $71.40
Second Fiscal Quarter
. . . . . $84.18 $65.61
Third Fiscal Quarter . . . . . . . $70.95 $58.29
Fourth Fiscal Quarter . . . . . . $60.30 $55.65

$ 0.50
$17.00*
$ 0.50
$ 0.50

High

Low

$62.01 $54.67
$66.19 $59.46
$70.02 $59.73
$72.64 $62.30

Cash Dividends
Declared per
share

$0.45
$0.45
$0.45
$0.45

* 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 cash dividends can be found in Note 8, “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, 2015, there were 451 holders of record of our common stock.

Equity Repurchase Plans

The following is a summary of stock repurchases for each month during the fourth quarter of the fiscal year

ended June 30, 2015(1):

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, 2015 . . . . . . . . . . . . . . . . . .
May 1, 2015 to May 31, 2015 . . . . . . . . . . . . . . . . . . .
June 1, 2015 to June 30, 2015 . . . . . . . . . . . . . . . . . . .

1,350,089
634,622
764,301

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,749,012

$58.93
$59.31
$57.26

$58.55

10,760,336
10,125,714
9,361,413

(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.

Stock Performance Graph and Cumulative Total Return

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, 2010 to June 30,
2015.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among KLA-Tencor Corporation, the S&P 500 Index, and the PHLX Semiconductor Index

$350

$300

$250

$200

$150

$100

$50

6/10

6/11

6/12

6/13

6/14

6/15

KLA-Tencor Corporation

S&P 500

PHLX Semiconductor

KLA-Tencor Corporation . . . . . . . . . . . . . . . . . . .
S&P 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PHLX Semiconductor . . . . . . . . . . . . . . . . . . . . . .

$100.00
$100.00
$100.00

$148.99
$130.69
$135.83

$187.01
$137.81
$139.10

$218.28
$166.20
$165.22

$292.87
$207.10
$223.35

$290.54
$222.47
$233.52

6/10

6/11

6/12

6/13

6/14

6/15

* Assumes $100 invested on June 30, 2010 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.

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.

(In thousands, except per share amounts)

2015

2014

2013

2012

2011

Year ended June 30,

Consolidated Statements of Operations:

Total revenues . . . . . . . . . . . . . . . . . . . .
Net income(1) . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared per share

(including a special cash dividend of
$16.50 per share declared during the
three months ended December 31,
2014) . . . . . . . . . . . . . . . . . . . . . . . . .

Net income per share:

Basic . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . .

$2,814,049
$ 366,158

$2,929,408
$ 582,755

$2,842,781
$ 543,149

$3,171,944
$ 756,015

$3,175,167
$ 794,488

$
$

18.50

2.26
2.24

$
$

1.80

3.51
3.47

$
$

1.60

3.27
3.21

$
$

1.40

4.53
4.44

$
$

1.00

4.75
4.66

2015

2014

2013

2012

2011

As of June 30,

Consolidated Balance Sheets:

Cash, cash equivalents and marketable

securities . . . . . . . . . . . . . . . . . . . . . .
Working capital . . . . . . . . . . . . . . . . . . .
Total assets(3) . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
Long-term debt(2)(3)
. . . . . . . . .
Total stockholders’ equity(2)

$2,387,111
$2,902,813
$4,826,012
$3,173,435
$ 421,439

$3,152,637
$3,690,484
$5,535,846
$ 745,101
$3,669,346

$2,918,881
$3,489,236
$5,283,804
$ 743,823
$3,482,152

$2,534,444
$3,300,401
$5,096,020
$ 742,545
$3,315,595

$2,038,535
$2,796,414
$4,670,498
$ 741,267
$2,860,893

(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) 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 million of five-
year senior unsecured prepayable term loans and a $500 million unfunded revolving credit facility and
redeemed our $750 million aggregate principal amount of 6.900% Senior Notes due in 2018 (the “2018
Notes”). Refer to Note 7, “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, “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.

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% 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.

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, “Commitments and Contingencies” to the Consolidated Financial Statements for a
detailed description.

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.

Stock-Based Compensation. 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, “Commitments and Contingencies” and Note 14, “Litigation and Other
Legal Matters” to the Consolidated Financial Statements for a detailed description.

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 recoverability whenever events or changes in circumstances indicate that their carrying amounts
may not be recoverable. See Note 6, “Goodwill and Purchased Intangible Assets” to the Consolidated Financial
Statements for a detailed description. 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
there was no impairment. There have been no significant events or
June 30, 2015 and concluded that
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.

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.

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. 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, the Financial Accounting Standards Board (“FASB”) issued an accounting standard update
that provides guidance on the financial statement presentation of an unrecognized tax benefit when a net
operating loss carryforward, a similar tax loss or a tax credit carryforward exists. Under this accounting standard
update, in most circumstances, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should
be presented in 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. 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.

Earlier adoption is permitted for financial statements that have not been previously issued and we are required to
apply the guidance on a retrospective basis with additional disclosure requirements upon transition. We 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 our consolidated financial statements.

Updates Not Yet Effective

In May 2014, the FASB issued an accounting standard update regarding revenue from customer contracts to
transfer goods and services or non-financial assets, unless the contracts are covered by other standards (for
example,
insurance or lease contracts). Under the new guidance, an entity should recognize revenue in
connection with the transfer of promised goods or services to customers in an amount that reflects the
consideration that the entity expects to be entitled to receive in exchange for those goods or services. In addition,
the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of
revenue and cash flows arising from contracts with customers. The updates are effective for 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, with early adoption on the original effective date permitted. The new revenue standard may be
applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as
of the date of adoption. 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
early adoption permitted. 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, with early adoption permitted to be applied prospectively. 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.

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. 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 lower volumes of process control equipment that we had expected. 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.

During the most recent quarter, we implemented a plan to reduce our global employee workforce aimed at
streamlining our organization and business processes in response 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 end of the first quarter of fiscal year 2016, but certain reductions will occur in the
second quarter of fiscal year 2016.

The following table sets forth some of our key consolidated financial information for each of our last three

fiscal years:

(Dollar amounts in thousands)

Year ended June 30,

2015

2014

2013

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross margin percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,814,049
$1,215,229
57%
$ 366,158
2.24
$

$2,929,408
$1,232,962
58%
$ 582,755
3.47
$

$2,842,781
$1,237,452
56%
$ 543,149
3.21
$

Total revenues during the fiscal year ended June 30, 2015 decreased by 4% compared to the fiscal year
ended June 30, 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
in process control and services to improve
ended June 30, 2013, as our customers continued to invest
manufacturing yields as they adopt advanced technologies and new materials to enable smaller design rules
required to fabricate advanced ICs.

Revenues and Gross Margin

(Dollar amounts in thousands)

2015

2014

2013

FY15 vs. FY14

FY14 vs. FY13

Year ended June 30,

Revenues:

Product
. . . . . . . . . . . . . . . . .
Service . . . . . . . . . . . . . . . . .

$2,125,396
688,653

$2,286,437
642,971

$2,247,147
595,634

$(161,041)
45,682

(7)% $39,290
7% 47,337

Total revenues . . . . . . . . . . . . . . . .

$2,814,049

$2,929,408

$2,842,781

$(115,359)

(4)% $86,627

2%
8%

Costs of revenues . . . . . . . . . . . . .
Gross margin percentage . . . . . . .

$1,215,229
57%

$1,232,962
58%

$1,237,452
56%

$ (17,733)
(1)%

(1)% $ (4,490) —%

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 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 in 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 and 2015, 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:

2015

Year ended June 30,

2014

2013

Intel Corporation

Samsung Electronics Co., Ltd.

Taiwan Semiconductor

Manufacturing Company Limited

Taiwan Semiconductor

Manufacturing Company Limited

Revenues by region

Revenues by region for the periods indicated were as follows:

Year ended June 30,

(Dollar amounts in thousands)

2015

2014

2013

North America . . . . . . . . . . . . . . . . . . . . . . . . . .
Taiwan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe & Israel . . . . . . . . . . . . . . . . . . . . . . . . .
Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rest of Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 815,914
691,482
426,963
194,670
405,320
279,700

29% $ 705,159
741,470
25%
334,653
15%
306,779
7%
371,139
14%
470,208
10%

24% $ 846,125
936,445
25%
310,204
11%
211,121
11%
292,724
13%
246,162
16%

30%
33%
11%
7%
10%
9%

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,814,049

100% $2,929,408

100% $2,842,781

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:

Fiscal year ended June 30, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revenue volume of products and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mix of products and services sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing labor, overhead and efficiencies . . . . . . . . . . . . . . . . . . . . . . . .
Other service and manufacturing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fiscal year ended June 30, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revenue volume of products and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mix of products and services sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing labor, overhead and efficiencies . . . . . . . . . . . . . . . . . . . . . . . .
Other service and manufacturing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fiscal year ended June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Gross Margin
Percentage

56.5%
— %
(0.3)%
0.2%
1.5%

57.9%
(1.1)%
0.3%
(0.6)%
0.3%

56.8%

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 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, “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.

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,

(Dollar amounts in thousands)

2015

2014

2013

FY15 vs. FY14

FY14 vs. FY13

R&D expenses . . . . . . . . . . . . . . . . . . . . . .
R&D expenses as a percentage of total

$530,616

$539,469

$487,832

$(8,853)

(2)% $51,637

11%

revenues . . . . . . . . . . . . . . . . . . . . . . . . .

19%

18%

17%

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, our R&D expenses have generally
increased over time, primarily due to higher costs associated with advanced product and technology development
projects. We incur significant costs associated with these projects, including compensation for engineering talent,
engineering material costs, and other expenses, as technological innovation is essential to our success. One of the
goals of our plan to reduce our global employee workforce is to streamline our organization and business
processes and direct our resources toward our best opportunities.

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, “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.

Selling, General and Administrative (“SG&A”)

(Dollar amounts in thousands)

2015

2014

2013

FY15 vs. FY14

FY14 vs. FY13

SG&A expenses . . . . . . . . . . . . . . . . . . . . . .
SG&A expenses as a percentage of total

$406,864

$384,907

$387,812

$21,957

6% $(2,905)

(1)%

revenues . . . . . . . . . . . . . . . . . . . . . . . . . .

14%

13%

14%

(1)%

Year ended June 30,

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, “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 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 requirement in our industry. The goals of this reduction
are to enable continued innovation, direct our resources toward our best opportunities and lower our ongoing
expense run rate. We expect to recognize significant cost savings from a number of activities we have recently
undertaken, including estimated annual cost savings of approximately $100 million of employee related costs as
a result of our announced global employee workforce reduction. 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, “Restructuring Charges” for additional details.

The following table shows the activity primarily related to accrual for severance and benefits expense for

the fiscal year ended June 30, 2015:

(In thousands)

Beginning Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year ended
June 30, 2015

$ 2,329
31,569
1,177
(10,188)

Ending Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 24,887

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

quarter ending December 31, 2015.

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.

Interest Expense and Other Expense (Income), Net

(Dollar amounts in thousands)

Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense (income), net
Interest expense as a percentage of total revenues . . . . . . . . . . . . . . . . . . . . . . .
Other expense (income), net as a percentage of total revenues . . . . . . . . . . . . . .

Year ended June 30,

2015

2014

2013

$106,009
$ 54,176
$ 53,812
$ (10,469) $(16,203) $(15,112)
2%
1%

4%
— %

2%
1%

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 million unsecured prepayable term loan facility during
the three months ended December 31, 2014, as compared to $750 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 June 30, 2014, our investment balance for our marketable
securities portfolio declined by $973 million as a result of our strategic decision to liquidate certain marketable
securities 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 result of
liquidation of our investment portfolio are not expected to recur.

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
in a privately-held company, partially offset by an impairment charge of $1.4 million
equity investment
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 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, Debt” and “Note 16, 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, 2014 and 2013.

