KLA Annual Report 2016 | Quarterlytics

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FY2016 Annual Report · KLA

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KLA-Tencor Corporation

One Technology Drive

Milpitas, CA 95035

408.875.3000

www.kla-tencor.com

Collaboration | Innovation | Execution

A N N U A L R E P O R T
2 0 1 6

TO OUR STOCKHOLDERS:

KLA-Tencor delivered exceptional operating and financial performance in fiscal year 2016.

Total revenues in 2016 were $3.0 billion, with net income of $704 million, and diluted earnings
per share of $4.49.

Additionally, we delivered $760 million in operating cash flow, and ended the year with $2.5
billion in cash and investments. In keeping with our ongoing commitment to rewarding our
long-term stockholders, we returned $346 million to stockholders through our cash dividend
program in fiscal year 2016, which included the effect of a 4% increase in our regularly
quarterly cash dividend level
to $0.52 per share. 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.

These strong numbers reflect KLA-Tencor’s market leadership and the mission-critical role
process control plays in enabling innovation and growth for the semiconductor industry. They
also make a fitting highlight for the company, our employees, and stockholders as KLA-
Tencor celebrates our 40th anniversary year in 2016.

On October 21, 2015 KLA-Tencor and Lam Research Corporation announced they had
entered into a merger agreement, subject to regulatory and stockholder approval among other
customary conditions.

As always, our success in fiscal year 2016 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 successful new product introductions,
including, most recently, the success of our next-generation flagship optical inspection
platform, which was introduced in the year and is experiencing very strong customer
acceptance. 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 introductions 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. Total revenue grew 6% in fiscal
year 2016, in line with our Growth objectives.

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 2016, 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.

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 and advanced-degree tuition
reimbursement programs.

In fiscal year 2016, 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,

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, 2016

‘ 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 Stock Market, LLC
The NASDAQ Global Select Market

Securities Registered Pursuant to Section 12(g) of the Act:
None
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes 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, 2015, was approximately $10.78 billion.

The registrant had 155,995,003 shares of common stock outstanding as of July 15, 2016.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2016 Annual Meeting of Stockholders (“Proxy Statement”), and to be filed pursuant to Regulation

14A within 120 days after the registrant’s fiscal year ended June 30, 2016, are incorporated by reference into Part III of this report.

INDEX

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

PART I

Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Consolidated Balance Sheets as of June 30, 2016 and June 30, 2015 . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for each of the three years in the period ended

June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

ended June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

ended June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PART III

Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Item 12.

Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14.

PART IV

Item 15.

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

1
17
38
38
39
39

40
42
43
67
69
70

74
75
121
122
122
123

124
124

124
124
124

125
126
127

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of
historical fact may be forward-looking statements. You can identify these and other forward-looking statements
by the use of words such as “may,” “will,” “could,” “would,” “should,” “expects,” “plans,” “anticipates,”
“relies,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” “thinks,” “seeks,” or the
negative of such terms, or other comparable terminology. Forward-looking statements also include the
assumptions underlying or relating to any of the foregoing statements. Such forward-looking statements include,
among others, our Merger with Lam Research; forecasts of the future results of our operations, including
profitability; orders for our products and capital equipment generally; sales of semiconductors; the investments
by our customers in advanced technologies and new materials; the allocation of capital spending by our
customers (and, in particular, the percentage of spending that our customers allocate to process control); growth
of revenue in the semiconductor industry, the semiconductor capital equipment industry and our business;
technological trends in the semiconductor industry; future developments or trends in the global capital and
financial markets; our future product offerings and product features; the success and market acceptance of new
products; timing of shipment of backlog; our future product shipments and product and service revenues; our
future gross margins; our future research and development expenses and selling, general and administrative
expenses; our ability to successfully maintain cost discipline; international sales and operations; our ability to
maintain or improve our existing competitive position; success of our product offerings; creation and funding of
programs for research and development; attraction and retention of employees; results of our investment in
leading edge technologies; the effects of hedging transactions; the effect of the sale of trade receivables and
promissory notes from customers; our future effective income tax rate; our recognition of tax benefits; future
payments of dividends to our stockholders; the completion of any acquisitions of third parties, or the technology
or assets thereof; benefits received from any acquisitions and development of acquired technologies; sufficiency
of our existing cash balance, investments, cash generated from operations and unfunded revolving line of credit
under a Credit Agreement (the “Credit Agreement”) to meet our operating and working capital requirements,
including debt service and payment thereof; future dividends, and stock repurchases; our compliance with the
financial covenants under the Credit Agreement; the expected timing of the completion of our global employee
workforce reduction; the additional charges that we may incur in connection with our global employee
workforce reduction; the expected cost savings that we expect to recognize as a result of such workforce
reduction; the adoption of new accounting pronouncements; the timing for the consummation of the Merger; and
our repayment of our outstanding indebtedness.

Our actual results may differ significantly from those projected in the forward-looking statements in this
report. Factors that might cause or contribute to such differences include, but are not limited to, those discussed
in Item 1A, “Risk Factors” in this Annual Report on Form 10-K, as well as in Item 1, “Business” and Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report. You
should carefully review these risks and also review the risks described in other documents we file from time to
time with the Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q that we will
file in the fiscal year ending June 30, 2017. 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 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 20549-2736, by
submitting an online request to the SEC at www.sec.gov or by calling the SEC at 1-800-732-0330.

Investors and others should note that we announce material financial information to our investors using our
investor relations web site (www.ir.kla-tencor.com), SEC filings, press releases, public conference calls and
webcasts. We use these channels as well as social media to communicate with the public about our company, our
products and services and other matters. It is possible that the information we post on social media could be
deemed to be material information. Therefore, we encourage investors, the media, and others interested in our
company to review the information we post on the social media channels listed on our investor relations web site.

Proposed Merger with Lam Research

On October 20, 2015, the Company entered into an Agreement and Plan of Merger and Reorganization (the
“Merger Agreement”) with Lam Research Corporation (“Lam Research”), under which KLA-Tencor will
ultimately become a direct or indirect wholly-owned subsidiary of Lam Research through a merger with a
subsidiary of Lam Research (the “Merger”). The Merger has been unanimously approved by the boards of
directors of both companies. The consummation of the Merger is conditioned on the satisfaction of customary
closing conditions, including domestic and foreign regulatory approvals and performance in all material respects
by each party of its obligations under the Merger Agreement. On February 19, 2016, the Merger Agreement was
approved by KLA-Tencor’s stockholders and Lam Research’s stockholders approved the issuance of Lam
Research’s common stock in the Merger. Refer also to Note 1 “Description of Business and Summary of
Significant Accounting Policies” and Item 1A, “Risk Factors.” For additional details on the transaction, refer to
the copy of the Merger Agreement attached as an Exhibit to the Form 8-K filed with the U.S. Securities and
Exchange Commission (“SEC”) on October 21, 2015.

Industry

General Background

KLA-Tencor’s core focus is the semiconductor industry. The semiconductor fabrication process begins with
a bare silicon wafer—a round disk that is typically 150 millimeters, 200 millimeters or 300 millimeters in
diameter, about as thick as a credit card and gray in color. The process of manufacturing wafers is in itself highly
sophisticated, involving the creation of large ingots of silicon by pulling them out of a vat of molten silicon. The
ingots are then sliced into wafers. Prime silicon wafers are then polished to a mirror finish. Other, more
specialized wafers, such as epitaxial silicon (“epi”), silicon-on-insulator (“SOI”), gallium nitride (“GaN”) and
silicon carbide (“SiC”), are also common in the semiconductor industry.

The manufacturing cycle of an IC is grouped into three phases: design, fabrication and testing. IC design
involves the architectural layout of the circuit, as well as design verification and reticle generation. The
fabrication of a chip is accomplished by depositing a series of film layers that act as conductors, semiconductors
or insulators on bare wafers. The deposition of these film layers is interspersed with numerous other process
steps that create circuit patterns, remove portions of the film layers, and perform other functions such as heat
treatment, measurement and inspection. Most advanced chip designs require hundreds of individual steps, many
of which are performed multiple times. Most chips consist of two main structures: the lower structure, typically
consisting of transistors or capacitors which perform the “smart” functions of the chip; and the upper
“interconnect” structure, typically consisting of circuitry which connects the components in the lower structure.
When all of the layers on the wafer have been fabricated, each chip on the wafer is tested for functionality. The
wafer is then cut into individual chips, and those chips that passed functional testing are packaged. Final testing
is performed on all packaged chips.

Current Trends

The growth of consumer demand for mobile devices, including smartphones, tablets and wearable devices,
is currently driving growth in the electronics industry and, as a result, growth in the semiconductor industry as
well. Contained within each of these latest consumer devices are advanced semiconductors that are helping to
enable the features consumers want in device performance, such as smaller product form factors, lower power
requirements, bigger and brighter screens and speed, at a lower cost. Alongside this market growth, the industry
continues to experience a high rate of change in technology, with the emergence of new techniques and
architectures in production today, such as three-dimensional (“3D”) transistors, advanced patterning lithography
and advanced wafer-level packaging. 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 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 inspection and metrology products, and related service, software and other offerings.

solutions

for

KLA-Tencor’s inspection and metrology products and related offerings can be broadly categorized as
supporting customers
in the following groups: Chip Manufacturing, Wafer Manufacturing, Reticle
Manufacturing, LED, Power Device and Compound Semiconductor Manufacturing, Data Storage Media/Head
(“MEMS”) Manufacturing, and General Purpose/Lab
Manufacturing, Microelectromechanical Systems

Applications. The more significant of these products are included in the product table at the end of this
“Products” section. 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 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

including:

KLA-Tencor’s front-end defect inspection tools cover a broad range of yield applications within the IC
reticle
research and development;
manufacturing environment,
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.

incoming wafer qualification;

During the fiscal year ended June 30, 2016, we launched several front-end defect inspection products that
help accelerate yield for next-generation design node devices: 3900 Series, 2930 Series, PumaTM 9980 Series and
Surfscan® SP5XP. The 3900 Series broadband plasma patterned wafer inspection systems incorporate a new high
resolution deep ultra-violet (“DUV”) wavelength range and optical inspection speed, supporting defect discovery
and debug of advanced IC processes. The 2930 Series broadband plasma patterned wafer inspection systems are
used to discover and monitor defects related to design or process issues, supporting advanced IC development
and ramp. The PumaTM 9980 laser scanning patterned wafer inspector provides enhanced defect type capture for
high throughput production ramp monitoring across a wide range of IC applications. The Surfscan® SP5XP
unpatterned wafer inspection system utilizes extended deep ultra-violet optical technologies for cost-effective,
early detection of process and tool excursions.

The products that we launched during the fiscal year ended June 30, 2016 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 3900 Series (for high resolution broadband plasma defect inspection); our 2930 Series and 2920
Series (for broadband plasma defect inspection); our PumaTM 9980 Series, PumaTM 9850 Series and PumaTM
9650 Series (for laser scanning defect inspection); our 8 Series systems (for high productivity defect inspection);
and our CIRCLTM cluster tool (for defect inspection, review and metrology of all wafer surfaces—front side,
edge and back side). In the field of unpatterned wafer and surface inspection, we offer the Surfscan® SP5 Series
and Surfscan® SP3 Series (wafer defect inspection systems for process tool qualification and monitoring using
blanket films and bare wafers); and the SURFmonitorTM (integrated on the Surfscan® SP5 and Surfscan® SP3
Series), which enables surface quality measurements and capture of low-contrast defects. For reticle inspection,
we offer our X5.2TM, X5.3TM and TeronTM SL650 Series products, which are photomask inspection systems that
allow IC fabs to qualify incoming reticles and inspect production reticles for contaminants and other process-
related changes. In addition, we offer a number of other products for the front-end defect inspection market, as
reflected in the product table at the conclusion of this “Products” section.

Defect Review

KLA-Tencor’s defect review systems capture high resolution images of the defects detected by inspection
tools. These images enable defect classification, helping chipmakers 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. During the fiscal
year ended June 30, 2016, we introduced the eDR7280TM, an electron-beam wafer defect review and
classification system that utilizes improved imaging and automatic defect classification capability to identify
detected defects and produce an accurate representation of the detected defect population.

Advanced Packaging Process Control

KLA-Tencor offers standalone and cluster inspection and metrology systems for various applications in the
field of advanced semiconductor packaging (i.e., at the middle and back-end of the semiconductor manufacturing
process). Our CIRCL-AP™ all-surface inspection, metrology and review system supports advanced wafer-level
packaging processes, such as 2.5D/3D IC integration using through silicon vias (“TSVs”), wafer-level chip scale
packaging (“WLCSP”) and fan-out wafer-level packaging (“FOWLP”). Used for packaging applications
associated with LEDs, MEMS, image sensors and flip-chip packaging, our WI-22x0 Series products focus on
front side wafer inspection and provide feedback on wafer surface quality, quality of the wafer dicing, or quality
of wafer bumps, pads and pillars. Our component inspector products, the ICOS® T830 and ICOS® T640, inspect
various semiconductor components that are handled in a tray, such as microprocessors or memory chips.
Component inspection capability includes 3D coplanarity inspection, measurement of the evenness of the
contacts, component height and two-dimensional (“2D”) surface inspection.

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.

KLA-Tencor offers a broad range of systems and solutions that support the metrology market. Our 5D
Patterning Control Solution™ addresses five elements of patterning process control—the three geometrical
dimensions of device structures,
time-to-results and overall equipment efficiency—and supports advanced
patterning technologies through the characterization, optimization and monitoring of fab-wide processes. The
ArcherTM Series of overlay metrology tools enables characterization of overlay error on lithography process
layers for advanced patterning technologies. The SpectraShapeTM family of optical CD and shape metrology
systems characterizes and monitors the critical dimensions and 3D shapes of geometrically complex features
incorporated by some IC manufacturers in their latest generation devices. The SpectraFilmTM and AlerisTM
families of film metrology tools provide precise measurement of film thickness, refractive index, stress and
composition for a broad range of film layers. The WaferSight™ PWG system measures patterned wafer
geometry after a wide range of IC processes, helping identify and monitor variations that can affect patterning.
Finally, K-T Analyzer® offers advanced, run-time data analysis for a wide range of metrology system types. In
addition, we offer a number of other products for the metrology market, as reflected in the product table at the
conclusion of this “Products” section.

In-Situ Process Monitoring

KLA-Tencor’s SensArray® SensorWafers are a portfolio of advanced wireless and wired temperature
monitoring wafers that capture the effect of the process environment on production wafers. These SensorWafers
provide 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 provides analysis of experimental data,
including CD, roughness, sidewall angle, top loss and pattern collapse.

Wafer Manufacturing

KLA-Tencor’s portfolio of products focused on the demands of wafer manufacturers includes inspection,
metrology and data management systems. Specialized inspection tools assess surface quality and detect, count
and bin defects during the wafer manufacturing process and as a critical part of outgoing inspection. Wafer
geometry tools ensure that the wafer is extremely flat and uniform in thickness, with precisely controlled surface
topography. Specifications for wafer defectivity, geometry and surface quality are tightening as the dimensions
of transistors become so small that the geometry of the substrate can substantially affect transistor performance.

Our wafer inspection portfolio for wafer manufacturing is anchored by the edge handling configuration of
the Surfscan® SP5 and the Surfscan® SP5XP, both launched during the fiscal year ended June 30, 2016. The
Surfscan® SP5 Series and Surfscan® SP3 Series are wafer inspection systems designed to enable development
and production monitoring of polished wafers, epi wafers and engineered substrates. The SURFmonitorTM
module (integrated on the Surfscan® SP5 Series and Surfscan® SP3 Series) characterizes wafer surface quality
and captures low-contrast defects. The WaferSightTM Series offers bare wafer geometry and nanotopography
metrology capabilities. FabVision® offers fab-wide data management and automated yield analysis for wafer
manufacturers.

Reticle Manufacturing

Error-free reticles, or masks, are necessary to achieving high semiconductor device yields, since reticle
defects can be replicated in every die on production wafers. KLA-Tencor offers high sensitivity reticle inspection
and metrology systems for mask shops, designed to help them manufacture reticles that are free of pattern defects
that could print on the wafers and meet pattern placement and critical dimension uniformity specifications.

Our reticle inspection portfolio includes the TeronTM 600 Series for development and manufacturing of
advanced optical and EUV masks, the TeraScanTM 500XR system for mask shop production of reticles for the
32nm node and above and our X5.2TM, X5.3™ and TeronTM SL650 Series products for reticle quality control
capability for IC fabs. These products include the capability for mapping critical dimension uniformity across the
reticle. In addition, we offer the LMS IPRO line of reticle metrology systems for measuring pattern placement
error, including the LMS IPRO6 which measures on-device pattern features in addition to standard registration
marks. If the pattern on the reticle is displaced from its intended location, overlay error can result on the wafer,
which can lead to electrical continuity issues affecting yield, performance or reliability of the IC device.

LED, Power Device and Compound Semiconductor Manufacturing

LEDs are becoming more commonly used in solid-state lighting, television and notebook backlighting, and
automotive applications. As LED device makers target aggressive cost and performance targets, they place
significant emphasis on improved process control and yield during the manufacturing process.

KLA-Tencor offers a portfolio of systems to help LED manufacturers reduce production costs and increase
product output: Candela® 8720, Klarity® LED, WI-2280, 8 Series, MicroXAM Series optical profilers and

P-Series and HRP®-Series stylus profilers. The Candela® 8720 substrate and epi wafer inspection system
provides automated inspection and quality control of LED substrates, detecting defects that can impact device
performance, yield and field reliability. Klarity® LED is an automated defect data management and analysis
system for LED yield enhancement. The WI-2280 system is designed specifically for defect inspection and 2D
metrology for LED applications. The 8 Series provides patterned wafer defect inspection capability for LED
manufacturing. The MicroXAM Series optical profilers measure step height,
texture and form for LED
applications. The P-Series and HRP®-Series stylus profilers are metrology systems for measurement of step
heights and roughness for LED substrates and pattern wafer applications.

Leading power device manufacturers are targeting faster development and ramp times, high product yields
and lower device costs. To achieve these goals, they are implementing solutions for characterizing yield-limiting
defects and processes. Full-surface, high sensitivity defect inspection and profiler metrology systems provide
accurate process feedback, enabling improvements in SiC substrate quality and optimal epitaxial growth yields
on both SiC epi and GaN-on-silicon processes.

KLA-Tencor offers inspection and metrology systems to support power device manufacturing. The
Candela® CS920 inspection system integrates surface defect detection and Photoluminescence technology for
inspection and defect classification of a wide range of defects on SiC substrates and epi layers. The MicroXAM
Series optical profilers measure step height, texture and form for power device applications. The P-Series and
HRP®-Series stylus profilers measure step heights and roughness for SiC substrates and pattern wafer
applications.

Finally, our primary products for compound semiconductor manufacturing include Candela® CS20, the
MicroXAM Series optical profilers and the P-Series and HRP®-Series stylus profilers, used for the inspection
and metrology of substrates, epi-layers and process films.

Data Storage Media/Head Manufacturing

Advancements in data storage are being driven by a wave of innovative consumer electronics with small
form factors and immense storage capacities, as well as an increasing need for high-volume storage options to
back up modern methods of remote computing and networking (such as cloud computing). Our process control
and yield management solutions are designed to enable customers to rapidly understand and resolve complex
manufacturing problems, which can help improve time to market and product yields. In the front-end and back-
end of thin-film head wafer manufacturing, we offer the same process control equipment that we serve to the
semiconductor industry. In addition, we offer an extensive range of test equipment and surface profilers with
particular strength in photolithography. In substrate and media manufacturing, we offer metrology and defect
inspection solutions with KLA-Tencor’s optical surface analyzers. Products that we offer for the data storage
media/head manufacturing market manufacturing are highlighted in the product table at the conclusion of this
“Products” section.

MEMS Manufacturing

The increasing demand for MEMS technology is coming from diverse industries such as automotive, space
and consumer electronics. MEMS have the potential to revolutionize nearly every product category by bringing
together silicon-based microelectronics with micromachining technology, making possible the realization of
complete systems-on-a-chip. KLA-Tencor offers tools and techniques for this emerging market, such as defect
inspection and review, optical inspection and surface profiling, which were first developed for the integrated
circuit industry. Products that we offer for MEMS manufacturing are highlighted in the product table at the
conclusion of this “Products” section.

General Purpose/Lab Applications

A range of industries, including general scientific and materials research and optoelectronics, require
measurements of surface topography to either control their processes or research new material characteristics.

Typical measurement parameters that our tools address include flatness, roughness, curvature, peak-to-valley,
asperity, waviness, texture, volume, sphericity, slope, density, stress, bearing ratio and distance (mainly in the
micron to nanometer range). The profiler and in-situ process monitoring products that we offer for general
purpose/lab applications are highlighted in the product table at the conclusion of this “Products” section.

K-T Certified

K-T Certified is our refurbished tools program that delivers fully refurbished, tested and certified KLA-
Tencor tools to our customers. In addition to high-quality pre-owned 300mm and sub-200mm tools for the
integrated circuit, reticle, substrate, MEMS and data storage markets, K-T Certified also offers system software
and hardware performance upgrades to extend the capabilities of existing equipment. When a customer needs to
move to the next manufacturing node, K-T Certified can help maximize the value of the customer’s existing
assets through K-T Certified’s repurchase, trade-in and redeployment services.

K-T Services

Our K-T Services program enables our customers in all business sectors to maintain the high performance
and productivity of our products through a flexible portfolio of services. Whether a manufacturing site is
producing integrated circuits, wafers or reticles, K-T Services delivers yield management expertise spanning
advanced technology nodes, including collaboration with customers to determine the best products and services
to meet technology requirements and optimize cost of ownership. Our comprehensive services include service
engineers, technical support teams and knowledge management systems; and an extensive parts network to
ensure worldwide availability of parts.

