KLA (KLAC) 10-K risk factor changes: FY2018 vs FY2017

Our customer base, particularly in the semiconductor industry, historically has [removed: been, and is becoming increasingly,] [added: been] highly concentrated due to corporate consolidation, acquisitions and business closures.

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 [removed: corporate] [added: organizational] structure.

When cyclical fluctuations result in lower than expected revenue levels, operating results may be adversely affected and cost reduction measures may be necessary [removed: in order] for us to remain competitive and financially sound.

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 [removed: acceptances;] [added: acceptance;] an inability to adjust our operations rapidly enough to adapt to changing business conditions; or a different than anticipated effective tax rate.

Additionally, we have commitments for an unfunded revolving credit facility of [removed: $500.0] [added: $750.0] million under the Credit Agreement.

We may incur additional indebtedness in the future by accessing the unfunded [added: portion of our] revolving credit facility [removed: under the Credit Agreement] and/or entering into new financing arrangements.

[removed: The term loans] [added: Borrowings] under [removed: the] [added: our Revolving] Credit [removed: Agreement] [added: Facility] bear interest at a floating rate, [removed: which is based on the London Interbank Offered Rate plus a fixed spread, and, therefore, any] [added: and an] increase in interest rates would require us to pay additional [removed: interest,] [added: interest on any borrowings,] 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 [removed: the] [added: our Revolving] Credit Facility is also subject to an adjustment in conjunction with our credit rating downgrades or upgrades.

Additionally, under [removed: the] [added: our Revolving] Credit [removed: Agreement,] [added: Facility,] we are required to comply with affirmative and negative covenants, which include the maintenance of certain financial ratios, the details of which can be found in Note 7, [removed: “Debt”] [added: “Debt,”] to [removed: the] [added: our] consolidated financial statements.

In addition, certain of our domestic subsidiaries [removed: under the Credit Agreement] are required to guarantee our borrowings under [removed: the] [added: our Revolving] Credit [removed: Agreement.][added: Facility.]

| • | obligations to comply with restrictive and financial covenants as noted in the above risk factor and Note 7, [removed: “Debt”] [added: “Debt,”] to [removed: the] [added: our] consolidated financial statements. |

Furthermore, our future operations may not generate sufficient cash flows to enable us to meet our future expenses and service our [added: 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 [removed: revolving credit facility] [added: portion] of [removed: $500.0 million under the] [added: our Revolving] Credit [removed: Agreement] [added: Facility of $750.0 million] or enter into new financing arrangements to obtain necessary funds.

Any additional borrowing under [removed: the Credit Agreement] [added: our revolving credit facility] will place further pressure on us to comply with the financial covenants.

[removed: Such workforce] [added: Workforce] changes can also temporarily reduce workforce productivity, which could be disruptive to our business and adversely affect our results of operations.

Such additional write-offs could [removed: constitute] [added: result in] material charges.

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 [removed: matters (in addition to proceedings and claims related to intellectual property matters, which are separately discussed elsewhere in this Item 1A).][added: matters.]

[removed: As part of this effort, we] [added: We] may [removed: make] [added: also enter into definitive agreements for and consummate] acquisitions of, or significant investments in, businesses with complementary products, services and/or technologies.

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, [added: any perception that we might be unable to complete the merger with Orbotech, material delays in our ability to complete the merger with Orbotech,] or adverse consequences experienced by us as a result of any of the risks described elsewhere in this Item 1A.

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; expiration of tax holidays in certain jurisdictions that are not renewed; 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 [removed: laws (for example, proposals for fundamental United States international tax reform);] [added: laws;] 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.

As of June 30, 2018, we had $2.25 billion aggregate principal amount of senior, unsecured long-term notes.

For example, at the same time we announced our intention to acquire Orbotech, we also announced a new stock repurchase program authorizing the repurchase up to $2.00 billion of our common stock, a large portion of which would be financed with new indebtedness.

As part of this effort, in March 2018, we announced that we had entered into a definitive agreement to acquire Orbotech.

For example, as a consequence of the newly enacted Tax Cuts and Jobs Act (“the Act”), foreign earnings are now deemed to be repatriated, which resulted in a higher effective tax rate for the Company’s fiscal year ending June 30, 2018.

In addition, recent changes to U.S. tax laws will significantly impact how U.S. multinational corporations are taxed on foreign earnings.

Numerous countries are evaluating their existing tax laws due in part, to recommendations made by the Organization for Economic Co-operation and Development’s (“OECD’s”) Base Erosion and Profit Shifting (“BEPS”) project.

To address the impact of the recent U.S. tax law changes, we recorded a provisional tax amount of $339.6 million for the transitional tax liability and recorded a provisional tax amount of $102.1 million to re-measure certain deferred tax assets and liabilities as a result of the enactment of the Act.

These provisional tax amounts recorded are based on our reasonable estimate until we fully complete our assessment and we may need additional information to complete our assessment.

We are still evaluating the tax provisions related to Global Intangible Low-Taxed Income (“GILTI”) and we have not made a policy election on how to account for the GILTI provisions of the Act as allowed by the U.S. generally accepted accounting standards.

Our selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing our global income to determine whether we expect to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be.

Also, the recent U.S. tax law changes are subject to further interpretations from the U.S. federal and state governments and regulatory organizations, such as Treasury Department and/or IRS and this could change the provisional tax liability or the accounting treatment of the provisional tax liability based on updated guidance and interpretations.

A significant portion of the additional provisions for income taxes we have made due to the enactment of the Act is payable by us over a period of up to eight years.

As a result, our cash flows from operating activities will be adversely impacted until the additional tax provisions are paid in full.

In addition, the passing of the Act in December 2017 caused us to significantly increase our provision for income taxes, which had a material adverse effect on our net income for the year ended June 30, 2018.

Further interpretations of the Act from the government and regulatory organizations may change our tax expense provided for our transitional tax liability and deferred tax adjustments as well as our provision liability or accounting treatment of the provisional liability which may potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts.

Risks Related to Our Pending Acquisition of Orbotech

If we are unable to complete our contemplated acquisition of Orbotech, our expected financial results and the market value of our common stock could be adversely affected.

On March 18, 2018, we entered into a definitive agreement to acquire Orbotech.

Consummation of the acquisition is subject to customary conditions to closing, including the receipt of required regulatory approvals.

If any condition to the closing of the acquisition is not satisfied or waived, the acquisition will not be completed.

We and Orbotech also may terminate the acquisition agreement under certain circumstances.

Any or all of the preceding could jeopardize our ability to consummate the acquisition on the already negotiated terms.

To the extent the acquisition is not completed for any reason, we would have devoted substantial resources and management attention to the transaction without realizing the accompanying benefits expected by our management, and our financial condition and results of operations and the market value of our stock may be adversely affected.

Additional risks and uncertainties associated with the acquisition include:

| • | the failure to consummate the acquisition may result in negative publicity and a negative impression of us in the investment community; |

| | |

| --- | --- |

| • | we and Orbotech may be subject to additional proceedings in the future, which may effect the closing of the acquisition within the expected time frame, or at all; |

| | |

| --- | --- |

| • | required regulatory approvals from governmental entities may delay the acquisition or result in the imposition of conditions that could cause the abandonment of the acquisition; |

| | |

| --- | --- |

| • | the attention of our employees and management may be diverted due to activities related to the acquisition; and |

| | |

| --- | --- |

| • | disruptions from the acquisition, whether completed or not, may harm our relationships with our employees, customers, distributors, suppliers or other business partners. |

Even if the Orbotech acquisition is consummated, we may not be able to integrate the business of Orbotech successfully with our own or realize the anticipated benefits of the acquisition.

The acquisition involves the combination of two companies that currently operate as independent public companies.

The combined company will be required to devote significant management attention and resources to integrating our business practices with those of Orbotech.

As of June 30, 2017, we had $2.95 billion aggregate principal amount of outstanding indebtedness, consisting of $2.50 billion aggregate principal amount of senior, unsecured long-term notes and $446.3 million of term loans under a Credit Agreement (the “Credit Agreement”).

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.

We base these estimates and assumptions on historical experience, and evaluate them on an [removed: on-going] [added: ongoing] basis to ensure that they remain reasonable under current conditions.

We accrue the estimated credits earned by our customers for such incentives, and in situations when the credit levels vary depending upon sales volume, we update our accrual based on the amount that we estimate [removed: to] [added: will] be purchased pursuant to the volume purchase agreements.

Spare parts revenue is recognized when the [removed: product has] [added: parts have] been shipped, risk of loss has passed to the customer and collection of the resulting receivable is [removed: probable.][added: reasonably assured.]

Inventories are stated at the lower of cost (on a first-in, first-out basis) or [removed: market.][added: net realizable value.]

We provide standard warranty coverage on our systems for 40 hours per week for 12 months, providing labor and parts necessary to repair [removed: and maintain] the systems during the warranty period.

We performed our annual qualitative assessment of the goodwill by reporting unit [removed: in our second quarter of] [added: during the] fiscal year ended June 30, [removed: 2017] [added: 2018] and concluded that there was no impairment.

The next annual evaluation of the goodwill by reporting unit will be performed in the [removed: second] [added: third] quarter of the fiscal year ending June 30, [removed: 2018.][added: 2019.]

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 [removed: periods.][added: periods, whether in connection with our next annual impairment assessment or prior to that, if any triggering event occurs outside of the quarter during which the annual goodwill impairment assessment is performed.]

[removed: We account for income taxes in accordance with the authoritative guidance, which requires that deferred] [added: Deferred] tax assets and liabilities [removed: be] [added: are] recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities.

We provide [removed: leading-edge] [added: 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.

Our products and services are used by the vast majority of bare wafer, IC, lithography reticle (“reticle” or “mask”) and [added: hard] disk [added: drive] manufacturers around the world.

Although capital spending in all three semiconductor markets has historically been [added: 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.

In the global semiconductor [removed: and semiconductor-related] [added: related] industries, China is emerging as a major region for manufacturing of logic and memory chips, adding to its role as the world’s largest consumer of ICs.

Currently, there are multiple drivers for growth in the industry with increased demand for chips providing computation power and connectivity for [removed: AI] [added: Artificial Intelligence (“AI”)] applications and support for mobile devices at the leading edge of foundry [added: and logic] chip manufacturing.

Qualification of early [removed: EUV] [added: extreme ultraviolet (“EUV”)] lithography processes and equipment is driving growth at leading logic/foundry and [removed: DRAM] [added: dynamic random-access memory (“DRAM”)] manufacturers.

Expansion of the [removed: IoT] [added: Internet of Things (“IoT”)] together with increasing acceptance of [removed: ADAS] [added: advanced driver assistance systems (“ADAS”)] in anticipation of the introduction of autonomous cars have begun to accelerate legacy-node technology conversions and capacity expansions.

| [removed: | Year] [added: Fiscal year] ended June 30, [removed: | | | | | | | |] [added: 2018] | [added: 64.1] | [added: %] |

| (Dollar amounts in thousands, except diluted net income per share) | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | |

| Total revenues | $ | [removed: 3,480,014] [added: 4,036,701] | | | $ | [removed: 2,984,493] [added: 3,480,014] | | | $ | [removed: 2,814,049] [added: 2,984,493] | |

| Costs of revenues | $ | [removed: 1,287,547] [added: 1,447,369] | | | $ | [removed: 1,163,391] [added: 1,287,547] | | | $ | [removed: 1,215,229] [added: 1,163,391] | |

| Gross margin percentage | [removed: 63] [added: 64] | | % | | [removed: 61] [added: 63] | | % | | [removed: 57] [added: 61] | | % |

| Net income | $ | [removed: 926,076] [added: 802,265] | | | $ | [removed: 704,422] [added: 926,076] | | | $ | [removed: 366,158] [added: 704,422] | |

| Diluted net income per share | $ | [removed: 5.88] [added: 5.10] | | | $ | [removed: 4.49] [added: 5.88] | | | $ | [removed: 2.24] [added: 4.49] | |

Our year over year revenue growth [removed: reflected] [added: was primarily due to] increases from sales of both our [added: wafer] inspection and [removed: metrology] [added: patterning] products as our customers continue to invest in process control and [removed: services.][added: services, 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, [removed: 2016] [added: 2018] increased by [removed: 6%] [added: 16%] compared to the fiscal year ended June 30, [removed: 2015.][added: 2017.]