Provision for Income Taxes

The following table provides details of income taxes:

(Dollar amounts in thousands)

Year ended June 30,

2015

2014

2013

Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$434,131
$ 67,973
15.7%

$734,461
$151,706
20.7%

$690,621
$147,472
21.4%

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, 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.

Liquidity and Capital Resources

(Dollar amounts in thousands)

As of June 30,

2015

2014

2013

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

838,025
1,549,086

$ 630,861
2,521,776

$ 985,390
1,933,491

Total cash, cash equivalents and marketable securities . . . . . . . . . . . . . .

$ 2,387,111

$3,152,637

$2,918,881

Percentage of total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

49%

57%

55%

(In thousands)

Year ended June 30,

2015

2014

2013

Cash flows:
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash and cash equivalents . . . . . . . .

605,906
918,221
(1,302,972)
(13,991)

$ 778,886
(676,109)
(458,887)
1,581

$ 913,188
(241,447)
(428,510)
(9,135)

Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . .

207,164

$ (354,529) $ 234,096

Cash and Cash Equivalents and Marketable Securities:

As of June 30, 2015, our cash, cash equivalents and marketable securities totaled $2.39 billion, which is a
decrease of $766 million from June 30, 2014. The decrease 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 our 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 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. As of June 30,
2015, $1.47 billion of our $2.39 billion of cash, cash equivalents, and marketable securities were held by our
foreign subsidiaries and branch offices. We currently intend to permanently reinvest $1.34 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 million of the $1.47 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, 2015, 2014
and 2013 was $324.8 million, $298.9 million and $265.9 million, respectively. The increase in the amount of
regular quarterly cash dividends paid during the fiscal year ended June 30, 2015 reflected the increase in the level
of our regular quarterly cash dividend from $0.45 to $0.50 per share that was instituted during the three months
ended September 30, 2014. The amount of accrued dividends payable for regular quarterly cash dividends on
unvested restricted stock units with dividend equivalent rights was $0.9 million as of June 30, 2015. We did not
have accrued dividends payable in the fiscal years ended June 30, 2014 and 2013. These amounts will be paid
upon vesting of the underlying unvested restricted stock units as described in Note 8, “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.

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, “Debt” that was completed during the three months ended December 31, 2014.
The total amount of the special cash dividend accrued by the Company during the three months ended
December 31, 2014 was approximately $2.76 billion, substantially all of which was paid out during the three
months ended December 31, 2014. As of June 30, 2015, we have $41.1 million 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, “Equity and Long-term Incentive
Compensation Plans.” We did not declare any special cash dividend in the fiscal years ended June 30, 2014 and
2013. 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 decreased 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. The stock repurchase program is intended, in part, to offset shares issued in connection with the purchases
under our ESPP program, the vesting of employee restricted stock units and the exercise of employee stock
options.

Fiscal Year 2015 Compared to Fiscal Year 2014

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, 2015 decreased compared to the fiscal year
ended June 30, 2014, from $779 million to $606 million primarily as a result of the following key factors:

•

A decrease of cash collections by approximately $270 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 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 million upon vesting of cash-based long-term incentive
(“Cash 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 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 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 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
million compared to the fiscal year ended June 30, 2014 from net cash used in investing activities of $676
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 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
million during fiscal year ended June 30, 2014. 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, 2015 increased compared to the
fiscal year ended June 30, 2014, from $459 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 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 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 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.

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 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, “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, 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 million of five-year senior unsecured prepayable term loans and a
$500 million unfunded revolving credit facility (collectively, the “Credit Facility”) under the Credit Agreement.
The 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 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
additional principal of $20.0 million in addition to the scheduled quarterly payments for the term loans.

Future principal payments for the term loans (without giving effect for any prepayments made) as of

June 30, 2015, are as follows:

Fiscal Quarters Ending

Quarterly Payment
(in thousands)

June 30, 2015 through December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . .
March 31, 2017 through December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . .
March 31, 2018 through September 30, 2019 . . . . . . . . . . . . . . . . . . . . . .
December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$
9,375
$ 14,063
$ 18,750
$487,500

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, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30, 2015 and December 31, 2015 . . . . . . . . . . . . . . . . . .
March 31, 2016 through September 30, 2016 . . . . . . . . . . . . . . . . . .
December 31, 2016 and March 31, 2017 . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter

4.25:1.00
4.00:1.00
3.75:1.00
3.50:1.00
3.00:1.00

We were in compliance with the financial covenants under the Credit Agreement as of June 30, 2015 (the
interest expense coverage ratio was 7.93 to 1.00 and the leverage ratio was 3.82 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.

Debt Redemption:

In December 2014, we redeemed the $750 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 includes $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 with our redemption of the then outstanding
2018 Senior Notes that occurred during the three months ended December 31, 2014. The notional amount of the
non-designated forward contract was $750 million. For additional details, refer to Note 16, “Derivative
Instruments and Hedging Activities.”

Contractual Obligations

The following is a schedule summarizing our significant obligations to make future payments under contractual

obligations as of June 30, 2015:

(In thousands)

Total

2016

2017

2018

2019

2020

2021 and
thereafter

Others

Debt obligations(1)
Interest payment associated

. . . . . . . $3,211,250 $ 17,500 $ 46,875 $315,625 $ 75,000 $756,250 $2,000,000 $ —

Fiscal year ending June 30,

with all debt
obligations(2) . . . . . . . . . .

Purchase

commitments(3) . . . . . . . .
Income taxes payable(4)
. . .
Operating leases . . . . . . . . .
Cash long-term incentive

program(5) . . . . . . . . . . . .
Pension obligations . . . . . .
Executive Deferred Savings
. . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . .

Plan(6)
Other(7)

Total contractual cash

1,060,852

119,117

118,606

114,796

110,711

100,310

497,312

—

298,717
76,939
21,381

296,908
—
8,008

1,347
—
5,818

337
—
3,964

63
—
1,815

124,972
21,546

42,962
3,034

39,624
1,348

27,839
1,570

14,547
1,559

167,886
42,002

—
22,173

—
9,599

—
6,985

—
3,245

—
—
1,220

—
1,413

—
—

62
—
556

—
76,939
—

—
12,622

—
—

— 167,886
—
—

obligations . . . . . . . . . . . $5,025,545 $509,702 $223,217 $471,116 $206,940 $859,193 $2,510,552 $244,825

(1)

In November 2014, we issued $750 million aggregate principal amount of term loans due in fiscal year 2020
(outstanding balance of $711.3 million as of June 30, 2015) and $2.50 billion aggregate principal amount of
Senior Notes due from fiscal year 2018 to fiscal year 2035.

(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, 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 million.

(6) 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) Represents the amount committed for accrued dividends payable, 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, “Equity
and Long-term Incentive Compensation Plans”.

Starting in fiscal year 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:

(In thousands)

Year ended June 30,

2015

2014

2013

Receivables sold under factoring agreements . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of LCs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$137,285
6,920
$

$116,292
8,323
$

$144,307
3,808
$

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 million,
of which $19.0 million had been issued as of June 30, 2015, primarily to fund guarantees to customs authorities
for value-added tax (“VAT”) and other operating requirements of 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 million as of
June 30, 2015 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, “Commitments and
Contingencies” to the Consolidated Financial Statements for a detailed description.

Working Capital:

Working capital was $2.90 billion as of June 30, 2015, which was a decrease of $787.7 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.
As of June 30, 2015, our principal sources of liquidity consisted of $2.39 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.

Our credit ratings and outlooks as of June 30, 2015 are summarized below:

Rating Agency

Rating Outlook

Fitch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BBB-
Moody’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Baa2
Standard & Poor’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Stable
Stable
BBB 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
interests 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, “Derivative Instruments and Hedging Activities” to the Consolidated Financial Statements for a
detailed description). Our outstanding hedge contracts, with maximum maturity of 16 months, were as follows:

(In thousands)

Cash flow hedge contracts

As of June 30,

2015

2014

Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 32,775
$ 88,800

$
6,066
$ 33,999

Other foreign currency hedge contracts

$ 64,012
$123,091

$108,901
$106,322

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 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 year
ended June 30, 2015, we recognized $0.5 million for the amortization of the gain recognized in accumulated
other comprehensive income (loss), which amount reduced the interest expense. We did not record any
ineffectiveness for the fiscal year ended June 30, 2015. The cash proceeds of $7.5 million from the settlement of
the Rate Lock Agreements were included in the cash flows from operating activities in the consolidated
statements of cash flows for the fiscal year ended June 30, 2015 because the designated hedged item was
classified as interest expense in the cash flows from operating activities in the consolidated statements of cash
flows.

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 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.

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.

tool

In addition, we may in limited circumstances enter into agreements that contain customer-specific
reliability, spare parts stocking levels, service response time and other
commitments on pricing,
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.

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, 2015. Actual results may differ materially.

As of June 30, 2015, we had an investment portfolio of fixed income securities of $1.65 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, 2015, the fair value of the portfolio would have declined by $18.1 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, the book value of our Senior Notes of $2.50 billion approximates the fair value. 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, “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, 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 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, 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, if LIBOR-based interest rates
increased by 100 bps, the change would increase our annual interest expense annually by approximately $6.3
million as it relates to our borrowings under the term loans. Additionally, as of June 30, 2015, 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 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, 2015.

As of June 30, 2015, we had net forward and option contracts to sell $115.1 million in foreign currency in
order to hedge certain currency exposures (see Note 16, “Derivative Instruments and Hedging Activities” to the

Consolidated Financial Statements for a detailed description). If we had entered into these contracts on June 30,
2015, the U.S. dollar equivalent would have been $115.1 million. A 10% adverse move in all currency exchange
rates affecting the contracts would decrease the fair value of the contracts by $23.9 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.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Balance Sheets as of June 30, 2015 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

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

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

2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

118

KLA-TENCOR CORPORATION

Consolidated Balance Sheets

As of June 30,

2015

2014

(In thousands, except par value)

ASSETS

Current assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 838,025
1,549,086
585,494
617,904
236,253
77,814

$ 630,861
2,521,776
492,863
656,457
215,676
68,462

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,904,576

4,586,095

Land, property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchased intangibles, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

314,591
335,263
11,895
259,687

330,263
335,355
27,697
256,436

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$4,826,012

$5,535,846

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred system profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 103,342
148,691
71,335
16,981
661,414

$ 103,422
147,923
59,176
—
585,090

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,001,763

895,611

Non-current liabilities:

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt
Unearned revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,173,435
47,145
182,230

745,101
57,500
168,288

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,404,573

1,866,500

Commitments and contingencies (Notes 13 and 14)

Stockholders’ equity:

Preferred stock, $0.001 par value, 1,000 shares authorized, none outstanding . . .
Common stock, $0.001 par value, 500,000 shares authorized, 259,007 and

257,542 shares issued, 157,851 and 165,448 shares outstanding, as of June 30,
2015 and June 30, 2014, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings (accumulated deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss)

—

158
474,216
(12,362)
(40,573)

165
1,220,339
2,479,113
(30,271)

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

421,439

3,669,346

Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$4,826,012

$5,535,846

See accompanying notes to consolidated financial statements.

KLA-TENCOR CORPORATION

Consolidated Statements of Operations

Year ended June 30,

2015

2014

2013

(In thousands, except per share amounts)

Revenues:

Product
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,125,396
688,653

$2,286,437
642,971

$2,247,147
595,634

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,814,049

2,929,408

2,842,781

Costs and expenses:

Costs of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Engineering, research and development . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on extinguishment of debt and other, net . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense (income), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,215,229
530,616
406,864
131,669
106,009
(10,469)

1,232,962
539,469
384,907
—
53,812
(16,203)

1,237,452
487,832
387,812
—
54,176
(15,112)

Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

434,131
67,973

734,461
151,706

690,621
147,472

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 366,158

$ 582,755

$ 543,149

Net income per share:

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash dividends declared per share (including a special cash dividend of

$16.50 per share declared during the three months ended
December 31, 2014) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weighted-average number of shares:

2.26

2.24

3.51

3.47

3.27

3.21

18.50

1.80

1.60

Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

162,282

166,016

166,089

Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

163,701

168,118

169,260

See accompanying notes to consolidated financial statements.