Product Table

MARKETS

APPLICATIONS

PRODUCTS

Chip Manufacturing

Patterned Wafer

3900 Series, 2930 Series, 2920
Series,
PumaTM 9980 Series, PumaTM
9850 Series, PumaTM 9650
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 and X5.3™
TeronTM SL650 Series

Klarity® product family

eDR7200TM Series

CIRCL-APTM
WI-22x0 Series

High Productivity and All
Surface

Unpatterned Wafer/Surface

Reticle

Data Management

Electron-beam

Wafer-Level Packaging

Component Inspection

ICOS® T830 and ICOS® T640

Patterning Control

Overlay

5D Patterning Control
Solution™

ArcherTM Series

Optical CD and Shape

SpectraShapeTM product family

Film Thickness/Index

SpectraFilmTM product family
AlerisTM product family

Wafer Geometry and
Topography

WaferSightTM Series
SURFmonitorTM

Ion Implant and Anneal

Therma-Probe®

Surface Metrology

Resistivity

Data Management

Lithography

Plasma Etch

Implant and Wet

HRP® product family
P-Series product family

RS product family

K-T Analyzer®

SensArray® product family

SensArray® PlasmaSuite

Front-End Defect Inspection

Defect Review

Advanced Packaging

Metrology

In-Situ Process Monitoring

Lithography Software

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

Surfscan® SP3 Series and Surfscan® SP5 Series
SURFmonitorTM

WaferSightTM Series
SURFmonitorTM

FabVision®

TeraScanTM 500XR and TeronTM 600 Series

Pattern Placement Metrology

LMS IPRO Series

LED, Power Device and Compound Semiconductor

Manufacturing

Patterned Wafer Inspection

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

Defect Inspection (substrates and epi wafers)

Candela® product family

Surface Metrology

Data Management

Data Storage Media/Head Manufacturing

P-Series product family
MicroXAM Series
HRP® product family

Klarity® LED

Thin-Film Head Metrology and Inspection

Aleris product family
CIRCLTM with 8 Series, CV350i, BDR300 and
Micro300 modules
8 Series (8800, 8820, 8900, 8920)
HRP® product family
P-Series product family

Virtual Lithography

In-Situ Process Monitoring

PROLITHTM

SensArray® product family

Transparent and Metal Substrate Inspection

Candela® product family

Data Management

MEMS Manufacturing

Surface Metrology: Stylus Profiling

Surface Metrology: Optical Profiling

Optical Inspection

General Purpose/Lab Applications

Surface Metrology: Stylus Profiling

Klarity® Defect
K-T Analyzer®

P-Series product family
HRP® product family

MicroXAM Series

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, 2016, 2015 and 2014, the following customers each accounted for more

than 10% of total revenues:

2016

Year ended June 30,

2015

2014

Micron Technology, Inc.

Intel Corporation

Taiwan Semiconductor

Samsung Electronics Co., Ltd.

Manufacturing Company Limited

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, 2016, we employed approximately 2,110 full-time sales and related personnel, service
engineers and applications engineers. In addition to sales and service offices in the United States, we conduct
sales, marketing and services out of wholly-owned subsidiaries or branches in other countries, including
Belgium, China, Germany, Israel, Japan, Singapore, South Korea and Taiwan. International revenues accounted
for approximately 82%, 71% and 76% of our total revenues in the fiscal years ended June 30, 2016, 2015 and
2014, respectively. Additional information regarding our revenues from foreign operations for our last three
fiscal years can be found in Note 16, “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 $1.21 billion and $984 million as of
June 30, 2016 and 2015, 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
$255 million and $221 million as of June 30, 2016 and 2015, 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, 2016, we
employed approximately 1,430 full-time research and development personnel.

Our key research and development activities during the fiscal year ended June 30, 2016 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, 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
position. New product
introductions, however, may contribute to fluctuations in operating results, since
customers may defer ordering existing products, and, if new products have reliability or quality problems, those
problems may result in reduced orders, higher manufacturing costs, delays in acceptance of and payment for new
products, and additional service and warranty expenses. There can be no assurance that we will successfully
develop and manufacture new products, or that new products introduced by us will be accepted in the
marketplace. If we do not successfully introduce new products, our results of operations will be adversely
affected.

Manufacturing, Raw Materials and Supplies

We perform system design, assembly and testing in-house and utilize an outsourcing strategy for the
manufacture of components and major subassemblies. Our in-house manufacturing activities consist primarily of
assembling and testing components and subassemblies that are acquired through third-party vendors and
integrating those subassemblies into our finished products. Our principal manufacturing activities take place in
the United States (Milpitas, California), Singapore, Israel, Germany and China. As of June 30, 2016, we
employed approximately 970 full-time manufacturing personnel.

Some critical parts, components and subassemblies (collectively, “parts”) that we use are designed by us
and manufactured by suppliers in accordance with our specifications, while other parts are standard commercial
products. We use numerous vendors to supply parts and raw materials for the manufacture and support of our
products. Although we make reasonable efforts to ensure that these parts and raw materials are available from
multiple suppliers, this is not always possible, and certain parts and raw materials included in our systems may be
obtained only from a single supplier or a limited group of suppliers. Through our business interruption planning,
we endeavor to minimize the risk of production interruption by, among other things, monitoring the financial
condition of suppliers of key parts and raw materials, identifying (but not necessarily qualifying) possible
alternative suppliers of such parts and materials, and ensuring adequate inventories of key parts and raw
materials are available to maintain manufacturing schedules.

Although we seek to reduce our dependence on sole and limited source suppliers, in some cases the partial
or complete loss of certain of these sources, or disruptions within our suppliers’ often-complex supply chains,
could disrupt scheduled deliveries to customers, damage customer relationships and have a material adverse
effect on our results of operations.

Competition

The worldwide market for process control and yield management systems is highly competitive. In each of
our product markets, we face competition from established and potential competitors, such as Applied Materials,
Inc., ASML Holding N.V., Hermes Microvision, Inc., Hitachi High-Technologies Corporation, Nanometrics, Inc.
and Rudolph Technologies, Inc., some of which may have greater financial, research, engineering, manufacturing
and marketing resources than we have. We may also face future competition from new market entrants from
other overseas and domestic sources. We expect our competitors to continue to improve the design and
performance of their current products and processes and to introduce new products and processes with improved
price and performance characteristics. We believe that, to remain competitive, we will require significant

financial resources to offer a broad range of products, to maintain customer service and support centers
worldwide, and to invest in product and process research and development.

We believe that, while price and delivery are important competitive factors, the customers’ overriding
requirement is for systems that easily and effectively incorporate automated and highly accurate inspection and
metrology capabilities into their existing manufacturing processes to enhance productivity. Significant
competitive factors in the market for process control and yield management systems include system performance,
ease of use, reliability, interoperability with the existing installed base and technical service and support, as well
as overall cost of ownership.

Management believes that we are well positioned in the market with respect to both our products and
services. However, any loss of competitive position could negatively impact our prices, customer orders,
revenues, gross margins and market share, any of which would negatively impact our operating results and
financial condition.

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, 2016, we employed approximately 5,580 full-time employees. Except for our employees in
Belgium (where a trade union delegation has been recognized) and our employees in the German operations of
our MIE business unit (who are represented by employee works council), none of our employees are represented
by a labor union. We have not experienced work stoppages and believe that our employee relations are good.

Competition is intense in the recruiting of personnel in the semiconductor and semiconductor equipment
industry. We believe that our future success will depend, in part, on our continued ability to hire and retain
qualified management, marketing and technical employees.

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)

excursion

fab

front-end

in-situ

interconnect

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.

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, which carries electrical
signals to different parts of a die.

lithography

mask shop

metrology

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

Moore’s Law

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).

An observation made by Gordon Moore in 1965 and revised in 1975 that the
number of transistors on a typical integrated circuit doubles approximately every
two years.

nanometer (nm)

One billionth (10-9) of a meter.

narrowband

patterned

photoresist

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

semiconductor manufacturing and industries using similar processing
refers to substrates that have electronic circuits (transistors,

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

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 the Merger

There are risks and uncertainties associated with the Merger with Lam Research Corporation.

to certain conditions,

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

to specific standards,

including (1) subject

•

Various conditions to the closing of the Merger may not be satisfied or waived;

If the Merger does not close on or before October 20, 2016, subject to certain limitations, either party
will have the right to terminate the Merger Agreement;

The Merger may not be consummated, which among other things may cause our share price to decline
to the extent that the current price of our common stock reflects an assumption that the Merger will be
completed;

The failure to consummate the Merger may result in negative publicity and a negative impression of us
in the investment community;

Required regulatory approvals from governmental entities may delay the Merger or result in the
imposition of conditions that could cause Lam Research to abandon the Merger;

The Merger Agreement may be terminated in circumstance that would require us to pay Lam Research
a termination fee of $290.0 million;

• We will have incurred significant costs in connection with the acquisition that we may be unable to

recover;

•

Our ability to attract, recruit, retain and motivate current and prospective employees may be adversely
affected;

The attention of our employees and management may be diverted due to activities related to the
Merger;

• We may forego opportunities we might otherwise pursue absent the Merger Agreement, and may not
be able to take advantage of alternative business opportunities or effectively respond to competitive
pressures; and

•

The Merger Agreement restricts us from engaging in certain actions without Lam Research’s approval,
which could prevent us from pursuing certain business opportunities outside the ordinary course of
business that arise prior to the closing of the Merger.

In addition, we have incurred, and will continue to incur, significant costs, expenses and fees for
professional services and other transaction costs in connection with the Merger, and these fees and costs are
payable by us regardless of whether the Merger is consummated.

Several lawsuits have been filed against Lam Research and us challenging the Merger and an adverse

ruling may prevent the Merger from being completed.

Lam Research, KLA-Tencor, Merger Sub 1 and Merger Sub 2, as well as the members of the KLA-Tencor
Board, have been named as defendants in several lawsuits brought by KLA-Tencor stockholders. Additional
lawsuits may be filed against Lam Research, KLA-Tencor, Merger Sub 1, Merger Sub 2 and the directors of one
of the foregoing companies in connection with the Merger.

One of the conditions to the closing of the Merger is that no order, injunction, decree or other legal restraint
or prohibition shall be in effect that prevents completion of the Merger. Consequently, if a settlement or other
resolution is not reached in the lawsuits referenced above and the plaintiffs secure injunctive or other relief
prohibiting, delaying or otherwise adversely affecting the defendants’ ability to complete the Merger, then such
injunctive or other relief may prevent the Merger from becoming effective within the expected time frame or at
all.

The Merger is subject to the receipt of consents and clearances from domestic and foreign regulatory
authorities that may impose conditions that could have an adverse effect on Lam Research, KLA-Tencor or
the combined company or, if not obtained, could prevent completion of the Merger.

Before the Merger may be completed, applicable waiting periods must expire or terminate under antitrust
and competition laws and various approvals or consents must be obtained from regulatory entities. In addition, at
any time prior to the Merger, competition authorities may seek to enjoin completion of the Merger. In deciding
whether to grant antitrust or regulatory clearances, the relevant governmental entities will consider the effect of
the Merger on competition within their relevant jurisdiction. The terms and conditions of any approvals that are
granted may impose requirements, limitations or costs or place restrictions on the conduct of the combined
company’s business. KLA-Tencor and Lam Research have obtained consents or clearances from regulatory
authorities in Germany, Israel, Ireland and Taiwan. The Merger Agreement may require KLA-Tencor and Lam
Research to comply with conditions imposed by regulatory entities and, in certain circumstances, either company
may refuse to close the Merger on the basis of those regulatory conditions. There can be no assurance that
regulators will not
terms,
obligations or restrictions will not have the effect of delaying completion of the Merger or imposing additional
material costs on or materially limiting the revenues of the combined company following the Merger. In addition,
we can provide no assurance that any such conditions, obligations or restrictions will not result in the delay or
abandonment of the Merger.

terms, obligations or restrictions, or that such conditions,

impose conditions,

On May 13, 2016, Lam Research and KLA-Tencor each received a request for additional information and
documentary material (commonly referred to as a “Second Request”) from the United States Department of
Justice (DOJ) in connection with the proposed transaction between the companies. The companies are working
with the staff of the DOJ on the terms of a consent decree.

For additional information on the risks associated with our proposed Merger with Lam Research, please
review the risks beginning on page 22 of the joint proxy statement/prospectus filed by Lam Research with the
SEC on January 13, 2016, which risks are incorporated by reference herein and included as Exhibit 99.1 to this
annual report.

Risks Associated with Our Industry

Ongoing changes in the technology industry, as well as the semiconductor industry in particular, could

expose our business to significant risks.

The semiconductor equipment industry and other industries that we serve are constantly developing and
changing over time. Many of the risks associated with operating in these industries are comparable to the risks
faced by all technology companies, such as the uncertainty of future growth rates in the industries that we serve,
pricing trends in the end-markets for consumer electronics and other products (which place a growing emphasis

on our customers’ cost of ownership), changes in our customers’ capital spending patterns and, in general, an
environment of constant change and development, including decreasing product and component dimensions; use
of new materials; and increasingly complex device structures, applications and process steps. If we fail to
appropriately adjust our cost structure and operations to adapt to any of these trends, or, with respect to
technological advances, if we do not timely develop new technologies and products that successfully anticipate
and address these changes, we could experience a material adverse effect on our business, financial condition and
operating results.

In addition, we face a number of risks specific to ongoing changes in the semiconductor industry, as the
significant majority of our sales are made to semiconductor manufacturers. Some of the trends that our
management monitors in operating our business include the following:

•

the trend of increasing cost per transistor for leading edge technology transitions below the 28
nanometer node, a reversal of the historical trend of declining cost per transistor with each new
generation of technological advancement within the semiconductor industry, and the adverse impact
that such reversal may have upon our business;

the increasing cost of building and operating fabrication facilities and the impact of such increases on
our customers’ investment decisions;

differing market growth rates and capital requirements for different applications, such as memory,
logic and foundry;

lower level of process control adoption by our memory customers compared to our foundry and logic
customers;

our customers’ reuse of existing and installed products, which may decrease their need to purchase new
products or solutions at more advanced technology nodes;

the emergence of disruptive technologies that change the prevailing semiconductor manufacturing
processes (or the economics associated with semiconductor manufacturing) and, as a result, also impact
the inspection and metrology requirements associated with such processes;

the higher design costs for the most advanced integrated circuits, which could economically constrain
leading-edge manufacturing technology customers to focus their resources on only the large,
technologically advanced products and applications;

the possible introduction of integrated products by our larger competitors that offer inspection and
metrology functionality in addition to managing other semiconductor manufacturing processes;

changes in semiconductor manufacturing processes that are extremely costly for our customers to
implement and, accordingly, our customers could reduce their available budgets for process control
equipment by reducing inspection and metrology sampling rates for certain technologies;

the 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. 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
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.

to recover

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 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
including pricing such competitive tools
that may discourage customers from purchasing our products,
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, certain key parts
are 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

the availability of resources for the installation of our products, delays or
manage customer deliveries,
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, 2016, we had $3.08 billion aggregate principal amount of outstanding indebtedness,
consisting of $2.50 billion aggregate principal amount of senior, unsecured long-term notes and $576.3 million of
term loans under a Credit Agreement (the “Credit Agreement”). Additionally, we have commitments for an
unfunded revolving credit facility of $500.0 million under the Credit Agreement. We may incur additional
indebtedness in the future by accessing the unfunded revolving credit facility under the Credit Agreement and/or
entering into new financing arrangements. Our ability to pay interest and repay the principal of our current
indebtedness is dependent upon our ability to manage our business operations, our credit rating, the ongoing
interest rate environment and the other risk factors discussed in this section. There can be no assurance that we
will be able to manage any of these risks successfully.

In addition, the interest rates of the senior, unsecured long-term notes may be subject to adjustments from
time to time if Moody’s Investors Service, Inc. (“Moody’s”), Standard & Poor’s Ratings Services (“S&P”) or,
under certain circumstances, a substitute rating agency selected by us as a replacement for Moody’s or S&P, as
the case may be (a “Substitute Rating Agency”), downgrades (or subsequently upgrades) its rating assigned to the
respective series of notes such that the adjusted rating is below investment grade. Accordingly, changes by
Moody’s, S&P, or a Substitute Rating Agency to the rating of any series of notes, our outlook or credit rating
could require us to pay additional interest, which may negatively affect the value and liquidity of our debt and the
market price of our common stock could decline. Factors that can affect our credit rating include changes in our
the economic environment, conditions in the semiconductor and semiconductor
operating performance,
indebtedness, and our
including the incurrence of additional
equipment
business strategy.

industries, our financial position,

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 6, “Debt.” If we fail to comply with these covenants, we will be
in default and our borrowings will become immediately due and payable. There can be no assurance that we will
have sufficient financial resources or we will be able to arrange financing to repay our borrowings at such time.
In addition, certain of our domestic subsidiaries under the Credit Agreement are required to guarantee our
borrowings under the Credit Agreement. In the event that we default on our borrowings, these domestic
subsidiaries shall be liable for our borrowings, which could disrupt our operations and result in a material adverse
impact on our business, financial condition or stock price.

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

income per share.

We completed our leveraged recapitalization transaction during the fiscal quarter ended December 31, 2014,
which included raising $3.25 billion in new borrowings, consisting of $2.50 billion aggregate principal amount of
senior, unsecured long-term notes and $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

6, “Debt.”

Our ability to satisfy our future expenses as well as our new debt obligations will depend on our future
performance, which will be affected by financial, business, economic, regulatory and other factors. Furthermore,
our future operations may not generate sufficient cash flows to enable us to meet our future expenses and service
our new debt obligations, which may impact our ability to manage our capital structure to preserve and maintain
our investment grade rating. If our future operations do not generate sufficient cash flows, we may need to access
the unfunded revolving credit facility of $500 million under the Credit Agreement or enter into new financing
arrangements to obtain necessary funds. If we determine it is necessary to seek additional funding for any reason,
we may not be able to obtain such funding or, if funding is available, we may not be able to obtain it on
acceptable terms. Any additional borrowing under the Credit Agreement will place further pressure on us to
comply with the financial covenants. If we fail to make a payment associated with our new debt obligations, we
could be in default on such debt, and such a default could cause us to be in default on our other outstanding
indebtedness.

There can be no assurance that we will continue to declare cash dividends at all or in any particular

amounts.

Our Board of Directors first instituted a quarterly dividend during the fiscal year ended June 30, 2005. Since
that time, we have announced a number of increases in the amount of our quarterly dividend level as well as
payment of a special cash dividend that was declared and substantially paid in the second quarter of our fiscal
year ended June 30, 2015. We intend to continue to pay quarterly dividends subject to capital availability and
periodic determinations by our Board of Directors that cash dividends are in the best interest of our stockholders
and are in compliance with all laws and agreements applicable to the declaration and payment of cash dividends
by us. Future dividends may be affected by, among other factors: our views on potential future capital
requirements for investments in acquisitions and the funding of our research and development; legal risks; stock
repurchase programs; changes in federal and state income tax laws or corporate laws; changes to our business
model; restrictions on increasing dividends under the Merger Agreement; and our increased interest and principal
payments required by our $3.08 billion aggregate principal amount of outstanding indebtedness and any
additional indebtedness that we may incur in the future. Our dividend payments may change from time to time,
and we cannot provide assurance that we will continue to declare dividends at all or in any particular amounts. A
reduction in our dividend payments could have a negative effect on our stock price.

We are exposed to risks related to our commercial terms and conditions, including our indemnification of

third parties, as well as the performance of our products.

Although our standard commercial documentation sets forth the terms and conditions that we intend to
apply to commercial transactions with our business partners, counterparties to such transactions may not
explicitly agree to our terms and conditions. In situations where we engage in business with a third party without
an explicit master agreement regarding the applicable terms and conditions, or where the commercial
documentation applicable to the transaction is subject to varying interpretations, we may have disputes with those
third parties regarding the applicable terms and conditions of our business relationship with them. Such disputes
could lead to a deterioration of our commercial relationship with those parties, costly and time-consuming
litigation, or additional concessions or obligations being offered by us to resolve such disputes, or could impact
our revenue or cost recognition. Any of these outcomes could materially and adversely affect our business,
financial condition and results of operations.

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 reductions,
large excess inventory write-offs, and material impairment charges related to our goodwill and purchased

intangible assets. During the fourth quarter of fiscal year ended 2015, we implemented a plan to reduce our
global employee workforce to streamline our organization and business processes in response to changing
customer requirements in our industry. We substantially completed the global employee workforce reduction
during the fiscal year ended June 30, 2016 and recorded net restructuring charges of $8.9 million during the same
period. Such workforce changes can also temporarily reduce workforce productivity, which could be disruptive
to our business and adversely affect our results of operations. In addition, we may not achieve or sustain the
expected cost savings or other benefits of our restructuring plans, or do so within the expected time frame. If we
again restructure our organization and business processes, implement additional cost reduction actions or
discontinue certain business operations, we may take additional, potentially material, restructuring charges
related to, among other things, employee terminations or exit costs. We may also be required to write-off
additional inventory if our product build plans or usage of service inventory decline. Also, as our lead times from
suppliers increase (due to the increasing complexity of the parts and components they provide) and the lead times
demanded by our customers decrease (due to the time pressures they face when introducing new products or
technology or bringing new facilities into production), we may be compelled to increase our commitments, and
therefore our risk exposure, to inventory purchases to meet our customers’ demands in a timely manner, and that
inventory may need to be written-off if demand for the underlying product declines for any reason. Such
additional write-offs could constitute material charges.