[removed: Increased] [added: Service] revenues [removed: during] [added: increased sequentially over] the fiscal [removed: year] [added: years] ended June 30, [removed: 2016 were also driven by the introduction of our new generation of inspection products as well strong demand from our foundry customers] [added: 2016, 2017] and [added: 2018, primarily as a result of] an increase [added: over time] in the number of post-warranty systems installed at our customers’ sites over [removed: this] [added: that] time [removed: period for our service revenues.][added: period.]

| (Dollar amounts in thousands) | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | | | [removed: FY17] [added: FY18] vs. [removed: FY16] [added: FY17] | | | | | | | [removed: FY16] [added: FY17] vs. [removed: FY15] [added: FY16] | | | | | |

| Product | $ | [removed: 2,703,934] [added: 3,160,671] | | | $ | [removed: 2,250,260] [added: 2,703,934] | | | $ | [removed: 2,125,396] [added: 2,250,260] | | | $ | [removed: 453,674] [added: 456,737] | | | [removed: 20] [added: 17] | % | | $ | [removed: 124,864] [added: 453,674] | | | [removed: 6] [added: 20] | % |

| Service | [removed: 776,080] [added: 876,030] | | | | [removed: 734,233] [added: 776,080] | | | | [removed: 688,653] [added: 734,233] | | | | [removed: 41,847] [added: 99,950] | | | | [removed: 6] [added: 13] | % | | [removed: 45,580] [added: 41,847] | | | | [removed: 7] [added: 6] | % |

| Total revenues | $ | [removed: 3,480,014] [added: 4,036,701] | | | $ | [removed: 2,984,493] [added: 3,480,014] | | | $ | [removed: 2,814,049] [added: 2,984,493] | | | $ | [removed: 495,521] [added: 556,687] | | | [removed: 17] [added: 16] | % | | $ | [removed: 170,444] [added: 495,521] | | | [removed: 6] [added: 17] | % |

| Costs of revenues | $ | [removed: 1,287,547] [added: 1,447,369] | | | $ | [removed: 1,163,391] [added: 1,287,547] | | | $ | [removed: 1,215,229] [added: 1,163,391] | | | $ | [removed: 124,156] [added: 159,822] | | | [removed: 11] [added: 12] | % | | $ | [removed: (51,838] [added: 124,156] | [removed: )] | | [removed: (4] [added: 11] | [removed: )%] [added: %] |

| Gross margin percentage | [removed: 63] [added: 64] | | % | | [removed: 61] [added: 63] | | % | | [removed: 57] [added: 61] | | % | | [removed: 2] [added: 1] | | % | | | | | [removed: 4] [added: 2] | | % | | | |

Our year over year increase in our product revenues were primarily driven by strong demand for our inspection and metrology products, increased investments by our foundry customers to support their new device architectures [removed: and process technologies for capacity-related expansion,] [added: and,] and sales of our next generation inspection products.

Product revenues increased by [removed: 6%] [added: 17%] in the fiscal year ended June 30, [removed: 2016] [added: 2018] compared to the fiscal year ended June 30, [removed: 2015,] [added: 2017,] primarily due to growth in revenues from our customers in [removed: China, Taiwan and Japan, partially offset by lower revenues from our customers in North America,] Korea, [removed: Rest of Asia] [added: China,] and [removed: Europe & Israel.][added: Japan.]

| [removed: 2017] [added: 2018] | | [removed: 2016] [added: 2017] | | [removed: 2015] [added: 2016] |

| Samsung Electronics Co., Ltd. | | [added: Samsung Electronics Co., Ltd. | |] Micron Technology, Inc. | [removed: | Intel Corporation |]

| [added: | |] Taiwan Semiconductor Manufacturing Company Limited | | Taiwan Semiconductor Manufacturing Company Limited | [removed: | Samsung Electronics Co., Ltd. |]

| (Dollar amounts in thousands) | [removed: 2017] [added: 2018] | | | | | | | [removed: 2016] [added: 2017] | | | | | | | [removed: 2015] [added: 2016] | | | | | |

| Taiwan | [removed: $] [added: 636,363] | [removed: 1,104,307] | | | [removed: 32] [added: 16] | % | | [removed: $] [added: 1,104,307] | [removed: 894,557] | | | [removed: 30] [added: 32] | % | | [removed: $] [added: 894,557] | [removed: 691,482] | | | [removed: 25] [added: 30] | % |

| Korea | [removed: 688,094] [added: $] | [added: 1,178,601] | | | [removed: 20] [added: 29] | % | | [removed: 367,905] [added: $] | [added: 688,094] | | | [removed: 12] [added: 20] | % | | [removed: 405,320] [added: $] | [added: 367,905] | | | [removed: 14] [added: 12] | % |

Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.

We review and set standard costs semi-annually at current manufacturing costs in order to approximate actual costs.

We account for income taxes in accordance with the authoritative guidance, which requires income tax effects for changes in tax laws are recognized in the period in which the law is enacted.

Transition tax liability is recognized in the period when the change in the U.S. tax law was enacted and the income tax effects are recorded as a component of provision for income taxes from continuing operations.

The calculation of the transition tax liability includes assumptions and reasonable estimates of the income tax effects and are based on provisional tax amounts.

Several inputs were considered in the calculation, such as the calculation of the post-1986 foreign earnings and profit (“E&P”), income tax pools for all foreign subsidiaries, and the amount of those earnings held in cash and other specified assets.

We applied the current interpretations from the U.S. federal and state governments and regulatory organization in our calculation of the transition tax liability and our reasonable estimate of the transition tax liability could change if further interpretations are provided for in the future.

We expect to fully complete our provisional transition tax liability calculation within the reasonable measurement period allowed by the authoritative guidance.

Proposed Merger with Orbotech, Ltd.

On March 18, 2018, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Orbotech, Ltd. (“Orbotech”) pursuant to which we would acquire Orbotech for $38.86 in cash and 0.25 of a share of our common stock in exchange for each ordinary share of Orbotech, which at the time of announcement valued Orbotech at $3.2 billion in enterprise value.

The merger contemplated by the Merger Agreement (the “Orbotech Merger”) is subject to receipt of required regulatory approvals and satisfaction of the other customary closing conditions.

We intend to fund the cash portion of the purchase price with cash from the combined company's balance sheet.

In addition, we announced a $2 billion share repurchase authorization.

The share repurchase program is targeted to be completed within 12 to 18 months following the close of this transaction.

We intend to raise approximately $1 billion in new long-term debt financing to complete the share repurchase

For additional details, refer to Note 1 “Description of Business and Summary of Significant Accounting Policies” to the consolidated financial statements, and Item 1A, “Risk Factors”.

Our year over year increase in our product revenues were primarily driven by increased investments from our memory and wafer customers for next generation technology as well as capacity-related investments.

| (Dollar amounts in thousands) | 2018 | | | | 2017 | | | | 2016 | | | | FY18 vs. FY17 | | | | | | | FY17 vs. FY16 | | | | | |

| (Dollar amounts in thousands) | 2018 | | | | 2017 | | | | 2016 | | | | FY18 vs. FY17 | | | | | | | FY17 vs. FY16 | | | | | |

SG&A expenses during the fiscal year ended June 30, 2018 were higher compared to the fiscal year ended June 30, 2017, primarily due to an increase in employee-related expenses of $36.5 million mainly as a result of additional headcount, higher variable compensation and employee benefit costs, an increase in Orbotech merger-related expense of $10.6 million, an increase in facilities-related expense of $4.8 million, and an increase in travel-related costs of $4.6 million, partially offset by $9.3 million of lower Lam Research Corporation merger-related expenses.

Restructuring charges for the fiscal year ended June 30, 2017 was immaterial.

Restructuring charges for the year ended June 30, 2016 were $8.9 million, of which $3.6 million were related to cost 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.

The decrease in interest expense during the fiscal year ended June 30, 2018 compared to the fiscal year ended June 30, 2017, was primarily due to a $250.0 million repayment of the Senior Notes at maturity and prepayment of term loans.

| (Dollar amounts in thousands) | 2018 | | | | 2017 | | | | 2016 | | |

Our effective tax rate during the fiscal year ended June 30, 2018 was impacted by the Tax Cuts and Jobs Act (“the Act”), which was enacted into law on December 22, 2017.

Income tax effects resulting from changes in tax laws are accounted for by us in accordance with the authoritative guidance, which requires that these tax effects be recognized in the period in which the law is enacted and the effects are recorded as a component of provision for income taxes from continuing operations.

We have not fully completed our accounting for the tax effects of the enactment of the Act.

As a result, we made an additional provision for income tax during the three months ended June 30, 2018 relating to the enactment of the Act.

This Act includes significant changes to the U.S. corporate income tax system which reduces the U.S. federal corporate tax rate from 35.0% to 21.0% as of January 1, 2018; shifts to a modified territorial tax regime which requires companies to pay a transition tax on earnings of certain foreign subsidiaries that were previously tax deferred; and creates new taxes on certain foreign-sourced earnings.

The decrease in the U.S. federal corporate tax rate from 35.0% to 21.0% results in a blended statutory tax rate of 28.1% for the fiscal year ended June 30, 2018.

The new taxes for certain foreign-sourced earnings under the Act are effective for the Company after the fiscal year ended June 30, 2018.

| • | Tax expense increased by $339.6 million during the fiscal year ended June 30, 2018 relating to a transition tax on the Company’s total post-1986 earnings and profits (“E&P”) which, prior to the enactment of the Act, was previously deferred from U.S. income taxes; |

| • | Tax expense increased by $102.1 million during the fiscal year ended June 30, 2018 relating to the re-measurement of the Company’s deferred tax assets and liabilities based on the Act’s new corporate tax rate of 21.0%; partially offset by |

| • | Tax expense decreased by $50.9 million relating to the reduction of the U.S. federal corporate tax rate from 35.0% to 28.1% for the fiscal year ended June 30, 2018. |

As of June 30, 2018, we had not yet completed our accounting for the tax effects of the enactment of the Act.

Our provision for income taxes for the fiscal year ended June 30, 2018 is based in part on a reasonable estimate of the effects on its transition tax and existing deferred tax balances.

For the amounts which we were able to reasonably estimate, we recognized a provisional tax amount of $441.7 million for the fiscal year ended June 30, 2018.

The provisional tax amount is included as a component of provision for income taxes from continuing operations.

The components of the provisional tax amounts are as follows:

| • | We recorded a provisional tax amount of $339.6 million for the transition tax liability. We will elect to remit the U.S. transition tax liability in installments over an eight-year period. We have not yet completed the calculation of the total post-1986 foreign E&P and the income tax pools for all foreign subsidiaries. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation of post-1986 foreign E&P previously deferred from U.S. federal and state governments and regulatory organizations may change the provisional tax liability or the accounting treatment of the provisional tax liability. |

Warranty.

We account for the estimated warranty cost as a charge to costs of revenues when revenue is recognized.

The estimated warranty cost is based on historical product performance and field expenses.

Utilizing actual service records, we calculate the average service hours and parts expense per system and apply the actual labor and overhead rates to determine the estimated warranty charge.

We update these estimated charges on a regular basis.

The actual product performance and/or field expense profiles may differ, and in those cases we adjust our warranty accruals accordingly.

See Note 13, “Commitments and Contingencies” to the Consolidated Financial Statements for additional details.

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 three or four equal installments, with one-third or one-fourth of the aggregate amount of the Cash LTI award vesting on each yearly anniversary of the grant date over a three or 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.

On October 20, 2015, we entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement” or “Merger”) with Lam Research Corporation (“Lam Research”) which was subject to regulatory approvals.

On October 5, 2016, we mutually agreed to terminate the Merger Agreement and no termination fees were payable by either party in connection with the termination.

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| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

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.

Service revenues increased sequentially over the fiscal years ended June 30, 2015, 2016 and 2017, 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.

| | | | | Taiwan Semiconductor Manufacturing Company Limited |

| Fiscal year ended June 30, 2015 | 56.8 | % |

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.

The increases above were partially offset by a decrease in merger-related expenses of $6.6 million and a lower severance-related charges of $3.7 million.

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, principally for financial advisory services including the fairness opinion fees, employee-related expenses and legal fees during the fiscal year ended June 30, 2016.

The following table shows the activity primarily related to accrual for severance and benefits for the fiscal years ended June 30, 2017, 2016 and 2015:

| Beginning balance | $ | 587 | | | $ | 24,887 | | | $ | 2,329 | |

| Restructuring costs | — | | | | 8,926 | | | | 31,569 | | |

| Adjustments | (147 | | ) | | (142 | | ) | | 1,177 | | |

| Cash payments | (440 | | ) | | (33,084 | | ) | | (10,188 | | ) |

| Ending balance | $ | — | | | $ | 587 | | | $ | 24,887 | |

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.

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 7, Debt” and “Note 16, Derivative Instruments and Hedging Activities” to the consolidated financial statements for further details.

We had no loss on extinguishment of debt and other, net, in the fiscal years ended June 30, 2017 and 2016.

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 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.

Tax expense as a percentage of income increased also because there was a decrease in unrecognized tax benefits during the fiscal year ended June 30, 2016 compared to the fiscal year ended June 30, 2017 due to settlements with taxing authorities and expiration of statutes of limitations.

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.

All of the potential changes noted below are based on sensitivity analyses performed on our financial position as of June 30, [removed: 2017.][added: 2018.]

As of June 30, [removed: 2017,] [added: 2018,] we had an investment portfolio of fixed income securities of [removed: $2.10] [added: $1.50] billion.