KLA-TENCOR CORPORATION

Consolidated Statements of Comprehensive Income

(In thousands)

Year ended June 30,

2015

2014

2013

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$366,158

$582,755

$543,149

Other comprehensive income (loss):

Currency translation adjustments:

Change in currency translation adjustments . . . . . . . . . . . . . . . . . . .
Change in income tax benefit or expense . . . . . . . . . . . . . . . . . . . . .

(20,740)
8,086

6,428
(1,232)

(11,298)
(750)

Net change related to currency translation adjustments . . . . . . .

(12,654)

5,196

(12,048)

Cash flow hedges:

Change in net unrealized gains or losses . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustments for net gains or losses included in net

income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in income tax benefit or expense . . . . . . . . . . . . . . . . . . . . .

Net change related to cash flow hedges . . . . . . . . . . . . . . . . . . .

13,745

1,641

4,929

(6,615)
(2,565)

4,565

(4,145)
898

(1,606)

(1,483)
(1,233)

2,213

Net change related to unrecognized losses and transition obligations in

connection with defined benefit plans . . . . . . . . . . . . . . . . . . . . . . . . . .

(147)

(617)

(2,255)

Available-for-sale securities:

Change in net unrealized gains or losses . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustments for net gains or losses included in net

income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in income tax benefit or expense . . . . . . . . . . . . . . . . . . . . .

Net change related to available-for-sale securities . . . . . . . . . . .

(1,069)

7,212

(2,953)

(2,119)
1,122

(2,066)

(2,084)
(1,726)

3,402

6,375

(2,287)
1,827

(3,413)

(15,503)

Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(10,302)

Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$355,856

$589,130

$527,646

See accompanying notes to consolidated financial statements.

KLA-TENCOR CORPORATION

Consolidated Statements of Stockholders’ Equity

(In thousands, except per share amounts)

Amount

Common Stock and
Capital in Excess of
Par Value

Retained
Earnings
(Accumulated
Deficit)

Accumulated
Other
Comprehensive
Income (Loss)

166,710
—
—
4,099
(5,374)

$1,089,480
—
—
96,989
(107,973)

$ 2,247,258
543,149
—
—

(165,281)

$(21,143)

—
(15,503)
—
—

—
—
—

—
70,084
10,985

165,435
—
—
3,848
(3,835)

1,159,565
—
—
60,320
(76,839)

—
—
—

—
60,940
16,518

165,448
—
—
1,658
(9,255)

1,220,504
—
—
16,186
(26,891)

(265,893)

—
—

2,359,233
582,755
—
—

(164,004)

(298,871)

—
—

2,479,113
366,158
—
—

(581,965)

—
—
—

(36,646)
—
6,375
—
—

—
—
—

(30,271)
—
(10,302)
—
—

Total
Stockholders’
Equity

$ 3,315,595
543,149
(15,503)
96,989
(273,254)

(265,893)
70,084
10,985

3,482,152
582,755
6,375
60,320
(240,843)

(298,871)
60,940
16,518

3,669,346
366,158
(10,302)
16,186
(608,856)

Balances as of June 30, 2012 . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . .
Net issuance under employee stock plans . .
Repurchase of common stock . . . . . . . . . . .
Cash dividends declared ($1.60 per

share) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . .
Tax benefit for equity awards . . . . . . . . . . . .

Balances as of June 30, 2013 . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . .
Net issuance under employee stock plans . .
Repurchase of common stock . . . . . . . . . . .
Cash dividends declared ($1.80 per

share) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . .
Tax benefit for equity awards . . . . . . . . . . . .

Balances as of June 30, 2014 . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . .
Net issuance under employee stock plans . .
Repurchase of common stock . . . . . . . . . . .
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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . .
Tax benefit for equity awards . . . . . . . . . . . .

—
—
—

(807,391)
55,302
16,664

(2,275,668)

—
—

—
—
—

(3,083,059)
55,302
16,664

Balances as of June 30, 2015 . . . . . . . . . . . .

157,851

$ 474,374

(12,362)

$(40,573)

421,439

See accompanying notes to consolidated financial statements.

KLA-TENCOR CORPORATION

Consolidated Statements of Cash Flows

Year Ended June 30,

2015

2014

2013

(In thousands)

Cash flows from operating activities:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating

366,158

582,755

543,149

activities:

Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on extinguishment of debt and other, net . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit from equity awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gain on sale of marketable securities and other investments . . . . . . . . . . .
Changes in assets and liabilities, net of impact of acquisition of business:

Decrease (increase) in accounts receivable, net . . . . . . . . . . . . . . . . . . . .
Decrease (increase) in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease (increase) in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in deferred system profit . . . . . . . . . . . . . . . . . . . . . .
Increase in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

80,536
2,126
131,669

—
55,302
(24,245)
(15,403)
(2,119)

(118,520)
27,500
11,135
848
768
90,151

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . .

605,906

83,072
1,374
—
—
60,940
17,176
(20,554)
(5,920)

32,591
(26,173)
(26,265)
(12,333)
(10,042)
102,265

778,886

87,534
1,327
—
(1,160)
70,084
4,532
(14,198)
(2,287)

159,245
14,787
6,035
(22,812)
10,748
56,204

913,188

Cash flows from investing activities:

Acquisition of non-marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures, net
Proceeds from sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of available-for-sale securities . . . . . . . . . . . . . . . . . . . . .
Proceeds from maturity of available-for-sale securities . . . . . . . . . . . . . . . . . .
Purchase of trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—
—
(45,791)
—

(1,731,551)
1,993,396
699,108
(60,808)
63,867

(1,345)
(18,000)
(67,502)
3,836
(1,834,223)
987,512
251,876
(64,053)
65,790

—
—
(74,573)
1,838
(1,588,093)
1,117,511
300,209
(40,850)
42,511

Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . .

918,221

(676,109)

(241,447)

Cash flows from financing activities:

Proceeds from issuance of debt, net of issuance costs . . . . . . . . . . . . . . . . . . .
Repayment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax withholding payments related to vested and released restricted stock

units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of dividends to stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefit from equity awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,224,906
(916,117)
47,008

(30,229)
(602,888)
(3,041,055)
15,403

—
—
112,221

(51,948)
(240,843)
(298,871)
20,554

—
—
126,121

(29,682)
(273,254)
(265,893)
14,198

Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1,302,972)

(458,887)

(428,510)

Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . .

(13,991)

1,581

(9,135)

Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . .

Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Supplemental cash flow disclosures:

Income taxes paid, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Non-cash activities:

Purchase of land, property and equipment—investing activities . . . . . . . . . . .
Dividends payable—financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

207,164
630,861

838,025

69,681
92,982

1,843
42,002

$
$

(354,529)
985,390

630,861

117,348
52,474

$
$

234,096
751,294

985,390

120,342
53,693

3,457

$
— $

6,839
—

See accompanying notes to consolidated financial statements.

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements

NOTE 1— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

The Consolidated Financial Statements include the accounts of KLA-Tencor and its majority-owned

subsidiaries. All significant intercompany balances and transactions have been eliminated.

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

Cash Equivalents and Marketable Securities. All highly liquid debt

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

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

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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.

Inventories. Inventories are stated at

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

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

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

Asset Category

Period

Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . .
Office furniture and fixtures . . . . . . . . . . . . . .

30 to 35 years
Shorter of 10 to 15 years or lease term
2 to 5 years
5 to 7 years

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

Business Combinations. KLA-Tencor allocates the fair value of the purchase consideration of the
Company’s acquisitions to the tangible assets, liabilities, and intangible assets acquired, including in-process
research and development (“IPR&D”), based on their estimated fair values. The excess of the fair value of
purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill.
IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for
impairment thereafter. When a project underlying reported IPR&D is completed, the corresponding amount of

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

IPR&D is reclassified as an amortizable purchased intangible asset and is amortized over the asset’s estimated
useful life. Acquisition-related expenses and restructuring costs are recognized separately from the business
combination and are expensed as incurred.

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

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

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

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

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

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

2015

Year ended June 30,

2014

2013

Intel Corporation

Samsung Electronics Co., Ltd.

Taiwan Semiconductor
Manufacturing Company Limited

Taiwan Semiconductor

Manufacturing Company Limited

Taiwan Semiconductor
Manufacturing Company Limited

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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

indicated below:

2015

2014

As of June 30,

Taiwan Semiconductor Manufacturing Company

Intel Corporation

Limited

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.

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

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

labor and overhead rates to determine the estimated warranty charge. The Company updates these estimated
charges on a regular basis. The actual product performance and/or field expense profiles may differ, and in those
cases the Company adjusts its warranty accruals accordingly (see Note 13, “Commitments and Contingencies”).

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

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

• When system sales to independent distributors have no installation requirement, contain no acceptance

agreement, and 100% payment is due based upon shipment.

• When the installation of the system is deemed perfunctory.

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

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

of the Company. If the arrangement does not meet all the above criteria, the entire amount of the sales contract is
deferred until all elements are accepted by the customer.

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

Spare parts revenue is recognized when the product has been shipped, risk of loss has passed to the customer

and collection of the resulting receivable is probable.

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

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

award holder is not entitled to received payments under dividend equivalent rights unless the associated restricted
stock unit award vests (i.e., the award holder is entitled to receive credits, payable in cash or shares of the
Company’s common stock, equal to the cash dividends that would have been received on the shares of common
stock underlying the restricted stock units had the shares been issued and outstanding on the dividend record
date, but such dividend equivalents are only paid subject to the recipient satisfying the vesting requirements of
the underlying award). The fair value is determined using a Black-Scholes valuation model for purchase rights
under the Employee Stock Purchase Plan. 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.

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

Advertising Expenses. Advertising costs are expensed as incurred.

Income Taxes. The Company accounts for income taxes in accordance with the authoritative guidance,
which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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

The Company applies a two-step approach, based on authoritative guidance, to recognizing and measuring
uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight
of available evidence indicates that it is more likely than not that the position will be sustained in audit, including
resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the
largest amount
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.

that

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

Contingencies and Litigation. The Company is subject

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

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

Recent Accounting Pronouncements

Recently Adopted

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

carryforward, a similar tax loss or a tax credit carryforward. This accounting standard update became effective
for the Company’s interim period ended September 30, 2014, and the adoption did not have a material impact on
the Company’s consolidated financial statements.

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

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

Updates Not Yet Effective

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

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

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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

NOTE 2—FAIR VALUE MEASUREMENTS

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

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

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

Level 1 Valuations based on quoted prices in active markets for identical assets or liabilities that the entity

has the ability to access.

Level 2 Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are

not active, or other inputs that are observable or can be corroborated by observable data for
substantially the full term of the assets or liabilities.

Level 3 Valuations based on inputs that are supported by little or no market activity and that are significant

to the fair value of the assets or liabilities.

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

significant to the fair value measurement.

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

As of June 30, 2015, the types of instruments valued based on other observable inputs included corporate
debt securities, municipal securities and certain U.S. Government agency securities and sovereign securities. The

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

market inputs used to value these instruments generally consist of market yields, reported trades and broker/
dealer quotes. Such instruments are generally classified within Level 2 of the fair value hierarchy.

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

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

As of June 30, 2015 (In thousands)

Assets
Cash equivalents:

Quoted Prices in
Active Markets
for Identical
Assets (Level 1)

Significant Other
Observable Inputs
(Level 2)

Total

U.S. Government agency securities . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market and other . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7,500
13,099
611,385

7,500
—
611,385

Marketable securities:

U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Government agency securities . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sovereign securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

275,555
564,768
31,816
612,862
57,093

275,555
556,019
—
—
8,976

Total cash equivalents and marketable securities(1)

. . . . . . .