As noted above, in the past, we recorded a material charge related to the impairment of our goodwill and
purchased intangible assets. Goodwill represents the excess of costs over the net fair value of net assets acquired
in a business combination. Goodwill is not amortized, but is instead tested for impairment at least annually in
accordance with authoritative guidance for goodwill. Purchased intangible assets with estimable useful lives are
amortized over their respective estimated useful lives based on economic benefit if known or using the straight-
line method, and are reviewed for impairment in accordance with authoritative guidance for long-lived assets.
The valuation of goodwill and intangible assets requires assumptions and estimates of many critical factors,
including revenue and market growth, operating cash flows, market multiples, and discount rates. A substantial
decline in our stock price, or any other adverse change in market conditions, particularly if such change has the
effect of changing one of the critical assumptions or estimates we previously used to calculate the value of our
goodwill or intangible assets (and, as applicable, the amount of any previous impairment charge), could result in
a change to the estimation of fair value that could result in an additional impairment charge.

Any such additional material charges, whether related to restructuring or goodwill or purchased intangible

asset impairment, may have a material negative impact on our operating results and related financial statements.

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 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
to
proceedings and claims, regardless of their merit, and associated internal
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.

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
regulations. In addition, many of these outsourced service providers,
including certain hosted software
applications that we use for confidential data storage, employ “cloud computing” technology for such storage
(which refers to an information technology hosting and delivery system in which data is not stored within the
user’s physical infrastructure but instead is delivered to and consumed by the user as an Internet-based service).
These providers’ cloud computing systems may be susceptible to “cyber incidents,” such as intentional cyber
attacks aimed at theft of sensitive data or inadvertent cyber-security compromises, which are outside of our
control. If we do not effectively develop and manage our outsourcing strategies, if required export and other
governmental approvals are not timely obtained, if our third-party service providers do not perform as anticipated
or do not adequately protect our data from cyber-related security breaches, or if there are delays or difficulties in
enhancing business processes, we may experience operational difficulties (such as limitations on our ability to
ship products), increased costs, manufacturing or service interruptions or delays, loss of intellectual property
rights or other sensitive data, quality and compliance issues, and challenges in managing our product inventory or
recording and reporting financial and management information, any of which could materially and adversely
affect our business, financial condition and results of operations.

We are exposed to risks related to cybersecurity threats and cyber incidents.

information,

In the conduct of our business, we collect, use, transmit and store data on information systems. This data
information and intellectual property belonging to us, our
includes confidential
customers and our business partners, as well as personally-identifiable information of individuals. We allocate
significant resources to network security, data encryption and other measures to protect our information systems
and data from unauthorized access or misuse. Despite our ongoing efforts to enhance our network security
measures, our information systems are susceptible to computer viruses, cyber-related security breaches and
similar disruptions from unauthorized intrusions, tampering, misuse, criminal acts, including phishing, or other

transactional

events or developments that we may be unable to anticipate or fail to mitigate and are subject to the inherent
vulnerabilities of network security measures. We have experienced cyber-related attacks in the past, and may
experience cyber-related attacks in the future. Our security measures may also be breached due to employee
errors, malfeasance, or otherwise. Third parties may also attempt to influence employees, users, suppliers or
customers to disclose sensitive information in order to gain access to our, our customers’ or business partners’
data. Because the techniques used to obtain unauthorized access to the information systems change frequently,
and may not be recognized until launched against a target, we may be unable to anticipate these techniques or to
implement adequate preventative measures.

Any of such occurrences could result in disruptions to our operations; misappropriation, corruption or theft
of confidential information, including intellectual property and other critical data, of KLA-Tencor, our customers
and other business partners; misappropriation of funds and company assets; reduced value of our investments in
research, development and engineering; litigation with, or payment of damages to, third parties; reputational
damage; costs to comply with regulatory inquiries or actions; data privacy issues; costs to rebuild our internal
information systems; and increased cybersecurity protection and remediation costs.

We carry insurance that provides some protection against the potential losses arising from a cybersecurity

incident but it will not likely cover all such losses, and the losses that it does not cover may be significant.

We rely upon certain critical information systems for our daily business operations. Our inability to use
or access our information systems at critical points in time could unfavorably impact our business operations.

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

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
in
to earthquake, flood, other natural catastrophic events, health epidemics or terrorism could result
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 Japanese Yen and
the euro. We have international subsidiaries that operate and sell our products globally. In addition, an increasing
proportion of our manufacturing activities are conducted outside of the United States, and many of the costs
associated with such activities are denominated in foreign currencies. We routinely hedge our exposures to
certain foreign currencies with certain financial institutions in an effort to minimize the impact of certain
currency exchange rate fluctuations, but these hedges may be inadequate to protect us from currency exchange
rate fluctuations. To the extent that these hedges are inadequate, or if there are significant currency exchange rate
fluctuations in currencies for which we do not have hedges in place, our reported financial results or the way we
conduct our business could be adversely affected. Furthermore, if a financial counterparty to our hedges
experiences financial difficulties or is otherwise unable to honor the terms of the foreign currency hedge, we may
experience material financial losses.

We are exposed to fluctuations in interest rates and the market values of our portfolio investments;
impairment of our investments could harm our earnings. In addition, we and our stockholders are exposed to
risks related to the volatility of the market for our common stock.

Our investment portfolio primarily consists of both corporate and government debt securities that are
susceptible to changes in market interest rates and bond yields. As market interest rates and bond yields increase,
those securities with a lower yield-at-cost show a mark-to-market unrealized loss. We believe we have the ability

to realize the full value of all these investments upon maturity. However, an impairment of the fair market value
of our investments, even if unrealized, must be reflected in our financial statements for the applicable period and
may therefore have a material adverse effect on our results of operations for that period.

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, 2016 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

60,619

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

35,531

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, 2016, we owned or leased a total of approximately 2.0 million square feet of space
worldwide, including the locations listed above and office space for smaller sales and service offices in several
locations throughout the world. Our operating leases expire at various times through December 31, 2021, subject
to renewal, with some of the leases containing renewal option clauses at the fair market value, for additional

periods up to five years. Additional information regarding these leases is incorporated herein by reference to
Note 12, “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 13, “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 prices for our common stock

on the NASDAQ Global Select Market for the periods indicated:

Year ended June 30, 2016

Year ended June 30, 2015

High

Low

Cash Dividends
Declared per
share

First Fiscal Quarter . . . . . . . . . . $57.35 $44.95
Second Fiscal Quarter . . . . . . . . $70.28 $48.73
Third Fiscal Quarter . . . . . . . . . $73.19 $62.33
. . . . . . . . $75.17 $67.32
Fourth Fiscal Quarter

$0.52
$0.52
$0.52
$0.52

High

Low

$81.27 $70.10
$84.21 $65.25
$71.26 $57.49
$60.80 $55.24

Cash Dividends
Declared per
share

$ 0.50
$17.00*
$ 0.50
$ 0.50

* Includes a special cash dividend of $16.50 per share that was declared by our Board of Directors on
November 19, 2014 and was paid on December 9, 2014 to the stockholders of record as of the close of
business on December 1, 2014 during the second quarter of the fiscal year ended June 30, 2015. Additional
information regarding special cash dividend can be found in Note 7, “Equity and Long-term Incentive
Compensation Plans.”

As of July 15, 2016, there were 312 holders of record of our common stock.

Equity Repurchase Plans

Our Board of Directors has authorized a program for us to repurchase shares of our common stock under
which an aggregate of approximately 5.9 million shares were available for repurchase as of June 30, 2016. In
connection with entering into the Merger Agreement, we suspended further repurchases under our repurchase
program effective October 21, 2015. We did not repurchase any shares during the three months ended June 30,
2016 and repurchased 3.4 million shares ($175.7 million) in the year ended June 30, 2016.

Stock Performance Graph and Cumulative Total Return

Notwithstanding any statement to the contrary in any of our previous or future filings with the Securities
and Exchange Commission, the following information relating to the price performance of our common stock
shall not be deemed “filed” with the Commission or “soliciting material” under the Securities Exchange Act of
1934 and shall not be incorporated by reference into any such filings.

The following graph compares the cumulative 5-year total return attained by stockholders on our common
stock relative to the cumulative total returns of the S&P 500 Index (as required by SEC regulations) and the
Philadelphia Semiconductor Index (PHLX). The graph tracks the performance of a $100 investment in our
common stock and in each of the indices (with the reinvestment of all dividends) from June 30, 2011 to June 30,
2016.

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

$300

$250

$200

$150

$100

$50

6/11

6/12

6/13

6/14

6/15

6/16

KLA-Tencor Corporation

S&P 500

PHLX Semiconductor

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

$100.00
$100.00
$100.00

$125.52
$105.45
$104.43

$146.51
$127.17
$123.18

$196.57
$158.46
$166.91

$195.01
$170.22
$174.92

$262.83
$177.02
$184.43

June 2011

June 2012

June 2013

June 2014

June 2015

June 2016

* Assumes $100 invested on June 30, 2011 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)

2016

2015

2014

2013

2012

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

Consolidated Balance Sheets:

Cash, cash equivalents and marketable

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

$2,984,493
$ 704,422

$2,814,049
$ 366,158

$2,929,408
$ 582,755

$2,842,781
$ 543,149

$3,171,944
$ 756,015

$
$

2.08

4.52
4.49

$
$

18.50

2.26
2.24

$
$

1.80

3.51
3.47

$
$

1.60

3.27
3.21

$
$

1.40

4.53
4.44

2016

2015

2014

2013

2012

As of June 30,

$2,491,294
$2,865,609
$4,962,432
$3,057,936
$ 689,114

$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

(1) Our net income decreased to $366.2 million in the fiscal year ended June 30, 2015, primarily as a result of
the impact of the pre-tax net loss of $131.7 million for the loss on extinguishment of debt and certain one-
time expenses of $2.5 million associated with the leveraged recapitalization that was completed during the
three months ended December 31, 2014.

(2) We early adopted the accounting standards update regarding classification of deferred taxes at the beginning
of the fourth quarter of fiscal year ended 2016. Upon adoption, approximately $218 million in net current
deferred tax assets were reclassified to noncurrent. No prior periods were retrospectively adjusted. Refer to
Note 1, “Description of Business and Summary of Significant Accounting Policies” for additional details.
(3) Our long-term debt increased to $3.17 billion at the end of fiscal year ended June 30, 2015, because, as part
of the leveraged recapitalization plan, we issued $2.50 billion aggregate principal amount of senior,
unsecured long-term notes (collectively referred to as “Senior Notes”), entered into $750.0 million of five-
year senior unsecured prepayable term loans and a $500 million unfunded revolving credit facility and
redeemed our $750.0 million aggregate principal amount of 6.900% Senior Notes due in 2018 (the “2018
Notes”). Refer to Note 6, “Debt” for additional details. Our total stockholders’ equity decreased to $421.4
million at the end of fiscal year ended June 30, 2015, because, as part of our leveraged recapitalization plan,
we declared a special cash dividend of approximately $2.76 billion. Refer to Note 7, “Equity and Long-term
Incentive Compensation Plans” for additional details.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction
with our Consolidated Financial Statements and the related notes included in Item 8, “Financial Statements and
Supplementary Data,” in this Annual Report on Form 10-K. This discussion contains forward-looking
statements, which involve risks and uncertainties. Our actual results could differ materially from those
anticipated in the forward-looking statements as a result of certain factors, including but not limited to those
discussed in Item 1A, “Risk Factors” and elsewhere in this Annual Report on Form 10-K. (See “Special Note
Regarding Forward-Looking Statements.”)

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

The preparation of our consolidated financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions in applying
our accounting policies that affect the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We base these estimates and assumptions on historical experience,
and evaluate them on an on-going basis to ensure that they remain reasonable under current conditions. Actual
results could differ from those estimates. We discuss the development and selection of the critical accounting
estimates with the Audit Committee of our Board of Directors on a quarterly basis, and the Audit Committee has
reviewed our related disclosure in this Annual Report on Form 10-K. The accounting policies that reflect our
more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully
understanding and evaluating our reported financial results include the following:

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

• When the customer fab has previously accepted the same tool, with the same specifications, and when

we can objectively demonstrate that the tool meets all of the required acceptance criteria.

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

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

• When the installation of the system is deemed perfunctory.

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

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

In many instances, products are sold in stand-alone arrangements. Services are sold separately through
renewals of annual maintenance contracts. We have multiple element revenue arrangements in cases where
certain elements of a sales arrangement are not delivered and accepted in one reporting period. To determine the
relative fair value of each element in a revenue arrangement, we allocate arrangement consideration based on the
selling price hierarchy. For substantially all of the arrangements with multiple deliverables pertaining to products
and services, we use vendor-specific objective evidence (“VSOE”) or third-party evidence (“TPE”) to allocate
the selling price to each deliverable. We determine TPE based on historical prices charged for products and

services when sold on a stand-alone basis. When we are unable to establish relative selling price using VSOE or
TPE, we use estimated selling price (“ESP”) in our allocation of arrangement consideration. The objective of
ESP is to determine the price at which we would transact a sale if the product or service were sold on a stand-
alone basis. ESP could potentially be used for new or customized products. We regularly review relative selling
prices and maintain internal controls over the establishment and updates of these estimates.

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

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

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 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 12, “Commitments and Contingencies” to the Consolidated Financial Statements for
additional details.

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

Accounting for Stock-Based Compensation Plans. We account for stock-based awards granted to
employees for services based on the fair value of those awards. The fair value of stock-based awards is measured
at the grant date and is recognized as expense over the employee’s requisite service period. The fair value for
restricted stock units granted without “dividend equivalent” rights is determined using the closing price of our
common stock on the grant date for restricted stock units, adjusted to exclude the present value of dividends
which are not accrued on the restricted stock units. The fair value for restricted stock units granted with
“dividend equivalent” rights is determined using the closing price of our common stock on the grant date. The
award holder is not entitled to receive payments under dividend equivalent rights unless the associated restricted
stock unit award vests (i.e., the award holder is entitled to receive credits, payable in cash or shares of our
common stock, equal to the cash dividends that would have been received on the shares of our common stock
underlying the restricted stock units had the shares been issued and outstanding on the dividend record date, but
such dividend equivalents are only paid subject to the recipient satisfying the vesting requirements of the
underlying award). The fair value is determined using a Black-Scholes valuation model for purchase rights under
our Employee Stock Purchase Plan. The Black-Scholes option-pricing model requires the input of assumptions,
including the option’s expected term and the expected price volatility of the underlying stock. The expected stock
price volatility assumption is based on the market-based historical implied volatility from traded options of our
common stock. We have elected not to include the indirect tax effects of stock-based compensation deductions
when calculating the windfall benefits and therefore recognize the full effect of these deductions in the income
statement in the period in which the taxable event occurs.

Accounting for Cash-Based Long-Term Incentive Compensation. Cash-based long-term incentive
(“Cash LTI”) awards issued to employees under our Cash LTI program vest in four equal installments, with 25%

of the aggregate amount of the Cash LTI award vesting on each yearly anniversary of the grant date over a four-
year period. In order to receive payments under a Cash LTI award, participants must remain employed by us as
of the applicable award vesting date. Compensation expense related to the Cash LTI awards is recognized over
the vesting term, which is adjusted for the impact of estimated forfeitures.

Contingencies and Litigation. We are subject to the possibility of losses from various contingencies.
Considerable judgment is necessary to estimate the probability and amount of any loss from such contingencies.
An accrual is made when it is probable that a liability has been incurred or an asset has been impaired and the
amount of loss can be reasonably estimated. We accrue a liability and recognize as expense the estimated costs
expected to be incurred over the next twelve months to defend or settle asserted and unasserted claims existing as
of the balance sheet date. See Note 12, “Commitments and Contingencies” and Note 13, “Litigation and Other
Legal Matters” to the Consolidated Financial Statements for additional details.

Goodwill and Intangible Assets. We assess goodwill for impairment annually as well as whenever events
or changes in circumstances indicate that the carrying value may not be recoverable. Long-lived intangible assets
are tested for impairment whenever events or changes in circumstances indicate that their carrying amounts may
not be recoverable. See Note 5, “Goodwill and Purchased Intangible Assets” to the Consolidated Financial
Statements for additional details. Goodwill represents the excess of the purchase price over the fair value of the
net tangible and identifiable intangible assets acquired in each business combination. We performed our annual
qualitative assessment of the goodwill by reporting unit in our second quarter of fiscal year ended June 30, 2016
and concluded that there was no impairment. There have been no significant events or circumstances affecting
the valuation of goodwill subsequent to our annual impairment test. The next annual evaluation of the goodwill
by reporting unit will be performed in the second quarter of the fiscal year ending June 30, 2017.

If we were to encounter challenging economic conditions, such as a decline in our operating results, an
unfavorable industry or macroeconomic environment, a substantial decline in our stock price, or any other
adverse change in market conditions, we may be required to perform the two-step quantitative goodwill
impairment analysis. In addition, if such conditions have the effect of changing one of the critical assumptions or
estimates we use to calculate the value of our goodwill or intangible assets, we may be required to record
goodwill and/or intangible asset impairment charges in future periods. It is not possible at this time to determine
if any such future impairment charge would occur or, if it does, whether such charge would be material to our
results of operations.

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

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. 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 November 2015, the Financial Accounting Standards board (“FASB”) issued an accounting standard
update for the presentation of deferred income taxes. Under this new guidance, deferred tax assets and liabilities
should be classified as noncurrent in a classified balance sheet. We early adopted this accounting standard update
on a prospective basis at the beginning of the fourth quarter of fiscal year ended 2016. Upon adoption,
approximately $218 million in net current deferred tax assets were reclassified to noncurrent. No prior periods
were retrospectively adjusted.

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
insurance or lease contracts). Under the new guidance, an entity should recognize revenue in
example,
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. In August 2015, the FASB issued an amendment
to defer the effective date of the update by one year, with early adoption on the original effective date permitted.
With this amendment, the updates are effective for us beginning in the first quarter of our fiscal year ending
June 30, 2019, with early adoption permitted beginning in the first quarter of our fiscal year ending June 30,
2018. Subsequent to this amendment, the FASB has issued additional clarifying implementation guidance. The
new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the
cumulative effect recognized as of the date of adoption. We are currently evaluating the impact of this accounting
standard update on our consolidated financial statements.

In April 2015, the FASB issued an accounting standard update for customer’s cloud based fees. The
guidance changes what a customer must consider in determining whether a cloud computing arrangement

contains a software license. If the arrangement contains a software license, the customer would account for the
fees related to the software license element in accordance with guidance related to internal use software; if the
arrangement does not contain a software license, the customer would account for the arrangement as a service
contract. The update is effective for us beginning in the first quarter of our fiscal year ending June 30, 2017.
Early adoption is permitted as of the beginning of an interim or annual period. We are currently evaluating the
impact of this accounting standard update on our consolidated financial statements.

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

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

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

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

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

EXECUTIVE SUMMARY

KLA-Tencor Corporation is a leading supplier of process control and yield management solutions for the
semiconductor and related nanoelectronics industries. Our broad portfolio of 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.
During the fiscal year ended June 30, 2016, we experienced strong demand for our products as we released a new

generation of inspection products and our foundry customers increased their level of investments in our process
control tools. Our earnings will depend not only on our revenue levels, but also on the amount of research and
development spending required to meet our customers’ technology roadmaps. We have maintained production
volumes and capacity to meet anticipated customer requirements and remain at risk of incurring significant
inventory-related and other restructuring charges if business conditions deteriorate. Over the past year, our
customers have taken delivery of higher volumes of process control equipment than they did in the previous year.
However, any delay or push out by our customers in taking delivery of process control and yield management
equipment may cause earnings volatility, due to increases in the risk of inventory related charges as well as
timing of revenue recognition due to expiration of credits or volume discounts, which, if not used by a stipulated
time frame, will expire.

Proposed Merger with Lam Research

On October 20, 2015, the Company entered into an Agreement and Plan of Merger and Reorganization (the
“Merger Agreement”) with Lam Research Corporation (“Lam Research”), under which KLA-Tencor will
ultimately become a direct or indirect wholly-owned subsidiary of Lam Research. The Merger has been
unanimously approved by the boards of directors of both companies. The consummation of the Merger is
conditioned on the satisfaction of customary closing conditions, including domestic and foreign regulatory
approvals and performance in all material respects by each party of its obligations under the Merger Agreement.
On February 19, 2016, the Merger Agreement was approved by KLA-Tencor’s stockholders and Lam Research’s
stockholders approved the issuance of Lam Research’s common stock in the Merger. Refer also to Note 1
“Description of Business and Summary of Significant Accounting Policies” and Item 1A, “Risk Factors.” For
additional details on the transaction, refer to the copy of the Merger Agreement attached as an Exhibit to the
Form 8-K filed with the U.S. Securities and Exchange Commission (“SEC”) on October 21, 2015.

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,

2016

2015

2014

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

$2,984,493
$1,163,391
61%
$ 704,422
4.49
$

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

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

Total revenues during the fiscal year ended June 30, 2016 increased by 6% compared to the fiscal year
ended June 30, 2015. Our year over year revenue growth reflected increases from sales of both our inspection
and metrology products as our customers continue to invest in process control and services. Increased revenues
during the fiscal year ended June 30, 2016 were also driven by the introduction of our new generation of
inspection products as well strong demand from our foundry customers and an increase in the number of post-
warranty systems installed at our customers’ sites over this time period for our service revenues.

Total revenues during the fiscal year ended June 30, 2015 decreased by 4% compared to the fiscal year
ended June 30, 2014. Revenue decreases from sales of both our 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.