If market interest rates were to increase immediately and uniformly by 100 bps from levels as of June 30, [removed: 2017,] [added: 2018,] the fair value of the portfolio would have declined by [removed: $21.9] [added: $13.6] 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 [removed: Notes”) due in various fiscal years ranging from 2018 to 2035.][added: Notes”).]

As of June 30, [removed: 2017,] [added: 2018,] the fair value and the book value of our Senior Notes were [removed: $2.67] [added: $2.33] billion and [removed: $2.50] [added: $2.25] billion, [removed: respectively.][added: respectively, due in various fiscal years ranging from 2020 to 2035.]

As of June 30, [removed: 2017,] [added: 2018,] 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 [removed: $46.7] [added: $45.0] million.

We are [removed: also] obligated to pay an annual commitment fee of 15 bps on the daily undrawn balance of the [removed: unfunded revolving credit facility] [added: Revolving Credit Facility] which is [removed: also] subject to an adjustment in conjunction with our credit rating downgrades or upgrades.

[removed: Additionally, as] [added: As] of June 30, [removed: 2017,] [added: 2018,] if our credit [removed: rating was] [added: ratings were] downgraded to be below investment grade, the maximum potential increase to our annual [removed: interest expense] [added: commitment fee] for the [removed: term loans and the revolving credit facility,] [added: Revolving Credit Facility,] using the highest range of the ranges discussed above, is estimated to be approximately [removed: $2.7] [added: $1.0] 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, [removed: 2017.][added: 2018.]

As of June 30, [removed: 2017,] [added: 2018,] we had net forward and option contracts to sell [removed: $62.3] [added: $130.9] million in foreign currency in order to hedge certain currency exposures (see Note 16, “Derivative Instruments and Hedging Activities” to the Consolidated Financial Statements for additional details).

If we had entered into these contracts on June 30, [removed: 2017,] [added: 2018,] the U.S. dollar equivalent would have been [removed: $57.7] [added: $1.4] million.

A 10% adverse move in all currency exchange rates affecting the contracts would decrease the fair value of the contracts by [removed: $29.6] [added: $30.2] million.

In November 2017, we entered into a Credit Agreement (the “Credit Agreement”) for a $750.0 million five-year unsecured revolving credit facility (the “Revolving Credit Facility”), which replaced our prior Credit Agreement.

Subject to the terms of the Credit Agreement, the Revolving Credit Facility may be increased in an amount up to $250.0 million in the aggregate.

We made borrowings of $250.0 million from the Revolving Credit Facility on the closing date, which were paid in full during the second half of the fiscal year ended June 30, 2018.

As of June 30, 2018, we do not have any outstanding floating rate debts that are subject to an increase in interest rates.

As of June 30, 2018, we had forward contracts to sell $500.0 million in treasury securities in order to hedge certain interest rate exposures (see Note 14, “Derivative Instruments and Hedging Activities,” to the consolidated financial statements for additional details).

A 10% adverse move in interest rates affecting the contracts would decrease the fair value of the contracts by $24.1 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 interest rate exposure, changes in most relevant interest rates should have no material impact on our income or cash flows.

In November 2014, we entered into $750.0 million aggregate principal amount of floating rate senior, unsecured prepayable term loans due in 2019 and a $500.0 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, 2017, the difference between book value and fair value of our term loans was immaterial.

As of June 30, 2017, if LIBOR-based interest rates increased by 100 bps, the change would increase our annual interest expense annually by approximately $4.0 million as it relates to our borrowings under the term loans.

Our products are also used in a number of other high technology industries, including the [removed: advanced] packaging, light emitting diode (“LED”), power [removed: devices,] [added: device,] compound semiconductor, and data storage industries, as well as general materials research.

Within our primary area of focus, our comprehensive portfolio of [removed: inspection and] [added: inspection,] metrology [added: and data analytic] 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.

KLA-Tencor’s products and services are used by the vast majority of bare wafer, IC, [removed: lithography] reticle (“reticle” or “mask”) and [added: hard] disk [added: drive] 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 [removed: conditions,] [added: conditions;] wafer shape and stress metrology; computational lithography tools; and overall yield and fab-wide data management and analysis systems.

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 [removed: originally] began operations in 1975 and 1976, respectively.

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 [removed: web site.][added: website.]

The semiconductor fabrication process begins with a bare silicon wafer—a round disk that is typically [removed: 150 millimeters,] 200 millimeters or 300 millimeters in diameter, about as thick as a credit card and gray in color.

Other, more specialized wafers, such as epitaxial silicon (“epi”), [removed: silicon-on-insulator] [added: silicon on insulator] (“SOI”), gallium nitride (“GaN”) and silicon carbide (“SiC”), are also common in the semiconductor industry.

The semiconductor equipment industry is currently experiencing growth from multiple drivers, such as demand for chips providing [removed: computation] [added: computational] power and connectivity for Artificial Intelligence (“AI”) [removed: applications] [added: applications,] and [removed: support] [added: continued need] for [removed: mobile devices at the] [added: chips from] leading edge [removed: of] foundry [added: and logic] chip [removed: manufacturing.][added: manufacturers that support mobile devices.]

Qualification of early [removed: EUV] [added: extreme ultraviolet (“EUV”)] lithography processes and equipment is driving growth at leading logic/foundry and dynamic random-access memory (“DRAM”) manufacturers.

Expansion of the Internet of Things (“IoT”) together with increasing acceptance of advanced driver assistance systems (“ADAS”) [removed: in anticipation of] [added: that support] the introduction of autonomous cars have begun to accelerate legacy-node technology conversions and capacity expansions.

New techniques and architectures in production today include [removed: three-dimensional] [added: three dimensional] finFET [removed: transistors, three-dimensional] [added: transistors; three dimensional] flash memory (“3D NAND”); design technology co-optimization (“DTCO”); advanced patterning [removed: lithography,] [added: technologies,] including self-aligned multiple patterning and [removed: extreme ultraviolet (“EUV”)] [added: EUV] lithography; and [removed: advanced wafer-level] packaging.

KLA-Tencor’s [removed: inspection] [added: inspection, metrology] and [removed: measurement] [added: data analytic] technologies play key roles in enabling our customers to develop and manufacture advanced semiconductor devices to support these trends.

Ramping to [removed: high-volume] [added: high volume] production ahead of competitors can dramatically increase the revenue an IC manufacturer realizes for a given product.

[removed: In today’s market, driven by consumer demand for low-cost electronic goods,] [added: Today,] the leading semiconductor manufacturers are investing in simultaneous production integration of multiple new process technologies, some requiring new substrate and film materials, new geometries, advanced [removed: multiple-patterning] [added: multi-patterning] and EUV lithography and [removed: 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 [removed: full-volume] [added: 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 [removed: line width] [added: linewidth] and film thickness variation.

New process materials, such as [added: photoresists for] EUV [removed: lithography-capable photoresists,] [added: lithography,] require extensive characterization before they can be used in the [removed: manufacturing process.]

Once customers’ production lines are operating at high volume, our [removed: tools] [added: systems] help ensure that yields are stable and process excursions are identified for quick resolution.

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 architectures, more demanding lithography processes, and new [removed: back-end] packaging techniques.

KLA-Tencor is engaged primarily in the design, manufacture and marketing of process control and yield management solutions for the semiconductor and related nanoelectronics industries and provides a comprehensive portfolio of [removed: inspection and] [added: inspection,] metrology [added: and data analytics] products, and related service, software and other offerings.

KLA-Tencor’s [removed: inspection and] [added: inspection,] metrology [added: and data analytics] products and related offerings can be broadly categorized as supporting customers in the following groups: Chip [removed: Manufacturing;] [added: and] Wafer Manufacturing; Reticle Manufacturing; [removed: Advanced Packaging; LED, Power Device,] [added: Packaging Manufacturing;] Compound Semiconductor [removed: Manufacturing] and [removed: Microelectromechanical Systems (“MEMS”) Manufacturing; Data Storage Media/Head] [added: Hard Disk Drive] Manufacturing; and General Purpose/Lab Applications.

For customers manufacturing legacy [removed: design-rule] [added: design rule] devices, our K-T Pro division provides refurbished KLA-Tencor [removed: tools] [added: systems] as part of our K-T Certified program; remanufactured trailing edge systems; [removed: and] [added: and,] enhancements and upgrades for last-generation KLA-Tencor [removed: tools.][added: systems.]

Chip [added: and Wafer] Manufacturing

KLA-Tencor’s comprehensive portfolio of [removed: inspection and] [added: inspection,] metrology [added: and data analytics] 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.

KLA-Tencor’s [removed: front-end] defect inspection [removed: tools] [added: and review systems] cover a broad range of yield applications within the IC manufacturing environment, including: research and development; incoming wafer qualification; reticle qualification; and tool, process and line monitoring.

The defect data generated by our inspectors [removed: is] [added: are] compiled and reduced to relevant [removed: root-cause] [added: root cause] and [removed: yield-analysis] [added: yield analysis] information with our suite of data [added: analytics and] management tools.

By implementing our [removed: front-end] defect [removed: inspection] [added: inspection, review] and [removed: analysis] [added: data analytics] systems, chipmakers are able to take quick corrective action, resulting in faster yield improvement and better time to market.

[removed: In August 2016, we launched the] [added: The] Teron SL655 reticle inspection [removed: system, which] [added: system] enables IC manufacturers to assess incoming reticle quality, monitor reticle degradation and detect yield-critical reticle defects.

The Teron SL655 [removed: introduces new] [added: introduced] STARlightGold technology, which provides a golden reference to maximize detection of defects critical to the mask requalification process.

[removed: In the field of patterned wafer inspection, we] [added: We also] offer our 3900 Series (for high resolution broadband plasma defect inspection); our 2930 Series and 2920 Series (for broadband plasma defect inspection); our Puma 9980 Series, Puma 9850 Series and Puma 9650 Series (for laser scanning defect inspection); our 8 Series systems (for high productivity defect inspection); and our CIRCL cluster tool (for defect inspection, review and metrology of all wafer surfaces - [removed: front side,] [added: frontside,] edge and back side).

In [removed: the field of unpatterned wafer and surface inspection,] [added: addition,] 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 [removed: the SURFmonitor (integrated on the Surfscan SP5 and Surfscan SP3 Series),] [added: SURFmonitor,] which enables surface quality measurements and capture of low-contrast defects.

[removed: For reticle inspection, we offer our X5.3 and Teron SL650 Series products, which are photomask inspection systems that] [added: These inspectors] 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 [removed: front-end] defect inspection market, as reflected in the product table at the conclusion of this “Products” section.

Defect [added: Inspection and] Review

[removed: KLA-Tencor’s] [added: Our] defect review systems capture high resolution images of the defects detected by inspection [removed: tools.][added: tools, helping chipmakers identify and resolve yield issues.]

[removed: The eDR7280, an] [added: Our eDR7280] electron-beam wafer defect review and classification [removed: system, utilizes improved imaging and automatic defect classification capability to identify] [added: system identifies] detected [removed: defects and produce] [added: defects, producing] an accurate representation of the detected defect population.

[removed: Overlay] [added: |] Metrology [added: | Overlay | Archer™ Series ATL™ Series |]

The [removed: WaferSight PWG2] system enables faster process ramp, overlay control, lithography focus window control and [removed: in-line] [added: inline] process monitoring for processes such as thin films, etch, CMP and rapid thermal processing (“RTP”).

[added: |] Optical CD and Shape [removed: Metrology][added: | SpectraShape™ product family | |]

Proposed Merger with Orbotech, Ltd.

On March 18, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Orbotech, Ltd. (“Orbotech”) pursuant to which KLA-Tencor would acquire Orbotech for $38.86 in cash and 0.25 of a share of KLA-Tencor common stock in exchange for each ordinary share of Orbotech, which at the time of announcement valued Orbotech at $3.2 billion in enterprise value.

The merger contemplated by the Merger Agreement (the “Orbotech Merger”) is subject to receipt of required regulatory approvals and satisfaction of the other customary closing conditions.

KLA-Tencor intends to fund the cash portion of the purchase price with cash from the combined company's balance sheet.

In addition, KLA-Tencor announced a $2 billion share repurchase authorization.

The share repurchase program is targeted to be completed within 12 to 18 months following the close of this transaction.

KLA-Tencor intends to raise approximately $1 billion in new long-term debt financing to complete the share repurchase

manufacturing process.

For patterned wafer optical inspection, we launched the Voyager 1015 Series during the fiscal year ended June 30, 2018.

The Voyager 1015 laser scanning patterned wafer inspection system provides enhanced defect capture for high throughput lithography cell monitoring, as well as other production ramp monitoring applications.

In the field of unpatterned wafer and surface inspection, we launched the Surfscan SP7 during the fiscal year ended June 30, 2018.

The Surfscan SP7 unpatterned wafer defect inspection system provides high sensitivity on bare wafers, smooth films and rough films, supporting development and production of advanced substrates, processes and devices at wafer shops, OEMs and IC fabs.

For in-fab reticle qualification, we offer the Teron SL650 Series and X5.3 reticle inspection systems.