2,174,078

1,459,435

$ —

13,099
—

—
8,749
31,816
612,862
48,117

714,643

Other current assets:

Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,064

—

3,064

Other non-current assets:

Executive Deferred Savings Plan . . . . . . . . . . . . . . . . . . . . .

165,655

91,203

74,452

Total financial assets(1)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,342,797

$1,550,638

$792,159

Liabilities
Other current liabilities:

Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3,106)

—

$ (3,106)

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

2015.

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

As of June 30, 2014 (In thousands)

Assets
Cash equivalents:

Quoted Prices in
Active Markets
for Identical
Assets (Level 1)

Significant Other
Observable Inputs
(Level 2)

Total

U.S. Government agency securities . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market and other . . . . . . . . . . . . . . . . . . . . . . . . . . . .

28,000
2,891
68,992
397,517

Marketable securities:

384,400
839,843
93,325
1,155,176
42,264

8,000
—
—
397,517

365,401
811,841
—
—
9,253

Total cash equivalents and marketable securities(1)

. . . . . . .

3,012,408

1,592,012

20,000
2,891
68,992
—

18,999
28,002
93,325
1,155,176
33,011

1,420,396

Other current assets:

Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

666

—

666

Other non-current assets:

Executive Deferred Savings Plan . . . . . . . . . . . . . . . . . . . . .

159,995

105,311

54,684

Total financial assets(1)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,173,069

$1,697,323

$1,475,746

Liabilities
Other current liabilities:

Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(898)

—

(898)

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

2014.

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

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

NOTE 3—FINANCIAL STATEMENT COMPONENTS

Consolidated Balance Sheets

(In thousands)

Accounts receivable, net:

As of June 30,

2015

2014

Accounts receivable, gross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 607,157
(21,663)

$ 514,690
(21,827)

$ 585,494

$ 492,863

Inventories:

Customer service parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 209,726
194,218
156,820
57,140

$ 203,194
221,612
171,249
60,402

$ 617,904

$ 656,457

Other current assets:

Prepaid expenses(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax related receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 37,006
32,850
7,958

$ 34,743
27,452
6,267

$ 77,814

$ 68,462

Land, property and equipment, net:

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings and leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 40,397
316,566
510,642
21,411
3,152

$ 41,848
302,537
491,167
20,945
8,945

Less: accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

892,168
(577,577)

865,442
(535,179)

$ 314,591

$ 330,263

Other non-current assets:

Executive Deferred Savings Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets—long-term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 165,655
78,648
15,384

$ 159,996
75,138
21,302

Other current liabilities:

Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Deferred Savings Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer credits and advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 259,687

$ 256,436

$ 36,413
167,886
196,682
15,582
19,395
93,212
132,244

$ 37,746
160,527
203,990
15,283
8,769
79,373
79,402

$ 661,414

$ 585,090

Other non-current liabilities:

Pension liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 55,696
69,018
57,516

$ 59,908
59,575
48,805

$ 182,230

$ 168,288

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

(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

Total

Balance as of June 30, 2015 . . . . . . .

$(29,925)

Balance as of June 30, 2014 . . . . . . .

$(17,271)

$ 734

$2,800

$4,553

$ (12)

$(15,935)

$(40,573)

$(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):

Accumulated OCI Components

Location in the Consolidated
Statements of Operations

Twelve months
ended June 30,

2015

2014

Unrealized gains (losses) on cash flow
hedges from foreign exchange and
interest rate contracts . . . . . . . . . . . . . . Revenues

Costs of revenues
Interest expense

Net gains reclassified from

accumulated OCI

$ 7,615
(1,503)
503

$3,851
294
—

$ 6,615

$4,145

Unrealized gains on available-for-sale

securities . . . . . . . . . . . . . . . . . . . . . . . Other expense (income), net

$ 2,119

$2,084

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

Consolidated Statements of Operations

(In thousands)

Other expense (income), net:

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange losses, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net realized gains on sale of investments . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year ended June 30,

2015

2014

2013

$(12,545) $(13,555) $(14,976)
1,002
(2,287)
1,149

514
(2,084)
(1,078)

1,764
(2,119)
2,431

$(10,469) $(16,203) $(15,112)

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

NOTE 4—MARKETABLE SECURITIES

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

As of June 30, 2015 (In thousands)

U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Government agency securities . . . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sovereign securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: Time deposits(1)
Less: Cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Amortized
Cost

$ 274,965
571,843
31,819
625,965
611,385
57,091

2,173,068
29,941
654,933

Gross
Unrealized
Gains

Gross
Unrealized
Losses

$ 605
551
7
511
—
33

1,707
—
—

$ (15)
(126)
(10)
(515)
—
(31)

(697)
—
—

Fair Value

$ 275,555
572,268
31,816
625,961
611,385
57,093

2,174,078
29,941
654,933

Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,548,076

$1,707

$(697)

$1,549,086

As of June 30, 2014 (In thousands)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal
Add: Time deposits(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Amortized
Cost

$ 384,165
867,309
96,198
1,220,794
397,517
42,227

3,008,210
33,509
524,149

Gross
Unrealized
Gains

Gross
Unrealized
Losses

$ 287
651
93
3,526
—
46

4,603
—
—

$ (52)
(117)
(75)
(152)
—

(9)

(405)
—

(8)

Fair Value

$ 384,400
867,843
96,216
1,224,168
397,517
42,264

3,012,408
33,509
524,141

Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,517,570

$4,603

$(397)

$2,521,776

(1) Time deposits excluded from fair value measurements.

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

As of June 30, 2015 (In thousands)

U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Government agency securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sovereign securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fair Value

$ 34,508
133,933
9,776
286,355
26,729

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$491,301

Gross
Unrealized
Losses(1)

$ (15)
(126)
(10)
(515)
(31)

$(697)

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

(1) As of June 30, 2015, the amount of total gross unrealized losses related to investments that had been in a

continuous loss position for 12 months or more was immaterial.

The contractual maturities of securities classified as available-for-sale, regardless of their classification on

the Company’s Consolidated Balance Sheet, as of the date indicated below were as follows:

As of June 30, 2015 (In thousands)

Amortized
Cost

Fair Value

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due within one year
Due after one year through three years . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 496,916
1,051,160

$ 497,121
1,051,965

$1,548,076

$1,549,086

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

NOTE 5—BUSINESS COMBINATION

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

The following table represents the purchase price allocation and summarizes the aggregate fair values of the

net assets acquired on the closing date of the acquisition:

(In thousands)

Purchase Price
Allocation

Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 9,400
8,730
(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.

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

NOTE 6—GOODWILL AND PURCHASED INTANGIBLE ASSETS

Goodwill

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

2015 and 2014:

(In thousands)

As of June 30, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

As of June 30, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$326,635
8,730
(10)

335,355
(92)

As of June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$335,263

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

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

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

Purchased Intangible Assets

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

(In thousands)

As of June 30, 2015

As of June 30, 2014

Category

Existing technology . . . . . .
Patents . . . . . . . . . . . . . . . .
Trade name/Trademark . . .
Customer relationships . . .
. . . . . . . . . . . . . . . . .
Other

Range of
Useful Lives

4-7 years
6-13 years
4-10 years
6-7 years
0-1 year

Gross
Carrying
Amount

$141,659
57,648
19,893
54,980
17,299

Accumulated
Amortization
and
Impairment

$134,664
56,998
18,899
51,724
17,299

Net
Amount

$ 6,995
650
994
3,256
—

Gross
Carrying
Amount

$141,659
57,648
19,893
54,980
17,299

Accumulated
Amortization
and
Impairment

$126,567
54,398
17,427
48,915
16,475

Net
Amount

$15,092
3,250
2,466
6,065
824

Total . . . . . . . . . . . . . .

$291,479

$279,584

$11,895

$291,479

$263,782

$27,697

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the

carrying amount of an asset or asset group may not be recoverable.

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

Fiscal year ending June 30:

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Amortization
(In thousands)

$ 7,564
2,806
1,525

$11,895

NOTE 7—DEBT

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

As of June 30, 2015

As of June 30, 2014

Amount
(in thousands)

Effective
Interest Rate

Amount
(in thousands)

Effective
Interest Rate

7.001%

Fixed-rate 6.900% Senior notes due on May 1, 2018 . . . . . . . $
Fixed-rate 2.375% Senior notes due on November 1, 2017 . . .
Fixed-rate 3.375% Senior notes due on November 1, 2019 . . .
Fixed-rate 4.125% Senior notes due on November 1, 2021 . . .
Fixed-rate 4.650% Senior notes due on November 1,

—

250,000
250,000
500,000

2024(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed-rate 5.650% Senior notes due on November 1, 2034 . . .
Term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total debt

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized debt issuance costs(2) . . . . . . . . . . . . . . . . . . . . . .

1,250,000
250,000
711,250

3,211,250
(3,723)
(17,111)

Total debt

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,190,416

Reported as:
Current portion of long-term debt
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . $

16,981
3,173,435

Total debt

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,190,416

2.396%
3.377%
4.128%

4.682%
5.670%

$750,000
—
—
—

—
—
—

750,000
(2,081)
(2,818)

$745,101

$ —

745,101

$745,101

(1)

(2)

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%.
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

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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.

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

summarized as follows.

Fiscal year ending June 30,

2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter

Amount
(In thousands)

17,500
46,875
315,625
75,000
756,250
2,000,000

Total payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,211,250

Debt Issuance—Senior Notes:

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

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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

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

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

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

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

Future principal payments for the Company’s term loans (without giving effect for any prepayments made)

as of June 30, 2015, are as follows:

Fiscal Quarters Ending

Quarterly Payment
(in thousands)

June 30, 2015 through December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31, 2017 through December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31, 2018 through September 30, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$
9,375
$ 14,063
$ 18,750
$487,500

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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

Fiscal Quarters Ending

Maximum Leverage Ratio

June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30, 2015 and December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31, 2016 through September 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2016 and March 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter

4.25:1.00
4.00:1.00
3.75:1.00
3.50:1.00
3.00:1.00

The Company was in compliance with the financial covenants under the Credit Agreement as of June 30,

2015 and had no outstanding borrowings under the unfunded revolving credit facility.

Debt Redemption:

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

NOTE 8—EQUITY AND LONG-TERM INCENTIVE COMPENSATION PLANS

Equity Incentive Program

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

2004 Plan:

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

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

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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

Outside Director Plan

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

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)

Balances as of June 30, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units granted(1)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units canceled(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options canceled/expired/forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan shares expired(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balances as of June 30, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan shares increased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units granted(1)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units canceled(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options canceled/expired/forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan shares expired(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balances as of June 30, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units granted(1)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units canceled(1)
Options granted/canceled/expired/forfeited . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan shares expired(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Available
For Grant

7,969
(1,899)
466
207
(47)

6,696
2,900
(1,268)
468
59
(51)

8,804
(1,191)
196
11
(10)

Balances as of June 30, 2015(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7,810

(1) The number of restricted stock units provided in this row reflects the application of the award multiplier as

described above (1.8x or 2.0x depending on the grant date of the applicable award).