Revenues and Gross Margin

(Dollar amounts in thousands)

2016

2015

2014

FY16 vs. FY15

FY15 vs. FY14

Year ended June 30,

Revenues:

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

$2,250,260
734,233

$2,125,396
688,653

$2,286,437
642,971

$124,864
45,580

6% $(161,041)
45,682
7%

(7)%
7%

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

$2,984,493

$2,814,049

$2,929,408

$170,444

6% $(115,359)

(4)%

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

$1,163,391
61%

$1,215,229
57%

$1,232,962
58%

$ (51,838)
4%

(4)% $ (17,733)
(1)%

(1)%

Product revenues

Our business is affected by the concentration of our customer base and our customers’ capital equipment
procurement schedules as a result of their investment plans. Our product revenues in any particular period are
significantly impacted by the amount of new orders that we receive during that period and, depending upon the
duration of manufacturing and installation cycles, in the preceding period.

Product revenues increased by 6% in the fiscal year ended June 30, 2016 compared to the fiscal year ended
June 30, 2015, primarily due to growth in revenues from our customers in China, Taiwan and Japan, partially
offset by lower revenues from our customers in North America, Korea, Rest of Asia and Europe & Israel. The
year over year increase in our product revenues were primarily driven by strong demand for our inspection and
metrology products, the introduction of our new generation of inspection products and the expansion of
semiconductor investments in Asia, particularly in China and Taiwan from our foundry customers.

Product revenues decreased by 7% in the fiscal year ended June 30, 2015 compared to the fiscal year ended
June 30, 2014, primarily as a result of lower revenues from our customers in Taiwan, China and the rest of Asia,
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.

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, 2014, 2015 and 2016, primarily as a result of an increase over time in the number
of post-warranty systems installed at our customers’ sites over that time period.

Revenues—Top Customers

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

2016

Year ended June 30,

2015

2014

Micron Technology, Inc.

Intel Corporation

Taiwan Semiconductor

Samsung Electronics Co., Ltd.

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)

2016

2015

2014

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

$ 894,557
521,335
444,216
430,074
367,905
167,936
158,470

30% $ 691,482
815,914
18%
426,963
15%
162,669
14%
405,320
12%
194,670
6%
117,031
5%

25% $ 741,470
705,159
29%
334,653
15%
260,089
6%
371,139
14%
306,779
7%
210,119
4%

25%
24%
11%
9%
13%
11%
7%

Total

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

$2,984,493

100% $2,814,049

100% $2,929,408

100%

A significant portion of our revenues continues to be generated in Asia, where a substantial portion of the

world’s semiconductor manufacturing capacity is located, and we expect that trend to continue.

Gross margin

Our gross margin fluctuates with revenue levels and product mix and is affected by variations in costs
related to manufacturing and servicing our products, including our ability to scale our operations efficiently and
effectively in response to prevailing business conditions.

The following table summarizes the major factors that contributed to the changes in gross margin

percentage:

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Gross Margin
Percentage

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

56.8%
0.4%
2.6%
0.7%
0.5%

61.0%

Changes in gross margin percentage driven by revenue volume of products and services reflect our ability to
leverage existing infrastructure to generate higher revenues. It also includes the effect of fluctuations in foreign
exchange rates, average customer pricing and customer revenue deferrals associated with volume purchase
agreements. Changes in gross margin percentage from mix of products and services sold reflect the impact of
changes in the composition within product and service offerings. Changes in gross margin percentage from
manufacturing labor, overhead and efficiencies reflect our ability to manage costs and drive productivity as we
scale our manufacturing activity to respond to customer requirements; this includes the impact of capacity
utilization, use of overtime and variability of cost structure. Changes in gross margin percentage from other
service and manufacturing costs include the impact of customer support costs, including the efficiencies with
which we deliver services to our customers, and the effectiveness with which we manage our production plans
and inventory risk.

Our gross margin increased to 61.0% during the fiscal year ended June 30, 2016 from 56.8% during the
fiscal year ended June 30, 2015, primarily due to a favorable mix of products and services sold, an increase in
manufacturing efficiencies driven by lower warranty costs as well as a decrease in severance-related expenses,
and higher revenue volume of products and service.

Our gross margin decreased to 56.8% during the fiscal year ended June 30, 2015 from 57.9% during the
fiscal year ended June 30, 2014, primarily due to lower volume of products and services, as well as a reduction in
manufacturing efficiencies driven by lower manufacturing output and severance-related expenses, a substantial
amount of which is related to our global workforce reduction plan that we announced in the fourth quarter of the
fiscal year ended June 30, 2015, refer to Note 14, “Restructuring Charges” for additional details. The above
decreases were partially offset by a favorable mix of products and services sold and efficiencies derived from
other service and manufacturing costs.

Research and Development (“R&D”)

(Dollar amounts in thousands)

2016

2015

2014

FY16 vs. FY15

FY15 vs. FY14

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

$481,258

$530,616

$539,469

$(49,358)

(9)% $(8,853)

(2)%

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

16%

19%

18%

(3)%

Year ended June 30,

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. As technological innovation is essential to our
success, we may incur significant costs associated with R&D projects, including compensation for engineering
talent, engineering material costs, and other expenses.

R&D expenses during the fiscal year ended June 30, 2016 were lower compared to the fiscal year ended
June 30, 2015, primarily due to a decrease in employee related expenses, including severance-related expenses of
$33.9 million as a result of the reduced headcount from our global workforce reduction that we initiated during
the three months ended June 30, 2015, partially offset by an increase in variable compensation of $10.6 million.
Additionally, there was a decrease in engineering materials and supplies expenses of $21.0 million and an
increase in the benefit to R&D expense from external funding of $5.4 million.

R&D expenses during the fiscal year ended June 30, 2015 were lower compared to the fiscal year ended
June 30, 2014, primarily due to a decrease in engineering materials and consulting costs of $19.8 million
associated with the completion of major platform developments, a decrease in depreciation expense of $2.1
million and a decrease in travel expenses of $1.2 million. This was partially offset by an increase in employee-
related expenses of $10.6 million mainly as a result of our severance-related expenses, a substantial amount of
which is related to our global workforce reduction plan that we announced in the fourth quarter of the fiscal year
ended June 30, 2015, refer to Note 14, “Restructuring Charges” for additional details. In addition, the decrease
was partially offset by a $6.3 million reduction in external funding used to offset the cost of R&D activities.

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)

2016

2015

2014

FY16 vs. FY15

FY15 vs. FY14

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

$379,399

$406,864

$384,907

$(27,465)

(7)% $21,957

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

13%

14%

13%

(1)%

Year ended June 30,

SG&A expenses during the fiscal year ended June 30, 2016 were lower compared to the fiscal year ended
June 30, 2015, primarily due to a decrease in employee-related expenses, including severance-related expenses,
of $28.0 million as a result of the reduced headcount from our global workforce reduction that we initiated
during the three months ended June 30, 2015 partially offset by an increase in variable compensation of $16.4
million, a decrease in cost of support for sales evaluation of $8.6 million, a decrease in contributions to support
our corporate social responsibility program of $7.0 million and a decrease in travel-related expenses of $4.7
million. The decreases above were partially offset by an increase in our merger-related expenses of $15.6 million
pertaining to the pending Merger with Lam Research, principally for financial advisory services including the
fairness opinion fees, employee-related expenses and legal fees during the fiscal year ended June 30, 2016.

SG&A expenses during the fiscal year ended June 30, 2015 were higher compared to the fiscal year ended
June 30, 2014, primarily due to an increase in employee-related expenses of $8.3 million mainly as a result of
severance-related expenses, a substantial amount of which is related to our global workforce reduction plan that
we announced in the fourth quarter of the fiscal year ended June 30, 2015 (refer to Note 14, “Restructuring
Charges” for additional details), an increase in cost of support for sales evaluation of $6.5 million, an increase in
certain expenses of $2.5 million as a result of our one-time leveraged recapitalization expense that was
completed in the three months ended December 31, 2014, a payment related to a contractual settlement for $2.0
million, an increase due to the impairment charge recorded for certain long-lived assets of $1.7 million and an
increase in legal fees of $1.6 million. In addition, during the three months ended December 31, 2013, SG&A
expenses were favorably impacted by our receipt of $1.1 million in proceeds from a class action settlement, as
well as our recovery of $1.1 million in receivables that had previously been classified as a bad debt expense
during the three months ended December 31, 2013, both of which resulted in a decrease of our SG&A expense
for the fiscal year ended June 30, 2014. The increases described above were partially offset by a decrease in
travel related expenses of $4.3 million and a decrease in marketing-related expenses of $1.9 million.

Restructuring Charges

During the fourth quarter of the fiscal year ended 2015, we announced a plan to reduce our global employee
workforce to streamline our organization and business processes in response to changing customer requirements
in its industry. The goals of this reduction were to enable continued innovation, direct our resources toward its
best opportunities and lower our ongoing expense run rate. We substantially completed our global workforce
reduction during the fiscal year ended June 30, 2016 and recorded an $8.9 million net restructuring charge, of
which $3.6 million was recorded to costs of revenues, $1.6 million to research and development expense and
$3.7 million to selling, general and administrative expense. During the fiscal year ended June 30, 2015, we
recorded a $31.6 million net restructuring charge, of which $8.0 million was recorded to costs of revenues, $11.1
million to research and development expense and $12.5 million to selling, general and administrative expense.
Refer to Note 14, “Restructuring Charges” for additional details.

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

years ended June 30, 2016 and 2015:

(In thousands)

Year ended June 30,

2016

2015

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

$ 24,887
8,926
(142)
(33,084)

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

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

587

$ 24,887

The remaining accrual for severance and benefits as of June 30, 2016 is expected to be paid out by the end

of our quarter ending December 31, 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,

2016

2015

2014

$122,887
$ 53,812
$106,009
$ (20,634) $ (10,469) $(16,203)
2%
1%

4%
— %

4%
1%

The increase in interest expense during the fiscal year ended June 30, 2016 compared to the fiscal year
ended June 30, 2015 was primarily attributable to the $2.50 billion aggregate principal amount of senior,
unsecured long-term notes (collectively referred to as “Senior Notes”), the $750.0 million unsecured prepayable
term loans and the $500.0 million unfunded revolving credit facility which were executed during the three
months ended December 31, 2014 and which were not outstanding for the entire fiscal year ended June 30, 2015.
In addition,
the $750.0 million of 2018 Senior Notes were redeemed during the three months ended
December 31, 2014.

The increase in interest expense during the fiscal year ended June 30, 2015 compared to the fiscal year
ended June 30, 2014 was primarily attributable to the issuance of $2.50 billion aggregate principal amount of
senior, unsecured long-term notes and entry into the $750.0 million unsecured prepayable term loan facility
during the three months ended December 31, 2014, as compared to $750.0 million of 2018 Senior Notes for the
fiscal year ended June 30, 2014.

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.

The increase in other expense (income), net during the fiscal year ended June 30, 2016 compared to the
fiscal year ended June 30, 2015 was primarily due to reduction of interest and penalty accruals related to
uncertain tax positions of $5.5 million and an increase of $4.5 million for gain on the sale of equity investments
in privately-held companies net of impairment charges.

The decrease in other expense (income), net during the fiscal year ended June 30, 2015 compared to the
fiscal year ended June 30, 2014 was primarily attributable to a net decline of $4.7 million in gains from the sale
of equity investments in privately-held companies, a $1.1 million decrease in interest
income from our
investment portfolio as a result of our decision to liquidate certain marketable securities and a $1.1 million
increase in net foreign currency losses resulting from the volatility of the foreign currencies against the U.S.

dollar, which was partially offset by a decrease in an impairment charge of $1.0 million related to an equity
investment in a privately-held company that was deemed to be other-than-temporary impairment and an increase
of $0.9 million of realized gains from the investment portfolio liquidation.

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 $750.0 million of 2018 Senior Notes during the
three months ended December 31, 2014. Included in the loss on extinguishment of debt and other, net is the $1.2
million gain on the non-designated forward contract that was entered into by us in anticipation of the redemption
of the 2018 Senior Notes, which were redeemed during the three months ended December 31, 2014. Refer to
“Note 6, Debt” and “Note 15, Derivative Instruments and Hedging Activities” for further details. We had no loss
on extinguishment of debt and other, net, in the fiscal years ended June 30, 2016 and 2014.

Provision for Income Taxes

The following table provides details of income taxes:

(Dollar amounts in thousands)

Year ended June 30,

2016

2015

2014

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

$858,192
$153,770
17.9%

$434,131
$ 67,973
15.7%

$734,461
$151,706
20.7%

The provision for income taxes differs from the statutory U.S. federal rate primarily due to foreign income

with lower tax rates, tax credits, and other domestic incentives.

Tax expense as a percentage of income during the fiscal year ended June 30, 2016 was 17.9% compared to
15.7% for the fiscal year ended June 30, 2015. Tax expense as a percentage of income increased primarily due to
an increase in the percentage of income earned in the U.S. compared to income earned outside the U.S. in
jurisdictions with lower tax rates. During the fiscal year ended June 30, 2015, the loss on extinguishment of debt
decreased income earned in the U.S.

Tax expense as a percentage of income during the fiscal year ended June 30, 2015 was 15.7% compared to
20.7% for the fiscal year ended June 30, 2014. Tax expense as a percentage of income decreased primarily due to
an increase in our research and development credits, an increase in the domestic manufacturing deduction as a
percentage of income, and a decrease in the percentage of income earned in the U.S. as a result of the loss on
extinguishment of debt compared to income earned outside the U.S. in jurisdictions with lower tax rates.

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. 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,

2016

2015

2014

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

$1,108,488
1,382,806

838,025
1,549,086

$ 630,861
2,521,776

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

$2,491,294

$ 2,387,111

$3,152,637

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

50%

49%

57%

(In thousands)

Year ended June 30,

2016

2015

2014

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 . . . . . . . .

$ 759,696
144,687
(636,702)
2,782

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

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

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

$ 270,463

207,164

$ (354,529)

Cash and Cash Equivalents and Marketable Securities:

As of June 30, 2016, our cash, cash equivalents and marketable securities totaled $2.49 billion, which is an
increase of $104.2 million from June 30, 2015. The increase is primarily attributable to our cash generated from
operations and our net proceeds from investing activities, partially offset by the payment of regular quarterly
cash dividends and a special cash dividend with respect to fully vested restricted stock units with dividend
equivalent rights aggregating to $346.3 million, payment for stock repurchases of $181.7 million and payment of
term loans of $135.0 million. As of June 30, 2016, $1.73 billion of our $2.49 billion of cash, cash equivalents,
and marketable securities were held by our foreign subsidiaries and branch offices. We currently intend to
indefinitely reinvest $1.57 billion of the cash held by our foreign subsidiaries and branch offices. If, however, a
portion of these funds were to be repatriated to the United States, we would be required to accrue and pay U.S.
and foreign taxes of approximately 30%-50% of the funds repatriated. The amount of taxes due will depend on
the amount and manner of the repatriation, as well as the location from which the funds are repatriated. We have
accrued (but have not paid) U.S. taxes on the remaining cash of $157.3 million of the $1.73 billion held by our
foreign subsidiaries and branch offices. As such, these funds can be returned to the U.S. without accruing any
additional U.S. tax expense.

Cash Dividends and Special Cash Dividend:

The total amount of regular quarterly cash dividends paid during the fiscal years ended June 30, 2016, 2015
and 2014 was $324.5 million, 324.8 million and $298.9 million, respectively. The increase in the amount of
regular quarterly cash dividends paid during the fiscal year ended June 30, 2016 reflected the increase in the level
of our regular quarterly cash dividend from $0.50 to $0.52 per share that was instituted during the three months
ended September 30, 2015. The amount of accrued dividends payable for regular quarterly cash dividends on
unvested restricted stock units with dividend equivalent rights was $2.7 million and $0.9 million as of June 30,
2016 and 2015, respectively. We did not have accrued dividends payable as of June 30, 2014. These amounts
will be paid upon vesting of the underlying unvested restricted stock units as described in Note 7, “Equity and
Long-term Incentive Compensation Plans.”

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 6, “Debt” that was completed during the three months ended December 31, 2014.
The total amount of the special cash dividend accrued by the Company during the three months ended
December 31, 2014 was approximately $2.76 billion, substantially all of which was paid out during the three
months ended December 31, 2014, except for the aggregate special cash dividend of $43.0 million that was
accrued for the unvested restricted stock units. As of June 30, 2016 and 2015, we have $16.9 million and $41.1
million, respectively, of accrued dividends payable for the special cash dividend with respect to outstanding
unvested restricted stock units, which will be paid when such underlying unvested restricted stock units vest as
described in detail in Note 7, “Equity and Long-term Incentive Compensation Plans.” We paid a special cash
dividend with respect to vested restricted stock units during the fiscal years ended June 30, 2016 and 2015 of
$21.8 million and $1.8 million, respectively. We did not declare any special cash dividend in the fiscal years
ended June 30, 2016 and 2014. Other than the special cash dividend declared during the three months ended
December 31, 2014, we historically have not declared any special cash dividends.

Stock Repurchases:

The shares repurchased under our stock repurchase program have reduced our basic and diluted weighted-
average shares outstanding. The stock repurchase program is intended, in part, to offset shares issued in
connection with the purchases under our ESPP program and the vesting of employee restricted stock units. In
connection with entering into the Merger Agreement with Lam Research, we suspended further repurchases
under our repurchase program effective October 21, 2015.

Fiscal Year 2016 Compared to Fiscal Year 2015

Cash Flows from Operating Activities:

We have historically financed our liquidity requirements through cash generated from operations. Net cash
provided by operating activities during the fiscal year ended June 30, 2016 increased compared to the fiscal year
ended June 30, 2015, from $605.9 million to $759.7 million primarily as a result of the following key factors:

•

An increase in collections of approximately $294.0 million mostly due to higher shipments during the
fiscal year ended June 30, 2016 compared to the fiscal year ended June 30, 2015;

A decrease in payroll and employee-related payments of approximately $34.0 million during the fiscal
year ended June 30, 2016 compared to the fiscal year ended June 30, 2015; partially offset by

An increase in vendor payments of approximately $65.0 million during the fiscal year ended
June 30, 2016 mainly due to higher inventory purchases compared to the fiscal year ended
June 30, 2015;

A net increase of realized foreign exchange hedge losses of approximately $48.0 million during the
fiscal year ended June 30, 2016 compared to the fiscal year ended June 30, 2015, mainly due to the
substantial foreign exchange fluctuations in Japanese Yen during these periods;

An increase in debt interest payments of approximately $27.0 million during the fiscal year ended
June 30, 2016 due to higher average outstanding debt balances compared to the fiscal year ended
June 30, 2015;

An increase in income tax and other tax payments net of tax refunds of approximately $22.0 million
during the fiscal year ended June 30, 2016 compared to the fiscal year ended June 30, 2015; and

An increase in cash LTI payments of approximately $13.0 million during the fiscal year ended
June 30, 2016 compared to the fiscal year ended June 30, 2015.

Cash Flows from Investing Activities:

Net cash provided by investing activities during the fiscal year ended June 30, 2016 decreased to $144.7
million compared to the fiscal year ended June 30, 2015 from net cash provided in investing activities of $918.2
million, primarily as a result of our strategic decision to liquidate certain marketable securities in our investment
portfolio to fund our working capital requirements during the fiscal year ended June 30, 2015, partially offset by
approximately $14.0 million lower capital expenditures during the fiscal year ended June 30, 2016, as compared
to the fiscal year ended June 30, 2015.

Cash Flows from Financing Activities:

Net cash used in financing activities during the fiscal year ended June 30, 2016 decreased compared to the
fiscal year ended June 30, 2015, from $1.30 billion to $636.7 million, primarily as a result of the following key
factors:

•

A decrease in payment of dividends to stockholders of $2.70 billion, primarily from the payment of
special cash dividend during the fiscal year ended June 30, 2015;

A decrease in repayment of debt of approximately $781.0 million mainly as a result of the redemption
of the 2018 Senior Notes during the fiscal year ended June 30, 2015;

A decrease in common stock repurchases of $421.0 million during the fiscal year ended June 30, 2016
compared to the fiscal year ended June 30, 2015. In connection with entering into the Merger
Agreement, we suspended further repurchases under our repurchase program effective October 21,
2015; partially offset by

Net proceeds of $3.22 billion from the issuance of Senior Notes and the term loans during the fiscal
year ended June 30, 2015.

Fiscal Year 2015 Compared to Fiscal Year 2014

Cash Flows from Operating Activities:

Net cash provided by operating activities during the fiscal year ended June 30, 2015 decreased compared to
the fiscal year ended June 30, 2014, from $778.9 million to $605.9 million primarily as a result of the following
key factors:

•

A decrease of cash collections by approximately $270.0 million during the fiscal year ended
June 30, 2015 compared to the fiscal year ended June 30, 2014,

An increase of debt-related interest payments of approximately $40.0 million during the fiscal year
ended June 30, 2015 compared to the fiscal year ended June 30, 2014,

An increase in payments of approximately $15.0 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 $15.0 million during the fiscal year ended
June 30, 2015 compared to the fiscal year ended June 30, 2014, partially offset by

A decrease in accounts payable payments of approximately $143.0 million during the fiscal year ended
June 30, 2015 compared to the fiscal year ended June 30, 2014, and

A decrease in income tax and other tax payments net of tax refunds of approximately $30.0 million
during the fiscal year ended June 30, 2015 compared to the fiscal year ended June 30, 2014.