The ATL100 (Accurate Tunable Laser) scatterometry-based overlay metrology systems, introduced in September 2017, utilize tunable laser technology to automatically maintain highly accurate and robust overlay error measurements in the presence of process variations, supporting fast technology ramps and wafer disposition during production.

The SpectraFilm F1 film metrology system, introduced in September 2017, employs new optical technologies that determine single- and multi-layer film thicknesses and uniformity with high precision to monitor deposition processes in production, and deliver bandgap data that predict device electrical performance earlier than end of line test.

For example, the EtchTemp in situ wafer temperature measurement systems capture the effect of the plasma etch process environment on production wafers.

By characterizing thermal conditions that closely represent product wafer conditions, the EtchTemp-SE wireless wafer assists process engineers with tuning of the etch process conditions and the qualification, matching and post-PM verification of front end of line plasma etch chambers.

Patterning Simulation

Data Analytics

The 5D Analyzer X1 data analysis system, introduced in September 2017, offers an extendible, open architecture that accepts data from a wide range of metrology and process tools to enable advanced analysis, characterization and real-time control of fab-wide process variations.

The Teron 640e reticle inspection product line, introduced in September 2017, incorporates optical, detector and algorithm enhancements that detect critical pattern and particle defects at high throughput, advancing the development and qualification of EUV and optical patterned reticles in leading-edge mask shops.

The LMS IPRO7 reticle registration metrology system, introduced in September 2017, leverages a new operating mode to accurately measure on-device reticle pattern placement error with fast cycle time, enabling comprehensive reticle qualification for e-beam mask writer corrections and reduction of reticle-related contributions to device overlay errors in the IC fab.

In August 2017, we entered the dedicated reticle blank inspection market.

The FlashScan reticle blank inspection product line is used by blank manufacturers for defect control during process development and volume manufacturing, and by reticle manufacturers (“mask shops”) for incoming inspection, tool monitoring and process control.

Packaging Manufacturing

Wafer-level packaging inspection/metrology

Component inspection/metrology

The compound semiconductor market is comprised of a diverse group of applications including power devices, RF (“radio frequency”) communications devices, photonics, LED lighting and photovoltaic and display markets.

The Zeta-388 measures patterned sapphire substrates (“PSS”) and inspects for defects on high brightness LED substrates.

KLA-Tencor offers a variety of products for the display market, including the ZetaScan Series defect inspector, SensArray Process Probe 2070, Zeta-300 optical profiler, P-17 OF stylus profiler, and the Nano Indenter nanomechanical tester.

| Edge Bead Removal | CIRCL™ | |

| In Situ Process Management | Lithography, Plasma Etch, Deposition, CMP, Ion Implant, Wet Processing | SensArray® product family |

| In Situ Data Analytics | Lithography, Plasma Etch, Deposition, CMP, Ion Implant, Wet Processing | SensArray® PlasmaSuite, LithoSuite, Thermal MAP |

| Patterning Simulation | Lithography Simulation | PROLITH™ |

| Defect Inspection (wafer fab) | Teron™ SL650 Series, X5.3™ | |

| Defect Inspection (mask blanks) | FlashScan® | |

| Data Analytics | RDC, Klarity® Defect | |

| Packaging Manufacturing | | |

| Wafer-Level Packaging Inspection \| Metrology | CIRCL™-AP 8 Series-AP WI-2280 Zeta-5xx/6xx |

| Compound Semiconductor \| HDD Manufacturing | |

Terminated Merger with Lam Research

On October 20, 2015, we entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement” or “Merger”) with Lam Research Corporation (“Lam Research”) which was subject to regulatory approvals.

On October 5, 2016, we mutually agreed to terminate the Merger Agreement and no termination fees were payable by either party in connection with the termination.

Front-End Defect Inspection

The launch of the Teron SL655 further strengthened our broad range of offerings that support the front-end defect inspection market.

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.

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.

In February 2017, we launched several metrology products that are key components in our 5D Patterning Control Solution and help accelerate the ramp of innovative patterning techniques for advanced design node devices:

To help achieve sub-3nm overlay error for advanced logic and memory devices we introduced the Archer 600 imaging-based overlay metrology system.

New optics in combination with innovative ProAIM targets deliver better resilience to process variations and improved correlation between measurement target and actual device pattern overlay errors, producing more accurate overlay measurements.

Patterned Wafer Geometry Metrology

The WaferSight PWG2 system was introduced to measure comprehensive wafer stress and shape uniformity data with significant productivity improvements.

Several new optical technologies including a new high brightness light source illumination enable accurate measurements of critical parameters in FinFET and 3D NAND devices.

The products that we launched during the fiscal year ended June 30, 2017 further strengthened our broad range of offerings that support the metrology market.

Finally, 5D Analyzer offers advanced, run-time data analysis for a wide range of metrology system types.

In February 2017 we introduced the SensArray HighTemp 4mm wireless wafer, which provides temporal and spatial temperature information for advanced films processes.

With a thinner wafer profile than its predecessor, the SensArray HighTemp 4mm is compatible with a wider range of process tool types, including track, strip and physical vapor deposition (“PVD”) systems.

Lithography Software

Our ProDATA process window analysis software tool provides analysis of experimental data, including CD, roughness, sidewall angle, top loss and pattern collapse.

In December 2016 we introduced PROLITH X6.0, which includes new modeling features and productivity improvements to support key lithography segments such as EUV, 193nm immersion, multiple patterning and thick resist lithography for 3D interconnects and MEMS manufacturing.

KLA-Tencor’s portfolio of products focused on the demands of wafer manufacturers includes inspection, metrology and data management systems.

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 unpatterned wafer inspection portfolio is comprised of the Surfscan SP5, the Surfscan SP5XPand the Surfscan SP3 Series.

These unpatterned wafer inspection systems are designed to enable development and production monitoring of polished wafers, epi wafers and engineered substrates.

The integrated SURFmonitor module characterizes wafer surface quality and captures low-contrast defects.

In August 2016 we launched the Teron 640 and RDC systems to support the ability of leading-edge mask shops to accurately qualify advanced optical masks.

The Teron 640 inspection system utilizes 193nm illumination with Dual Imaging mode to provide the sensitivity required for high-performance reticle quality control.

These products include the capability for mapping critical dimension uniformity across the reticle.

Advanced Packaging

In October 2016, we introduced the P-170 stylus profiler with an integrated wafer handler, providing fully automated measurements to support LED, GaAs and power device manufacturers.

In addition, the HRP-260 was introduced in July 2016 as the latest generation of our HRP (High Resolution Profiler) Series focused on providing both high resolution and high-aspect ratio surface topography profiling to support power device, LED, compound semiconductor and MEMS manufacturing.

In June 2017, KLA-Tencor acquired a privately-held company, whose products include optical surface profilers serving LED and MEMS applications used to measure the cone height, diameter and pitch of patterned sapphire substrates for LEDs and serve broad applications for MEMS.

The June 2017 acquisition of a privately-held company added general metrology optical surface profilers to KLA-Tencor’s portfolio.

These systems are complementary to KLA-Tencor’s original stylus and optical profiler product lines.

| Chip Manufacturing | | |

| Reticle | X5.3™, TeronTM SL650 Series | |

| Metrology | Patterning Control | 5D Patterning Control Solution™ |

| Overlay | ArcherTM Series | |

| | For the Fiscal Year Ended June 30, [removed: 2017] [added: 2018] |

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. [removed: x][added: o]

The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant based upon the closing price of the registrant’s stock, as of December 31, [removed: 2016,] [added: 2017,] was approximately [removed: $11.05] [added: $16.43] billion.

The registrant had [removed: 156,840,420] [added: 156,126,508] shares of common stock outstanding as of July [removed: 14, 2017.][added: 13, 2018.]

Portions of the Proxy Statement for the [removed: 2017] [added: 2018] 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, [removed: 2017,] [added: 2018,] are incorporated by reference into Part III of this report.

| | | [Special Note Regarding Forward-Looking [removed: Statements](#s2ADEB8D5C3DEA00812532C8D775DCCD0)] [added: Statements](#s375604CEF38453F8BC67E141DBF42783)] | [removed: [ii](#s2ADEB8D5C3DEA00812532C8D775DCCD0)] [added: [ii](#s375604CEF38453F8BC67E141DBF42783)] |

| Item 1. | | [removed: [Business](#s026B3C8B07F732C507262C8D77AB3347)] [added: [Business](#sB453351F19845F1AA072B2717F9E9226)] | [removed: [1](#s026B3C8B07F732C507262C8D77AB3347)] [added: [1](#sB453351F19845F1AA072B2717F9E9226)] |

| Item 1A. | | [Risk [removed: Factors](#s09A1C7E7391F1A72F4452C8D5A3A4CB1)] [added: Factors](#s736FA579D74C58EAABA75B55EDE43A64)] | [removed: [16](#s09A1C7E7391F1A72F4452C8D5A3A4CB1)] [added: [16](#s736FA579D74C58EAABA75B55EDE43A64)] |

| Item 1B. | | [Unresolved Staff [removed: Comments](#sB1142DBD908246B682182C8D77F91A34)] [added: Comments](#sF881B0065F5B57D2925EC58B726AE37E)] | [removed: [32](#sB1142DBD908246B682182C8D77F91A34)] [added: [34](#sF881B0065F5B57D2925EC58B726AE37E)] |

| Item 2. | | [removed: [Properties](#sD216FE6B9E727176353B2C8D7837D382)] [added: [Properties](#sE18E9B501CCF5E849A41446D0984E3CA)] | [removed: [33](#sD216FE6B9E727176353B2C8D7837D382)] [added: [35](#sE18E9B501CCF5E849A41446D0984E3CA)] |

| Item 3. | | [Legal [removed: Proceedings](#s566605A2F7EC35D20A8A2C8D7856F063)] [added: Proceedings](#s68F99B5A98AE5170A98DDC057E9A232F)] | [removed: [33](#s566605A2F7EC35D20A8A2C8D7856F063)] [added: [35](#s68F99B5A98AE5170A98DDC057E9A232F)] |

| Item 4. | | [Mine Safety [removed: Disclosures](#s85FD7D19D59E68BFD9512C8D7885E840)] [added: Disclosures](#s2762B840E6D1560E9330AB1968C73509)] | [removed: [33](#s85FD7D19D59E68BFD9512C8D7885E840)] [added: [35](#s2762B840E6D1560E9330AB1968C73509)] |

| Item 5. | | [Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity [removed: Securities](#s9BB3EEBB35083CCC6B552C8D78D34B09)] [added: Securities](#s288A00DE899A57EA8C2BA2E466FD027D)] | [removed: [34](#s9BB3EEBB35083CCC6B552C8D78D34B09)] [added: [36](#s288A00DE899A57EA8C2BA2E466FD027D)] |

| Item 6. | | [Selected Financial [removed: Data](#sA00F4FCDA99C8B994F732C8D69A5A02E)] [added: Data](#s2E93044EF630581C96642AADC63B4345)] | [removed: [36](#sA00F4FCDA99C8B994F732C8D69A5A02E)] [added: [38](#s2E93044EF630581C96642AADC63B4345)] |

| Item 7. | | [Management’s Discussion and Analysis of Financial Condition and Results of [removed: Operations](#s51D73840443EA299C8FA2C8D79314083)] [added: Operations](#s7CEB514C64FF5453B0D2628534A8851B)] | [removed: [37](#s51D73840443EA299C8FA2C8D79314083)] [added: [39](#s7CEB514C64FF5453B0D2628534A8851B)] |

| Item 7A. | | [Quantitative and Qualitative Disclosures About Market [removed: Risk](#sEB17F35AECEFA7095A272C8D7B240ABC)] [added: Risk](#s0125DF2CEE59512CAF9813F7DEB5BC3A)] | [removed: [57](#sEB17F35AECEFA7095A272C8D7B240ABC)] [added: [59](#s0125DF2CEE59512CAF9813F7DEB5BC3A)] |

| Item 8. | | [Financial Statements and Supplementary [removed: Data](#s29B7F3C86D78BEF9D04D2C8D7B434E1D)] [added: Data](#s00B5978EC5455DEBA8C2F67258409D7E)] | [removed: [58](#s29B7F3C86D78BEF9D04D2C8D7B434E1D)] [added: [60](#s00B5978EC5455DEBA8C2F67258409D7E)] |

| | | [Consolidated Balance Sheets as of June 30, [removed: 2017] [added: 2018] and June 30, [removed: 2016](#s1925093C0A5AFB9ED98B2C8D5A3AFDFB)] [added: 2017](#s4099CB77C0E15F8DB611F0E14661BFE4)] | [removed: [59](#s1925093C0A5AFB9ED98B2C8D5A3AFDFB)] [added: [61](#s4099CB77C0E15F8DB611F0E14661BFE4)] |