(2) Represents the portion of shares listed as “Options canceled/expired/forfeited” above that were issued under
the Company’s equity incentive plans other than the 2004 Plan and the Outside Director Plan. Because the
Company is only currently authorized to issue equity awards under the 2004 Plan and the Outside Director
Plan, any equity awards that are canceled, expired or forfeited under any other Company equity incentive
plan do not result in additional shares being available to the Company for future grant.
Includes restricted stock units granted to senior management during the applicable fiscal year with
performance-based vesting criteria (in addition to service-based vesting criteria for any of such restricted
stock units that are deemed to have been earned). As of June 30, 2015, it had not yet been determined the

(3)

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

extent to which (if at all) the performance-based vesting criteria of such restricted stock units had been
satisfied. Therefore, this line item includes all such performance-based restricted stock units granted during
such fiscal year, reported at the maximum possible number of shares that may ultimately be issuable under
such restricted stock units if all applicable performance-based criteria are achieved at their maximum levels
and all applicable service-based criteria are fully satisfied (i.e., 0.6 million shares for the fiscal year ended
June 30, 2013, 0.6 million shares for the fiscal year ended June 30, 2014 and 0.6 million shares for the fiscal
year ended June 30, 2015, which, in each case reflects the application of the 1.8x or 2.0x multiplier
described above). The Company has granted only restricted stock units under its equity incentive program
since October 2007, except the number of shares subject to outstanding options under the 2004 Plan was
adjusted during the three months ended December 31, 2014 due to a proportionate and equitable adjustment
under the 2004 Plan provisions as discussed below. For the preceding several years until October 31, 2007,
stock options were granted at the market price of the Company’s common stock on the date of grant
generally with vesting period terms ranging from one to five years. Restricted stock units may be granted
with varying criteria such as service-based and/or performance-based vesting.

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

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

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

(In thousands)

Stock-based compensation expense by:

Year ended June 30,

2015

2014

2013

Costs of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Engineering, research and development
. . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . .

$ 7,242
12,259
35,801

$ 9,101
16,397
35,442

$11,433
19,346
39,305

Total stock-based compensation expense . . . . . . . . . . . . . . . . . . . . .

$55,302

$60,940

$70,084

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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

below:

(In thousands)

As of June 30,

2015

2014

Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,242

$8,278

Stock Options

The following table summarizes the activity and weighted-average exercise price for stock options under all

plans during the fiscal year ended June 30, 2015:

Stock Options

Shares
(In thousands)

Weighted-
Average
Exercise Price

Outstanding stock options as of June 30, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled/expired/forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

141
4
(134)
(11)

$40.70
$32.11
$39.32
$39.97

Outstanding stock options as of June 30, 2015 (all outstanding and all vested and

exercisable)

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

$ —

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

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

(In thousands)

Total intrinsic value of options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash received from employees and non-employee Board members as a result
of stock option exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefits realized by the Company in connection with these exercises . . . . . . . .

Year ended June 30,

2015

2014

2013

$4,549

$18,022

$15,884

$5,892
$1,989

$72,700
$ 5,708

$89,935
$ 5,223

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

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

Restricted Stock Units

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

Restricted Stock Units

Shares
(In thousands)(1)

Weighted-Average
Grant Date
Fair Value

Outstanding restricted stock units as of June 30, 2014(2)
. . . . . . . .
Granted(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested and released . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Withheld for taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Outstanding restricted stock units as of June 30, 2015(2)

. . . . . . . .

3,356
596
(765)
(405)
(108)

2,674

$38.95
$74.48
$32.50
$32.50
$38.90

$49.36

(2)

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

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,
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.

in two equal

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)

Weighted-average grant date fair value per unit
Tax benefits realized by the Company in connection with vested and released

. . . . . . . . . . . . . . . . . . . . . . . . . . .

Year ended June 30,

2015

2014

2013

$ 74.48

$ 53.28

$ 47.71

restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$26,250

$44,298

$29,204

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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

Cash-Based Long-Term Incentive Compensation

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

Employee Stock Purchase Plan

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

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

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

Year ended June 30,

2015

2014

2013

Stock purchase plan:

Expected stock price volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life (in years)

24.5% 27.5% 28.8%
0.1% 0.1% 0.1%
2.8% 2.9% 3.2%
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

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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)

Total cash received from employees for the issuance of shares under the ESPP . .
Number of shares purchased by employees through the ESPP . . . . . . . . . . . . . . . .
Tax benefits realized by the Company in connection with the disqualifying

Year ended June 30,

2015

2014

2013

$41,116
759

$39,675
796

$36,186
877

dispositions of shares purchased under the ESPP . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . .

Weighted-average fair value per share based on Black-Scholes model

$ 1,741
$ 14.55

$ 2,221
$ 12.31

$ 1,452
$ 10.46

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

Quarterly cash dividends

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

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

Special cash dividend

On November 19, 2014, the Company’s Board of Directors declared a special cash dividend of $16.50 per
share, which was paid on December 9, 2014 to the stockholders of record as of the close of business on
December 1, 2014. Additionally, in connection with the special cash dividend, the Company’s Board of Directors
and the Compensation Committee of the Board of Directors approved a proportionate and equitable adjustment to
outstanding equity awards (restricted stock units and stock options), as required under the 2004 Plan, subject to
the vesting requirements of the underlying awards. As the adjustment was required by the 2004 Plan, the
adjustment to the outstanding awards did not result in any incremental compensation expense due to modification
of such awards, under the authoritative guidance. Under the authoritative guidance, the dividend when declared is
recognized as a reduction of retained earnings, to the extent available, with any excess recognized as a reduction
of additional paid-in-capital. The special cash dividend reduced the retained earnings by $2.1 billion as of the
special cash dividend declaration date, reducing the retained earnings amount to zero and the excess amount of
the special cash dividend of $646.5 million was charged against additional paid-in capital. The declaration and

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

payment of the special cash dividend are part of the Company’s leveraged recapitalization transaction under
which the special cash dividend was financed through a combination of existing cash and proceeds from the debt
financing disclosed in Note 7, “Debt” that was completed during the three months ended December 31, 2014.
The total amount of the special cash dividend accrued by the Company during the three months ended
December 31, 2014 was approximately $2.76 billion, substantially all of which was paid out during the three
months ended December 31, 2014. As of June 30, 2015, the Company accrued a total of $41.1 million of
dividends payable for the special cash dividend with respect to outstanding unvested restricted stock units, which
will be paid when such underlying unvested restricted stock units vest. Other than the special cash dividend
declared during the three months ended December 31, 2014, the Company historically has not declared any
special cash dividends.

NOTE 9—STOCK REPURCHASE PROGRAM

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

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

follows:

(In thousands)

Year ended June 30,

2015

2014

Number of shares of common stock repurchased . . . . . . . . . . . . . . . . . . . . . . .
Total cost of repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9,255
$608,856

3,835
$240,843

As of June 30, 2015, the Company had repurchased 105,542 shares for $6.0 million, which repurchases had

not settled prior to June 30, 2015 and were recorded as a component of other current liabilities.

NOTE 10—NET INCOME PER SHARE

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

100

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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

(In thousands, except per share amounts)

Numerator:

Year ended June 30,

2015

2014

2013

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$366,158

$582,755

$543,149

Denominator:

Weighted-average shares-basic, excluding unvested restricted stock

units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of dilutive options and restricted stock units . . . . . . . . . . . . . . . . . .

162,282
1,419

166,016
2,102

166,089
3,171

Weighted-average shares-diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

163,701

168,118

169,260

Basic net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Anti-dilutive securities excluded from the computation of diluted net income

$
$

2.26
2.24

$
$

3.51
3.47

$
$

3.27
3.21

per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

—

1,366

NOTE 11—EMPLOYEE BENEFIT PLANS

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

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

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

101

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

Summary data relating to the Company’s foreign defined benefit pension plans, including key weighted-

average assumptions used, is provided in the following tables:

(In thousands)

Change in projected benefit obligation:

Year ended June 30,

2015

2014

Projected benefit obligation as of the beginning of the fiscal year . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contributions by plan participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .
Foreign currency exchange rate changes and others, net

$77,035
3,905
1,562
81
3,702
(3,982)
(6,375)

$71,276
4,054
1,401
102
1,927
(1,910)
185

Projected benefit obligation as of the end of the fiscal year . . . . . . . . . . . . .

$75,928

$77,035

(In thousands)

Change in fair value of plan assets:

Year ended June 30,

2015

2014

Fair value of plan assets as of the beginning of the fiscal year . . . . . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit and expense payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .
Foreign currency exchange rate changes and others, net

$15,163
334
3,568
(3,982)
1,955

$13,317
274
3,229
(1,910)
253

Fair value of plan assets as of the end of the fiscal year . . . . . . . . . . . . . . . .

$17,038

$15,163

(In thousands)

As of June 30,

2015

2014

Underfunded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$58,890

$61,872

(In thousands)

As of June 30,

2015

2014

Plans with accumulated benefit obligations in excess of plan assets:

Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$46,419
$75,928
$17,038

$47,122
$77,035
$15,163

Year ended June 30,

2015

2014

2013

Weighted-average assumptions:

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected rate of return on assets . . . . . . . . . . . . . . . . .
Rate of compensation increases . . . . . . . . . . . . . . . . .

1.3%-2.0% 1.5%-3.5% 1.5%-3.5%
1.8%-2.5% 1.8%-3.8% 1.8%-4.0%
3.0%-5.5% 3.0%-5.5% 3.0%-5.0%

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

102

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

The following table presents losses recognized in accumulated other comprehensive income (loss) before

tax related to the Company’s foreign defined benefit pension plans:

(In thousands)

Year ended June 30,

2015

2014

Unrecognized transition obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized prior service cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

515
180
24,119

772
225
23,645

Amount of losses recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$24,814

$24,642

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

(In thousands)

Unrecognized transition obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Amount of losses expected to be recognized . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year ending
June 30, 2016

$ 255
42
824

$1,121

The components of the Company’s net periodic cost relating to its foreign subsidiaries’ defined pension

plans are as follows:

(In thousands)

Components of net periodic pension cost:

Year ended June 30,

2015

2014

2013

Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of transitional obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment

$3,905
$4,054
1,562
1,401
(450)
(321)
259
262
46
52
1,014
1,021
(177) —

$ 3,399
1,320
(315)
372
58
633
(1,436)

Net periodic pension cost

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$6,159

$6,469

$ 4,031

Fair Value of Plan Assets

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The three levels of inputs used to measure fair
value of plan assets are described in Note 2, “Fair Value Measurements.”

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

103

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

The expected aggregate employer contribution for the foreign plans during the fiscal year ending June 30,

2016 is $1.7 million.

The total benefits to be paid from the foreign pension plans are not expected to exceed $2.5 million in any

year through the fiscal year ending June 30, 2025.

Foreign plan assets measured at fair value on a recurring basis consisted of the following investment

categories as of June 30, 2015 and 2014, respectively:

As of June 30, 2015 (In thousands)

Quoted Prices in
Active Markets
for Identical
Assets (Level 1)

Significant Other
Observable Inputs
(Level 2)

Total

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bonds, equity securities and other investments . . . . . . . . . . . . . . . . .

$10,954
6,084

$10,954

—

Total assets measured at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . .

$17,038

$10,954

$ —
6,084

$6,084

As of June 30, 2014 (In thousands)

Quoted Prices in
Active Markets
for Identical
Assets (Level 1)

Significant Other
Observable Inputs
(Level 2)

Total

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bonds, equity securities and other investments . . . . . . . . . . . . . . . . .

$11,061
4,102

$11,061

—

Total assets measured at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . .

$15,163

$11,061

$ —
4,102

$4,102

Concentration of Risk

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

NOTE 12—INCOME TAXES

The components of income before income taxes are as follows:

(In thousands)

Year ended June 30,

2015

2014

2013

Domestic income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$157,251
276,880

$434,336
300,125

$420,862
269,759

Total income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$434,131

$734,461

$690,621

104

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

The provision for income taxes is comprised of the following:

(In thousands)

Current:

Year ended June 30,

2015

2014

2013

Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 63,123
3,655
25,438

$ 98,937
8,580
27,867

$118,888
4,404
25,112

92,216

135,384

148,404

Deferred:

(22,390)
409
(2,262)

22,904
(334)
(6,248)

(24,243)

16,322

(2,552)
(1,036)
2,656

(932)

Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 67,973

$151,706

$147,472

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

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

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

105

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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

(In thousands)

Deferred tax assets:

As of June 30,

2015

2014

Tax credits and net operating losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee benefits accrual
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized R&D expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-deductible reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$108,615
99,472
18,722
47
92,649
47,176
13,267
16,150
28,784

$ 95,492
97,308
17,676
12,051
83,783
41,469
2,572
13,937
29,483

Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

424,882
(91,350)

393,771
(76,328)

Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$333,532

$317,443

Deferred tax liabilities:

Unremitted earnings of foreign subsidiaries not permanently

reinvested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (12,775)
(7,372)
(2,673)

$ (17,334)
(16,358)
(1,168)

Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(22,820)

(34,860)

Total net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$310,712

$282,583

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

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

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

106

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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

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

tax rate is as follows:

Year ended June 30,

2015

2014

2013

Federal statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State income taxes, net of federal benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of foreign operations taxed at various rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development tax credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in tax reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Domestic manufacturing benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.7%

35.0% 35.0% 35.0%
0.7% 0.3%
(15.3)% (11.5)% (9.6)%
(3.7)% (1.5)% (3.1)%
1.5%
0.3% 1.7%
(2.1)% (1.4)% (1.6)%
0.4% (0.3)%
0.8%
(1.2)% (1.3)% (1.0)%

Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15.7% 20.7% 21.4%

A reconciliation of gross unrecognized tax benefits is as follows:

(In thousands)

Year ended June 30,

2015

2014

2013

Unrecognized tax benefits at the beginning of the year . . . . . . . . . . . . . . . . . . . . . .
Increases for tax positions taken in prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decreases for tax positions taken in prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increases for tax positions taken in current year . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decreases for settlements with taxing authorities . . . . . . . . . . . . . . . . . . . . . . . . . .
Decreases for lapsing of statutes of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$59,575
1,245
(7)
11,634
—
(3,429)

$59,494
551
(764)
11,585
(3,601)
(7,690)

$50,839
2,701
(905)
12,709
(3,907)
(1,943)

Unrecognized tax benefits at the end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . .

$69,018

$59,575

$59,494

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

The Company is subject to federal income tax examinations for all years beginning from the fiscal year
ended June 30, 2011 and is under United States federal income tax examination for the fiscal year ended June 30,
2013. The Company is subject to state income tax examinations for all years beginning from the fiscal year

107

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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

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

NOTE 13—COMMITMENTS AND CONTINGENCIES

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

The following table shows total receivables sold under factoring agreements and proceeds from sales of LCs

for the indicated periods:

(In thousands)

Year ended June 30,

2015

2014

$137,285
6,920
$

$116,292
8,323
$

Factoring and LC fees for the sale of certain trade receivables were recorded in other expense (income), net

and were not material for the periods presented.

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

The following is a schedule of expected operating lease payments:

Fiscal year ending June 30,

2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Amount
(In thousands)

$ 8,008
5,818
3,964
1,815
1,220
556

$21,381

Purchase Commitments. KLA-Tencor maintains commitments to purchase inventory from its suppliers as
well as goods and services in the ordinary course of business. The Company’s liability under these purchase
commitments is generally restricted to a forecasted time-horizon as mutually agreed upon between the parties.
This forecasted time-horizon can vary among different suppliers. The Company’s estimate of its significant

108

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

purchase commitments is approximately $298.7 million as of June 30, 2015 which are primarily due within the
next 12 months. Actual expenditures will vary based upon the volume of the transactions and length of
contractual service provided. In addition, the amounts paid under these arrangements may be less in the event
that the arrangements are renegotiated or canceled. Certain agreements provide for potential cancellation
penalties.

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

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

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

(In thousands)

Year ended June 30,

2015

2014

Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accruals for warranties issued during the period . . . . . . . . . . . . . . . . . . . . . . . .
Changes in liability related to pre-existing warranties . . . . . . . . . . . . . . . . . . . .
Settlements made during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 37,746
39,368
(572)
(40,129)

$ 42,603
45,540
(8,462)
(41,935)

Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 36,413

$ 37,746

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

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

109

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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.

NOTE 14—LITIGATION AND OTHER LEGAL MATTERS

The Company is named from time to time as a party to lawsuits and other types of legal proceedings and
claims in the normal course of its business. Actions filed against the Company include commercial, intellectual
including complaints of alleged wrongful
property, customer, and labor and employment related claims,
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.

110

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

NOTE 15—RESTRUCTURING CHARGES

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

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

The following table shows the activity primarily related to accrual for severance and benefits for the fiscal

years ended June 30, 2015 and 2014:

(In thousands)

Year ended June 30,

2015

2014

Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,329
31,569
1,177
(10,188)

$ 3,947
6,662
(459)
(7,821)

Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 24,887

$ 2,329

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

quarter ending December 31, 2015.

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

NOTE 16—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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

KLA-Tencor’s foreign subsidiaries operate and sell KLA-Tencor’s products in various global markets. As a
result, KLA-Tencor is exposed to risks relating to changes in foreign currency exchange rates. KLA-Tencor
utilizes foreign currency forward exchange contracts and option contracts to hedge against future movements in

111

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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

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

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

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

In addition, in November 2014, the Company entered into a non-designated forward contract to lock the
treasury rate used to determine the redemption amount of the 2018 Senior Notes that occurred during the three
months ended December 31, 2014. The objective of the forward contract was to hedge the risk associated with
the variability of the redemption amount due to changes in interest rates through the redemption of the existing
2018 Senior Notes. The forward contract had a notional amount of $750 million. The forward contract was

112

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

terminated in December 2014 and the resulting fair value of $1.2 million receivable was included in the loss on
extinguishment of debt and other, net line in the consolidated statements of operations, partially offsetting the
loss on redemption of the debt during the three months December 31, 2014. The cash proceeds from the forward
contract were included in the cash flows from financing activities in the consolidated statements of cash flows for
the fiscal year ended June 30, 2015, partially offsetting the cash outflows for the redemption of the 2018 Senior
Notes.

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

The locations and amounts of designated and non-designated derivative instruments’ gains and losses

reported in the consolidated financial statements for the indicated periods were as follows:

(In thousands)

Location in Financial Statements

Year ended June 30,

2015

2014

Derivatives Designated as Hedging

Instruments

Gains in accumulated OCI on derivatives

(effective portion)

. . . . . . . . . . . . . . . . . . . . Accumulated OCI

$13,745

$1,641

Gains reclassified from accumulated OCI into

income (effective portion):

. . . . . . . . . . . . . Revenues

Costs of revenues
Interest expense

Net gains reclassified from accumulated
OCI into income (effective portion)

Gains recognized in income on derivatives
(ineffective portion and amount excluded
from effectiveness testing) . . . . . . . . . . . . . . Other expense (income), net

Derivatives Not Designated as Hedging

Instruments

$ 7,615
(1,503)
503

$3,851
294
—

$ 6,615

$4,145

243

Gains recognized in income . . . . . . . . . . . . . . . Other expense (income), net

$13,976

$2,856

Loss on extinguishment of debt and other,
net

$ 1,180

$ —

The U.S. dollar equivalent of all outstanding notional amounts of hedge contracts, with maximum maturity

of 16 months, as of the dates indicated below was as follows:

(In thousands)

Cash flow hedge contracts

As of
June 30, 2015

As of
June 30, 2014

Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 32,775
$ 88,800

Other foreign currency hedge contracts

$ 64,012
$123,091

$
6,066
$ 33,999

$108,901
$106,322

113

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

The locations and fair value amounts of the Company’s derivative instruments reported in its Consolidated

Balance Sheets as of the dates indicated below were as follows:

Asset Derivatives

Liability Derivatives

Balance Sheet
Location

As of
June 30,
2015

As of
June 30,
2014

Fair Value

Balance Sheet
Location

As of
June 30,
2015

As of
June 30,
2014

Fair Value

(In thousands)

Derivatives designated

as hedging
instruments

Foreign exchange

contracts . . . . . . . . Other current assets

$1,722

$120 Other current liabilities

$1,920

$100

Total derivatives

designated as hedging
instruments . . . . . . . . .

Derivatives not

designated as hedging
instruments

Foreign exchange

1,722

120

1,920

100

contracts . . . . . . . . Other current assets

1,342

546 Other current liabilities

1,186

798

Total derivatives not

designated as hedging
instruments . . . . . . . . .

Total derivatives . . . . . .

1,342

546

$3,064

$666

1,186

798

$3,106

$898

The following table provides the balances and changes in accumulated OCI, before taxes, related to

derivative instruments for the indicated periods:

(In thousands)

Year ended
June 30,

2015

2014

Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount reclassified to income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in unrealized gains or losses . . . . . . . . . . . . . . . . . . . . . . . .

(20)
(6,615)
13,745

$ 2,484
(4,145)
1,641

Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 7,110

(20)

114

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

Offsetting of Derivative Assets and Liabilities

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

As of June 30, 2015

Description

Gross Amounts
of Derivatives
Offset in the
Consolidated
Balance Sheets

Net Amount of
Derivatives
Presented in the
Consolidated
Balance Sheets

Gross Amounts
of Derivatives

Gross Amounts of
Derivatives Not Offset in
the Consolidated
Balance Sheets

Financial
Instruments

Cash
Collateral
Received

Derivatives—Assets . . . . . . . . .
Derivatives—Liabilities . . . . . .

$ 3,064
$(3,106)

$—
$—

$ 3,064
$(3,106)

$(2,809)
$ 2,809

$—
$—

As of June 30, 2014

Description

Gross Amounts
of Derivatives
Offset in the
Consolidated
Balance Sheets

Net Amount of
Derivatives
Presented in the
Consolidated
Balance Sheets

Gross Amounts
of Derivatives

Gross Amounts of
Derivatives Not Offset in
the Consolidated
Balance Sheets

Financial
Instruments

Cash
Collateral
Received

Derivatives—Assets . . . . . . . . .
Derivatives—Liabilities . . . . . .

$ 666
$(898)

$—
$—

$ 666
$(898)

$(423)
$ 423

$—
$—

Net
Amount

$ 255
$(297)

Net
Amount

$ 243
$(475)

NOTE 17—SEGMENT REPORTING AND GEOGRAPHIC INFORMATION

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

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

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

115

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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)

2015

2014

2013

Year ended June 30,

Revenues:

North America . . . . . . . . . . . . . . . . . . . . . .
Taiwan . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe & Israel . . . . . . . . . . . . . . . . . . . . .
Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rest of Asia . . . . . . . . . . . . . . . . . . . . . . . .

$ 815,914
691,482
426,963
194,670
405,320
279,700

29% $ 705,159
741,470
25%
334,653
15%
306,779
7%
371,139
14%
470,208
10%

24% $ 846,125
936,445
25%
310,204
11%
211,121
11%
292,724
13%
246,162
16%

30%
33%
11%
7%
10%
9%

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,814,049

100% $2,929,408

100% $2,842,781

100%

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

revenues):

(Dollar amounts in thousands)

2015

2014

2013

Year ended June 30,

Revenues:

Defect inspection . . . . . . . . . . . . . . . . . . . .
Metrology . . . . . . . . . . . . . . . . . . . . . . . . .
Service . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,541,422
492,175
688,653
91,799

55% $1,685,114
532,002
18%
642,971
24%
69,321
3%

58% $1,594,128
540,835
18%
595,634
22%
112,184
2%

56%
19%
21%
4%

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,814,049

100% $2,929,408

100% $2,842,781

100%

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

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

(In thousands)

Long-lived assets:

As of June 30,

2015

2014

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Israel
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rest of Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$207,779
16,536
45,444
33,841
10,991

$219,280
19,527
48,938
33,388
9,130

Total

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$314,591

$330,263

NOTE 18—RELATED PARTY TRANSACTIONS

During the fiscal years ended June 30, 2015, 2014 and 2013, the Company purchased from, or sold to,
several entities, where one or more executive officers of the Company or members of the Company’s Board of
Directors, or their immediate family members, also serves as an executive officer or board member, including
Avago Technologies Ltd., Cisco Systems, Inc., Citrix System, Inc., Freescale Semiconductor, Inc., JDS Uniphase

116

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

Corporation, NetApp, Inc. and SAP AG. The following table provides the transactions with these parties for the
indicated periods (for the portion of the period during which they were considered related):

(In thousands)

Year ended June 30,

2015

2014

2013

Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,856
$1,098

$2,701
$2,622

$6,854
$4,460

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

NOTE 19—SUBSEQUENT EVENTS

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

NOTE 20—QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the Company’s quarterly consolidated results of operations (unaudited) for

the fiscal years ended June 30, 2015 and 2014.