Cash Flows from Investing Activities:

Net cash provided by investing activities during the fiscal year ended June 30, 2015 increased to $918.2
million compared to the fiscal year ended June 30, 2014 from net cash used in investing activities of $676.1

million, primarily as a result of an increase in the proceeds from sale of available-for-sale and trading securities,
net of sales and maturities, of approximately $964.0 million during the fiscal year ended June 30, 2015,
compared to the purchases of available-for-sale and trading securities, net of sales and maturities, of
approximately $593.0 million during fiscal year ended June 30, 2014. In addition, we acquired a privately-held
company for a total purchase consideration of $18.0 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 $458.9 million to $1.30 billion, primarily as a result of the following key
factors:

•

An increase in dividend payments of $2.74 billion during the fiscal year ended June 30, 2015 compared
to the fiscal year ended June 30, 2014, reflecting the payments for the special cash dividend during the
fiscal year ended June 30, 2015 and an increase in our quarterly dividend payout amount from $0.45 to
$0.50 per share that was instituted during the three months ended September 30, 2014,

Payments for redemption of the 2018 Senior Notes and payments for the term loans, including
prepayment for the principal amount for the term loans, aggregating to $916.0 million during the fiscal
year ended June 30, 2015, whereas no such payments were made during the fiscal year ended June 20,
2014,

An increase in common stock repurchases of $362.0 million during the fiscal year ended June 30, 2015
compared to the fiscal year ended June 30, 2014 and

A decrease in proceeds from the exercise of stock options of $65.0 million during the fiscal year ended
June 30, 2015 compared to the fiscal year ended June 30, 2014, partially offset by

Net proceeds of $3.22 billion from issuance of Senior Notes and the term loans during the fiscal year
ended June 30, 2015.

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 $750.0 million of 2018 Senior Notes, including
associated redemption premiums, accrued interest and other fees and expenses and (z) for other general corporate
purposes, including repurchases of shares pursuant to our stock repurchase program. The interest rate specified
for each series of the Senior Notes will be subject to adjustments from time to time if Moody’s Investor Service,
Inc. (“Moody’s”) or Standard & Poor’s Ratings Services (“S&P”) or, under certain circumstances, a substitute
rating agency selected by us as a replacement for Moody’s or S&P, as the case may be (a “Substitute Rating
Agency”), downgrades (or subsequently upgrades) its rating assigned to the respective series of Senior Notes
such that the adjusted rating is below investment grade. If the adjusted rating of any series of Senior Notes from
Moody’s (or, if applicable, any Substitute Rating Agency) is decreased to Ba1, Ba2, Ba3 or B1 or below, the
stated interest rate on such series of Senior Notes as noted above will increase by 25 bps, 50 bps, 75 bps or 100
bps, respectively (“bps” refers to Basis Points and 1% is equal to 100 bps). If the rating of any series of Senior
Notes from S&P (or, if applicable, any Substitute Rating Agency) with respect to such series of Senior Notes is
decreased to BB+, BB, BB- or B+ or below, the stated interest rate on such series of Senior Notes as noted above
will increase by 25 bps, 50 bps, 75 bps or 100 bps, respectively. The interest rates on any series of Senior Notes
will permanently cease to be subject to any adjustment (notwithstanding any subsequent decrease in the ratings
by any of Moody’s, S&P and, if applicable, any Substitute Rating Agency) if such series of Senior Notes
becomes rated “Baa1” (or its equivalent) or higher by Moody’s (or, if applicable, any Substitute Rating Agency)
and “BBB+” (or its equivalent) or higher by S&P (or, if applicable, any Substitute Rating Agency), or one of

those ratings if rated by only one of Moody’s, S&P and, if applicable, any Substitute Rating Agency, in each case
with a stable or positive outlook. In October 2014, we entered into a series of forward contracts to lock the 10-
year treasury rate (“benchmark rate”) on a portion of the Senior Notes with a notional amount of $1.00 billion in
aggregate. For additional details, refer to Note 15, “Derivative Instruments and Hedging Activities.”

The original discount on the Senior Notes amounted to $4.0 million and is being amortized over the life of the
debt. Interest is payable semi-annually on May 1 and November 1 of each year. The debt indenture (the “Indenture”)
includes covenants that limit our ability to grant liens on its facilities and enter into sale and leaseback transactions,
subject to certain allowances under which certain sale and leaseback transactions are not restricted. As of June 30,
2016, we were in compliance with all of the covenants under the Indenture associated with the Senior Notes.

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

In November 2014, we entered into $750.0 million of five-year senior unsecured prepayable term loans and
a $500.0 million unfunded revolving credit facility (collectively,
the “Credit Facility”) under the Credit
Agreement. The interest under the Credit Facility will be payable on the borrowed amounts at the London
Interbank Offered Rate (“LIBOR”) plus a spread, which is currently 125 bps, and this spread is subject to
adjustment in conjunction with our credit rating downgrades or upgrades by Moody’s and S&P. The spread
ranges from 100 bps to 175 bps based on the Company’s then effective credit rating. We are also obligated to pay
an annual commitment fee of 15 bps on the daily undrawn balance of the revolving credit facility, which is also
subject to an adjustment in conjunction with our credit rating downgrades or upgrades. The annual commitment
fee ranges from 10 bps to 25 bps on the daily undrawn balance of the revolving credit facility, depending upon
the then effective credit rating. Principal payments with respect to the term loans will be made on the last day of
each calendar quarter and any unpaid principal balance of the term loans, including accrued interest, shall be
payable on November 14, 2019 (the “Maturity Date”). We may prepay the term loans and unfunded revolving
credit facility at any time without a prepayment penalty. During the fiscal year ended June 30, 2016, we made
term loan principal payments of $135.0 million.

Future principal payments for the term loans (without giving effect

to $117.5 million of principal
prepayments made as of June 30, 2016 that shall be applied to the future scheduled quarterly payments) as of
June 30, 2016, are as follows:

Fiscal Quarters Ending

Quarterly Payment
(in thousands)

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

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, 2016 (the
interest expense coverage ratio was 9.12 to 1.00 and the leverage ratio was 2.75 to 1.00) and had no outstanding
borrowings under the unfunded revolving credit facility. Considering our current liquidity position, short-term
financial forecasts and ability to prepay the term loans, if necessary, we expect to continue to be in compliance
with our financial covenants at the end of our first quarter of fiscal year ending June 30, 2017.

Debt Redemption:

In December 2014, we redeemed the $750.0 million aggregate principal amount of 2018 Senior Notes. The
redemption resulted in a pre-tax net loss on extinguishment of debt of $131.7 million for the three months ended
December 31, 2014, after an offset of a $1.2 million of gain upon the termination of the non-designated forward
contract described below.

In addition, in November 2014, we entered into a non-designated forward contract to lock the treasury rate
to be used for determining the redemption amount as part of our plan to redeem the existing 2018 Senior Notes.
The notional amount of the non-designated forward contract was $750.0 million. For additional details, refer to
Note 15, “Derivative Instruments and Hedging Activities.”

Merger-related Commitment and Fees:

We have an agreement with a financial advisor in relation to the pending Merger with Lam Research. We
agreed to pay a fee of approximately $58.0 million, $0.1 million of which was paid upon the execution of the
engagement letter and $5.0 million of which was paid upon delivery of the fairness opinion, and the remaining
portion of which will be paid upon, and subject to, consummation of the Merger (provided that the final actual
fee will be, in part, based on an average of the closing prices of Lam Research common stock over ten trading
days approaching the closing of the Merger). During the fiscal year ended June 30, 2016, $5.1 million of the
above fees were recorded in selling, general and administrative line of the consolidated statements of operations.
In addition, the Merger Agreement contains certain termination rights for us and further provides that we may be
required to pay a termination fee of $290.0 million to Lam Research under certain circumstances.

Contractual Obligations

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

contractual obligations as of June 30, 2016:

(In thousands)

Total

2017

2018

2019

2020

2021

2022 and
thereafter

Others

Debt obligations(1)
Interest payment associated

. . . . . . . . . $3,076,250 $ — $250,000 $ 70,000 $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(6) . . . . . . .
Executive Deferred Savings

Plan(7) . . . . . . . . . . . . . . . . .
Other(8) . . . . . . . . . . . . . . . . . .

Total contractual cash

946,076 119,053 116,084 112,650 100,976 92,875
164
292,937 290,576
—
54,030
—
25
8,026
17,058

—
—
1,613

2,100
—
5,006

97
—
2,363

—
404,438
—
—
— 54,030
—
25

121,447
22,086

47,942
1,301

37,085
1,487

24,908
1,536

11,512
1,452

—
1,664

—
14,646

—
—

162,289
43,406

—
8,917

—
30,520

—
3,576

—
393

—
—

— 162,289
—
—

obligations . . . . . . . . . . . . . $4,735,579 $475,815 $442,282 $215,130 $872,196 $94,728 $2,419,109 $216,319

(1)

In November 2014, we issued $750.0 million aggregate principal amount of term loans due in fiscal year
2020 (outstanding balance of $576.3 million as of June 30, 2016) and $2.50 billion aggregate principal
amount of Senior Notes due from fiscal year 2018 to fiscal year 2035. During our fiscal year ended June 30,
2016, we made term loan principal payments of $135.0 million.

(2) The interest payments associated with the Senior Notes obligations included in the table above are based on
the principal amount multiplied by the applicable coupon rate for each series of Senior Notes. Our future
interest payments are subject to change if our then effective credit rating is below investment grade as
discussed above. The interest payments under the term loans are payable on the borrowed amounts at the
LIBOR plus 125 bps. As of June 30, 2016, we utilized the existing interest rates to project our estimated
term loans interest payments for the next five years. The interest payment under the revolving credit facility
for the undrawn balance is payable at 15 bps as a commitment fee based on the daily undrawn balance and
we utilized the existing rate for the projected interest payments included in the table above. Our future
interest payments for the term loans and the revolving credit facility are subject to change due to future
fluctuations in the LIBOR rates as well as any upgrades or downgrades to our then effective credit rating.
(3) Represents an estimate of significant commitments to purchase inventory from our suppliers as well as an
estimate of significant purchase commitments associated with other goods and services in the ordinary
course of business. Our liability under these purchase commitments is generally restricted to a forecasted
time-horizon as mutually agreed upon between the parties. This forecasted time-horizon can vary among
different suppliers. Actual expenditures will vary based upon the volume of the transactions and length of
contractual service provided. In addition, the amounts paid under these arrangements may be less in the
event the arrangements are renegotiated or canceled. Certain agreements provide for potential cancellation
penalties.

(4) Represents the estimated income tax payable obligation related to uncertain tax positions as well as related
accrued interest. We are unable to make a reasonably reliable estimate of the timing of payments in
individual years due to uncertainties in the timing of tax audit outcomes.

(5) Represents the amount committed under our cash long-term incentive program. The expected payment after

estimated forfeitures is approximately $97.9 million.

(6) Represents an estimate of expected benefit payments up to fiscal year 2026 that was actuarially determined
and excludes the minimum cash required to contribute to the plan. As of June 30, 2016, our defined pension
plans do not have material required minimum cash contribution obligations.

(8)

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

Starting in fiscal year ended June 30, 2013, we adopted a cash-based long-term incentive (“Cash LTI”)
program for many of our employees as part of our employee compensation program. Cash LTI awards issued to
employees under the Cash Long-Term Incentive Plan (“Cash LTI Plan”) generally vest
in four equal
installments, with 25% of the aggregate amount of the Cash LTI award vesting on each yearly anniversary of the
grant date over a four-year period. In order to receive payments under the Cash LTI Plan, participants must
remain employed by us as of the applicable award vesting date.

We have agreements with financial institutions to sell certain of our trade receivables and promissory notes
from customers without recourse. In addition, we periodically sell certain letters of credit (“LCs”), without
recourse, received from customers in payment for goods.

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

for the indicated periods:

(In thousands)

Year ended June 30,

2016

2015

2014

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

$205,790
$ 21,904

$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.

We maintain guarantee arrangements available through various financial institutions for up to $22.1 million,
of which $18.7 million had been issued as of June 30, 2016, 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 $292.9 million as of
June 30, 2016 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 12, “Commitments and
Contingencies” to the Consolidated Financial Statements for additional details.

Working Capital:

Working capital was $2.87 billion as of June 30, 2016, which was a decrease of $37.2 million compared to
our working capital as of June 30, 2015. As of June 30, 2016, our principal sources of liquidity consisted of $2.49
billion of cash, cash equivalents and marketable securities. Our liquidity is affected by many factors, some of
which are based on the normal ongoing operations of the business, and others of which relate to the uncertainties
of global and regional economies and the semiconductor and the semiconductor equipment industries. Although
cash requirements will fluctuate based on the timing and extent of these factors, we believe that cash generated
from operations, together with the liquidity provided by existing cash and cash equivalents balances and our $500
million unfunded revolving credit facility, will be sufficient to satisfy our liquidity requirements associated with
working capital needs, capital expenditures, dividends, stock repurchases and other contractual obligations,
including repayment of outstanding debt, for at least the next 12 months.

Our credit ratings and outlooks as of June 30, 2016 are summarized below:

Rating Agency

Rating Outlook

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

Stable
Stable
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
earnings and cash flows from unanticipated fluctuations in earnings and cash flows caused by volatility in
currency exchange rates. This financial exposure is monitored and managed as an integral part of our overall risk
management program, which focuses on the unpredictability of financial markets and seeks to reduce the
potentially adverse effects that the volatility of these markets may have on our operating results. We continue our
policy of hedging our current and forecasted foreign currency exposures with hedging instruments having tenors
of up to 18 months (see Note 15, “Derivative Instruments and Hedging Activities” to the Consolidated Financial
Statements for additional details). Our outstanding hedge contracts, with maximum remaining maturities of
approximately seven months and 16 months as of June 30, 2016 and 2015, respectively, were as follows:

(In thousands)

Cash flow hedge contracts

As of June 30,

2016

2015

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

$
7,591
$ 91,793

$ 32,775
$ 88,800

Other foreign currency hedge contracts

$122,275
$115,087

$ 64,012
$123,091

In October 2014, in anticipation of the issuance of the Senior Notes, we entered into a series of forward
contracts (“Rate Lock Agreements”) to lock the benchmark rate on a portion of the Senior Notes. The objective
of the Rate Lock Agreements was to hedge the risk associated with the variability in interest rates due to the
changes in the benchmark rate leading up to the closing of the intended financing, on the notional amount being
hedged. The Rate Lock Agreements had a notional amount of $1.00 billion in aggregate which matured in the
second quarter of the fiscal year ended June 30, 2015. We designated each of the Rate Lock Agreements as a
qualifying hedging instrument and accounted for as a cash flow hedge, under which the effective portion of the
gain or loss on the close out of the Rate Lock Agreements was initially recognized in accumulated other
comprehensive income (loss) as a reduction of total stockholders’ equity and subsequently amortized into
earnings as a component of interest expense over the term of the underlying debt. The ineffective portion, if any,
was recognized in earnings immediately. The Rate Lock Agreements were terminated on the date of pricing of
the $1.25 billion of 4.650% Senior Notes due in 2024 and we recorded the fair value of $7.5 million as a gain
within accumulated other comprehensive income (loss) as of December 31, 2014. For the fiscal years ended
June 30, 2016 and 2015, we recognized $0.8 million and $0.5 million, respectively, for the amortization of the
gain recognized in accumulated other comprehensive income (loss), which amount reduced the interest expense.
As of June 30, 2016, the unamortized portion of the fair value of the forward contracts for the rate lock
agreements was $6.3 million. The cash proceeds of $7.5 million from the settlement of the Rate Lock
Agreements were included in the cash flows from operating activities in the consolidated statements of cash
flows for the fiscal year ended June 30, 2015 because the designated hedged item was classified as interest
expense in the cash flows from operating activities in the consolidated statements of cash flows.

In addition, in November 2014, we entered into a non-designated forward contract to lock the treasury rate
used to determine the redemption amount of the 2018 Senior Notes that occurred during the three months ended
December 31, 2014. The objective of the forward contract was to hedge the risk associated with the variability of
the redemption amount due to changes in interest rates through the redemption of the existing 2018 Senior Notes.
The forward contract had a notional amount of $750.0 million. The forward contract was terminated in December
2014 and the resulting fair value of $1.2 million was included in the loss on extinguishment of debt and other, net

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

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

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, 2016. Actual results may differ materially.

As of June 30, 2016, we had an investment portfolio of fixed income securities of $1.48 billion. These
securities, as with all fixed income instruments, are subject to interest rate risk and will decline in 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, 2016, the fair value of the portfolio would have declined by $16.5 million.

In November 2014, we issued $2.50 billion aggregate principal amount of fixed rate senior, unsecured long-
term notes (collectively referred to as “Senior Notes”) due in various fiscal years ranging from 2018 to 2035. The
fair market value of long-term fixed interest rate notes is subject to interest rate risk. Generally, the fair market
value of fixed interest rate notes will increase as interest rates fall and decrease as interest rates rise. As
of June 30, 2016, the fair value and the book value of our Senior Notes were $2.68 billion and $2.50 billion,
respectively. Additionally, the interest expense for the Senior Notes is subject to interest rate adjustments
following a downgrade of our credit ratings below investment grade by the credit rating agencies. Following a
rating change below investment grade, the stated interest rate for each series of Senior Notes may increase
between 25 bps to 100 bps based on the adjusted credit rating. Refer to Note 6, “Debt” to the Consolidated
Financial Statements in Part II, Item 8 and Management’s Discussion and Analysis of Financial Condition and
Results of Operations, “Liquidity and Capital Resources,” in Part II, Item 7 for additional details. Factors that
can affect our credit ratings include changes in our operating performance, the economic environment, conditions
in the semiconductor and semiconductor equipment industries, our financial position, and changes in our
business strategy. As of June 30, 2016, if our credit rating was downgraded below investment grade by Moody’s
and S&P, the maximum potential increase to our annual interest expense on the Senior Notes, considering a 200
bps increase to the stated interest rate for each series of our Senior Notes, is estimated to be approximately $53.4
million.

In November 2014, we entered into $750 million aggregate principal amount of floating rate senior,
unsecured prepayable term loans due in 2019 and a $500 million unfunded revolving credit facility. The interest
rates for the term loans are based on LIBOR plus a fixed spread and this spread is subject to adjustment in
conjunction with our credit rating downgrades or upgrades. The spread ranges from 100 bps to 175 bps based on
the adjusted credit rating. The fair value of the term loans is subject to interest rate risk only to the extent of the
fixed spread portion of the interest rates which does not fluctuate with change in interest rates. As of June 30,
2016, the difference between book value and fair value of our term loans was immaterial. We are also obligated
to pay an annual commitment fee of 15 bps on the daily undrawn balance of the unfunded revolving credit
facility which is also subject to an adjustment in conjunction with our credit rating downgrades or upgrades. The
annual commitment fee ranges from 10 bps to 25 bps on the daily undrawn balance of the revolving credit
facility, depending upon the then effective credit rating. As of June 30, 2016, if LIBOR-based interest rates
increased by 100 bps, the change would increase our annual interest expense annually by approximately $5.2
million as it relates to our borrowings under the term loans. Additionally, as of June 30, 2016, if our credit rating
was downgraded to be below investment grade, the maximum potential increase to our annual interest expense
for the term loans and the revolving credit facility, using the highest range of the ranges discussed above, is
estimated to be approximately $3.4 million.

See Note 4, “Marketable Securities” to the Consolidated Financial Statements in Part II, Item 8;
Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Liquidity and Capital
Resources,” in Part II, Item 7; and Risk Factors in Part I, Item 1A of this Annual Report on Form 10-K for a
description of recent market events that may affect the value of the investments in our portfolio that we held as of
June 30, 2016.

As of June 30, 2016, we had net forward and option contracts to sell $77.0 million in foreign currency in
order to hedge certain currency exposures (see Note 15, “Derivative Instruments and Hedging Activities” to the
Consolidated Financial Statements for additional details). If we had entered into these contracts on June 30,
2016, the U.S. dollar equivalent would have been $87.6 million. A 10% adverse move in all currency exchange
rates affecting the contracts would decrease the fair value of the contracts by $21.1 million. However, if this
occurred, the fair value of the underlying exposures hedged by the contracts would increase by a similar amount.
Accordingly, we believe that, as a result of the hedging of certain of our foreign currency exposure, changes in
most relevant foreign currency exchange rates should have no material impact on our income or cash flows.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Balance Sheets as of June 30, 2016 and 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Operations for each of the three years in the period ended June 30, 2016 . . . . .

Consolidated Statements of Comprehensive Income for each of the three years in the period ended June 30,
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, 2016 . . . . .

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

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

121

KLA-TENCOR CORPORATION

Consolidated Balance Sheets

As of June 30,

2016

2015

(In thousands, except par value)

ASSETS

Current assets:

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

$1,108,488
1,382,806
613,233
698,635
—
64,870

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

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

3,868,032

3,904,576

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

278,014
335,177
302,219
4,331
174,659

314,591
335,263
78,648
11,895
181,039

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

$4,962,432

$4,826,012

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

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

$ 106,517
174,551
59,147
—
662,208

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

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

1,002,423

1,001,763

Non-current liabilities:

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

3,057,936
56,336
156,623

3,173,435
47,145
182,230

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

4,273,318

4,404,573

Commitments and contingencies (Notes 12 and 13)

Stockholders’ equity:

Preferred stock, $0.001 par value, 1,000 shares authorized, none outstanding . . .
Common stock, $0.001 par value, 500,000 shares authorized, 260,619 and

259,007 shares issued, 155,955 and 157,851 shares outstanding, as of June 30,
2016 and June 30, 2015, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings (accumulated deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss)

—

156
452,818
284,825
(48,685)

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

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

689,114

421,439

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

$4,962,432

$4,826,012

See accompanying notes to consolidated financial statements.

KLA-TENCOR CORPORATION

Consolidated Statements of Operations

(In thousands, except per share amounts)

Revenues:

Year ended June 30,

2016

2015

2014

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

$2,250,260
734,233

$2,125,396
688,653

$2,286,437
642,971

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

2,984,493

2,814,049

2,929,408

Costs and expenses:

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

1,163,391
481,258
379,399
—
122,887
(20,634)

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

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

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

858,192
153,770

434,131
67,973

734,461
151,706

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

$ 704,422

$ 366,158

$ 582,755

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:

4.52

4.49

2.26

2.24

3.51

3.47

2.08

18.50

1.80

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

155,869

162,282

166,016

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

156,779

163,701

168,118

See accompanying notes to consolidated financial statements.