| | | [Consolidated Statements of Operations for each of the three years in the period ended June 30, [removed: 2017](#sF49F48C5B26011851A612C8D5A49B3EB)] [added: 2018](#s1E2D6A10B66858E8AF42A6A9752B97E5)] | [removed: [60](#sF49F48C5B26011851A612C8D5A49B3EB)] [added: [62](#s1E2D6A10B66858E8AF42A6A9752B97E5)] |

| | | [Consolidated Statements of Comprehensive Income for each of the three years in the period ended June 30, [removed: 2017](#s40F1BBA19510DDA128952C8D5A69C66D)] [added: 2018](#sD62311AFD55B5DEDA814BDEA7DE6483C)] | [removed: [61](#s40F1BBA19510DDA128952C8D5A69C66D)] [added: [63](#sD62311AFD55B5DEDA814BDEA7DE6483C)] |

| | | [Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended June 30, [removed: 2017](#s83E35553CE9778EF69892C8D5A690B1C)] [added: 2018](#sBCA8EC3316BD576DB9E1A89391D8CA5B)] | [removed: [62](#s83E35553CE9778EF69892C8D5A690B1C)] [added: [64](#sBCA8EC3316BD576DB9E1A89391D8CA5B)] |

| | | [Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, [removed: 2017](#s009099D561DE47C463EB2C8D5A97C604)] [added: 2018](#sCF56088BCE9658B3ADA019C9EF65D2F2)] | [removed: [63](#s009099D561DE47C463EB2C8D5A97C604)] [added: [65](#sCF56088BCE9658B3ADA019C9EF65D2F2)] |

| | | [Notes to Consolidated Financial [removed: Statements](#s7BB4DC60451D99A3BA322C8D7CB9E4CD)] [added: Statements](#sE903E3AE8FD0515CBD052FD7C8215D1F)] | [removed: [64](#s7BB4DC60451D99A3BA322C8D7CB9E4CD)] [added: [66](#sE903E3AE8FD0515CBD052FD7C8215D1F)] |

| | | [Report of Independent Registered Public Accounting [removed: Firm](#sBC7DD1406C1CFAD511D22C8D80A0CF8D)] [added: Firm](#sBAB51B0C8F5C5E39AED19DE7DA9B3920)] | [removed: [103](#sBC7DD1406C1CFAD511D22C8D80A0CF8D)] [added: [104](#sBAB51B0C8F5C5E39AED19DE7DA9B3920)] |

| Item 9. | | [Changes in and Disagreements with Accountants on Accounting and Financial [removed: Disclosure](#s910B393D7F63C3307FC92C8D80CF5025)] [added: Disclosure](#sCDE7FAE19A635C9E81CA53E3D49B238E)] | [removed: [104](#s910B393D7F63C3307FC92C8D80CF5025)] [added: [106](#sCDE7FAE19A635C9E81CA53E3D49B238E)] |

| Item 9A. | | [Controls and [removed: Procedures](#s37718EA34E0B3466C31B2C8D80FD24F1)] [added: Procedures](#sB26DF5C0188A5523B855B025851C0B5B)] | [removed: [104](#s37718EA34E0B3466C31B2C8D80FD24F1)] [added: [106](#sB26DF5C0188A5523B855B025851C0B5B)] |

| Item 9B. | | [Other [removed: Information](#sB4839F4D28A922D8B56D2C8D811D469F)] [added: Information](#s7B1C713863E25CCA9482FE32B22852B9)] | [removed: [105](#sB4839F4D28A922D8B56D2C8D811D469F)] [added: [107](#s7B1C713863E25CCA9482FE32B22852B9)] |

| Item 10. | | [Directors, Executive Officers and Corporate [removed: Governance](#s43E4846E8A7073246ADB2C8D816B3CE3)] [added: Governance](#sA10F9FDFF2D45D31915D4AF8F50B7718)] | [removed: [106](#s43E4846E8A7073246ADB2C8D816B3CE3)] [added: [108](#sA10F9FDFF2D45D31915D4AF8F50B7718)] |

| Item 11. | | [Executive [removed: Compensation](#s0B58AFFE701C350D729F2C8D81A994E4)] [added: Compensation](#sA1B91FB2089057128DE3F443DCCB4B2D)] | [removed: [106](#s0B58AFFE701C350D729F2C8D81A994E4)] [added: [108](#sA1B91FB2089057128DE3F443DCCB4B2D)] |

| Item 12. | | [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder [removed: Matters](#s492483BF8828880F39082C8D81C8C486)] [added: Matters](#sB3209858B69E51C6A45E54CA4D406E59)] | [removed: [106](#s492483BF8828880F39082C8D81C8C486)] [added: [108](#sB3209858B69E51C6A45E54CA4D406E59)] |

| Item 13. | | [Certain Relationships and Related Transactions, and Director [removed: Independence](#s682C387F684278F740A92C8D81F7E281)] [added: Independence](#s31A159FF349D5BCC9611FC12FA015994)] | [removed: [106](#s682C387F684278F740A92C8D81F7E281)] [added: [108](#s31A159FF349D5BCC9611FC12FA015994)] |

| Item 14. | | [Principal Accounting Fees and [removed: Services](#s17121047BED0B998A9242C8D82161A75)] [added: Services](#s8AABBD27A02259EB80A0749B57ACBCB2)] | [removed: [106](#s17121047BED0B998A9242C8D82161A75)] [added: [108](#s8AABBD27A02259EB80A0749B57ACBCB2)] |

| Item 15. | | [Exhibits, Financial Statement [removed: Schedules](#s30944EA9BEE26882DE7A2C8D82640EE4)] [added: Schedules](#sCCACDF39DAE95E5EAD606185FB27F493)] | [removed: [107](#s30944EA9BEE26882DE7A2C8D82640EE4)] [added: [109](#sCCACDF39DAE95E5EAD606185FB27F493)] |

| | | [Schedule II Valuation and Qualifying [removed: Accounts](#sB472B6463A30D447DBE72C8D73F379E8)] [added: Accounts](#s316B4D6F409A52379BA3B62F4652EFE2)] | [removed: [110](#sB472B6463A30D447DBE72C8D73F379E8)] [added: [112](#s316B4D6F409A52379BA3B62F4652EFE2)] |

| Item 16. | | [Form 10-K [removed: Summary](#sfe7b758943784dc0ab4782d34af0ba82)] [added: Summary](#s4AFD2EF2A7B8558C81BB0FE9C56ACA91)] | [removed: [112](#sfe7b758943784dc0ab4782d34af0ba82)] [added: [114](#s4AFD2EF2A7B8558C81BB0FE9C56ACA91)] |

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, [removed: 2018.][added: 2019.]

10-K 1 klac10k2018.htm 10-K

| | | [Signatures](#sB062B16E64FF5A8CA8C5FF006A7EF4E2) | [110](#sB062B16E64FF5A8CA8C5FF006A7EF4E2) |

| | | [Exhibit Index](#sB74CBAB570DE5C84B0B3B96BD619DF22) | [113](#sB74CBAB570DE5C84B0B3B96BD619DF22) |

10-K 1 klac10k2017.htm 10-K

| | | [Signatures](#s03FA2323E3B53E36E2092C8D82A3D4BD) | [108](#s03FA2323E3B53E36E2092C8D82A3D4BD) |

| | | [Exhibit Index](#s10FD3F80CA38E26358F22C8D82F1B0CF) | [111](#s10FD3F80CA38E26358F22C8D82F1B0CF) |

Information regarding our principal properties as of June 30, [removed: 2017] [added: 2018] is set forth below:

| Westwood, MA(1) | | Office and plant | | Engineering, Marketing, Manufacturing and Service | | [removed: 116,908] [added: 146,742] | | Leased |

| Shanghai, China | | Office | | Research, Service and Sales Administration | | [removed: 58,109] [added: 56,790] | | Leased |

| Yokohama, Japan | | Office and warehouse | | Sales and Service | | [removed: 35,531] [added: 27,079] | | Leased |

As of June 30, [removed: 2017,] [added: 2018,] we owned or leased a total of approximately 2.1 million square feet of space worldwide, including the locations listed above and office space for smaller sales and service offices in several locations throughout the world.

Our operating leases expire at various times through November [removed: 7,] [added: 8,] 2028, subject to renewal, with some of the leases containing renewal option clauses at the fair market value, for additional periods up to five years.

| | Year ended June 30, [removed: 2017] [added: 2018] | | | | | | | | | | | | Year ended June 30, [removed: 2016] [added: 2017] | | | | | | | | | | |

| First Fiscal Quarter | $ | [removed: 77.85] [added: 106.09] | | | $ | [removed: 66.88] [added: 87.93] | | | $ | [removed: 0.52] [added: 0.59] | | | $ | [removed: 57.35] [added: 77.85] | | | $ | [removed: 44.95] [added: 66.88] | | | $ | 0.52 | |

| Second Fiscal Quarter | $ | [removed: 83.23] [added: 114.43] | | | $ | [removed: 69.75] [added: 98.91] | | | $ | [removed: 0.54] [added: 0.59] | | | $ | [removed: 70.28] [added: 83.23] | | | $ | [removed: 48.73] [added: 69.75] | | | $ | [removed: 0.52] [added: 0.54] | |

| Third Fiscal Quarter | $ | [removed: 96.91] [added: 123.96] | | | $ | [removed: 77.86] [added: 96.12] | | | $ | [removed: 0.54] [added: 0.59] | | | $ | [removed: 73.19] [added: 96.91] | | | $ | [removed: 62.33] [added: 77.86] | | | $ | [removed: 0.52] [added: 0.54] | |

| Fourth Fiscal Quarter | $ | [removed: 109.59] [added: 118.56] | | | $ | [removed: 91.09] [added: 97.94] | | | $ | [removed: 0.54] [added: 0.75] | | | $ | [removed: 75.17] [added: 109.59] | | | $ | [removed: 67.32] [added: 91.09] | | | $ | [removed: 0.52] [added: 0.54] | |

As of July [removed: 14, 2017,] [added: 13, 2018,] there were [removed: 394] [added: 375] holders of record of our common stock.

The following is a summary of stock repurchases for each month during the fourth quarter of the fiscal year ended June 30, [removed: 2017(1):][added: 2018(1):]

| Period | Total Number of Shares Purchased [removed: (2)] [added: (1)] | | | Average Price Paid per Share | | | | [removed: Maximum Number of Shares] [added: Approximate Dollar Value] that May Yet Be Purchased Under the Plans or Programs [removed: (3)] [added: (2)] | | [added: |]

| [removed: (3)] [added: (2)] | The stock repurchase program has no expiration [removed: date.] [added: date and may be suspended at any time.] Future repurchases of our common stock under our repurchase program may be effected through various different repurchase transaction structures, including isolated open market transactions or systematic repurchase plans. |

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, [removed: 2012] [added: 2013] to June 30, [removed: 2017.][added: 2018.]

[removed: ][added: ]

| | June [removed: 2012 | | June] 2013 | | June 2014 | | June 2015 | | June 2016 | | June 2017 | [added: | June 2018 |]

* Assumes $100 invested on June 30, [removed: 2012] [added: 2013] in stock or index, including reinvestment of dividends.

On August 2, 2018, we announced that our Board of Directors had declared a quarterly cash dividend of $0.75 per share to be paid on August 31, 2018 to stockholders of record as of the close of business on August 15, 2018.

| | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | |

| April 1, 2018 to April 30, 2018 | — | | | $ | — | | | $ | 1,000,000,000 | |

| May 1, 2018 to May 31, 2018 | 290,400 | | | $ | 110.00 | | | $ | 968,055,978 | |

| June 1, 2018 to June 30, 2018 | 52,800 | | | $ | 116.69 | | | $ | 961,894,818 | |

| Total | 343,200 | | | $ | 111.03 | | | | | |

| (1) | On March 16, 2018, our Board of Directors authorized a new repurchase program which permits us to repurchase up to $1.00 billion of our common stock, or up to $2.00 billion if the Orbotech Merger closes. Shares are reported based on the trade date of the applicable repurchase. |

| KLA-Tencor Corporation | $100.00 | | $134.17 | | $133.10 | | $179.39 | | $230.12 | | $264.19 |

| S&P 500 | $100.00 | | $124.61 | | $133.86 | | $139.20 | | $164.11 | | $187.70 |

| PHLX Semiconductor | $100.00 | | $134.53 | | $138.83 | | $150.22 | | $208.31 | | $271.06 |

On June 1, 2017, we announced that our Board of Directors had authorized an increase in the level of our quarterly cash dividend from $0.54 to $0.59 per share.