(In thousands, except per share data)

Total revenues . . . . . . . . . . . . . . . . . . . . . . .
Gross margin . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per share:
Basic(1)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(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

$642,901
$354,434
$ 72,233

$
$

0.44
0.43

$676,357
$393,144
$ 20,268

$
$

0.12
0.12

$738,459
$418,177
$131,638

$
$

0.81
0.81

$756,332
$433,065
$142,019

$
$

0.90
0.89

First quarter
ended
September 30, 2013

Second quarter
ended
December 31, 2013

Third quarter
ended
March 31, 2014

Fourth quarter
ended
June 30, 2014

$658,337
$380,680
$111,197

$
$

0.67
0.66

$705,129
$419,315
$139,246

$
$

0.84
0.83

$831,599
$488,773
$203,581

$
$

1.22
1.21

$734,343
$407,678
$128,731

$
$

0.78
0.77

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

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

117

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

In our opinion, the consolidated financial statements listed in the 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, 2015 and June 30, 2014, and the results of their operations and their cash flows for each of the three
years in the period ended June 30, 2015 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement schedule listed in the 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, 2015 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.

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, 2015

118

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
including the CEO and CFO, as appropriate to allow timely decisions regarding required
management,
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, 2015.

The effectiveness of the Company’s internal control over financial reporting as of June 30, 2015 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.

119

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 error 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 2015 that have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

120

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
the Board of Directors and Its Committees—The Board of Directors” in the Proxy

“Information About
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, 2016” in the Proxy Statement, which is incorporated herein by reference.

121

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, 2015 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for each of the three years in the period ended June 30,

2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Comprehensive Income for each of the three years in the period

ended June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended
June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for each of the three years in the period ended June 30,
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

72
73
118

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

124

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.

122

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.

SIGNATURES

August 7, 2015
(Date)

KLA-Tencor Corporation

By:

/S/ RICHARD P. WALLACE

Richard P. Wallace

President and Chief Executive Officer

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

Richard P. Wallace

/S/ BREN D. HIGGINS

Bren D. Higgins

/S/ VIRENDRA A. KIRLOSKAR

Virendra A. Kirloskar

President, Chief Executive Officer
and Director (principal executive
officer)

August 7, 2015

Executive Vice President and Chief

August 7, 2015

Financial Officer (principal
financial officer)

Senior Vice President and Chief
Accounting Officer (principal
accounting officer)

August 7, 2015

/S/ EDWARD W. BARNHOLT

Chairman of the Board and

August 7, 2015

Edward W. Barnholt

/s/ ROBERT T. BOND

Robert T. Bond

Director

/S/ ROBERT M. CALDERONI

Director

Robert M. Calderoni

/S/

JOHN T. DICKSON
John T. Dickson

/S/ EMIKO HIGASHI

Emiko Higashi

/S/ KEVIN J. KENNEDY

Kevin J. Kennedy

/S/ GARY B. MOORE

Gary B. Moore

/S/ KIRAN M. PATEL

Kiran M. Patel

/S/ ROBERT A. RANGO

Robert A. Rango

/S/ DAVID C. WANG

David C. Wang

Director

123

August 7, 2015

SCHEDULE II

Valuation and Qualifying Accounts

Balance at
Beginning
of Period

Charged to
Expense

Deductions/
Adjustments

Balance
at End
of Period

(In thousands)

Fiscal Year Ended June 30, 2013:

Allowance for Doubtful Accounts . . . . . . . . . . . . . . . . . . . . .
Allowance for Deferred Tax Assets . . . . . . . . . . . . . . . . . . . .

$22,327
$40,479

Fiscal Year Ended June 30, 2014:

Allowance for Doubtful Accounts . . . . . . . . . . . . . . . . . . . . .
Allowance for Deferred Tax Assets . . . . . . . . . . . . . . . . . . . .

$22,135
$57,097

Fiscal Year Ended June 30, 2015:

Allowance for Doubtful Accounts . . . . . . . . . . . . . . . . . . . . .
Allowance for Deferred Tax Assets . . . . . . . . . . . . . . . . . . . .

$21,827
$76,328

$—
$—

$ (192)
$16,618

$22,135
$57,097

$ (308)
$19,231

$21,827
$76,328

$ (164)
$15,022

$21,663
$91,350

124

KLA-TENCOR CORPORATION

EXHIBIT INDEX

Exhibit
Number

Exhibit Description

Form

File No.

Exhibit
Number

Filing Date

Incorporated by Reference

3.1

3.2

3.3

3.4

4.1

4.2

10.1

10.2

10.3

10.4

10.5

10.6

10.7

10.8

10.9

Amended and Restated Certificate of
Incorporation

Certificate of Amendment of Amended
and Restated Certificate of
Incorporation

Certificate of Amendment to Amended
and Restated Certificate of
Incorporation of the Company effective
as of November 8, 2012

Amended and Restated Bylaws of the
Company effective as of May 7, 2015

Indenture dated November 6, 2014
between KLA-Tencor Corporation and
Wells Fargo Bank, National
Association, as trustee

Form of Officer’s Certificate setting
forth the terms of the Notes (with form
of Notes attached)

1998 Outside Director Option Plan*

Form of Option Agreement under 1998
Outside Director Option Plan*

2004 Equity Incentive Plan (as
amended and restated)*

2004 Equity Incentive Plan (as
amended and restated (as of
November 6, 2013))*

2004 Equity Incentive Plan (as
amended and restated (as of August 7,
2014))*

Rules of the Company’s 2004 Equity
Incentive Plan for the Grant of
Restricted Stock Units to Participants
in France*

Notice of Grant of Restricted Stock
Units*

Option Grant Notification Form*

Form of Restricted Stock Unit Award
Notification (Performance-Vesting)*

10-Q

No. 000-09992

3.1

May 14, 1997

10-Q

No. 000-09992

3.1

February 14, 2001

8-K

No. 000-09992

3.1

November 13, 2012

8-K

No. 000-09992

3.1

May 8, 2015

8-K

No. 000-09992

4.1

November 7, 2014

8-K

No. 000-09992

4.2

November 7, 2014

S-8

8-K

No. 333-68423

No. 000-09992

10.1

December 4, 1998

October 18, 2004

8-K

No. 000-09992

10.46

October 8, 2009

DEF 14A No. 000-09992 App. A September 26, 2013

8-K

No. 000-09992

10.45

August 12, 2014

10-Q

No. 000-09992

10.50

January 30, 2009

10-Q

No. 000-09992

10.18

May 4, 2006

No. 000-09992

10.1

September 29, 2005

No. 000-09992

10.19

September 20, 2006

8-K

125

Exhibit
Number

10.10

10.11

10.12

10.13

10.14

10.15

10.16

10.17

10.18

10.19

10.20

10.21

10.22

10.23

Exhibit Description

Form

File No.

Exhibit
Number

Filing Date

Incorporated by Reference

Form of Restricted Stock Unit Award
Notification (Performance-Vesting)
(approved August 2012)*

Form of Restricted Stock Unit Award
Notification (Performance-Vesting)
(approved August 2014)*

Form of Restricted Stock Unit Award
Notification (Service-Vesting)*

Form of Restricted Stock Unit Award
Notification (Service-Vesting)
(approved August 2012)*

Form of Restricted Stock Unit Award
Notification (Service-Vesting; 25%
Annual Vesting) (approved August
2014)*

Form of Restricted Stock Unit Award
Notification (Service-Vesting; 50%
Vesting Year Two, 50% Vesting Year
Four) (approved August 2014)*

Form of Restricted Stock Unit Award
Notification (France) (approved August
2014)*

Form of Restricted Stock Unit
Agreement*

Form of Restricted Stock Unit
Agreement for U.S. Employees
(approved December 2008)*

Form of Restricted Stock Unit
Agreement for U.S. Employees (with
Dividend Equivalents) (approved
August 2014)*

Form of Restricted Stock Unit
Agreement for French Participants
(approved December 2008)*

Form of Restricted Stock Unit
Agreement for French Participants
(with Dividend Equivalents) (approved
August 2014)*

Form of Restricted Stock Unit
Agreement for Non-U.S. Employees
(approved December 2008)*

Form of Restricted Stock Unit
Agreement for Non-U.S. Employees
(with Dividend Equivalents) (approved
August 2014)*

8-K

No. 000-09992

10.2

August 2, 2012

8-K

No. 000-09992

10.49

August 12, 2014

10-K

No. 000-09992

10.17

August 7, 2008

8-K

No. 000-09992

10.1

August 2, 2012

8-K

No. 000-09992

10.50

August 12, 2014

8-K

No. 000-09992

10.51

August 12, 2014

8-K

No. 000-09992

10.52

August 12, 2014

8-K

No. 000-09992

10.20

September 20, 2006

10-Q

No. 000-09992

10.44

January 30, 2009

8-K

No. 000-09992

10.46

August 12, 2014

10-Q

No. 000-09992

10.45

January 30, 2009

8-K

No. 000-09992

10.47

August 12, 2014

10-Q

No. 000-09992

10.46

January 30, 2009

8-K

No. 000-09992

10.48

August 12, 2014

126

Exhibit
Number

10.24

10.25

10.26

10.27

10.28

10.29

10.30

10.31

10.32

10.33

10.34

10.35

10.36

10.37

10.38

10.39

10.40

10.41

Exhibit Description

Form

File No.

Exhibit
Number

Filing Date

Incorporated by Reference

Amended and Restated 1997 Employee
Stock Purchase Plan (as amended
February 11, 2011)*

Amended and Restated 1997 Employee
Stock Purchase Plan (as amended
February 7, 2013)*

Amended and Restated 1997 Employee
Stock Purchase Plan (as amended
May 8, 2014)*

Therma-Wave, Inc.’s 2000 Equity
Incentive Plan*

Amendment No. 1 to Therma-Wave,
Inc.’s 2000 Equity Incentive Plan*

Amendment No. 2 to Therma-Wave,
Inc.’s 2000 Equity Incentive Plan*

Amendment No. 3 to Therma-Wave,
Inc.’s 2000 Equity Incentive Plan*

Amendment No. 4 to Therma-Wave,
Inc.’s 2000 Equity Incentive Plan*

Form of Indemnification Agreement
for Directors and Executive Officers*

KLA-Tencor Corporation Performance
Bonus Plan*

Fiscal Year 2013 Executive Incentive
Plan*+

Fiscal Year 2014 Executive Incentive
Plan*+

Fiscal Year 2015 Executive Incentive
Plan*+

Executive Deferred Savings Plan (as
amended and restated effective
November 7, 2012)*

Executive Severance Plan (as amended
and restated November 8, 2012)*

2010 Executive Severance Plan (as
amended and restated November 7,
2012)*

Letter Agreement by and between the
Company and Brian M. Martin*

Letter Agreement by and between the
Company and Mark Dentinger*

10-Q

No. 000-09992

10.47

April 29, 2011

10-Q

No. 000-09992

10.46

April 26, 2013

10-K

No. 000-09992

10.21

August 8, 2014

(1)

(2)

(3)

(4)

(5)

(1)

(2)

(3)

(4)

(5)

(1)

(2)

(3)

(4)

(5)

(1)

(2)

(3)

(4)

(5)

10-K

No. 000-09992

10.3

September 29, 1997

DEF 14A No. 000-09992 App. B September 26, 2013

10-Q

No. 000-09992

10.41

October 26, 2012

10-Q

No. 000-09992

10.44

October 25, 2013

10-Q

No. 000-09992

10.53

October 24, 2014

10-Q

No. 000-09992

10.42

January 25, 2013

10-Q

No. 000-09992

10.43

January 25, 2013

10-Q

No. 000-09992

10.44

January 25, 2013

10-Q

No. 000-09992

10.28

May 7, 2007

10-Q

No. 000-09992

10.43

October 31, 2008

127

Exhibit
Number

10.42

10.43

12.1

21.1

23.1

31.1

31.2

Exhibit Description

Form

File No.