KLA-TENCOR CORPORATION

Consolidated Statements of Comprehensive Income

(In thousands)

Year ended June 30,

2016

2015

2014

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

$704,422

$366,158

$582,755

Other comprehensive income (loss):

Currency translation adjustments:

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

(3,898)
1,399

(20,740)
8,086

6,428
(1,232)

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

(2,499)

(12,654)

5,196

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

(9,622)

13,745

1,641

3,722
2,122

(6,615)
(2,565)

(4,145)
898

(1,606)

3,549

(1,069)

7,212

(312)
(520)

(2,119)
1,122

(2,066)

(2,084)
(1,726)

3,402

6,375

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

(3,778)

4,565

Net change related to unrecognized losses and transition obligations in

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

(4,552)

(147)

(617)

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 . . . . . . . . . . .

2,717

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

(8,112)

(10,302)

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

$696,310

$355,856

$589,130

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)

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 ($18.50 per share including
a special cash dividend of $16.50 per
share declared during the three months
ended December 31, 2014) and dividend
equivalents declared . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . .
Tax benefit for equity awards . . . . . . . . . . . .

Balances as of June 30, 2015 . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . .
Net issuance under employee stock plans . .
Repurchase of common stock . . . . . . . . . . .
Cash dividends ($2.08 per share) and

dividend equivalents declared . . . . . . . . .
Stock-based compensation expense . . . . . . .
Tax benefit for equity awards . . . . . . . . . . . .

165,435
—
—
3,848
(3,835)

$1,159,565
—
—
60,320
(76,839)

$ 2,359,233
582,755
—
—

(164,004)

—
—
—

—
60,940
16,518

165,448
—
—
1,658
(9,255)

1,220,504
—
—
16,186
(26,891)

(298,871)

—
—

2,479,113
366,158
—
—

(581,965)

$(36,646)

—
6,375
—
—

—
—
—

(30,271)
—
(10,302)
—
—

Total
Stockholders’
Equity

$ 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)

—
—
—

157,851
—
—
1,589
(3,445)

—
—
—

(807,391)
55,302
16,664

474,374
—
—
14,354
(10,049)

(82,295)
45,050
11,540

(2,275,668)

—
—

(12,362)
704,422
—
—

(165,694)

(241,541)

—
—

—
—
—

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

(40,573)
—
(8,112)
—
—

—
—
—

421,439
704,422
(8,112)
14,354
(175,743)

(323,836)
45,050
11,540

Balances as of June 30, 2016 . . . . . . . . . . . .

155,995

$ 452,974

284,825

$(48,685)

689,114

See accompanying notes to consolidated financial statements.

KLA-TENCOR CORPORATION

Consolidated Statements of Cash Flows

(In thousands)

Cash flows from operating activities:

Year Ended June 30,

2016

2015

2014

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

704,422

366,158

582,755

activities:

Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on extinguishment of debt and other, net . . . . . . . . . . . . . . . . . . . . . . . . .
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 (decrease) in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .

66,932
1,396
—
45,050
19,804
(11,936)
(5,887)

(8,292)
(67,579)
14,613
3,109
25,860
(27,796)

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

759,696

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

Cash flows from investing activities:

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

—
—
(31,741)
7,076
(1,175,720)
737,817
602,446
(68,378)
73,187

—
—
(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

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

144,687

918,221

(676,109)

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

—

(135,000)
38,298

(23,942)
(181,711)
(346,283)
11,936

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

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

(636,702)

(1,302,972)

(458,887)

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

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

2,782

270,463
838,025

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

$ 1,108,488

Supplemental cash flow disclosures:

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

Non-cash activities:

Purchase of land, property and equipment—investing activities . . . . . . . . . . .
Unsettled common stock repurchase—financing activities . . . . . . . . . . . . . . .
Dividends payable—financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$
$

$
$
$

(13,991)

207,164
630,861

838,025

69,681
92,982

1,843
5,968
42,002

1,581

(354,529)
985,390

630,861

117,348
52,474

3,457
—
—

$
$

$
$
$

$
$

105,187
120,433

2,035

$
— $
$

19,556

See accompanying notes to consolidated financial statements.

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements

NOTE 1—DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

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

the entire semiconductor

fabrication process,

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

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

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

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

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

The Merger Agreement contains certain termination rights for both the Company and Lam Research,
including if a governmental body prohibits the Merger or if the Merger is not consummated by October 20, 2016.
Upon termination of the Merger Agreement under specified circumstances, the Company or Lam Research may
be required to pay the other party a termination fee of $290.0 million. During the fiscal year ended June 30, 2016,
the Company incurred merger-related costs of $18.2 million of which $0.7 million was recorded within costs of
revenues, $1.7 million was recorded within research and development and $15.8 million was recorded within
selling, general and administrative in the Consolidated Statements of Operations.

Management Estimates. The preparation of the Consolidated Financial Statements in conformity with
accounting principles generally accepted in the United States of America requires management to make estimates

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

and assumptions in applying the Company’s accounting policies that affect the reported amounts of assets and
liabilities (and related disclosure of contingent assets and liabilities) at the date of the Consolidated Financial
Statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could
differ from those estimates.

Cash Equivalents and Marketable Securities. All highly liquid debt

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

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

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

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

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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

Range of Useful Lives

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

30 to 35 years
Shorter of 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, 2016, 2015 and 2014 was $52.6 million, $55.8 million and $51.1
million, respectively.

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 impairment whenever events or changes in circumstances indicate that their
carrying amounts may not be recoverable. See Note 5, “Goodwill and Purchased Intangible Assets” for additional
details.

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

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

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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 consolidations, acquisitions and business
closures, and to the extent that these customers experience liquidity issues in the future, the Company may be
required to incur additional bad debt expense with respect to trade receivables. The Company performs ongoing
credit evaluations of its customers’ financial condition and generally requires no collateral to secure accounts
receivable. The Company maintains an allowance for potential credit losses based upon expected collectibility
risk of all accounts receivable. In addition, the Company may utilize letters of credit or non-recourse factoring to
mitigate credit risk when considered appropriate.

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

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

2016

Year ended June 30,

2015

2014

Micron Technology, Inc.

Intel Corporation

Taiwan Semiconductor

Samsung Electronics Co., Ltd.

Manufacturing Company Limited

Taiwan Semiconductor
Manufacturing Company Limited

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

indicated below:

SK Hynix, Inc.

2016

2015

As of June 30,

Taiwan Semiconductor Manufacturing Company
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.

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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
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 12, “Commitments and Contingencies”).

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

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

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

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

• When the installation of the system is deemed perfunctory.

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.

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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

In a multiple element revenue arrangement, the Company defers revenue recognition associated with the
relative fair value of each undelivered element until that element is delivered to the customer. To be considered a
separate element, the product or service in question must represent a separate unit of accounting, which means
that such product or service must fulfill the following criteria: (a) the delivered item(s) has value to the customer
on a stand-alone basis; and (b) if the arrangement includes a general right of return relative to the delivered
item(s), delivery or performance of the undelivered

item(s) is considered probable and substantially in the control of the Company. If the arrangement does not meet
all the above criteria, the entire amount of the sales contract is deferred until all elements are accepted by the
customer.

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

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

and collection of the resulting receivable is probable.

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

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.

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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.

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

Accounting for Stock-Based Compensation Plans. The Company accounts for stock-based awards
granted to employees for services based on the fair value of those awards. The fair value of stock-based awards is
measured at the grant date and is recognized as expense over the employee’s requisite service period. The fair
value for restricted stock units granted without “dividend equivalent” rights is determined using the closing price
of the Company’s common stock on the grant date, adjusted to exclude the present value of dividends which are
not accrued on the restricted stock units. The fair value for restricted stock units granted with “dividend
equivalent” rights is determined using the closing price of the Company’s common stock on the grant date. The
award holder is not entitled to 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 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
in four equal
(“Cash LTI”) awards issued to employees under the Company’s Cash LTI program vest
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 in 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

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

liabilities in the consolidated balance sheets. Changes in the Executive Deferred Savings Plan liability is recorded
in selling, general and administrative expense in the consolidated statements of operations. The expense (benefit)
associated with changes in the liability included in selling, general and administrative expense was $(0.8)
million, $10.4 million and $24.4 million for the fiscal years ended June 30, 2016, 2015 and 2014, 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 in the consolidated balance
sheets. Changes in the Executive Deferred Savings Plan assets are recorded as gains (losses), net in selling,
general and administrative expense in the consolidated statements of operations. The amount of net gains
included in selling, general and administrative expense were $0.1 million, $10.4 million and $24.8 million for the
fiscal years ended June 30, 2016, 2015 and 2014, respectively.

Advertising Expenses. Advertising costs are expensed as incurred.

Income Taxes. The Company accounts for income taxes in accordance with the authoritative guidance,
which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of
temporary differences between the book and tax bases of recorded assets and liabilities. The guidance also
requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that certain
deferred tax asset will not be realized. The Company has determined that a valuation allowance is necessary
against certain deferred tax assets, but it anticipates that its future taxable income will be sufficient to recover the
remainder of its deferred tax assets. However, should there be a change in the Company’s ability to recover its
deferred tax assets that are not subject to a valuation allowance, the Company could be required to record an
additional valuation allowance against such deferred tax assets. This would result
in an increase to the
Company’s tax provision in the period in which the Company determines that the recovery is not probable.
During its fiscal year ended 2016, the Company prospectively adopted the accounting standard update for the
presentation of deferred income taxes which requires it to classify deferred tax assets and liabilities as noncurrent
in a classified balance sheet. See “Recent Accounting Pronouncements” below for additional details.

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

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 dilutive potential shares of common stock 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. 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

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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 12, “Commitments and Contingencies” and
Note 13, “Litigation and Other Legal Matters” for additional details.

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

Recent Accounting Pronouncements

Recently Adopted

In November 2015, the Financial Accounting Standards board (“FASB”) issued an accounting standard
update for the presentation of deferred income taxes. Under this new guidance, deferred tax assets and liabilities
should be classified as noncurrent in a classified balance sheet. The Company early adopted this accounting
standard update on a prospective basis at the beginning of the fourth quarter of the fiscal year ended 2016. Upon
adoption, approximately $218 million in net current deferred tax assets were reclassified to noncurrent. No prior
periods were retrospectively adjusted.

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. In August 2015, the FASB issued an amendment
to defer the effective date of the update by one year, with early adoption on the original effective date permitted.
With this amendment, the updates are effective for the Company beginning in the first quarter of the fiscal year
ending June 30, 2019, with early adoption permitted beginning in the first quarter of the fiscal year ending
June 30, 2018. Subsequent to this amendment, the FASB has issued additional clarifying implementation
guidance. The new revenue standard may be applied retrospectively to each prior period presented or
retrospectively with the cumulative effect recognized as of the date of adoption. The Company is currently
evaluating the impact of this accounting standard update on its consolidated financial statements.

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

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

costs of completion, disposal and transportation. The requirement would replace the current lower of cost or
market evaluation and the accounting guidance is unchanged for inventory measured using last-in, first-out
(“LIFO”) or the retail inventory method. The update is effective for the Company beginning in the first quarter of
the Company’s fiscal year ending June 30, 2018 and should be applied prospectively with early adoption
permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the
impact of this accounting standard update on its consolidated financial statements.

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

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

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

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

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.

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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, 2016, 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, 2016, the types of instruments valued
based on quoted market prices in active markets included money market funds, U.S. Treasury securities, certain
sovereign securities and certain U.S. Government agency securities. Such instruments are generally classified
within Level 1 of the fair value hierarchy.

As of June 30, 2016, the types of instruments valued based on other observable inputs included corporate
debt securities, municipal securities, certain U.S. Government agency securities and certain sovereign securities.
The market inputs used to value these instruments generally consist of market yields, reported trades and broker/
dealer quotes. Such instruments are generally classified within Level 2 of the fair value hierarchy.

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

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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, 2016 (In thousands)

Assets
Cash equivalents:

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

Significant Other
Observable Inputs
(Level 2)

Total

U.S. Treasury securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market and other . . . . . . . . . . . . . . . . . . . . . . . . . . . .

68,748
20,569
626,156

68,748
—
626,156

Marketable securities:

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

258,754
405,705
5,016
657,905
41,257

258,754
385,731
—
—
6,426

Total cash equivalents and marketable securities(1)

. . . . . . .

2,084,110

1,345,815

$ —
20,569
—

—
19,974
5,016
657,905
34,831

738,295

Other current assets:

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

1,095

—

1,095

Other non-current assets:

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

162,160

106,149

56,011

Total financial assets(1)

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

$2,247,365

$1,451,964

$795,401

Liabilities
Other current liabilities:

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

$ (11,647)

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

$ (11,647)

—

$ (11,647)

(1) Excludes cash of $330.1 million held in operating accounts and time deposits of $77.1 million as of June 30,

2016.

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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:

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.

There were no transfers in and out of Level 1 and Level 2 fair value measurements during the fiscal year
ended June 30, 2016 or 2015. 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, 2016 or 2015.

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,

2016

2015

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

$ 634,905
(21,672)

$ 607,157
(21,663)

$ 613,233

$ 585,494

Inventories:

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

$ 234,712
208,689
187,733
67,501

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

$ 698,635

$ 617,904

Other current assets:

Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax related receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 37,127
18,190
9,553

$ 37,006
32,850
7,958

$ 64,870

$ 77,814

Land, property and equipment, net:

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

$ 40,603
313,239
507,378
21,737
5,286

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

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

888,243
(610,229)

892,168
(577,577)

$ 278,014

$ 314,591

Other non-current assets:

Executive Deferred Savings Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 162,160
12,499

$ 165,655
15,384

$ 174,659

$ 181,039

Other current liabilities:

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

$ 224,496
162,289
81,994
34,773
27,964
19,395
111,297

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

$ 662,208

$ 661,414

Other non-current liabilities:

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

$ 69,418
50,365
36,840

$ 55,696
69,018
57,516

$ 156,623

$ 182,230

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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, 2016 . . . . . . . .

$(32,424)

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

$(29,925)

$3,451

$ 734

$ 775

$4,553

$(20,487)

$(48,685)

$(15,935)

$(40,573)

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

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

Location in the Consolidated

Statements of Operations

Year ended June 30,

2016

2015

Costs of revenues
Interest expense

Net gains reclassified from accumulated

OCI

$(2,926) $ 7,615
(1,503)
(1,551)
503
755

$(3,722) $ 6,615

Unrealized gains (losses) on available-for-sale

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

312

$ 2,119

The amounts reclassified out of accumulated OCI related to the Company’s defined pension plans, which
were recognized as a component of net periodic cost for the fiscal years ended June 30, 2016 and 2015 were
$1.4 million and $1.3 million, respectively. For additional details, refer to Note 10, “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,

2016

2015

2014

$(14,507) $(12,545) $(13,555)
514
(2,084)
(1,078)

1,235
(311)
(7,051)

1,764
(2,119)
2,431

$(20,634) $(10,469) $(16,203)

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, 2016 (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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

As of June 30, 2015 (In thousands)

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

Amortized
Cost

$ 326,321
404,889
5,014
676,259
626,156
41,224

2,079,863
77,131
778,451
$1,378,543

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

$1,181
830
2
2,372
—
38

4,423
—

1
$4,422

$ —

(14)
—
(157)
—

(5)

(176)
—
(17)
$(159)

Gross
Unrealized
Gains

Gross
Unrealized
Losses

$ 605
551
7
511
—
33

1,707
—
—

$ (15)
(126)
(10)
(515)
—
(31)

(697)
—
—

Fair Value

$ 327,502
405,705
5,016
678,474
626,156
41,257

2,084,110
77,131
778,435
$1,382,806

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

(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, 2016 (In thousands)

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

Fair Value

$ 94,448
40,306
19,341

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

$154,095

Gross
Unrealized
Losses(1)

$(140)
(14)
(5)

$(159)

(1) As of June 30, 2016, the amount of total gross unrealized losses related to investments that had been in a

continuous loss position for 12 months or more was immaterial.

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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, 2016 (In thousands)

Amortized
Cost

Fair Value

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

$ 468,650
909,893

$ 468,985
913,821

$1,378,543

$1,382,806

Actual maturities may differ from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties. Realized gains on available for sale securities
for the fiscal years ended June 30, 2016, 2015 and 2014 were $0.9 million, $2.4 million and $2.2 million,
respectively. Realized losses on available for sale securities were immaterial for all years presented.

NOTE 5—GOODWILL AND PURCHASED INTANGIBLE ASSETS

Goodwill

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

2016 and 2015:

(In thousands)

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

$335,355
(92)

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

335,263
(86)

As of June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$335,177

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable
intangible assets acquired in prior business combinations. Goodwill is net of accumulated impairment losses of
$277.6 million, which were recorded prior to the fiscal year ended June 30, 2014.

The Company has made certain organizational changes and consolidated its product divisions effective in
the first quarter of fiscal year ended 2016, in response to changing customer requirements in the industry. As
required by the authoritative guidance, when an entity reorganizes its reporting structure in a manner that
changes the composition of one or more of its reporting units, goodwill is reassigned to the affected reporting
units using a relative fair value allocation approach. The fair value of each reporting unit is compared to the fair
value of the business immediately prior to the reorganization. The fair value for the Company’s reporting units
was determined using a weighted combination of market-based and income-based approach. The Company had
four reporting units as of June 30, 2016: Wafer Inspection, Patterning, Global Service and Support, and Others.
Prior to the organizational changes, the Company had four reporting units: Defect Inspection, Metrology, Service
and Other. The goodwill balances by reporting units as of June 30, 2016 were as follows:

(In thousands)

Wafer
Inspection

Patterning

Others

Total

Balance as of June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$332,783 (1) $ 2,480 (2) $—

(51,671)(3)

(86)

50,775 (3)
—

896 (3)
—

$335,263
—
(86)

Balance as of June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$281,026

$53,255

$896

$335,177

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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

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

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

The changes in the gross goodwill balance during the fiscal years ended June 30, 2016 and 2015 resulted

from foreign currency translation adjustments.

The Company performed a qualitative assessment of the goodwill by reporting unit as of November 30, 2015
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, 2016. The next annual assessment of goodwill by
reporting unit is scheduled to be performed in the second quarter of the fiscal year ending June 30, 2017.

Purchased Intangible Assets

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

(In thousands)

As of June 30, 2016

As of June 30, 2015

Category

Range of
Useful Lives

Gross
Carrying
Amount

Accumulated
Amortization
and
Impairment

Net
Amount

Gross
Carrying
Amount

Accumulated
Amortization
and
Impairment

Existing technology . . . . . . . . .
Patents . . . . . . . . . . . . . . . . . . . . 6-13 years
Trade name/Trademark . . . . . . 4-10 years
6-7 years
Customer relationships . . . . . . .

4-7 years $141,659
57,648
19,893
54,980

$138,160
57,648
19,743
54,298

$3,499 $141,659
57,648
19,893
54,980

—
150
682

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

Net
Amount

$ 6,995
650
994
3,256

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

$274,180

$269,849

$4,331 $274,180

$262,285

$11,895

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

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

For the fiscal years ended June 30, 2016, 2015 and 2014, amortization expense for other intangible assets
was $7.6 million, $15.8 million and $16.2 million, respectively. Based on the intangible assets recorded as of
June 30, 2016, 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:

2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Amortization
(In thousands)

$2,806
1,525

$4,331

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

NOTE 6—DEBT

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

As of June 30, 2016

As of June 30, 2015

Amount
(in thousands)

Effective
Interest Rate

Amount
(in thousands)

Effective
Interest Rate

Fixed-rate 2.375% Senior notes due on November 1, 2017 . . . . $ 250,000
250,000
Fixed-rate 3.375% Senior notes due on November 1, 2019 . . . .
Fixed-rate 4.125% Senior notes due on November 1, 2021 . . . .
500,000
1,250,000
Fixed-rate 4.650% Senior notes due on November 1, 2024(1) . . .
250,000
Fixed-rate 5.650% Senior notes due on November 1, 2034 . . . .
576,250
Term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.396% $ 250,000
250,000
3.377%
4.128%
500,000
4.682% 1,250,000
250,000
5.670%
711,250
1.714%

2.396%
3.377%
4.128%
4.682%
5.670%
1.498%

Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized discount
Unamortized debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . .

3,076,250
(3,312)
(15,002)

Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,057,936

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

—
3,057,936

Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,057,936

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

$3,190,416

16,981
3,173,435

$3,190,416

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

As of June 30, 2016, future principal payments for the long-term debt are summarized as follows. There are
no scheduled payments for the term loans for the fiscal years ending June 30, 2017 and 2018 since the Company
made $117.5 million of principal prepayments as of June 30, 2016.