Additional information regarding the declaration of our quarterly cash dividend after June 30, 2017 can be found in Note 19, “Subsequent Events” to the Consolidated Financial Statements.

| | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| April 1, 2017 to April 30, 2017 | — | | | $ | — | | | 5,916,120 | |

| May 1, 2017 to May 31, 2017 | 148,769 | | | $ | 102.03 | | | 5,767,351 | |

| June 1, 2017 to June 30, 2017 | 94,391 | | | $ | 104.06 | | | 5,672,960 | |

| Total | 243,160 | | | $ | 102.82 | | | | |

| | |

| --- | --- |

| (1) | Our Board of Directors has authorized a program for us to repurchase shares of our common stock. The total number and dollar amount of shares repurchased for the fiscal years ended June 30, 2017, 2016 and 2015 were 0.2 million shares ($25.0 million), 3.4 million shares ($175.7 million) and 9.3 million shares ($608.9 million), respectively. |

| (2) | All shares were purchased pursuant to the publicly announced repurchase program described in footnote 1 above. Shares are reported based on the trade date of the applicable repurchase. |

| KLA-Tencor Corporation | $100.00 | | $116.72 | | $156.61 | | $155.36 | | $209.39 | | $268.60 |

| S&P 500 | $100.00 | | $120.60 | | $150.27 | | $161.43 | | $167.87 | | $197.92 |

| PHLX Semiconductor | $100.00 | | $116.96 | | $156.62 | | $161.36 | | $173.61 | | $241.00 |

| (In thousands, except per share amounts) | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | | | [removed: 2014] [added: 2015] | | | | [removed: 2013] [added: 2014] | | |

| Total revenues | $ | [removed: 3,480,014] [added: 4,036,701] | | | $ | [removed: 2,984,493] [added: 3,480,014] | | | $ | [removed: 2,814,049] [added: 2,984,493] | | | $ | [removed: 2,929,408] [added: 2,814,049] | | | $ | [removed: 2,842,781] [added: 2,929,408] | |

| Net income(1) | $ | [removed: 926,076] [added: 802,265] | | | $ | [removed: 704,422] [added: 926,076] | | | $ | [removed: 366,158] [added: 704,422] | | | $ | [removed: 582,755] [added: 366,158] | | | $ | [removed: 543,149] [added: 582,755] | |

| Cash dividends declared per share (including a special cash dividend of $16.50 per share declared during the three months ended December 31, 2014) | $ | [removed: 2.14] [added: 2.52] | | | $ | [removed: 2.08] [added: 2.14] | | | $ | [removed: 18.50] [added: 2.08] | | | $ | [removed: 1.80] [added: 18.50] | | | $ | [removed: 1.60] [added: 1.80] | |

| Basic | $ | [removed: 5.92] [added: 5.13] | | | $ | [removed: 4.52] [added: 5.92] | | | $ | [removed: 2.26] [added: 4.52] | | | $ | [removed: 3.51] [added: 2.26] | | | $ | [removed: 3.27] [added: 3.51] | |

| Diluted | $ | [removed: 5.88] [added: 5.10] | | | $ | [removed: 4.49] [added: 5.88] | | | $ | [removed: 2.24] [added: 4.49] | | | $ | [removed: 3.47] [added: 2.24] | | | $ | [removed: 3.21] [added: 3.47] | |

| | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | | | [removed: 2014] [added: 2015] | | | | [removed: 2013] [added: 2014] | | |

| Cash, cash equivalents and marketable securities | $ | [removed: 3,016,740] [added: 2,880,318] | | | $ | [removed: 2,491,294] [added: 3,016,740] | | | $ | [removed: 2,387,111] [added: 2,491,294] | | | $ | [removed: 3,152,637] [added: 2,387,111] | | | $ | [removed: 2,918,881] [added: 3,152,637] | |

| Working capital(2) | $ | [removed: 3,098,904] [added: 3,330,917] | | | $ | [removed: 2,865,609] [added: 3,098,904] | | | $ | [removed: 2,902,813] [added: 2,865,609] | | | $ | [removed: 3,690,484] [added: 2,902,813] | | | $ | [removed: 3,489,236] [added: 3,690,484] | |

| Total assets | $ | [removed: 5,532,173] [added: 5,619,356] | | | $ | [removed: 4,962,432] [added: 5,532,173] | | | $ | [removed: 4,826,012] [added: 4,962,432] | | | $ | [removed: 5,535,846] [added: 4,826,012] | | | $ | [removed: 5,283,804] [added: 5,535,846] | |

| Long-term debt(3) | $ | [removed: 2,680,474] [added: 2,237,402] | | | $ | [removed: 3,057,936] [added: 2,680,474] | | | $ | [removed: 3,173,435] [added: 3,057,936] | | | $ | [removed: 745,101] [added: 3,173,435] | | | $ | [removed: 743,823] [added: 745,101] | |

| Total stockholders’ equity(3) | $ | [removed: 1,326,417] [added: 1,620,511] | | | $ | [removed: 689,114] [added: 1,326,417] | | | $ | [removed: 421,439] [added: 689,114] | | | $ | [removed: 3,669,346] [added: 421,439] | | | $ | [removed: 3,482,152] [added: 3,669,346] | |

| (1) | Our net income decreased to [added: $802.3 million in the fiscal year ended June 30, 2018, primarily as a result of the income tax effects from the enacted tax reform legislation through the Tax Cuts and Jobs Act, which was signed into law on December 22, 2017. 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. |

| [Consolidated Balance Sheets as of June 30, [removed: 2017] [added: 2018] and [removed: 2016](#s1925093C0A5AFB9ED98B2C8D5A3AFDFB)] [added: 2017](#s4099CB77C0E15F8DB611F0E14661BFE4)] | [removed: [59](#s1925093C0A5AFB9ED98B2C8D5A3AFDFB)] [added: [61](#s4099CB77C0E15F8DB611F0E14661BFE4)] |

| [Consolidated Statements of Operations for each of the three years in the period ended June 30, [removed: 2017](#sF49F48C5B26011851A612C8D5A49B3EB)] [added: 2018](#s1E2D6A10B66858E8AF42A6A9752B97E5)] | [removed: [60](#sF49F48C5B26011851A612C8D5A49B3EB)] [added: [62](#s1E2D6A10B66858E8AF42A6A9752B97E5)] |

| [Consolidated Statements of Comprehensive Income for each of the three years in the period ended June 30, [removed: 2017](#s40F1BBA19510DDA128952C8D5A69C66D)] [added: 2018](#sD62311AFD55B5DEDA814BDEA7DE6483C)] | [removed: [61](#s40F1BBA19510DDA128952C8D5A69C66D)] [added: [63](#sD62311AFD55B5DEDA814BDEA7DE6483C)] |

| [Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended June 30, [removed: 2017](#s83E35553CE9778EF69892C8D5A690B1C)] [added: 2018](#sBCA8EC3316BD576DB9E1A89391D8CA5B)] | [removed: [62](#s83E35553CE9778EF69892C8D5A690B1C)] [added: [64](#sBCA8EC3316BD576DB9E1A89391D8CA5B)] |

| [Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, [removed: 2017](#s009099D561DE47C463EB2C8D5A97C604)] [added: 2018](#sCF56088BCE9658B3ADA019C9EF65D2F2)] | [removed: [63](#s009099D561DE47C463EB2C8D5A97C604)] [added: [65](#sCF56088BCE9658B3ADA019C9EF65D2F2)] |

| [Notes to Consolidated Financial [removed: Statements](#s7BB4DC60451D99A3BA322C8D7CB9E4CD)] [added: Statements](#sE903E3AE8FD0515CBD052FD7C8215D1F)] | [removed: [64](#s7BB4DC60451D99A3BA322C8D7CB9E4CD)] [added: [66](#sE903E3AE8FD0515CBD052FD7C8215D1F)] |

| [Report of Independent Registered Public Accounting [removed: Firm](#sBC7DD1406C1CFAD511D22C8D80A0CF8D)] [added: Firm](#sBAB51B0C8F5C5E39AED19DE7DA9B3920)] | [removed: [103](#sBC7DD1406C1CFAD511D22C8D80A0CF8D)] [added: [104](#sBAB51B0C8F5C5E39AED19DE7DA9B3920)] |

| (In thousands, except par value) | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | |

| Cash and cash equivalents [removed: | $] [added: at beginning of period] | 1,153,051 | | | [removed: $] | 1,108,488 | | [added: | | 838,025 | | |]

| Marketable securities | [removed: 1,863,689] [added: 1,475,936] | | | | [removed: 1,382,806] [added: 1,863,689] | | |

| Accounts receivable, net | [removed: 571,117] [added: 651,678] | | | | [removed: 613,233] [added: 571,117] | | |

| Inventories | [removed: 732,988] [added: 931,845] | | | | [removed: 698,635] [added: 732,988] | | |

| Other current assets | [removed: 71,221] [added: 85,159] | | | | [removed: 64,870] [added: 71,221] | | |

| Total current assets | [removed: 4,392,066] [added: 4,549,000] | | | | [removed: 3,868,032] [added: 4,392,066] | | |

| Land, property and equipment, net | [removed: 283,975] [added: 286,306] | | | | [removed: 278,014] [added: 283,975] | | |

| Goodwill | [removed: 349,526] [added: 354,698] | | | | [removed: 335,177] [added: 349,526] | | |

| Deferred income taxes | [removed: 291,967] [added: 193,200] | | | | [removed: 302,219] [added: 291,967] | | |

| Purchased intangibles, net | [removed: 18,963] [added: 19,333] | | | | [removed: 4,331] [added: 18,963] | | |

| Other non-current assets | [removed: 195,676] [added: 216,819] | | | | [removed: 174,659] [added: 195,676] | | |

| Total assets | $ | [removed: 5,532,173] [added: 5,619,356] | | | $ | [removed: 4,962,432] [added: 5,532,173] | |

| Accounts payable | $ | [removed: 147,380] [added: 169,354] | | | $ | [removed: 106,517] [added: 147,380] | |

| Deferred system profit | [removed: 180,861] [added: 279,581] | | | | [removed: 174,551] [added: 180,861] | | |

| Unearned revenue | [removed: 65,507] [added: 69,255] | | | | [removed: 59,147] [added: 65,507] | | |

| Current portion of long-term debt | [removed: 249,983] [added: —] | | | | [removed: —] [added: 249,983] | | |

| Other current liabilities | [removed: 649,431] [added: 699,893] | | | | [removed: 662,208] [added: 649,431] | | |

| Total current liabilities | [removed: 1,293,162] [added: 1,218,083] | | | | [removed: 1,002,423] [added: 1,293,162] | | |

| Long-term debt | [removed: 2,680,474] [added: 2,237,402] | | | | [removed: 3,057,936] [added: 2,680,474] | | |

| Unearned revenue | [removed: 59,713] [added: 71,997] | | | | [removed: 56,336] [added: 59,713] | | |

| Other non-current liabilities | [removed: 172,407] [added: 471,363] | | | | [removed: 156,623] [added: 172,407] | | |

| Total liabilities | [removed: 4,205,756] [added: 3,998,845] | | | | [removed: 4,273,318] [added: 4,205,756] | | |

| Common stock, $0.001 par value, 500,000 shares authorized, [removed: 261,654] [added: 262,718] and [removed: 260,619] [added: 261,654] shares issued, [removed: 156,840] [added: 156,048] and [removed: 155,955] [added: 156,840] shares outstanding, as of June 30, [removed: 2017] [added: 2018] and June 30, [removed: 2016,] [added: 2017,] respectively | [removed: 157] [added: 156] | | | | [removed: 156] [added: 157] | | |

| Capital in excess of par value | [removed: 529,126] [added: 617,843] | | | | [removed: 452,818] [added: 529,126] | | |

| Retained earnings | [removed: 848,457] [added: 1,056,445] | | | | [removed: 284,825] [added: 848,457] | | |

| Accumulated other comprehensive income (loss) | [removed: (51,323] [added: (53,933] | | ) | | [removed: (48,685] [added: (51,323] | | ) |

| Total stockholders’ equity | [removed: 1,326,417] [added: 1,620,511] | | | | [removed: 689,114] [added: 1,326,417] | | |

| Total liabilities and stockholders’ equity | $ | [removed: 5,532,173] [added: 5,619,356] | | | $ | [removed: 4,962,432] [added: 5,532,173] | |

| (In thousands, except per share amounts) | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | |

| Product | $ | [removed: 2,703,934] [added: 3,160,671] | | | $ | [removed: 2,250,260] [added: 2,703,934] | | | $ | [removed: 2,125,396] [added: 2,250,260] | |

| Service | [removed: 776,080] [added: 876,030] | | | | [removed: 734,233] [added: 776,080] | | | | [removed: 688,653] [added: 734,233] | | |

| Total revenues | [removed: 3,480,014] [added: 4,036,701] | | | | [removed: 2,984,493] [added: 3,480,014] | | | | [removed: 2,814,049] [added: 2,984,493] | | |

| Cash and cash equivalents | $ | 1,404,382 | | | $ | 1,153,051 | |

| Cash dividends declared per share | $ | 2.52 | | | $ | 2.14 | | | $ | 2.08 | |

| Net income | $ | 802,265 | | | $ | 926,076 | | | $ | 704,422 | |

| Net income | — | | | — | | | | 802,265 | | | | — | | | | 802,265 | | |

| Repurchase of common stock | (1,960 | ) | | (6,755 | | ) | | (196,414 | | ) | | — | | | | (203,169 | | ) |

| Cash dividends ($2.52 per share) and dividend equivalents declared | — | | | — | | | | (397,863 | | ) | | — | | | | (397,863 | | ) |

| Balances as of June 30, 2018 | 156,048 | | | $ | 617,999 | | | $ | 1,056,445 | | | $ | (53,933 | ) | | $ | 1,620,511 | |

| Net income | $ | 802,265 | | | $ | 926,076 | | | $ | 704,422 | |

| Inventories | (182,883 | | ) | | (46,433 | | ) | | (67,579 | | ) |

Proposed Merger with Orbotech, Ltd. On March 18, 2018, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Orbotech, Ltd. (“Orbotech”) pursuant to which KLA-Tencor would acquire Orbotech for $38.86 in cash and 0.25 of a share of KLA-Tencor common stock in exchange for each ordinary share of Orbotech, which at the time of announcement valued Orbotech at $3.2 billion in enterprise value.