Exhibit
Number

Filing Date

Incorporated by Reference

10-Q

No. 000-09992

10.43

October 25, 2013

8-K

No. 000-09992

10.54 November 17, 2014

Letter Agreement between the
Company and Mark Dentinger*

Credit Agreement dated November 14,
2014 among KLA-Tencor Corporation,
the lenders party thereto and JPMorgan
Chase Bank, N.A., as administrative
agent

Computation of Ratio of Earnings to
Fixed Charges

List of Subsidiaries

Consent of Independent Registered
Public Accounting Firm

Certification of Chief Executive
Officer under Rule 13a-14(a) of the
Securities Exchange Act of 1934

Certification of Chief Financial Officer
under Rule 13a-14(a) of the Securities
Exchange Act of 1934

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

*
+
(1)

(2)

(3)

(4)

(5)

Denotes a management contract, plan or arrangement.
Confidential treatment has been requested as to a portion of this exhibit.
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).
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).
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).
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).
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).

128

Certification of Chief Executive Officer
Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) As Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Richard P. Wallace, certify that:

EXHIBIT 31.1

I have reviewed this Annual Report on Form 10-K of KLA-Tencor Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision,
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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a

significant role in the registrant’s internal control over financial reporting.

August 7, 2015

(Date)

/s/ RICHARD P. WALLACE

Richard P. Wallace
President and Chief Executive Officer
(Principal Executive Officer)

Certification of Chief Financial Officer
Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a) As Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Bren D. Higgins, certify that:

EXHIBIT 31.2

I have reviewed this Annual Report on Form 10-K of KLA-Tencor Corporation;

(b) Any fraud, whether or not material, that involves management or other employees who have a

significant role in the registrant’s internal control over financial reporting.

August 7, 2015

(Date)

/S/ BREN D. HIGGINS

Bren D. Higgins
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

Exhibit 32

I, Richard P. Wallace, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that the Annual Report of KLA-Tencor Corporation on Form 10-K for the fiscal
year ended June 30, 2015 fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all
material respects the financial condition and results of operations of KLA-Tencor Corporation.

August 7, 2015

(Date)

By:
Name:
Title:

/s/ RICHARD P. WALLACE

Richard P. Wallace
President and Chief Executive Officer

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Bren D. Higgins, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that the Annual Report of KLA-Tencor Corporation on Form 10-K for the fiscal
year ended June 30, 2015 fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all
material respects the financial condition and results of operations of KLA-Tencor Corporation.

August 7, 2015

(Date)

By:
Name:
Title:

/s/ BREN D. HIGGINS

Bren D. Higgins
Executive Vice President and Chief Financial Officer

[THIS PAGE INTENTIONALLY LEFT BLANK]

CORPORATE INFORMATION

BOARD OF DIRECTORS
(as of September 24, 2015)

Edward W. Barnholt
Chairman of the Board,
KLA-Tencor Corporation
Former Chairman of the Board,
(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:192)(cid:70)(cid:72)(cid:85)(cid:15)(cid:3)
Agilent Technologies, Inc.

Robert T. Bond*
(cid:41)(cid:82)(cid:85)(cid:80)(cid:72)(cid:85)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:50)(cid:73)(cid:192)(cid:70)(cid:72)(cid:85)(cid:3)
(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:50)(cid:73)(cid:192)(cid:70)(cid:72)(cid:85)(cid:15)(cid:3)
Rational Software Corporation

Robert M. Calderoni
(cid:41)(cid:82)(cid:85)(cid:80)(cid:72)(cid:85)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:192)(cid:70)(cid:72)(cid:85)(cid:15)(cid:3)(cid:36)(cid:85)(cid:76)(cid:69)(cid:68)(cid:15)(cid:3)(cid:44)(cid:81)(cid:70)(cid:17)(cid:3)
and President, SAP Cloud, SAP AG

John T. Dickson
Former President and Chief Executive
(cid:50)(cid:73)(cid:192)(cid:70)(cid:72)(cid:85)(cid:15)(cid:3)(cid:36)(cid:74)(cid:72)(cid:85)(cid:72)(cid:3)(cid:54)(cid:92)(cid:86)(cid:87)(cid:72)(cid:80)(cid:86)(cid:15)(cid:3)(cid:44)(cid:81)(cid:70)(cid:17)(cid:3)

Emiko Higashi
Managing Director and Founder,
Tomon Partners, LLC

(cid:46)(cid:72)(cid:89)(cid:76)(cid:81)(cid:3)(cid:45)(cid:17)(cid:3)(cid:46)(cid:72)(cid:81)(cid:81)(cid:72)(cid:71)(cid:92)
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(cid:36)(cid:89)(cid:68)(cid:92)(cid:68)(cid:3)(cid:44)(cid:81)(cid:70)(cid:17)

(cid:42)(cid:68)(cid:85)(cid:92)(cid:3)(cid:37)(cid:17)(cid:3)(cid:48)(cid:82)(cid:82)(cid:85)(cid:72)
Former President and Chief
(cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:50)(cid:73)(cid:192)(cid:70)(cid:72)(cid:85)(cid:15)(cid:3)
(cid:38)(cid:76)(cid:86)(cid:70)(cid:82)(cid:3)(cid:54)(cid:92)(cid:86)(cid:87)(cid:72)(cid:80)(cid:86)(cid:15)(cid:3)(cid:44)(cid:81)(cid:70)(cid:17)

Kiran M. Patel
Former Executive Vice President
and General Manager,
Small Business Group, Intuit Inc.

Robert A. Rango
Former Executive Vice President and
General Manager, Mobile and
Wireless Group, Broadcom Corporation

Richard P. Wallace
(cid:51)(cid:85)(cid:72)(cid:86)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:40)(cid:91)(cid:72)(cid:70)(cid:88)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:50)(cid:73)(cid:192)(cid:70)(cid:72)(cid:85)(cid:15)(cid:3)
KLA-Tencor Corporation

David C. Wang
Former President, Boeing-China, and
Former Vice President of International
(cid:53)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:15)(cid:3)(cid:55)(cid:75)(cid:72)(cid:3)(cid:37)(cid:82)(cid:72)(cid:76)(cid:81)(cid:74)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)

CORPORATE HEADQUARTERS

(cid:50)(cid:81)(cid:72)(cid:3)(cid:55)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:92)(cid:3)(cid:39)(cid:85)(cid:76)(cid:89)(cid:72)
Milpitas, California 95035
408.875.3000
www.kla-tencor.com

GLOBAL OFFICES

EXECUTIVE OFFICERS
(as of September 24, 2015)

(cid:46)(cid:47)(cid:36)(cid:16)(cid:55)(cid:72)(cid:81)(cid:70)(cid:82)(cid:85)(cid:3)(cid:75)(cid:68)(cid:86)(cid:3)(cid:82)(cid:73)(cid:192)(cid:70)(cid:72)(cid:86)(cid:3)(cid:68)(cid:85)(cid:82)(cid:88)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:74)(cid:79)(cid:82)(cid:69)(cid:72)(cid:17)(cid:3)
For a complete list of locations, go to:
(cid:75)(cid:87)(cid:87)(cid:83)(cid:29)(cid:18)(cid:18)(cid:90)(cid:90)(cid:90)(cid:17)(cid:78)(cid:79)(cid:68)(cid:16)(cid:87)(cid:72)(cid:81)(cid:70)(cid:82)(cid:85)(cid:17)(cid:70)(cid:82)(cid:80)(cid:18)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:18)
(cid:82)(cid:73)(cid:192)(cid:70)(cid:72)(cid:86)(cid:16)(cid:80)(cid:68)(cid:83)(cid:86)(cid:17)(cid:75)(cid:87)(cid:80)(cid:79)

Bren D. Higgins
Executive Vice President and
(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:50)(cid:73)(cid:192)(cid:70)(cid:72)(cid:85)

(cid:37)(cid:82)(cid:69)(cid:69)(cid:92)(cid:3)(cid:53)(cid:17)(cid:3)(cid:37)(cid:72)(cid:79)(cid:79)
Executive Vice President,
Wafer Inspection Division

Michael D. Kirk, Ph.D.
Executive Vice President, Global
Service and Support Division

Ahmad A. Khan
Executive Vice President,
Patterning Division

Brian M. Martin**
Executive Vice President, General
(cid:38)(cid:82)(cid:88)(cid:81)(cid:86)(cid:72)(cid:79)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:82)(cid:85)(cid:83)(cid:82)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:54)(cid:72)(cid:70)(cid:85)(cid:72)(cid:87)(cid:68)(cid:85)(cid:92)

Brian M. Trafas, Ph.D.
Senior Vice President,
Global Customer Organization

Virendra A. Kirloskar
Senior Vice President and
(cid:38)(cid:75)(cid:76)(cid:72)(cid:73)(cid:3)(cid:36)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:50)(cid:73)(cid:192)(cid:70)(cid:72)(cid:85)

INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

PricewaterhouseCoopers LLP
San Jose, California

TRANSFER AGENT/REGISTRAR

Computershare
Boston, Massachusetts

STOCK SYMBOL

Common Stock traded on the NASDAQ
(cid:42)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:3)(cid:54)(cid:72)(cid:79)(cid:72)(cid:70)(cid:87)(cid:3)(cid:48)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:92)(cid:80)(cid:69)(cid:82)(cid:79)(cid:3)(cid:46)(cid:47)(cid:36)(cid:38)

(cid:36)(cid:71)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:83)(cid:76)(cid:72)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:80)(cid:68)(cid:92)(cid:3)
be obtained at www.kla-tencor.com,
(cid:69)(cid:92)(cid:3)(cid:70)(cid:68)(cid:79)(cid:79)(cid:76)(cid:81)(cid:74)(cid:3)(cid:23)(cid:19)(cid:27)(cid:17)(cid:27)(cid:26)(cid:24)(cid:17)(cid:22)(cid:19)(cid:19)(cid:19)(cid:15)(cid:3)(cid:82)(cid:85)(cid:3)(cid:69)(cid:92)(cid:3)(cid:90)(cid:85)(cid:76)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:82)(cid:29)(cid:3)
KLA-Tencor Corporation
Attn: Investor Relations
(cid:50)(cid:81)(cid:72)(cid:3)(cid:55)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:92)(cid:3)(cid:39)(cid:85)(cid:76)(cid:89)(cid:72)
Milpitas, California 95035

* On August 6, 2015, Robert T. Bond informed the KLA-Tencor Board of Directors of his decision not to stand for re-election

at our November 4, 2015 annual meeting.

** Brian M. Martin (cid:75)(cid:68)(cid:86)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:71)(cid:3)(cid:81)(cid:82)(cid:87)(cid:76)(cid:70)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:38)(cid:82)(cid:80)(cid:83)(cid:68)(cid:81)(cid:92)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:75)(cid:72)(cid:3)(cid:76)(cid:86)(cid:3)(cid:85)(cid:72)(cid:86)(cid:76)(cid:74)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:54)(cid:72)(cid:83)(cid:87)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:21)(cid:24)(cid:15)(cid:3)(cid:21)(cid:19)(cid:20)(cid:24)(cid:17)

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS: Except for historical statements, the letter to our stockholders in 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.
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the Securities and Exchange Commission (“SEC”) for further information regarding, and other risks related to, our business. These documents are available at
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KLA-Tencor Corporation
One Technology Drive
Milpitas, CA 95035
408.875.3000
www.kla-tencor.com

Printed in USA AR-2015