Fiscal year ending June 30,

2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Amount
(In thousands)

—
250,000
70,000
756,250
—
2,000,000

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

$3,076,250

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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 $750.0 million of 2018 Senior Notes,
including associated redemption premiums, accrued interest and other fees and expenses and (z) for other general
corporate purposes, including repurchases of shares pursuant to the Company’s stock repurchase program. The
interest rate specified for each series of the Senior Notes will be subject to adjustments from time to time if
Moody’s Investor Service, Inc. (“Moody’s”) or Standard & Poor’s Ratings Services (“S&P”) or, under certain
circumstances, a substitute rating agency selected by us as a replacement for Moody’s or S&P, as the case may
be (a “Substitute Rating Agency”), downgrades (or subsequently upgrades) its rating assigned to the respective
series of Senior Notes such that the adjusted rating is below investment grade. If the adjusted rating of any series
of Senior Notes from Moody’s (or, if applicable, any Substitute Rating Agency) is decreased to Ba1, Ba2, Ba3 or
B1 or below, the stated interest rate on such series of Senior Notes as noted above will increase by 25 bps, 50
bps, 75 bps or 100 bps, respectively (“bps” refers to Basis Points and 1% is equal to 100 bps). If the rating of any
series of Senior Notes from S&P (or, if applicable, any Substitute Rating Agency) with respect to such series of
Senior Notes is decreased to BB+, BB, BB- or B+ or below, the stated interest rate on such series of Senior Notes
as noted above will increase by 25 bps, 50 bps, 75 bps or 100 bps, respectively. The interest rates on any series of
Senior Notes will permanently cease to be subject to any adjustment (notwithstanding any subsequent decrease in
the ratings by any of Moody’s, S&P and, if applicable, any Substitute Rating Agency) if such series of Senior
Notes becomes rated “Baa1” (or its equivalent) or higher by Moody’s (or, if applicable, any Substitute Rating
Agency) and “BBB+” (or its equivalent) or higher by S&P (or, if applicable, any Substitute Rating Agency), or
one of those ratings if rated by only one of Moody’s, S&P and, if applicable, any Substitute Rating Agency, in
each case with a stable or positive outlook. In October 2014, the Company entered into a series of forward
contracts to lock the 10-year treasury rate (“benchmark rate”) on a portion of the Senior Notes with a notional
amount of $1.00 billion in aggregate. For additional details, refer to Note 15, “Derivative Instruments and
Hedging Activities.”

The original discount on the Senior Notes amounted to $4.0 million and is being amortized over the life of
the debt. Interest is payable semi-annually on May 1 and November 1 of each year. The debt indenture (the
“Indenture”) includes covenants that limit the Company’s ability to grant liens on its facilities and enter into sale
and leaseback transactions, subject to certain allowances under which certain sale and leaseback transactions are
not restricted. As of June 30, 2016, the Company was in compliance with all of its covenants under the Indenture
associated with the Senior Notes.

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

Based on the trading prices of the Senior Notes on the applicable dates, the fair value of the Senior Notes as
of June 30, 2016 and June 30, 2015 was approximately $2.68 billion and $2.52 billion, respectively. While the
Senior Notes are recorded at cost, the fair value of the long-term debt was determined based on quoted prices in
markets that are not active; accordingly, the long-term debt is categorized as Level 2 for purposes of the fair
value measurement hierarchy.

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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

In November 2014, the Company entered into $750.0 million of five-year senior unsecured prepayable term
loans and a $500.0 million unfunded revolving credit facility (collectively, the “Credit Facility”) under the Credit
Agreement (the “Credit Agreement”). The interest under the Credit Facility will be payable on the borrowed
amounts at the London Interbank Offered Rate (“LIBOR”) plus a spread, which is currently 125 bps, and this
spread is subject to adjustment in conjunction with the Company’s credit rating downgrades or upgrades. The
spread ranges from 100 bps to 175 bps based on the Company’s then effective credit rating. The Company is also
obligated to pay an annual commitment fee of 15 bps on the daily undrawn balance of the revolving credit
facility, which is also subject to an adjustment in conjunction with the Company’s credit rating downgrades or
upgrades by Moody’s and S&P. The annual commitment fee ranges from 10 bps to 25 bps on the daily undrawn
balance of the revolving credit facility, depending upon the then effective credit rating. Principal payments with
respect to the term loans will be made on the last day of each calendar quarter, and any unpaid principal balance
of the term loans, including accrued interest, shall be payable on November 14, 2019 (the “Maturity Date”). The
Company may prepay the term loans and unfunded revolving credit facility at any time without a prepayment
penalty. During the fiscal year ended June 30, 2016, we made term loan principal payments of $135.0 million.

Future principal payments for the Company’s term loans (without giving effect to $117.5 million of
principal prepayments as of June 30, 2016 that shall be applied to the future schedule quarterly payments) as of
June 30, 2016, are as follows:

Fiscal Quarters Ending

Quarterly Payment
(in thousands)

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

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,

2016 and had no outstanding borrowings under the unfunded revolving credit facility.

Debt Redemption:

In December 2014, the Company redeemed the $750.0 million aggregate principal amount of the 2018
Senior Notes. The redemption resulted in a pre-tax net loss on extinguishment of debt of $131.7 million for the
three months ended December 31, 2014 after an offset of a $1.2 million gain upon the termination of the non-
designated forward contract entered by the Company in November 2014. The objective of entering into the non-
designated forward contract was to lock the treasury rate used to determine the redemption amount of the 2018
Senior Notes. The notional amount of the non-designated forward contract was $750.0 million. Refer to Note 15,
“Derivative Instruments and Hedging Activities.”

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

NOTE 7—EQUITY AND LONG-TERM INCENTIVE COMPENSATION PLANS

Equity Incentive Program

As of June 30, 2016, the Company had two plans under which the Company was able to issue equity
incentive awards, such as restricted stock units and stock options, to its employees, consultants and members of
its Board of Directors: the 2004 Equity Incentive Plan (the “2004 Plan”) and the 1998 Director Plan (the
“Outside Director Plan”).

2004 Plan:

The 2004 Plan provides for the grant of options to purchase shares of the Company’s common stock, stock
appreciation rights, restricted stock units, performance shares, performance units and deferred stock units to the
Company’s employees, consultants and members of its Board of Directors. As of June 30, 2016, 5.1 million
shares were available for issuance under the 2004 Plan.

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

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

Outside Director Plan

The Outside Director Plan only permits the issuance of stock options to the non-employee members of the
Board of Directors. As of June 30, 2016, 1.7 million shares were available for grant under the Outside Director
Plan.

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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, 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 canceled/expired/forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan shares expired(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balances as of June 30, 2015(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units granted(1)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units canceled(1)

Balances as of June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Available
For Grant

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

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

7,810
(1,541)
509

6,778

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

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

(3)

(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 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, 2016, it had not yet been determined the extent to which (if at all) the performance-based vesting criteria of
such restricted stock units had been satisfied. Therefore, this line item includes all such performance-based restricted
stock units granted during such fiscal year, reported at the maximum possible number of shares that may ultimately
be issuable under such restricted stock units if all applicable performance-based criteria are achieved at their
maximum levels and all applicable service-based criteria are fully satisfied (i.e., 0.7 million shares for the fiscal year
ended June 30, 2016 and 0.6 million shares for each of the fiscal years ended June 30, 2015 and 2014, which, in each
case reflects the application of the 1.8x or 2.0x multiplier described above). The Company has granted only
restricted stock units under its equity incentive program since October 2007, except the number of shares subject to
outstanding options under the 2004 Plan was adjusted during the three months ended December 31, 2014 due to a
proportionate and equitable adjustment under the 2004 Plan provisions as discussed below. For the preceding several
years until October 31, 2007, stock options were granted at the market price of the Company’s common stock on the
date of grant generally with vesting period terms ranging from one to five years. Restricted stock units may be
granted with varying criteria such as service-based and/or performance-based vesting.

(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

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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, 2016, the Company accrued $19.6 million of dividends payable, substantially all
of which is related to the special cash dividend for the unvested restricted stock units outstanding as of the dividend
record date as well as restricted stock units granted with dividend equivalent rights during the fiscal year ended
June 30, 2016, which entitle the holders of such equity awards to the same dividend value per share as holders of
common stock subject to meeting the vesting requirements of the underlying equity awards. The fair value for purchase
rights under the Company’s Employee Stock Purchase Plan is determined using a Black-Scholes valuation model.

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

(In thousands)

Stock-based compensation expense by:

Year ended June 30,

2016

2015

2014

Costs of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . .

$ 4,689
8,618
31,743

$ 7,242
12,259
35,801

$ 9,101
16,397
35,442

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

$45,050

$55,302

$60,940

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

below:

(In thousands)

As of June 30,

2016

2015

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

$2,685

$3,242

Stock Options

The Company has not issued any stock options since October 2007. However, during the three months
ended December 31, 2014, the Company adjusted the number of shares subject to outstanding options under the
2004 Plan by an aggregate of 4,245 shares pursuant to a proportionate and equitable adjustment for the effect of
the special cash dividend, as required by the 2004 Plan. The total number of outstanding options under the 2004
Plan as well as the associated exercise prices were adjusted to ensure the aggregate intrinsic value remained the
same after considering the effect of the special cash dividend. As the adjustment was required by the 2004 Plan,
the adjustment to the outstanding awards did not result in any incremental compensation expense due to
modification of such awards, under the authoritative guidance. Additionally, the adjustment did not have an
impact on the shares available for future issuance under the 2004 Plan. As of June 30, 2016, the outstanding
stock options are immaterial (all vested and exercisable).

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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

Year ended June 30,

2016

2015

2014

$4,549

$18,022

stock option exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefits realized by the Company in connection with these exercises . . . . . . . . . . .

$4
$1

$5,892
$1,989

$72,700
$ 5,708

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

Restricted Stock Units

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

Restricted Stock Units

Shares
(In thousands) (1)

Weighted-Average
Grant Date
Fair Value

Outstanding restricted stock units as of June 30, 2015(2) . . . . . . . .
Granted(2)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested and released . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Withheld for taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Outstanding restricted stock units as of June 30, 2016(2) . . . . . . . .

2,674
770
(855)
(469)
(271)

1,849

$49.36
$51.12
$39.26
$39.26
$55.62

$56.41

(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 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, 2016, it had not yet been determined the extent to which (if at all) the performance-
based vesting criteria of such restricted stock units had been satisfied. Therefore, this line item includes all
such performance-based restricted stock units, reported at the maximum possible number of shares (i.e.,
0.3 million shares for each of the fiscal years ended June 30, 2016, 2015 and 2014) that may ultimately be
issuable under such restricted stock units if all applicable performance-based criteria are achieved at their
maximum and all applicable service-based criteria are fully satisfied.

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
installments on the third and fourth
performance-based and service-based vesting criteria,
anniversaries of the grant date, in each case subject to the recipient remaining employed by the Company as of

in two equal

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

the applicable vesting date. The restricted stock units granted by the Company from the beginning of the fiscal
year ended June 30, 2007 through the fiscal year ended June 30, 2012 generally vest in two equal installments on
the second and fourth anniversaries of the grant date, subject to the recipient remaining employed by the
Company as of the applicable vesting date. The restricted stock units granted to the independent members of the
board of directors vest on the first anniversary of the date of grant. However, in connection with the closing of
the proposed Merger with Lam Research, vesting of the restricted stock units held by the independent members
of the board of directors who will not be serving as members of the Lam Research board of directors, will
accelerate in whole or in part in accordance with the Company’s accelerated vesting policy approved by the
Company’s stockholders at the February 2016 special meeting of stockholders.

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

(In thousands, except for weighted-average grant date fair value)

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

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

Year ended June 30,

2016

2015

2014

$ 51.12

$ 74.48

$ 53.28

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

$27,412

$26,250

$44,298

As of June 30, 2016, the unrecognized stock-based compensation expense balance related to restricted stock
units was $55.8 million, excluding the impact of estimated forfeitures, and will be recognized over a weighted-
average remaining contractual term and an estimated weighted-average amortization period of 1.3 years. The
total grant date fair value of vested restricted stock units was $52.0 million, $38.9 million and $81.9 million, in
the fiscal years ended 2016, 2015 and 2014, respectively. The intrinsic value of outstanding restricted stock units
as of June 30, 2016 was $135.4 million.

Cash-Based Long-Term Incentive Compensation

Starting in the fiscal year ended June 30, 2013, the Company adopted a cash-based long-term incentive
(“Cash LTI”) program for many of its employees as part of the Company’s employee compensation program.
During the fiscal years ended June 30, 2016 and 2015, the Company approved Cash LTI awards of $49.3 million
and $67.7 million, respectively, under the Company’s Cash Long-Term Incentive Plan (“Cash LTI Plan”). Cash
LTI awards issued to employees under the Cash LTI Plan will vest in four equal installments, with 25% of the
aggregate amount of the Cash LTI award vesting on each yearly anniversary of the grant date over a four-year
period. In order to receive payments under a Cash LTI award, participants must remain employed by the
Company as of the applicable award vesting date. Executives and non-employee Board members are not
participating in this program. During the fiscal years ended June 30, 2016, 2015 and 2014, the Company
recognized $44.6 million, $39.6 million and $26.2 million, respectively, in compensation expense under the Cash
LTI Plan. As of June 30, 2016, the unrecognized compensation expense (excluding the impact of estimated
forfeitures) related to the Cash LTI Plan was $87.2 million.

Employee Stock Purchase Plan

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

100

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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

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,

2016

2015

2014

Stock purchase plan:

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

25.4% 24.5% 27.5%
0.2% 0.1% 0.1%
3.3% 2.8% 2.9%
0.50

0.50

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

(In thousands, except for weighted-average fair value per share)

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,

2016

2015

2014

$38,295
735

$41,116
759

$39,675
796

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

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

$ 2,194
$ 12.48

$ 1,741
$ 14.55

$ 2,221
$ 12.31

The ESPP shares are replenished annually on the first day of each fiscal year by virtue of an evergreen
provision. The provision allows for share replenishment equal to the lesser of 2.0 million shares or the number of
shares which KLA-Tencor estimates will be required to be issued under the ESPP during the forthcoming fiscal
year. As of June 30, 2016, a total of 1.4 million shares were reserved and available for issuance under the ESPP.

Quarterly cash dividends

On May 5, 2016, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.52 per
share on the outstanding shares of the Company’s common stock, which was paid on June 1, 2016 to the
stockholders of record as of the close of business on May 16, 2016. Under the authoritative guidance, the
dividend when declared is recognized as a reduction of retained earnings, to the extent available, with any
shortfall recognized as a reduction of additional paid-in-capital. The total amount of regular quarterly cash
dividends paid by the Company during the fiscal years ended June 30, 2016 and 2015 was $324.5 million and
$324.8 million, respectively. The amount of accrued dividends for quarterly cash dividends for unvested
restricted stock units with dividend equivalent rights was $2.7 million and $0.9 million as of June 30, 2016 and
2015, respectively.

101

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

Special cash dividend

On November 19, 2014, the Company’s Board of Directors declared a special cash dividend of $16.50 per share,
which was paid on December 9, 2014 to the stockholders of record as of the close of business on December 1, 2014.
Additionally, in connection with the special cash dividend, the Company’s Board of Directors and the Compensation
Committee of the Board of Directors approved a proportionate and equitable adjustment to outstanding equity awards
(restricted stock units and stock options), as required under the 2004 Plan, subject to the vesting requirements of the
underlying awards. As the adjustment was required by the 2004 Plan, the adjustment to the outstanding awards did not
result in any incremental compensation expense due to modification of such awards, under the authoritative guidance.
Under the authoritative guidance, the dividend when declared is recognized as a reduction of retained earnings, to the
extent available, with any shortfall recognized as a reduction of additional paid-in-capital. The special cash dividend
reduced the retained earnings by $2.1 billion as of the special cash dividend declaration date, reducing the retained
earnings amount to zero and the excess amount of the special cash dividend of $646.5 million was charged against
additional paid-in capital. The declaration and payment of the special cash dividend are part of the Company’s
leveraged recapitalization transaction under which the special cash dividend was financed through a combination of
existing cash and proceeds from the debt financing disclosed in Note 6, “Debt” that was completed during the three
months ended December 31, 2014. The total amount of the special cash dividend accrued by the Company during the
three months ended December 31, 2014 was approximately $2.76 billion, substantially all of which was paid out
during the three months ended December 31, 2014, except for the aggregate special cash dividend of $43.0 million that
was accrued for the unvested restricted stock units. As of June 30, 2016 and 2015, the Company had a total of
$16.9 million and $41.1 million, respectively, of accrued dividends payable for the special cash dividend with respect
to outstanding unvested restricted stock units, which will be paid when such underlying unvested restricted stock units
vest. The Company paid a special cash dividend with respect to vested restricted stock units during the fiscal years
ended June 30, 2016 and 2015 of $21.8 million and $1.8 million respectively. Other than the special cash dividend
declared during the three months ended December 31, 2014, the Company historically has not declared any special
cash dividends.

NOTE 8—STOCK REPURCHASE PROGRAM

The Company’s Board of Directors has authorized a program for the Company to repurchase shares of the
Company’s common stock. The intent of this program is to offset the dilution from KLA-Tencor’s equity
incentive plans and employee stock purchase plan, as well as to return excess cash to the Company’s
stockholders. Subject to market conditions, applicable legal requirements and other factors, the repurchases were
made in the open market in compliance with applicable securities laws, including the Securities Exchange Act of
1934 and the rules promulgated thereunder such as Rule 10b-18. As of June 30, 2016, an aggregate of
approximately 5.9 million shares were available for repurchase under the Company’s repurchase program. In
connection with entering into the Merger Agreement with Lam Research, the Company suspended further
repurchases under its repurchase program effective October 21, 2015.

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

follows:

(In thousands)

Year ended June 30,

2016

2015

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

3,445
$175,743

9,255
$608,856

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

102

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

NOTE 9—NET INCOME PER SHARE

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

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

(In thousands, except per share amounts)

Numerator:

Year ended June 30,

2016

2015

2014

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

$704,422

$366,158

$582,755

Denominator:

Weighted-average shares-basic, excluding unvested restricted stock

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

155,869
910

162,282
1,419

166,016
2,102

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

156,779

163,701

168,118

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

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

$
$

4.52
4.49

$
$

2.26
2.24

$
$

3.51
3.47

—

NOTE 10—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 $15.3 million, $14.2 million
and $15.4 million in the fiscal years ended June 30, 2016, 2015 and 2014, 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, 2016 and 2015.

103

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,

2016

2015

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

$75,928
3,349
1,322
163
9,029
(2,517)
2,649

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

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

$89,923

$75,928

(In thousands)

Change in fair value of plan assets:

Year ended June 30,

2016

2015

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

$17,038
588
4,330
(2,517)
(545)

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

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

$18,894

$17,038

(In thousands)

As of June 30,

2016

2015

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

$71,029

$58,890

(In thousands)

As of June 30,

2016

2015

Plans with accumulated benefit obligations in excess of plan assets:

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

$53,198
$89,923
$18,894

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

Year ended June 30,

2016

2015

2014

Weighted-average assumptions:

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

0.5%-2.0% 1.3%-2.0% 1.5%-3.5%
1.8%-2.5% 1.8%-2.5% 1.8%-3.8%
3.0%-5.8% 3.0%-5.5% 3.0%-5.5%

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

104

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,

2016

2015

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

108
113
31,739

515
180
24,119

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

$31,960

$24,814

Losses in accumulated other comprehensive income (loss) related to the Company’s foreign defined benefit
pension plans expected to be recognized as components of net periodic benefit cost over the fiscal year ending
June 30, 2017 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, 2017

$ 243
50
1,329

$1,622

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,

2016

2015

2014

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

$3,349
1,322
(406)
249
46
1,132
—

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

Net periodic pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$5,692

$6,159

$6,469

Fair Value of Plan Assets

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

The foreign plans’ investments are managed by third-party trustees consistent with the regulations or market
practice of the country where the assets are invested. The Company is not actively involved in the investment
strategy, nor does it have control over the target allocation of these investments. These investments made up
100% of total foreign plan assets in the fiscal years ended June 30, 2016 and 2015.

105

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,

2017 is $1.8 million.

The total benefits to be paid from the foreign pension plans are not expected to exceed $2.9 million in any

year through the fiscal year ending June 30, 2026.

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

categories as of June 30, 2016 and 2015, respectively:

As of June 30, 2016 (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 . . . . . . . . . . . . . . . . .

$11,950
6,944

$11,950

—

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

$18,894

$11,950

$ —
6,944

$6,944

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

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, 2016, the Company did not have concentrations of plan asset investment risk in
any single entity, manager, counterparty, sector, industry or country.

NOTE 11—INCOME TAXES

The components of income before income taxes are as follows:

(In thousands)

Year ended June 30,

2016

2015

2014

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

$417,803
440,389

$157,251
276,880

$434,336
300,125

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

$858,192

$434,131

$734,461

106

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,

2016

2015

2014

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

$ 94,088
6,123
37,680

$ 63,123
3,655
25,438

$ 98,937
8,580
27,867

137,891

92,216

135,384

Deferred:

15,645
3,583
(3,349)

(22,390)
409
(2,262)

22,904
(334)
(6,248)

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

$153,770

$ 67,973

$151,706

15,879

(24,243)

16,322

Current tax liabilities were lower than reflected in the table above for the fiscal years ended June 30, 2016,
2015 and 2014 by $11.5 million, $16.7 million and $16.5 million, respectively, primarily due to a benefit for a
deduction related to employee stock activity, which was recorded as an increase to capital in excess of par value.

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

(In thousands)

Deferred tax assets:

As of June 30,

2016

2015

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

$ 116,277
109,524
13,607
94,783
34,484
15,857
14,375
26,877

$108,615
99,472
18,722
92,649
47,176
13,267
16,150
28,831

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

425,784
(104,968)

424,882
(91,350)

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

$ 320,816

$333,532

Deferred tax liabilities:

Unremitted earnings of foreign subsidiaries not indefinitely reinvested . . . . . . . . . . .
Deferred profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (11,571) $ (12,775)
(7,372)
(2,673)

(10,346)
(604)

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

(22,521)

(22,820)

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

$ 298,295

$310,712

As of June 30, 2016, the Company had U.S. federal, state and foreign net operating loss (“NOL”) carry-
forwards of approximately $22.9 million, $63.2 million and $41.8 million, respectively. The U.S. federal NOL

107

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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 $145.4 million will be carried over indefinitely. The foreign
NOL carry-forwards will begin to expire in 2017.