The merger contemplated by the Merger Agreement (the “Orbotech Merger”) is subject to receipt of required regulatory approvals and satisfaction of the other customary closing conditions.

Non-Marketable Equity Securities.

KLA-Tencor acquires certain non-marketable equity investments for the promotion of business and strategic objectives.

Non-marketable equity securities do not give the Company the ability to exercise significant influence over the investees and are accounted for under the cost method.

Net realizable value is the estimated selling prices in the ordinary course of business, less costs of completion, disposal and transportation.

| 2018 | | 2017 |

| SK Hynix, Inc. | | |

The Company also uses interest rate lock agreements to hedge the risk associated with the variability of cash flows due to changes in the benchmark interest rate of the intended debt financing.

The Company accounts for income taxes in accordance with the authoritative guidance, which requires income tax effects for changes in tax laws are recognized in the period in which the law is enacted.

Transition tax liability is recognized in the period when the change in the U.S. tax law was enacted and the income tax effects are recorded as a component of provision for income taxes from continuing operations.

The calculation of the transition tax liability includes assumptions and reasonable estimates of the income tax effects and are based on provisional tax amounts.

Several inputs were considered in the calculation, such as the calculation of the post-1986 foreign earnings and profit (“E&P”), income tax pools for all foreign subsidiaries, and the amount of those earnings held in cash and other specified assets.

The Company applied the current interpretations from the U.S. federal and state governments and regulatory organization in its calculation of the transition tax liability and the Company's reasonable estimate of the transition tax liability could change if further interpretations are provided for in the future.

The Company expects to fully complete its provisional transition tax liability calculation within the reasonable measurement period allowed by the authoritative guidance.

The Company does not expect the update to have a material impact on its financial position, results of operations or cash flows.

In July 2018, the FASB issued an amendment to the standard which provide the Company an option to apply the practical expedient allowed in the standard retrospectively with the cumulative effect recognized as of the date of adoption.

The Company does not expect the update to have a material impact on its financial position, results of operations or cash flows.

The impact of this update on the Company's financial position, results of operations, or cash flows depends on the facts and circumstances of future acquisition or disposal activities.

The Company does not expect the update to have a material impact on its financial position, results of operations or cash flows.

The Company does not expect the update to have a material impact on its financial position, results of operations or cash flows.

In August 2017, the FASB issued an accounting standard update to hedge accounting to better align the Company’s risk management activities by refining financial and non-financial hedging strategy eligibilities.

This update also amends the presentation and disclosure requirements to increase transparency to better understand an entity’s risk exposures and how hedging strategies are used to manage those exposures.

In February 2018, the FASB issued an accounting standard update that provides an option to reclassify disproportional tax effects and other income tax effects (“stranded tax effects”) caused by the Tax Cuts and Jobs Act (“the Act”) from accumulated other comprehensive income to retained earnings.

| U.S. Government agency securities | 316,022 | | | | 299,501 | | | | 16,521 | | |

| U.S. Treasury securities | 405,654 | | | | 364,574 | | | | 41,080 | | |

| Total cash equivalents and marketable securities(1) | 2,352,007 | | | | 1,527,190 | | | | 824,817 | | |

| Executive Deferred Savings Plan | 197,213 | | | | 143,580 | | | | 53,633 | | |

| Total financial assets(1) | $ | 2,554,605 | | | $ | 1,670,770 | | | $ | 883,835 | |

| (In thousands) | 2018 | | | | 2017 | | |

| | $ | 651,678 | | | $ | 571,117 | |

| | |

| --- | --- |

| | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | Year ended June 30, | | | | | | | | | | |

| Loss on extinguishment of debt and other, net | — | | | | — | | | | 131,669 | | |

| Cash dividends declared per share (including a special cash dividend of $16.50 per share declared during the three months ended December 31, 2014) | $ | 2.14 | | | $ | 2.08 | | | $ | 18.50 | |

| Balances as of June 30, 2014 | 165,448 | | | $ | 1,220,504 | | | $ | 2,479,113 | | | $ | (30,271 | ) | | $ | 3,669,346 | |

| Net income | — | | | — | | | | 366,158 | | | | — | | | | 366,158 | | |

| Repurchase of common stock | (9,255 | ) | | (26,891 | | ) | | (581,965 | | ) | | — | | | | (608,856 | | ) |

| Cash dividends ($18.50 per share including a special cash dividend of $16.50 per share declared during the three months ended December 31, 2014) and dividend equivalents declared | — | | | (807,391 | | ) | | (2,275,668 | | ) | | — | | | | (3,083,059 | | ) |

| Decrease (increase) in inventories | (46,433 | | ) | | (67,579 | | ) | | 27,500 | | |

| Excess tax benefit from equity awards | — | | | | 11,936 | | | | 15,403 | | |

| Cash and cash equivalents at beginning of period | 1,108,488 | | | | 838,025 | | | | 630,861 | | |

| Unsettled common stock repurchase - financing activities | $ | — | | | $ | — | | | $ | 5,968 | |

Terminated Merger Agreement.

On October 20, 2015, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement” or “Merger”) with Lam Research Corporation (“Lam Research”) which was subject to regulatory approvals.

On October 5, 2016, the parties mutually agreed to terminate the Merger Agreement and no termination fees were payable by either party.

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.

with respect to trade receivables.

| | | | | Taiwan Semiconductor Manufacturing Company Limited |

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.

In September 2015, the FASB issued an accounting standard update on simplifying the accounting for measurement-period adjustments for business combinations.

This standard requires an acquirer in a business combination to recognize an impact of a measurement period adjustment in the reporting period in which the adjustment amounts are determined, rather than retrospectively adjusting previously reported amounts.

The Company adopted the standard in the fiscal year ended June 30, 2017 and there was no impact of adoption 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.

Impact to Consolidated Statements of Operations

The primary impact of adopting the standard update is a change in the recording of the excess tax benefits or deficiencies from share-based payments.

Before adoption, the Company recognized the excess tax benefits or deficiencies related to stock-based compensation as a credit or charge to additional paid-in capital (“APIC”) in the Company’s Consolidated Balance Sheets.

Under the standard update, these excess tax benefits or deficiencies are recognized as a discrete tax benefit or discrete tax expense in the income tax provision in the Company’s Consolidated Statement of Operations.

For the fiscal year ended June 30, 2017, the Company recognized a discrete tax benefit of $6.6 million related to net excess tax benefits mainly from stock-based compensation and dividend equivalents.

The standard update requires companies to adopt the amendment related to accounting for excess tax benefits or deficiencies on a prospective basis only and as a result, prior periods were not retrospectively adjusted.

Impact to Consolidated Statements of Cash Flows

In addition to the income tax consequence as described above, the standard update for share-based payment requires that cash flows from excess tax benefits related to share-based payments be reported as operating activities in the Consolidated Statements of Cash Flows.

Previously, cash flows from excess tax benefit related to share-based payments were reported as financing activities.

The standard update allows for two methods of adoption which are prospective or retrospective application.

The Company elected to adopt this amendment on a prospective basis and as a result, prior periods were not retrospectively adjusted.

| • | The Company will recognize revenue for software licenses at the time of delivery since the Vendor Specific Objective Evidence (“VSOE”) requirement for undelivered element such as post-contract support is eliminated and companies are allowed to use established or best estimate selling price for the undelivered element to allocate and defer the revenue. As a result, the Company will recognize as revenue a portion of the sales price upon delivery of the software, compared to the current practice of recognizing the entire sales price ratably over the term of the service contract due to the lack of VSOE. |

Based on this evaluation, the Company’s management concluded that the Company’s internal control over financial reporting was effective as of June 30, [removed: 2017.][added: 2018.]

The effectiveness of the Company’s internal control over financial reporting as of June 30, [removed: 2017] [added: 2018] 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.

There were no changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of fiscal year [removed: 2017] [added: 2018] that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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, [removed: 2018”] [added: 2019”] in the Proxy Statement, which is incorporated herein by reference.

| [Consolidated Balance Sheets as of June 30, [removed: 2017] [added: 2018] and June 30, [removed: 2016](#s1925093C0A5AFB9ED98B2C8D5A3AFDFB)] [added: 2017](#s4099CB77C0E15F8DB611F0E14661BFE4)] | [removed: [59](#s1925093C0A5AFB9ED98B2C8D5A3AFDFB)] [added: [61](#s4099CB77C0E15F8DB611F0E14661BFE4)] |

| [Consolidated Statements of Operations for each of the three years in the period ended June 30, [removed: 2017](#sF49F48C5B26011851A612C8D5A49B3EB)] [added: 2018](#s1E2D6A10B66858E8AF42A6A9752B97E5)] | [removed: [60](#sF49F48C5B26011851A612C8D5A49B3EB)] [added: [62](#s1E2D6A10B66858E8AF42A6A9752B97E5)] |

| [Consolidated Statements of Comprehensive Income for each of the three years in the period ended June 30, [removed: 2017](#s40F1BBA19510DDA128952C8D5A69C66D)] [added: 2018](#sD62311AFD55B5DEDA814BDEA7DE6483C)] | [removed: [61](#s40F1BBA19510DDA128952C8D5A69C66D)] [added: [63](#sD62311AFD55B5DEDA814BDEA7DE6483C)] |

| [Consolidated Statements of Stockholders' Equity for each of the three years in the period ended June 30, [removed: 2017](#s83E35553CE9778EF69892C8D5A690B1C)] [added: 2018](#sBCA8EC3316BD576DB9E1A89391D8CA5B)] | [removed: [62](#s83E35553CE9778EF69892C8D5A690B1C)] [added: [64](#sBCA8EC3316BD576DB9E1A89391D8CA5B)] |

| [Consolidated Statements of Cash Flows for each of the three years in the period ended June 30, [removed: 2017](#s009099D561DE47C463EB2C8D5A97C604)] [added: 2018](#sCF56088BCE9658B3ADA019C9EF65D2F2)] | [removed: [63](#s009099D561DE47C463EB2C8D5A97C604)] [added: [65](#sCF56088BCE9658B3ADA019C9EF65D2F2)] |

| [Notes to Consolidated Financial [removed: Statements](#s7BB4DC60451D99A3BA322C8D7CB9E4CD)] [added: Statements](#sE903E3AE8FD0515CBD052FD7C8215D1F)] | [removed: [64](#s7BB4DC60451D99A3BA322C8D7CB9E4CD)] [added: [66](#sE903E3AE8FD0515CBD052FD7C8215D1F)] |

| [Report of Independent Registered Public Accounting [removed: Firm](#sBC7DD1406C1CFAD511D22C8D80A0CF8D)] [added: Firm](#sBAB51B0C8F5C5E39AED19DE7DA9B3920)] | [removed: [103](#sBC7DD1406C1CFAD511D22C8D80A0CF8D)] [added: [104](#sBAB51B0C8F5C5E39AED19DE7DA9B3920)] |

| August [removed: 4, 2017] [added: 6, 2018] | | By: | | /S/ RICHARD P. WALLACE |

| /s/ RICHARD P. WALLACE | | President, Chief Executive Officer and Director (principal executive officer) | | August [removed: 4, 2017] [added: 6, 2018] |

| /s/ BREN D. HIGGINS | | Executive Vice President and Chief Financial Officer (principal financial officer) | | August [removed: 4, 2017] [added: 6, 2018] |

| /s/ VIRENDRA A. KIRLOSKAR | | Senior Vice President and Chief Accounting Officer (principal accounting officer) | | August [removed: 4, 2017] [added: 6, 2018] |

| /s/ EDWARD W. BARNHOLT | | Chairman of the Board and Director | | August [removed: 4, 2017] [added: 6, 2018] |

| /s/ ROBERT M. CALDERONI | | Director | | August [removed: 4, 2017] [added: 6, 2018] |

| /s/ JOHN T. DICKSON | | Director | | August [removed: 4, 2017] [added: 6, 2018] |

| /s/ EMIKO HIGASHI | | Director | | August [removed: 4, 2017] [added: 6, 2018] |

| /s/ KEVIN J. KENNEDY | | Director | | August [removed: 4, 2017] [added: 6, 2018] |