The net deferred tax asset valuation allowance was $105.0 million and $91.4 million as of June 30, 2016 and
June 30, 2015, 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, 2016. The valuation allowance is based on
the Company’s assessment that it is more likely than not that certain deferred tax assets will not be realized in the
foreseeable future. Of the valuation allowance as of June 30, 2016, $89.8 million relates to state credit carry-
forwards. The remainder of the valuation allowance relates primarily to state and foreign NOL carry-forwards.

As of June 30, 2016, U.S. income taxes were not provided for on a cumulative total of approximately $2.1
billion of undistributed earnings for certain non-U.S. subsidiaries. If these undistributed earnings were repatriated
to the United States, they would generate foreign tax credits to reduce the federal tax liability associated with the
foreign dividend. Assuming full utilization of the foreign tax credits, the potential deferred tax liability associated
with undistributed earnings would be approximately $707 million.

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 in the next
three to five years. The Company was in compliance with all the terms and conditions of the tax holidays as of
June 30, 2016. The net
impact of these tax holidays was to decrease the Company’s tax expense by
approximately $19.5 million, $20.4 million and $25.8 million in the fiscal years ended June 30, 2016, 2015 and
2014, respectively. The benefits of the tax holidays on diluted net income per share were $0.12, $0.13 and $0.15
for the fiscal years ended June 30, 2016, 2015 and 2014, 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,

2016

2015

2014

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

35.0% 35.0% 35.0%
0.7%
0.7%
0.9%
(13.0)% (15.3)% (11.5)%
(1.9)% (3.7)% (1.5)%
(2.2)%
0.3%
1.5%
(1.5)% (2.1)% (1.4)%
0.4%
0.8%
0.3%
(1.2)% (1.3)%
0.3%

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

17.9% 15.7% 20.7%

108

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

A reconciliation of gross unrecognized tax benefits is as follows:

(In thousands)

Year ended June 30,

2016

2015

2014

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

$ 69,018
4,245
(1,209)
13,636
(8,762)
(26,563)

$59,575
1,245
(7)
11,634
—
(3,429)

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

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

$ 50,365

$69,018

$59,575

The amount of unrecognized tax benefits that would impact the effective tax rate was $50.4 million, $69.0
million and $59.6 million as of June 30, 2016, 2015 and 2014 respectively. The amount of interest and penalties
recognized during the years ended June 30, 2016, 2015, and 2014 was income of $4.3 million as a result of a
release of unrecognized tax benefits, expense of $1.2 million, and expense of $0.7 million, respectively. KLA-
Tencor’s policy is to include interest and penalties related to unrecognized tax benefits within other expense
(income), net. The amount of interest and penalties accrued as of June 30, 2016 and 2015 was approximately
$3.7 million and $7.9 million, respectively.

The Company is subject to federal income tax examinations for all years beginning from the fiscal year
ended June 30, 2014. The Company is subject to state income tax examinations for all years beginning from the
fiscal year ended June 30, 2012. The Company is also subject
to examinations in other major foreign
jurisdictions, including Singapore, for all years beginning from the fiscal year ended June 30, 2012. The
Company believes that adequate amounts have been reserved for any adjustments that may ultimately result from
any future examinations of these years.

It is possible that certain examinations may be concluded in the next twelve months. The Company believes
it is possible that it may recognize up to $3.9 million of its existing unrecognized tax benefits within the next 12
months as a result of the lapse of statutes of limitations and the resolution of examinations with various tax
authorities.

NOTE 12—COMMITMENTS AND CONTINGENCIES

Merger-related Commitment and Fees. KLA-Tencor has an agreement with a financial advisor in relation
to the pending Merger with Lam Research. KLA-Tencor has agreed to pay the third party a fee of approximately
$58.0 million, $0.1 million of which was paid upon the execution of the engagement letter and $5.0 million of
which was paid upon delivery of the fairness opinion, and the remaining portion of which will be paid upon, and
subject to, consummation of the Merger (provided that the final actual fee will be, in part, based on an average of
the closing prices of Lam Research common stock over ten trading days approaching the closing of the Merger).
During the fiscal year ended June 30, 2016, $5.1 million of the above fees were recorded in selling, general and
administrative line of the consolidated statements of operations. In addition, the Merger Agreement contains
certain termination rights for KLA-Tencor and further provides that KLA-Tencor, as applicable, may be required
to pay a termination fee of $290.0 million to Lam Research under certain circumstances. The Company also has
an estimated $23.8 million of employee-related retention commitments as of June 30, 2016 in connection with
the pending Merger, which are expected to be paid over the stipulated period following the Merger.

Factoring. KLA-Tencor has agreements (referred to as “factoring agreements”) with financial institutions
to sell certain of its trade receivables and promissory notes from customers without recourse. The Company does

109

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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,

2016

2015

2014

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

$205,790
$ 21,904

$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 $8.7 million, $9.1 million and $8.7 million for the fiscal years ended June 30, 2016,
2015 and 2014, respectively.

The following is a schedule of expected operating lease payments:

Fiscal year ending June 30,

2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Amount
(In thousands)

$ 8,026
5,006
2,363
1,613
25
25

$17,058

Purchase Commitments. KLA-Tencor maintains commitments to purchase inventory from its suppliers as
well as goods and services in the ordinary course of business. The Company’s liability under these purchase
commitments is generally restricted to a forecasted time-horizon as mutually agreed upon between the parties.
This forecasted time-horizon can vary among different suppliers. The Company’s estimate of its significant
purchase commitments is approximately $292.9 million as of June 30, 2016 which are primarily due within the
next 12 months. Actual expenditures will vary based upon the volume of the transactions and length of
contractual service provided. In addition, the amounts paid under these arrangements may be less in the event
that the arrangements are renegotiated or canceled. Certain agreements provide for potential cancellation
penalties.

Cash Long-Term Incentive Plan. As of June 30, 2016, the Company had committed $121.4 million for
future payment obligations under its Cash LTI Plan. The calculation of compensation expense related to the Cash
LTI Plan includes estimated forfeiture rate assumptions. Cash LTI awards issued to employees under the Cash
LTI Plan vest in four equal installments, with 25% of the aggregate amount of the Cash LTI award vesting on
each yearly anniversary of the grant date over a four-year period. In order to receive payments under a Cash LTI
award, participants must remain employed by the Company as of the applicable award vesting date.

110

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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,

2016

2015

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

$ 36,413
39,175
(9,146)
(31,669)

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

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

$ 34,773

$ 36,413

The Company maintains guarantee arrangements available through various financial institutions for up to
$22.1 million, of which $18.7 million had been issued as of June 30, 2016, primarily to fund guarantees to
the Company’s
customs authorities for value-added tax (“VAT”) and other operating requirements of
subsidiaries in Europe and Asia.

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

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

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

111

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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 13—LITIGATION AND OTHER LEGAL MATTERS

Litigation Related to Proposed Merger with Lam Research.

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

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

Agreement in Principle to Resolve Merger-Related Litigation. On or about December 29, 2015,
plaintiffs in all four actions agreed to coordinate and proceed in the California Superior Court. On February 5,
2016, an agreement in principle was reached with the plaintiffs in the Rooney Action, Hedgecock Action, and
Spoleto Action to settle those actions. Pursuant
in principle, as set forth in a signed

to the agreement

112

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

memorandum of understanding, the parties agreed to resolve disputed legal claims and KLA-Tencor and Lam
agreed to make certain supplemental disclosures regarding the proposed Merger, as set forth in the Form 8-K
filed by KLA-Tencor on February 5, 2016. None of the defendants in these actions has admitted wrongdoing of
any kind, including that there were any inadequacies in any disclosure, any breach of any fiduciary duty, or
aiding or abetting any of the foregoing. On February 17, 2016, the California Superior Court dismissed the Karr
action pursuant to a stipulation by the parties.

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

Other Legal Matters

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

NOTE 14—RESTRUCTURING CHARGES

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

During the fourth quarter of fiscal year ended 2015, the Company implemented a plan to reduce its global
employee workforce to streamline the organization and business processes in response to changing customer
requirements in the industry. The goals of this reduction were to enable continued innovation, direct the
Company’s resources toward its best opportunities and lower its ongoing expense run rate. The Company
substantially completed its global workforce reduction during the fiscal year ended June 31, 2016 and recorded

113

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

an $8.9 million net restructuring charge, of which $3.6 million was recorded to costs of revenues, $1.6 million to
research and development expense and $3.7 million to selling, general and administrative expense lines of the
consolidated statements of operations. During the fiscal year ended June 30, 2015, the Company recorded a $31.6
million net restructuring charge, of which $8.0 million was recorded to costs of revenues, $11.1 million to
research and development expense and $12.5 million to selling, general and administrative expense lines of the
consolidated statements of operations.

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

years ended June 30, 2016 and 2015:

(In thousands)

Year ended June 30,

2016

2015

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

$ 24,887
8,926
(142)
(33,084)

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

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

587

$ 24,887

The remaining accrual for severance and benefits as of June 30, 2016 is expected to be paid out by the end

of the Company’s quarter ending December 31, 2016.

NOTE 15—DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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

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

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

114

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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 $1.00 billion in aggregate which matured in
the second quarter of the fiscal year ended June 30, 2015. The Company designated each of the Rate Lock
Agreements as a qualifying hedging instrument and accounted for as a cash flow hedge, under which the
effective portion of the gain or loss on the close out of the Rate Lock Agreements was initially recognized in
accumulated other comprehensive income (loss) as a reduction of total stockholders’ equity and subsequently
amortized into earnings as a component of interest expense over the term of the underlying debt. The ineffective
portion, if any, was recognized in earnings immediately. The Rate Lock Agreements were terminated on the date
of pricing of the $1.25 billion of 4.650% Senior Notes due in 2024 and the Company recorded the fair value of
$7.5 million as a gain within accumulated other comprehensive income (loss) as of December 31, 2014. For the
fiscal years ended June 30, 2016 and 2015, the Company recognized $0.8 million and $0.5 million, respectively,
for the amortization of the gain recognized in accumulated other comprehensive income (loss), which amount
reduced the interest expense. As of June 30, 2016, the unamortized portion of the fair value of the forward
contracts for the rate lock agreements was $6.3 million. The cash proceeds of $7.5 million from the settlement of
the Rate Lock Agreements were included in the cash flows from operating activities in the consolidated
statements of cash flows for the fiscal year ended June 30, 2015 because the designated hedged item was
classified as interest expense in the cash flows from operating activities in the consolidated statements of cash
flows.

In addition, in November 2014, the Company entered into a non-designated forward contract to lock the
treasury rate used to determine the redemption amount of the 2018 Senior Notes. 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
$750.0 million. The forward contract was terminated in December 2014 and the resulting fair value of $1.2
million was included in the loss on extinguishment of debt and other, net line in the 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.

115

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

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

2016

2015

Year ended June 30,

Derivatives Designated as Hedging Instruments
Gains in accumulated OCI on derivatives (effective

portion)

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

$ (9,622) $13,745

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)

$ (2,926) $ 7,615
(1,503)
503

(1,551)
755

$ (3,722) $ 6,615

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

(989) $

243

Derivatives Not Designated as Hedging Instruments
Gains recognized in income . . . . . . . . . . . . . . . . . . . . . . . . . Other expense (income), net

$(21,430) $13,976

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 remaining
maturities of approximately seven months and 16 months as of June 30, 2016 and 2015, respectively, were as
follows:

(In thousands)

Cash flow hedge contracts

As of
June 30, 2016

As of
June 30, 2015

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

$
7,591
$ 91,793

$ 32,775
$ 88,800

Other foreign currency hedge contracts

$122,275
$115,087

$ 64,012
$123,091

116

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,
2016

As of
June 30,
2015

Fair Value

Balance Sheet
Location

As of
June 30,
2016

As of
June 30,
2015

Fair Value

(In thousands)
Derivatives designated as
hedging instruments
Foreign exchange

contracts . . . . . . . . . . Other current assets $ 342 $1,722 Other current liabilities $ 4,736 $1,920

Total derivatives

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

Derivatives not designated
as hedging instruments
Foreign exchange

342

1,722

4,736

1,920

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

753

1,342 Other current liabilities

6,911

1,186

Total derivatives not

designated as hedging
instruments . . . . . . . . . . .
Total derivatives . . . . . . . . .

753

1,342
$1,095 $3,064

6,911

1,186
$11,647 $3,106

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

derivative instruments for the indicated periods:

(In thousands)

Year ended
June 30,

2016

2015

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

$ 7,110
3,722
(9,622)

(20)
(6,615)
13,745

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

$ 1,210

$ 7,110

Offsetting of Derivative Assets and Liabilities

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

As of June 30, 2016

Description

Gross Amounts of
Derivatives Not Offset
in the Consolidated
Balance Sheets

Gross Amounts
of Derivatives
Offset in the
Consolidated
Balance Sheets

Net Amount of
Derivatives
Presented in the
Consolidated
Balance Sheets

Gross Amounts
of Derivatives

Financial
Instruments

Cash
Collateral
Received

Net
Amount

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

$ 1,095
$(11,647)

$—
$—

117

$ 1,095
$(11,647)

$(843)
$ 843

252
$— $
$— $(10,804)

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

As of June 30, 2015

Description

Gross Amounts of
Derivatives Not Offset
in the Consolidated
Balance Sheets

Gross Amounts
of Derivatives
Offset in the
Consolidated
Balance Sheets

Net Amount of
Derivatives
Presented in the
Consolidated
Balance Sheets

Gross Amounts
of Derivatives

Financial
Instruments

Cash
Collateral
Received

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

$ 3,064
$(3,106)

$—
$—

$ 3,064
$(3,106)

$(2,809)
$ 2,809

$—
$—

Net
Amount

$ 255
$(297)

NOTE 16—SEGMENT REPORTING AND GEOGRAPHIC INFORMATION

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

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

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

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

118

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)

2016

2015

2014

Year ended June 30,

Revenues:

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

$ 894,557
521,335
444,216
430,074
367,905
167,936
158,470

30% $ 691,482
815,914
18%
426,963
15%
162,669
14%
405,320
12%
194,670
6%
117,031
5%

25% $ 741,470
705,159
29%
334,653
15%
260,089
6%
371,139
14%
306,779
7%
210,119
4%

25%
24%
11%
9%
13%
11%
7%

Total

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

$2,984,493

100% $2,814,049

100% $2,929,408

100%

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

revenues):

(Dollar amounts in thousands)

2016

2015

2014

Year ended June 30,

Revenues:

Wafer Inspection . . . . . . . . . . . . . . . . . . . .
Patterning . . . . . . . . . . . . . . . . . . . . . . . . .
Global Service and Support(1) . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$1,293,922
772,045
824,297
94,229

43% $1,224,858
736,959
26%
752,881
28%
99,351
3%

44% $1,466,275
705,473
26%
685,658
27%
72,002
3%

50%
24%
23%
3%

Total

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

$2,984,493

100% $2,814,049

100% $2,929,408

100%

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

In the fiscal year ended June 30, 2016, two customers accounted for approximately 18% and 10% of total
revenues. In the fiscal year ended June 30, 2015, three customers accounted for approximately 15%, 12% and
11% of total revenues. In the fiscal year ended June 30, 2014, three customers accounted for approximately 18%,
14% and 11% of total revenues.

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

(In thousands)

Long-lived assets:

As of June 30,

2016

2015

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

$182,597
41,658
30,844
13,347
9,568

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

Total

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

$278,014

$314,591

119

KLA-TENCOR CORPORATION

Notes to Consolidated Financial Statements—(Continued)

NOTE 17—RELATED PARTY TRANSACTIONS

During the fiscal years ended June 30, 2016, 2015 and 2014, the Company purchased from, or sold to,
several entities, where one or more executive officers of the Company or members of the Company’s Board of
Directors, or their immediate family members, also serves as an executive officer or a board member, including
Broadcom Limited (formerly known as Avago Technologies Ltd.), Cisco Systems, Inc., Citrix Systems, Inc.,
Freescale Semiconductor, Inc., Keysight Technologies, Inc., NetApp, Inc. and SAP AG. The following table
provides the transactions with these parties for the indicated periods (for the portion of such period that they were
considered related):

(In thousands)

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

Year ended June 30,

2016

$
8
$983

2015

2014

$1,856
$1,098

$2,701
$2,622

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

NOTE 18—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, 2016 and 2015.

(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)

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

First quarter
ended
September 30, 2015

Second quarter
ended
December 31, 2015

Third quarter
ended
March 31, 2016

Fourth quarter
ended
June 30, 2016

$642,644
$372,400
$104,897

$
$

0.67
0.66

$710,245
$429,265
$152,207

$
$

0.98
0.98

$712,433
$437,834
$175,777

$
$

1.13
1.12

$919,171
$581,603
$271,541

$
$

1.74
1.73

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

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

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

120

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, 2016 and June 30, 2015, and the results of their operations and their cash flows for each of the three
years in the period ended June 30, 2016 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, 2016 based on criteria
established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these
financial statements and financial statement schedule, for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included in
Management’s Report on Internal Control over Financial Reporting under Item 9A. Our responsibility is to
express opinions on these financial statements, on the financial statement schedule, and on the Company’s
internal control over financial reporting based on our integrated audits. We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal control over financial reporting was maintained in all
material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable
basis for our opinions.

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which

it classifies deferred taxes on the consolidated balance sheet in 2016.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP
San Jose, California

August 5, 2016

121

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, 2016.

The effectiveness of the Company’s internal control over financial reporting as of June 30, 2016 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.

122

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 errors 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 2016 that have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

123

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
the Board of Directors and Its Committees—Compensation
Compensation” and “Information About
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, 2017” in the Proxy Statement, which is incorporated herein by reference.

124

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, 2016 and June 30, 2015 . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for each of the three years in the period ended June 30,

2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

ended June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended
June 30, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for each of the three years in the period ended June 30,
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

74
75
121

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

127

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.

125

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 5, 2016

(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 5, 2016

Executive Vice President and Chief

August 5, 2016

Financial Officer (principal
financial officer)

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

August 5, 2016

/S/ EDWARD W. BARNHOLT

Chairman of the Board and Director

August 5, 2016

Edward W. Barnholt

/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

126

August 5, 2016

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, 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

$ —
$ —

$ (308)
$19,231

$ 21,827
$ 76,328

$ (164)
$15,022

$ 21,663
$ 91,350

Fiscal Year Ended June 30, 2016:

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

$21,663
$91,350

$ —
$1,763

9
$
$11,855

$ 21,672
$104,968

127

BOARD OF DIRECTORS
(as of September 23, 2016)

Edward W. Barnholt Chairman of the
Board, KLA-Tencor Corporation
Former Chairman of the Board,
President and Chief Executive Officer,
Agilent Technologies, Inc.

David C. Wang
Former President, Boeing-China,
and Former Vice President of
International Relations, The Boeing
Company

CORPORATE HEADQUARTERS
One Technology Drive
Milpitas, California 95035
408.875.3000
www.kla-tencor.com

Robert M. Calderoni
Executive Chairman,
Citrix Systems, Inc.

John T. Dickson
Former President and
Chief Executive Officer,
Agere Systems, Inc.

Emiko Higashi
Managing Director and Founder,
Tomon Partners, LLC

Kevin J. Kennedy
President and
Chief Executive Officer,
Avaya Inc.

Gary B. Moore
Former President and
Chief Operating Officer,
Cisco Systems, Inc.

EXECUTIVE OFFICERS
(as of September 23, 2016)

Richard P. Wallace
President and Chief Executive
Officer

Bren D. Higgins
Executive Vice President and
Chief Financial Officer

Bobby R. Bell
Executive Vice President

Michael D. Kirk, Ph.D.
Executive Vice President,
Wafer Inspection Division

Ahmad A. Khan
Executive Vice President,
Patterning Division

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

Teri A. Little
Senior Vice President, General
Counsel and Corporate Secretary

Robert A. Rango
President and Chief Executive Officer,
Enevate Corporation

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

Richard P. Wallace
President and Chief Executive
Officer, KLA-Tencor Corporation

Virendra A. Kirloskar
Senior Vice President and
Chief Accounting Officer

GLOBAL OFFICES
KLA-Tencor has offices around the
globe. For a complete list of locations,
go to:
http:// www.kla-tencor.com/
company/offices-maps.html

INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

PricewaterhouseCoopers LLP
San Jose, California

TRANSFER AGENT/REGISTRAR

Computershare
Boston, Massachusetts

STOCK SYMBOL

Common Stock traded on the NASDAQ
Global Select Market under the
symbol KLAC

Additional copies of this report may be
obtained at www.kla-tencor.com,
by calling 408.875.3000, or by writing
to:

KLA-Tencor Corporation
Attn: Investor Relations
One Technology Drive
Milpitas, California 95035

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. Such
forward-looking statements may include, among others, statements regarding our future prospects,
financial results and results of our operations including our through-cycle revenue growth rate objectives
and operating income; our ability to maintain and strengthen our market and technology leadership
positions; our ability to successfully develop next-generation technologies; and our efforts to successfully
develop and introduce future product offerings and our customers’ acceptance of those offerings.

Our actual results may differ significantly from those projected in the forward-looking statements in the
letter included in this report due to various factors, including those set forth in our Annual Report on Form
10-K for the fiscal year ended June 30, 2016. Investors are cautioned to consult KLA-Tencor’s filings with
the Securities and Exchange Commission (“SEC”) for further information regarding, and other risks
related to, our business. These documents are available at the SEC website: www.sec.gov. We expressly
assume no obligation to update the forward-looking statements in the letter to our stockholders in this
report.

KLA-Tencor Corporation
One Technology Drive
Milpitas, CA 95035
408.875.3000
www.kla-tencor.com

Collaboration | Innovation | Execution

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

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