| /s/ GARY B. MOORE | | Director | | August [removed: 4, 2017] [added: 6, 2018] |

| /s/ KIRAN M. PATEL | | Director | | August [removed: 4, 2017] [added: 6, 2018] |

| /s/ ROBERT A. RANGO | | Director | | August [removed: 4, 2017] [added: 6, 2018] |

| /s/ DAVID C. WANG | | Director | | August [removed: 4, 2017] [added: 6, 2018] |

| Fiscal Year Ended June 30, [removed: 2015:] [added: 2018:] | | | | | | | | | | | | | | | |

| Allowance for Doubtful Accounts | $ | [removed: 21,827] [added: 21,636] | | | $ | — | | | $ | [removed: (164] [added: (9,997] | ) | | $ | [removed: 21,663] [added: 11,639] | |

| [removed: 2.1] [added: [2.1](http://www.sec.gov/Archives/edgar/data/319201/000143774918004961/ex_108317.htm)] | | [removed: Agreement] [added: [Agreement] and Plan of [removed: Merger and Reorganization,] [added: Merger,] dated as of [removed: October 20, 2015,] [added: March 18, 2018,] by and among [removed: Lam Research] [added: KLA-Tencor] Corporation, [removed: Topeka] [added: Orbotech Ltd. and Tiburon] Merger Sub [removed: 1, Inc., Topeka Merger sub 2, Inc. and KLA-Tencor Corporation] [added: Technologies Ltd.](http://www.sec.gov/Archives/edgar/data/319201/000143774918004961/ex_108317.htm)] | | 8-K | | No. 000-09992 | | 2.1 | | [removed: October 21, 2015] [added: March 19, 2018] |

| [removed: 3.1] [added: [3.1](http://www.sec.gov/Archives/edgar/data/319201/0000891618-97-002286.txt)] | | [removed: Amended] [added: [Amended] and Restated Certificate of [removed: Incorporation] [added: Incorporation](http://www.sec.gov/Archives/edgar/data/319201/0000891618-97-002286.txt)] | | 10-Q | | No. 000-09992 | | 3.1 | | May 14, 1997 |

| [removed: 3.2] [added: [3.2](http://www.sec.gov/Archives/edgar/data/319201/000089161801000175/f69522ex3-1.txt)] | | [removed: Certificate] [added: [Certificate] of Amendment of Amended and Restated Certificate of [removed: Incorporation] [added: Incorporation](http://www.sec.gov/Archives/edgar/data/319201/000089161801000175/f69522ex3-1.txt)] | | 10-Q | | No. 000-09992 | | 3.1 | | February 14, 2001 |

| [removed: 3.3] [added: [3.3](http://www.sec.gov/Archives/edgar/data/319201/000031920112000013/a31amendmenttocertificateo.htm)] | | [removed: Certificate] [added: [Certificate] of Amendment to Amended and Restated Certificate of Incorporation of the Company effective as of November 8, [removed: 2012] [added: 2012](http://www.sec.gov/Archives/edgar/data/319201/000031920112000013/a31amendmenttocertificateo.htm)] | | 8-K | | No. 000-09992 | | 3.1 | | November 13, 2012 |

| [removed: 3.4] [added: [3.4](http://www.sec.gov/Archives/edgar/data/319201/000031920115000031/exhibit31amendedandrestate.htm)] | | [removed: Amended] [added: [Amended] and Restated Bylaws of the Company effective as of May 7, [removed: 2015] [added: 2015](http://www.sec.gov/Archives/edgar/data/319201/000031920115000031/exhibit31amendedandrestate.htm)] | | 8-K | | No. 000-09992 | | 3.1 | | May 8, 2015 |

| [removed: 4.1] [added: [4.1](http://www.sec.gov/Archives/edgar/data/319201/000119312514403628/d817441dex41.htm)] | | [removed: Indenture] [added: [Indenture] dated November 6, 2014 between KLA-Tencor Corporation and Wells Fargo Bank, National Association, as [removed: trustee] [added: trustee](http://www.sec.gov/Archives/edgar/data/319201/000119312514403628/d817441dex41.htm)] | | 8-K | | No. 000-09992 | | 4.1 | | November 7, 2014 |

| [removed: 4.2] [added: [4.2](http://www.sec.gov/Archives/edgar/data/319201/000119312514403628/d817441dex42.htm)] | | [removed: Form] [added: [Form] of Officer’s Certificate setting forth the terms of the Notes (with form of Notes [removed: attached)] [added: attached)](http://www.sec.gov/Archives/edgar/data/319201/000119312514403628/d817441dex42.htm)] | | 8-K | | No. 000-09992 | | 4.2 | | November 7, 2014 |

| [removed: 10.1] [added: [10.1](http://www.sec.gov/Archives/edgar/data/319201/000031920114000040/a2004equityincentiveplan.htm)] | | [removed: 2004] [added: [2004] Equity Incentive Plan (as amended and restated (as of August 7, [removed: 2014))*] [added: 2014))*](http://www.sec.gov/Archives/edgar/data/319201/000031920114000040/a2004equityincentiveplan.htm)] | | 8-K | | No. 000-09992 | | 10.45 | | August 12, 2014 |

| [removed: 10.2] [added: [10.2](http://www.sec.gov/Archives/edgar/data/319201/000120677406001038/kt125871ex1018.htm)] | | [removed: Notice] [added: [Notice] of Grant of Restricted Stock [removed: Units*] [added: Units*](http://www.sec.gov/Archives/edgar/data/319201/000120677406001038/kt125871ex1018.htm)] | | 10-Q | | No. 000-09992 | | 10.18 | | May 4, 2006 |

| [removed: 10.3] [added: [10.3](http://www.sec.gov/Archives/edgar/data/319201/000031920114000040/rsunotificationprsu201408.htm)] | | [removed: Form] [added: [Form] of Restricted Stock Unit Award Notification (Performance-Vesting) (approved August [removed: 2014)*] [added: 2014)*](http://www.sec.gov/Archives/edgar/data/319201/000031920114000040/rsunotificationprsu201408.htm)] | | 8-K | | No. 000-09992 | | 10.49 | | August 12, 2014 |

| [removed: 10.4] [added: [10.4](http://www.sec.gov/Archives/edgar/data/319201/000118143112043242/rrd352201_38220.htm)] | | [removed: Form] [added: [Form] of Restricted Stock Unit Award Notification (Service-Vesting) (approved August [removed: 2012)*] [added: 2012)*](http://www.sec.gov/Archives/edgar/data/319201/000118143112043242/rrd352201_38220.htm)] | | 8-K | | No. 000-09992 | | 10.1 | | August 2, 2012 |

| [removed: 10.5] [added: [10.5](http://www.sec.gov/Archives/edgar/data/319201/000031920114000040/rsunotificationrsu25201408.htm)] | | [removed: Form] [added: [Form] of Restricted Stock Unit Award Notification (Service-Vesting; 25% Annual Vesting) (approved August [removed: 2014)*] [added: 2014)*](http://www.sec.gov/Archives/edgar/data/319201/000031920114000040/rsunotificationrsu25201408.htm)] | | 8-K | | No. 000-09992 | | 10.50 | | August 12, 2014 |

| [removed: 10.6] [added: [10.6](http://www.sec.gov/Archives/edgar/data/319201/000031920114000040/rsunotificationrsu50201408.htm)] | | [removed: Form] [added: [Form] of Restricted Stock Unit Award Notification (Service-Vesting; 50% Vesting Year Two, 50% Vesting Year Four) (approved August [removed: 2014)*] [added: 2014)*](http://www.sec.gov/Archives/edgar/data/319201/000031920114000040/rsunotificationrsu50201408.htm)] | | 8-K | | No. 000-09992 | | 10.51 | | August 12, 2014 |

| [removed: 10.7] [added: [10.7](http://www.sec.gov/Archives/edgar/data/319201/000031920114000040/rsuagreementus201408.htm)] | | [removed: Form] [added: [Form] of Restricted Stock Unit Agreement for U.S. Employees (with Dividend Equivalents) (approved August [removed: 2014)*] [added: 2014)*](http://www.sec.gov/Archives/edgar/data/319201/000031920114000040/rsuagreementus201408.htm)] | | 8-K | | No. 000-09992 | | 10.46 | | August 12, 2014 |

| [removed: 10.8] [added: [10.8](http://www.sec.gov/Archives/edgar/data/319201/000031920114000040/rsuagreementnon-us201408.htm)] | | [removed: Form] [added: [Form] of Restricted Stock Unit Agreement for Non-U.S. Employees (with Dividend Equivalents) (approved August [removed: 2014)*] [added: 2014)*](http://www.sec.gov/Archives/edgar/data/319201/000031920114000040/rsuagreementnon-us201408.htm)] | | 8-K | | No. 000-09992 | | 10.48 | | August 12, 2014 |

| [removed: 10.9] [added: [10.9](http://www.sec.gov/Archives/edgar/data/319201/000119312513380079/d571762ddef14a.htm#rom571762_41)] | | [removed: KLA-Tencor] [added: [KLA-Tencor] Corporation Performance Bonus [removed: Plan*] [added: Plan*](http://www.sec.gov/Archives/edgar/data/319201/000119312513380079/d571762ddef14a.htm#rom571762_41)] | | DEF 14A | | No. 000-09992 | | App. B | | September 26, 2013 |

| [removed: 10.12] [added: [10.10](http://www.sec.gov/Archives/edgar/data/319201/000031920113000007/exhibit10_42executivedefer.htm)] | | [removed: Executive] [added: [Executive] Deferred Savings Plan (as amended and restated effective November 7, [removed: 2012)*] [added: 2012)*](http://www.sec.gov/Archives/edgar/data/319201/000031920113000007/exhibit10_42executivedefer.htm)] | | 10-Q | | No. 000-09992 | | 10.42 | | January 25, 2013 |

| [removed: 10.13] [added: [10.11](http://www.sec.gov/Archives/edgar/data/319201/000031920117000049/creditagreementexecution.htm)] | | [removed: Credit Agreement] [added: [Credit Agreement,] dated [added: as of] November [removed: 14, 2014] [added: 30, 2017] among KLA-Tencor Corporation, the lenders [removed: party thereto] [added: from time to time] and JPMorgan Chase Bank, N.A., as administrative [removed: agent] [added: agent](http://www.sec.gov/Archives/edgar/data/319201/000031920117000049/creditagreementexecution.htm)] | | 8-K | | No. 000-09992 | | [removed: 10.54] [added: 10.1] | | November [removed: 17, 2014] [added: 30, 2017] |

| [Schedule II—Valuation and Qualifying Accounts](#s316B4D6F409A52379BA3B62F4652EFE2) for the years ended June 30, 2018, 2017 and 2016 | [112](#s316B4D6F409A52379BA3B62F4652EFE2) |

| /s/ ANA G. PINCZUK | | Director | | August 6, 2018 |

| Ana G. Pinczuk | | | | |

| Allowance for Deferred Tax Assets | $ | 120,708 | | | $ | 1,152 | | | $ | 41,710 | | | $ | 163,570 | |

| [2.2](http://www.sec.gov/Archives/edgar/data/319201/000031920118000025/amendmenttomergeragreement.htm) | | [Amendment No. 1 to Agreement and Plan of Merger dated May 10, 2018 by and among the Company, Orbotech Ltd. and Tiburon Merger Sub Technologies Ltd.](http://www.sec.gov/Archives/edgar/data/319201/000031920118000025/amendmenttomergeragreement.htm) | | 8-K | | No. 000-09992 | | 2.1 | | May 11, 2018 |

| [21.1](https://www.sec.gov/Archives/edgar/data/319201/000031920118000045/exhibit21106302018.htm) | | [List of Subsidiaries](https://www.sec.gov/Archives/edgar/data/319201/000031920118000045/exhibit21106302018.htm) | | | | | | | | |

| [Schedule II—Valuation and Qualifying Accounts](#sB472B6463A30D447DBE72C8D73F379E8) | [110](#sB472B6463A30D447DBE72C8D73F379E8) |

| Allowance for Deferred Tax Assets | $ | 76,328 | | | $ | — | | | $ | 15,022 | | | $ | 91,350 | |

| 2.2 | | Termination Agreement with Lam Research Corporation | | 8-K | | No. 000-09992 | | 2.1 | | October 6, 2016 |

| 10.10 | | Fiscal Year 2015 Executive Incentive Plan*+ | | 10-Q | | No. 000-09992 | | 10.53 | | October 24, 2014 |

| 10.11 | | Fiscal Year 2016 Executive Incentive Plan*+ | | 10-Q | | No. 000-09992 | | 10.44 | | October 22, 2015 |

| 10.14 | | Fiscal year 2017 6-Month Executive Incentive Plan*+ | | 10-Q | | No. 000-09992 | | 10.1 | | October 20, 2016 |

| 21.1 | | List of Subsidiaries | | | | | | | | |

| 99.1 | | Risks related to the Merger with Lam Research | | | | | | | | |